Sunday, February 28, 2016

122. An introductory note on Economics


C. M Heydenrych
November 2015

Demand and supply

Economic Growth

“You can stand in front of an empty fireplace and say “give me heat and I will give you wood” as long as you want and you will not get heat. You have to put the wood in first.”[1]

These are wise words – not only for the individual, an household, a firm or an economy.

In formal terms it can be said that: “Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.”

The question now arises – “What policies can a Government employ to foster economic growth?”

Monetary policies[2]

  1. Encourage savings. Savings is used by firms to acquire productive resources, which leads to economic growth. This is done by lowering taxes. Low taxes also mean that people have more money to spend. Spending according to Keynes will move the Aggregate Demand curve to the right and increase the output of a country.

  1. As a short term measure Keynes indicated that the Government could embark on capital expenditure programs such as road building. This will also put more money in people’s hands which they will be able to spend on consumer goods. It will also help to reduce the cost of production which helps an economy to gow.

            The problem however with increasing government spending, is that the money    has to come from somewhere (taxes) and that will reduce private investment and         private consumption. So unless government has savings (or prepared to risk   inflation,  by creating money - which in itself is a form of indirect taxation), this    route is not recommended

Fiscal policies

  1. Low interest rates will also act as a stimulus for spending


  1. Encourage entrepreneurship. Make it easy to start a business, no onerous entry requirements to start any business.

  1. Decriminalise the sale of some drugs such as marijuana. It is well known that tobacco played an enormous part in the growth of the American economy in the early years as did the sale of heroin in the development of Hong Kong. The legalisation of marijuana (dagga) will boost the depressed economies of the Transkei dramatically. The current decriminalisation of marijuana has benefitted the economy of many states in the US.


Gross Domestic Product is the market value of all the final goods and services produced within the borders of a country within a given time period normally a year. It is the spending on goods and services in a country

It is also equivalent to the money earned by all the production factors employed in a country.

This figure can also be calculated by the value that is added to products and services by the various industries in an economy.

GDP is therefore a measure of the economic well being of a country.

If GDP increases because of more economic freedom (less Government intervention) and real economic activity (production and trade) it will mean that poverty will be reduced since the people would have earned wealth through the production of goods and services required by society and not just the redistribution of wealth. Money will also be available to assist those that cannot help themselves.

One of the macro-economic objectives that societies have is to reduce unemployment – unemployment is when not all the production factors are being utilised fully. The most important one being labour.

Structural unemployment focuses on the structural problems within an economy and inefficiencies in labour markets. It also includes unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand. Changes that cause a skills gap are part of this phenomenon.

One structural reason for unemployment is the vast numbers of regulations that stifle the free interaction between individuals. These regulations are said to protect consumers, but often the hurt that they cause is unseen.

Frictional unemployment is the time period between jobs when a worker is searching for or transitioning from one job to another.

Cyclical unemployment is a type of short to medium term unemployment that occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Also called recessionary or depressionary unemployment

Classical unemployment occurs when real wages for a jobs are set above the marketing clearing level. This is the big problem in South Africa because of minimum wage laws.


Inflation can be defined as a significant (1-2%) and general rise in prices over time – or conversely the fall of the value of money.

The cause is generally accepted as: an increase in the money supply that is more than the increase in the goods and services being produced in an economy.

There are other theories related to this – such as cost push inflation and demand pull.


Macro economic Objectives

Economic Growth (also see separate heading)

The relationship between economic growth and economic freedom (less government involvement in the lives of people) is undisputed (

Economic Freedom = Economic Growth
Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others.

As you will remember from the discussion of the PPF, one way to achieve output and consumption levels outside the limits set by the PPF is through technology, capital formation and trade. Currently the world is on a path to end hunger and achieve food security and improved nutrition for the first time in human history – this is through the use of sustainable agriculture and innovative GMO strains (technological advancement).

The result of economic growth is also that people live healthy lives live longer, obtain better education as well as gender equality and the empowerment of women and girls.

It is generally agreed that free market economies that are unencumbered lead to the most optimum economic outcomes.

Countries with the highest GDP growth are also able to build infrastructure, promote inclusive and sustainable industrialization and foster innovation.

Economic growth also leads to peaceful relations between trading nations.

Economic growth is the result of limiting the size of government and low taxation
Countries with economic growth protects private property and the rule of law
The soundness of money results in faster growing economies
Since trade is one of the cornerstones if wealth creation there is little in the way of trade regulation and tariffs in fast growing economies
Economic growth is positively correlated with  less regulation of business, labour and capital  markets

[2]  Monetary policy is the actions of a central bank or other regulatory committee that determines the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves).

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