Economics / Notes Grade 11 Nkangala District/2022

NKANGALA DISTRICT
ECONOMICS NOTES
TOPIC 2: ECONOMIC GOODS & SERVICES
GRADE 11
2022

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 Economics / Notes Grade 11 Nkangala District/2022

TOPIC 2: ECONOMIC GOODS AND SERVICES

UNIT 1: BASELINE AND INTRODUCTION
 This topic has a foundation on the circular flow participants and their interaction with
one another, as well as the various flow in the economy (circular flow) e.g. goods
and services, money payments etc.
 Therefore, it is important for circular flow diagram to be revised (it was done in
Grade 10).

CIRCULAR FLOW IN OPEN ECONOMY

 All of the four participants in the economy consume goods and services and they
have to pay for their consumption.
 This topic focuses on final consumption expenditure by households, consumption
expenditure by Government and investment expenditure by firms (capital formation).

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 Economics / Notes Grade 11 Nkangala District/2022

UNIT 2: FINAL CONSUMPTION EXPENDITURE BY HOUSEHOLD (C)

2.1 DESCRIPTION
 Final consumption by households refers to the total spending by consumers/
households on final goods and services for own use.
 Expenditure by non-profit organisation such as churches and old age homes also fall
in this category
 It is represented by the symbol C which in the national accounts aggregates.

2.2 CLASSIFICATION /COMPOSITION OF FINAL CONSUMPTION

 There are three ways in which expenditure by household can be classified namely: by
nature, by purpose and type of activity.

Classification by nature
 When products are classified by their nature, they have four kinds which are:
 Durable goods: are products that can be used over a long period of time.
 They can last for a many years’ example, cars, houses.
 Semi-durable goods: they can be used for more than once but have a limited life
span e.g. clothing, glassware, car tyres
 Non- durable goods: are goods that can be used only once. They get used up as
they are consumed e.g. food, petrol, medicine.
 Services: are products that are intangible (cannot be seen, touched) e.g. education,
health service, hair salon services

Classification by purpose
 This is when final expenditure is classified by reason for usage/ function.
 This explains the function that goods (durable, non- durable, semi- durable) are used
 E.G. durable goods are classified by the following purposes. (see table on page 4)
 Furniture
 Personal transport
 Computers and related products
 Recreational and entertainment
 Other durable goods

Classification by type of activity

 Final consumption expenditure can be classified according to the industry from which
the products consumed were produced.
 The three sectors are: primary, secondary and tertiary sector which can produce
final goods and services.

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Economics / Notes Grade 11 Nkangala District/2022

TABLE 1: FINAL CONSUMPTION EXPENDITURE

2018 2019

Durable goods 219 263 ?

Furniture, household appliances 35 354 43 672
Personal transport equipment 133 824 88 797
Computers and related equipment 7 200 9 479
Recreational and entertainment goods 28 747 38 399
Other durable goods e.g. jewellery 141 38 12 918

Semi-durable goods 239881 ?

Clothing and foot-ware 145 220 108 320
Household textiles, furnishings, glassware 35 854 34 090
Motor tyres, parts ,accessories 22 631 16 471
Recreational and entertainment goods 18 508 14 758
Miscellaneous goods 17 668 15 191

Non - durable goods 118 3034 ?

Food, beverages, tobacco 752 423 462 123
Household fuel , power and water 134 980 67 468
Household consumer goods 107 376 82 144
Medical and pharmaceutical products 47 081 33 327
Petroleum products 112 560 57 240
Recreation and entertainment e.g. newspapers 28 614 17 373

Services 1 278 815 ?

Rent for dwellings (homes) 298 719 207 662
Household services 77 917 51 014
Medical services 182 275 117 469
Transport and communication services 254 471 185 639
Recreational, entertainment, educational services 173 906 102 274
e.g. cinemas, dstv subscriptions, hiring of equipment
Miscellaneous services e.g. hair dressers, plumbers, 291 527 191 831
cleaners

Total expenditure 2 920 993 1957 659

NB: the total expenditure for each type of product is at the top and bolded. This means
you can start from the bottom and add all items to get the total amount.

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 Economics / Notes Grade 11 Nkangala District/2022

2.3 THE IMPORTANCE OF FINAL CONSUMPTION BY HOUSEHOLDS

 Shows the level of economic welfare (standard of living) of households

 The higher the total final consumption expenditure, the more needs and wants are
satisfied, therefore the higher the economic welfare of consumers
 Shows the development level of a country
 The more the money spent on durable goods, the more developed a country is. This
is because durable goods are often expensive.
 In developing countries households often spend less money on durable goods as they
mainly do not afford them.
 Helps in analyses of business cycles
 The first indicator of a contraction of economic activity is a decrease in household
expenditure on durable goods.
 When the economy expands, the expenditure on durable goods usually expands.
 Calculation of Consumer Price Index (CPI)
 The classification of consumption expenditure shows the relative importance of each
subgroup of goods to households. The more money spent on a subgroup of products,
the more important that subgroup is to the households.
 The expenditure on each subgroup of products is used to calculate the CPI.

UNIT 3: FINAL CONSUMPTION EXPENDITURE BY THE GOVERNMENT (G)

3.1: DESCRIPTION:
 Final consumption expenditure by government refers to consumption expenditure by
national, provincial and local governments.
 It is represented by the letter G in the national accounts aggregates.

3.2 CLASSIFICATION/COMPOSITION
The two ways in which consumption by government is divided are: functional and
Economic classification.
 Functional classification
 The expenditure is categorised according to the purpose for which the money was
spent. This means the classification shows the type of service which the money
was spent providing.
 Purposes (functions) for which government spend money are:
 General public services
 Defence
 Public order and safety
 Economic affairs
 Environmental protections
 Housing and community amenities
 Health
 Recreation, arts and culture
 Education
 Social protection

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 Economics / Notes Grade 11 Nkangala District/2022

 Economic classification
 It measures the type of expense that government incurred. This includes expenses
such as:
 Salaries and wages of employees
 Interest on government debt,
 Grants,
 Subsidies,
 Purchases of goods and services

3.3: THE IMPORTANCE OF GOVERNMENT CONSUMPTION EXPENDITURE

 Shows government allocation of funds to provide public goods and services

 creates employment for members of the communities
 Helps to address previous economic imbalances
 The figures can be used to compare the efforts with other countries of the same level
of development

UNIT 4: GROSS FIXED CAPITAL FORMATION/ INVESTMENT (I)

4.1 DESCRIPTION
 Gross fixed capital formation refers to investment spending by firms.
 Gross capital formation is represented by letter (I) in the national accounts aggregates.
 Private businesses, government and State owned enterprises make investments.
 Firms invest in capital goods such as machinery and tools, buildings while government
can invest in construction of roads, airports, schools, railways etc.
 The money for buying capital goods is obtained from savings.

4.2 CLASSIFICATION
There are three ways in which investments (capital formation) can be classified,
namely: by kind of industry, type of organisation and type of assets

 Kind of industry: This shows money invested in primary, secondary and tertiary
industries.
 Type of organisation: investments made by general government, Public corporation
and private businesses
 Type of assets: this show money invested in different types of assets e.g. buildings,
transport equipment, machinery, construction works.

4.3 THE IMPORTANCE OF CAPITAL FORMATION

 It helps to increase the production capacity of a country (economic growth).

 Enables businesses to keep up with the latest technology
 Increase efficiency (productivity) of businesses.
 Essential for job creations as businesses employ people to use capital goods
 Machines improve standardisation of products possible as they can produce exactly
the same quality of products

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 Economics / Notes Grade 11 Nkangala District/2022

(See economic importance of capital in Topic 1)

UNIT 4: THE MAIN AGGREGATES IN THE ECONOMY

 There are three main economic aggregates (totals) which are: GDP (total production),
GNI (total income) and GNE (total spending).

GROSS DOMESTIC PRODUCT

 It is the monetary value of all the final (finished) products within the borders of a country
within a year.
 GDP can be calculated using three methods which are:
 Production (value added) method
 Income method
 Expenditure method
 It is assumed that in any economy the GDP = GDI =GDE, because production lead to
earning of income which is spend on goods and services.
 If all the income earned from participating in production is spend, the GDP =GDI=GDE.

 Production method/ Value added method/ GDP (P)

 Production takes place in primary, secondary and tertiary sector.
 The value that is added by each sector until final stage is added together
 That is why this method is called value added method.
 Only final products are counted, if intermediate goods can be added there will be
double counting of the value of some products.
 Double counting is when the value of a product is counted twice e.g. as an input and
as a final product (e.g. counting the value of flour for making bread and the value of
the loaf of bread produced).

Gross value added in R millions R million

Primary sector 289504

Secondary sector 510520

Tertiary sector 1605591

GDP at basic prices ?
+ Taxes on products 268902

- Subsidies on products 13083

GDP at market prices ?

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 Economics / Notes Grade 11 Nkangala District/2022

 Expenditure method
- It shows the amount spent on final goods produced within the borders of a country
- When using the expenditure method, the money spent by the three sectors in the
economy are added together.
-

Expenditure on GDP R millions

Final consumption expenditure by 1575930

households (c)
Final consumption expenditure by general 573470
government (G)
Gross capital formation 517009
Residual item 298
Gross domestic expenditure ?
Export of goods and services (X) 727721
Less: Import of goods and services (M) 732994
Expenditure on GDP at market prices ?

NB: The three methods should give the same value of GDP for the given
period.

 Income method (GDP I)

 When firms produce goods and services they employ factors of production.
 Therefore, the amount of income in the economy is equal to GDP at factor cost.
These factor costs are:
 Compensation of employees which is wages and salaries paid to workers,
 Net operating surpluses which are rent, interest on capital and profit of entrepreneurs
before taxation.
 Consumption of fixed capital which is depreciation value of fix assets.

Income R million
Compensation of employees 1201990
Net operating surplus 821783
Consumption of fixed capital 350982
Gross value added at factor cost ?
+ other taxes on production 46213
- Subsidies on production 8478
Gross value added at basic prices ?
Plus: taxes on products 263988
Less: subsidy on products 15044
GDP at market prices ?

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 Economics / Notes Grade 11 Nkangala District/2022

GROSS NATIONAL INCOME

- It is the total incomes of the citizens (permanent residents) of a country over a
specific period.
- This include the incomes of citizens of the country who are based in other countries.
Calculation of GNI FROM GDP
From GDP:
- Add Interest and profit from South African firms operating outside South Africa e.g.
MTN profits from its firm in Nigeria.
- Add dividends on shares owned by South Africans in foreign countries.
- Add salaries and wages of South African citizens working in foreign countries.

- Subtract all interest and profits earned by foreign firms in South Africa e.g. profits of
Coca –Cola.
- Subtract dividends on shares owned by foreign citizens in South Africa.
- Subtract salaries and wages of foreign nationals working in South Africa

GROSS NATIONAL EXPENDITURE

- Gross National Expenditure: is the total of all expenditure on final goods and
services by the citizens of a country over a period of time. It includes expenditure by
a country’s citizens living in foreign countries.
- Gross domestic expenditure: is the expenditure within the borders of a country
over a period of time. GDE includes expenditure by citizens and non-citizens as
long as they are in that country e.g. S. Africa’s GDE includes spending by citizens
and foreign nationals living in the country.
- Expenditure on gross domestic product: measures the expenditure on final
goods and services produced within the country. It is obtained by adding exports to
the GDP and subtracting imports.

IMPORTANCE OF THE MAIN AGGREGATES

- GDP and GNI are used to analyse the performance of the economy
 GDP measures the level of economic activity in the country
 It shows the potential for the creation of jobs because high GDP means high
production
 It shows the growth in the economy from one year to another.
 GNI measures the standard of living as represented by the income earned.