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Understanding Basic Economics

What is in this guide?

  This guide is meant to provide a basic understanding of economics. It has the following sections:

  1. Introduction
  2. How do we measure the size of an economy?
  3. Economic Growth
  4. Population
  5. The structure of the economy
  6. Globalisation and the South African Economy
  7. The impact of globalisation on South Africa
  8. Labour Market

  1. Introduction

The economy is about how wealth is created, distributed and consumed. It concerns the ways in which a country produces, distributes and consumes the tangible, material commodities of life. It is also about how the proceeds or income from these activities are distributed between those that contribute toward them: capitalist businesses, workers, the state and the whole of society. Every person affects the economy in some way and we are all affected by it.

Economics attempts to answer questions such as:

  1. How do we measure the size of an economy?

The way we usually measure the size of an economy is by its Gross Domestic Product (GDP). GDP is the value of all the goods and services produced within our borders in one year. This value is equal to the economic wealth of the country, all the things of economic value, which can be bought or sold, that have been produced in South Africa in one year. This includes all the goods like: loaves of bread, mielies, cars and gold, as well as all the services like, taxi rides, telephone units, haircuts, hotel rooms or tickets to football matches. We add the prices of al these things together to get GDP.

The estimated value of all goods and services produced in South Africa in 2001 amounts to about one hundred and fifteen thousand million (or billion) US dollars: US$115 billion. We use dollars because this makes it easy to compare our GDP with other countries.

One of the drawbacks of the GDP number is that it excludes unrecorded economic activity. Any exchange of money that is not reported to the government in some way goes unmentioned in the GDP figure, although Stats SA does attempt to estimate the size of the ‘informal economy’. Unrecorded transactions would include the informal sector, subsistence production (i.e. growing meilies to eat them yourself), the criminal economy and white-collar crime or other means in which the wealthy evade the notice of governments. Also unrecorded in total GDP is the work done by members of society that contributes to production but which is not sold for money. The classic example is housework mainly performed by women. Cooking, raising children, making the bed are all economic activities essential for producing wealth, but none find their way into GDP, unless they are done for money and registered with government, such as formal domestic work.

Figure one, below, shows how South Africa compares with some other countries in 2001.

Figure 1: GDP of Selected Countries in 2001

Data: World Bank:

As you can see South Africa is in the middle of this selection of countries. Many of our neighbours have very small economies compared to us. The nearest country to South Africa on our continent is Nigeria. On the other hand South Africa has an economy that is much smaller than many in the world. If you add together the GDP of all the countries listed in the graph it amounts to more than US$3 thousand billion (which is called a trillion). Japan alone in 2001 produced goods and services valued at more that $4 trillion. And the value of goods and services produced in 2001 in the USA, the wealth it creates every year, is worth more than US$10 trillion.

  1. Economic Growth

The GDP figure gives you a snapshot of how large an economy is in any particular year. But the GDP of all countries is changing all the time. If there are more goods and service produced this year than last year we say there has been growth in South Africa’s GDP.  We measure GDP growth using percentage change. For example if GDP is $100billion this year and next year it is $110billion, we say that GDP has grown by ten percent (because $10billion is 10% of $100billion).

The graph below shows growth of our GDP from 1948 until 2002

Figure 2: South African Real GDP Growth (1948 - 2002)

Data: South African Reserve Bank [% Change in KBP6006Y: Gross domestic product at market prices Yearly/RMILL/Constant 1995 prices, [1946 -2002]

There are a huge variety of factors that influence GDP growth over the long run. These include economic factors, but also all kinds of social, political and even cultural conditions.  This can be seen by observing the graph of South Africa’s GDP. Even without analysing the economic conditions in the country of the period, we can see how various political conditions affected growth.

The Sharpeville massacre led to the first state of emergency and the banning of the ANC and the PAC. After the Rivonia Trial all resistance to the state was incarcerated, exiled or forced underground. The regime successfully restored the racist order and to a large extent pacified the masses. Once they had completed these tasks, there was an investment boom, with foreign investors pouring millions into the country.

This Post-Sharpeville boom can be seen in the fact that in 1962 GDP grew by almost 4%. The next year growth was up to 6% and two years later GDP grew by a massive 8%, the highest level of growth seen in the post-war era. Even after this high point there is not a single year in which growth was below 4% of GDP from 1962 until 1972 – a decade long boom in the South African economy.

In the period following the Soweto uprising, when the future of the system of apartheid was in constant doubt, GDP growth became very volatile (jumping up and down). In 1977 GDP did not grow at all (i.e. 0% growth). In 1980, it reached almost seven percent, boosted by the high international gold price. Two years later it grew smaller, or contracted, by 2%.

You can see that more recently, in the first decade of freedom, growth has been far less volatile, but has not reached levels we are satisfied with. If you consider the dotted line in the graph, which is called the trend line, perhaps you’ll agree that this is not surprising. The trend-line gives the average of all the movements up and down over the whole period. As you can see it has moved consistently down.

Perhaps our policies are turning it around, taking our nation out of the crisis of declining growth and moving us into a new era sustained growth and development. But that is a matter for speculating the future: something which economists are notoriously bad at!

  1. Population

One of the reasons why it is important for us to generate growth every year is that every year our population also grows.

Figure 3: South African GDP per Capita (1946 – 2002)

If our GDP was to remain the same while our population grew - this would mean there would be fewer goods and services produced per person on average.

This can be easily shown using GDP per capita, which is simply GDP divided by the number of people in the country. This gives us average production, or average wealth produced, per person. As you can see in the graph above, while our GDP has grown consistently over the last fifty years, since the 1970s this growth has become more volatile and declined from its peak in 1983.
GDP per capita is a useful measure of how the economy is doing.  However, it is important to remember the following problems with this figure:


  1. The structure of the economy

The economy can be broken down, or classified, in various ways. The classifications in the chart below are taken from Stats SA methodology. 

Figure 4: Percentage of GDP by Economic Sector in 1986 and 2002

Data: Stats SA: GDP reports 1990 and 2002

The chart compares the percentage of total South African GDP produced in various sectors of the economy in 1986 and in 2002.  Which sectors produce relatively more GDP than in 1986? Remember that all sectors have grown larger in GDP since 1986. But some have grown faster than others and therefore account for a larger proportion of GDP.  Can you discern any relationship between those sectors that have grown and those that have got relatively smaller?

Let’s look closer at how Stats SA defines these sectors:

Each sector is interlinked with other sectors in various ways. A factory could not operate without electricity, which may be generated from coal, while from its profits the government takes taxes and may, for example, transfer these through a child support grant.

Another way of looking at the economy is to define it according to primary, secondary and tertiary sectors. These are terms you should be familiar with from the education system. Look at these classifications as given in table one below and try to explain the logic that underpins them.

    Table 1: Classifying Economic Sectors


    Mining and Quarrying

    Agriculture, Forestry and Fishing



    Electricity, Gas and Water (utilities)



    Finance, insurance, real estate and business services

    General Government

    Wholesale, retail, and motor trade; catering and accommodation

    Transport and communications

The primary sector is the closest to natural resources. Both mining and agriculture work directly on the products of nature found on, or under, our soil. The secondary sector is a step away from this: it consists of activities that process raw materials into manufactured products or material goods that are used by consumers. While growing mielies part of the primary sector, the production of mielie meal is a manufacturing process.

The tertiary sector is even farther removed from natural resources. This is where the mielie meal is sold to the consumer and marketed under a particular brand identity. Most of its activities can be said to belong to the service sector:
Having defined our sectors better and grouped them into broader economic categories lets go back to the questions we posed at the beginning of this section:
What is the general trend with respect to the economy the growth of various economic sectors?
Looking at the data you can see that those falling into the tertiary sector account for a greater proportion of our total GDP than they did in 1986. Conversely, those that falling into the primary sector accounts for a much lower proportion of our total GDP. In fact, using the same data we did in figure 4 we can say that the in 1986 the primary sector accounted for 16% of production, while in 2002 it was worth only 10%. In 1986 the secondary sector made up 34%, while in 2002 it had gone down to 28%. And the tertiary sector which means essentially services had grown from 50% of GDP in 1986 to 61% in 2002. This relative growth of services and relative decline of primary and secondary sectors is not confined to South Africa. In fact, it is a worldwide trend that is observable in all of the advanced capitalist economies throughout the twentieth century. These developments pose important challenges to all varieties of economic theory.
  1. Globalisation and the South African Economy

Since the 1990’s globalisation has become a buzzword. It dominates our debates. For some, globalisation signifies everything they believe is good about the world: progress, freedom, democracy and prosperity. For others, those in the anti-globalisation camp, it means everything bad: exploitation, unemployment, capitalism and imperialism.
But what does it actually mean? How do we define it? Nobody really agrees on the definition of globalisation, and this is one of the reasons why debate on this issue is so fruitless. But before attempting to answer this difficult question, let’s first ask another, easier, question:
What have been the main economic developments in the world over the last twenty years? Since 1985 the world economy has been influence by many changes. We can’t mention them all but some of the more important developments have been: 

Taken together these developments have been described as “globalisation”. Now we can see why globalisation is difficult to define. After all, it is only one word, and it must describe so many different things, no wonder it gets confused!

This complexity of defining globalisation was recently alluded to in a recent World Bank report:

“Globalization . . .  is a complex process that affects many aspects of our lives. The terrorist attacks on the United States on September 11 were one aspect of globalization. Rapid growth and poverty reduction in China, India and other countries that were poor 20 years ago is another. The development of the internet and easier communication and transportation around the world is a third. The spread of AIDS is part of globalization as is the accelerated development of life-expecting technologies…” [Globalization, Growth and Poverty: Building an Inclusive World Economy, 2002, IBRD/The World Bank, Washington DC.]

In short we can define globalisation as the process of the growing integration of economies and societies around the world.

By this definition, ‘globalisation’ has been going on for much longer than the last decade. The first time a ship set sail and crossed the water was the day that ‘globalisation’ started. And, of course, we are still a long way from full global integration.

It is not a single act or event. It is process that is changing all the time. It can intensify over one particular decade and slow down, or even reverse, over another decade. The manner in which it proceeds is not pre-determined and as the process develops various institutions, countries and people attempt to influence the direction and outcome of this process.

  1. The impact of globalisation on South Africa

South Africa is not an island. Since the discovery of gold and diamonds in the nineteenth century our country has been integrated into global economy. It is no accident that South Africa’s largest corporation is called “Anglo-American”.

During the 1980’s, Apartheid South Africa was a pariah. The people of the world, who united in the anti-apartheid struggles, forced many governments and corporations to impose sanctions, boycotts and generally to isolate the racist regime from the world economy. In South Africa, as the people’s struggle for democracy succeeded, the country was at the same time readmitted to the global economy, as well as to political bodies such as the UN.

Our isolation and subsequent democratisation has therefore meant that our country has felt the effects of globalisation more rapidly than many others. Let’s look at some practical examples of how the opening of South Africa’s economy to world has affected us.

(a) The Price of Maize

Figure below shows the price of corn (i.e. meilies/maize) on the international market. The black line in the graph gives the global price of maize, which is determined in a single world market. Its scale is measured in US$ along the left hand vertical axis. Looking at the graph we can see that in January 1994 the price of a ton of maize was about $120. In July 2002 this price was around $100. The international price was very high in 1996, but generally it has gone down since 1994.

Figure 5: The International Price of Maize (expressed in $ and R)

Data: International Grain Council (US No.2, Yellow, fob U.S. Gulf ports, Friday) and South African Reserve Bank (R-$ exchange rate)

But, as we all know, over this period the price of maize in South Africa has risen by a lot. Why is this the case? Surprisingly, the answer has little to do with the farmers in South Africa.

There is an international market for mielies. South Africa is only one (very small) part of all the maize produced in the world.  Therefore, whatever is produced in South Africa has no influence on the global price of maize. And this global price generally determines the price of maize in South Africa. What do you think would happen if we forced our farmers to sell maize to South Africans at a price less than the global price? Before answering lets look at the other line in the graph.
The white line is the same international price of maize, but denominated in Rands. It is measured on the right-hand vertical axis. (The two scales are independent of each other; we simply superimpose the one line on top of the other in order to give a sense of how two different variables have changed over the same time)
We all know that the value of the Rand has fallen since 1994. In 1994 one American dollar would buy about R3-50. Today in exchange for one dollar you would get between R7 and R10 (although it changes every day).  This means that in January 1994, $126 was worth R431. But in July 2002 one hundred dollars was worth more than R1000.
This is summarized in table 2 below:





  International maize price ($) Exchange Rate (R/$) International maize price (R)
January 1994 126.49 3.41 431.24
July 2002 100.32 10.11 1,014.61

So while the international price of maize has declined in dollar terms over the last decade, the same price expressed in Rands has increased. Obviously, this leads us into debates about policy: how should government intervene? Can’t prices be controlled? We cannot answer them in full because it would require much more information than we have considered so far.

But consider the question we posed earlier. All this economics is fine but people are hungry! Why shouldn’t government just fix the price at which South African farmers sell their maize? 
This is not impossible. But implementation would be very complicated. To see why, imagine you were a farmer: how would you respond to a situation in which, in South Africa a ton of maize will fetch, let’s say R500. But in a neighbouring country, over which the South African government has no control, there are customers who are willing to pay US$100 for the same ton. And don’t forget that a hundred dollars is worth more than a R700. Would you sell to the person offering you R500 or the person offering R700? In such situations even the strongest of patriots have been known to waver.

But let’s assume that all the farmers comply and sell their maize to the government at the fixed price. At the border between Mozambique and South Africa there is a shop on either side of the border. On the South African side a bag of maize costs R10. In Mozambique it costs R20. What do you do if you were a Mozambican?

  1. Labour Markets

The following graph (Figure 6) shows some changes in the labour market from 1995 to 1999. As you can see, the number of employed people increased over this period. But so has the number of unemployed. This is because, while more jobs have been created, they have not been enough to absorb the new people entering the labour market (i.e. the growth in the economically active population).

But behind these overall figures are many changes in the labour market that have taken place over the last ten years. These include:

Figure 6: Developments in the Labour Market (1995 and 1999)

All these factors combined mean that the changes in the labour market over the last few years can be characterised as:

  1. a decline in formal sector jobs, and a growth of informal sector jobs;
  2. a decline in primary and secondary sector jobs and a growth in service (or tertiary) sector    jobs;
  3. a decline in demand for unskilled work and growth in demand for skilled work.

None of these things are unique to South Africa; they are all global phenomena.  The ways in which global change affects our own labour markets are numerous and complex. In part, however, they are influenced by our policy choices.

The Clothing and Textile sector is an example. During the apartheid years it was amongst the most protected sectors in the economy. This meant that, anyone wishing to import clothing had to pay a tariff to the government of up to 75% of that article. This meant that local companies were protected from competition from producers in other countries (principally in Asia). While the Asians could produce cheaper shirts than South African companies, the addition of a 75% tariff would make their products more expensive on the South African market.

Since acceding to the WTO, South Africa has drastically reduced its protective barriers throughout the economy. This has meant that our clothing and textile sector has had to compete directly with overseas companies. It is estimated that more than 30,000 jobs were lost in the clothing and textile sector between 1997 and 2000.

At the same time, consider the following theoretical benefits to South Africans of the opening up of trade in the clothing and textile sector.

These arguments are by no means conclusive. Certainly it does appear that a more competitive clothing and textile sector is emerging in South Africa. In particular, this sector has been able to take advantage of new opportunities opened by the African Growth and Opportunities Act (AGOA) recently passed by the Americans, and the agreement with the European Union. But, obviously if you are a retrenched clothing worker, these arguments may not be very convincing. At the end of the day the balance of evidence would have to determine whether we have benefited or suffered as a result of tariff reductions. The debates are likely to rage for years and nobody has a monopoly on the truth.


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