1. © VAN SCHAIK PUBLISHERS Chapter 3: Production, income and spending in the mixed economy

2. Chapter Outcomes © VAN SCHAIK PUBLISHERS Once you have studied this chapter you should be able to describe how total production, total income and total spending in the economy are related distinguish between stocks and flows describe the different sources of production and income distinguish between households and firms and show how their decisions and activities are interrelated show how the government sector interacts with households and firms show how the foreign sector interacts with the domestic economy describe South Africa’s factor endowment

3. Introduction © VAN SCHAIK PUBLISHERS

4. Production, income and spending Figure 3-1 The three major flows in the economy (Textbook page 41) Box 3-1 Stocks and flows (Textbook page 41) © VAN SCHAIK PUBLISHERS

5. Sources of production: the factors of production Natural resources (land) Labour Box 3-2 Specialisation and the division of labour (Textbook page 43) Capital Entrepreneurship Technology Money is not a factor of production The choice of technique © VAN SCHAIK PUBLISHERS

6. Sources of income: The remuneration of the factors of production © VAN SCHAIK PUBLISHERS

7. Sources of spending: The four spending entities © VAN SCHAIK PUBLISHERS Households Firms Box 3-3 Different types of firms (Textbook page 47) Box 3-4 The goods market and the factor market (Textbook page 48) The government The foreign sector Total spending: a summary

8. Putting things together: a simple diagram Figure 3-2 The different components of production, income and spending (Textbook page 50) © VAN SCHAIK PUBLISHERS

9. Illustrating interdependence: circular flows of production, income and spending Households and firms Figure 3-3 The circular flow of goods and services (Textbook page 50) © VAN SCHAIK PUBLISHERS

10. Figure 3-4 The circular flow of income and spending (Textbook page 51) © VAN SCHAIK PUBLISHERS Illustrating interdependence: circular flows of production, income and spending Households and firms

11. Adding the government Figure 3-5 The government in the circular flow of production, income and spending(Textbook page 51) © VAN SCHAIK PUBLISHERS Illustrating interdependence: circular flows of production, income and spending

12. Adding the foreign sector Figure 3-6 The foreign sector in the circular flow of income and spending (Textbook page 52) © VAN SCHAIK PUBLISHERS Illustrating interdependence: circular flows of production, income and spending

13. Figure 3-7 Financial institutions in the circular flow of income and spending (Textbook page 52) © VAN SCHAIK PUBLISHERS Illustrating interdependence: circular flows of production, income and spending Adding the foreign sector

14. The overall picture © VAN SCHAIK PUBLISHERS Figure 3-8 The major elements of the circular flow of income and spending (Textbook page 53) Illustrating interdependence: circular flows of production, income and spending

15. A few further key concepts © VAN SCHAIK PUBLISHERS Specialisation and exchange Specialisation, opportunity cost and comparative advantage Box 3-5 Why did Charl Schwartzel not finish matric? The five main macroeconomic objectives

16. Appendix 3-1: South Africa’s factor endowment © VAN SCHAIK PUBLISHERS Natural resources Labour Capital Entrepreneurship

17. Important concepts © VAN SCHAIK PUBLISHERS Production Income Spending Stock Flow Goods market Factor market Factors of production Natural resources (land) Labour Specialisation Division of labour Human capital Capital Consumption of fixed capital Entrepreneurship Technology Money Capital-intensive production Labour-intensive production Rent Wages and salaries Interest Profit Household Consumer spending

18. Firms Profit Captial formation (investment) Government Public sector Government expenditure Taxes Transfer payments Foreign sector © VAN SCHAIK PUBLISHERS Balance of payments Imports Exports Circular flow Injection (addition) Leakage (withdrawal) Financial sector Absolute advantage Relative advantage Macroeconomic objectives Important concepts