Lesson 1, Topic 1
In Progress

1.9. An explanation is given of the role of the interest/BA rate, Gross Domestic Product and Balance of Payments in the operations of the new venture.

ryanrori December 23, 2020

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The workforce in SA is employed across a wide spectrum, including the primary, secondary and tertiary sectors.

The value of goods, products and services that are produced within the boundaries of the RSA during a particular year, is expressed as a final figure, known as the gross domestic product. (GDP) This GDP figure is compared with the GDP of other countries so that economists and geographers can compare the standard of living of the people of different countries. If a country is highly developed, only a small portion of the population works in the primary sector, considerably more are active in the secondary sector, while the majority are involved in the tertiary sector. In term of finance, the contributions made to the GDP by the various sectors also differ considerably. The primary sector yield the smallest amount and the tertiary sector the largest amount.

South Africa maintains extensive economic ties with the rest of the world and its dependence on other countries is greatest in the area of international trade. The importance of foreign trade to South Africa’s economy is evident from:

  • The relationship between its exports (goods and non-factor services like freight, insurance, tourism, etc.) and gross domestic product. This relationship decreased to 28,5 percent in 1989 from 36,5 percent in 1980.
  • The relationship between imports (goods and non-factor services) and gross domestic expenditure (GDE). This relationship decreased to 23,2 percent in 1989 from 28,2 percent in 1980.

Although the figures indicate a decline in the relative importance of the foreign sector, South Africa still ranks among the 25 most important trading nations of the West. In other words South Africa has a particularly open economy. For reasons of economic management it is of the utmost importance to be able to judge a country’s trading position with other countries. Hence it is essential to keep proper records of the transactions between South Africa and the rest of the world. The economic communication between one country, for example South Africa, and others is reflected in the balance of payments. It can be viewed as a country’s bank account with the rest of the world. All transactions that allow foreign money (exchange) to flow into South Africa are treated as credits (+), for example visible exports (goods, gold and other minerals); invisible exports (services rendered to foreign countries); and inflows of foreign capital (investments in and loans to South Africa). All transactions that allow foreign money (exchange) to flow out of South Africa are treated as debits (-), for example, visible imports (goods); invisible imports (services rendered by the rest of the world to South Africa); and outflows of foreign capital (investments in and loans to foreign countries).

The balancing item on the balance of payments is the gold reserves and other foreign exchange reserves.

A surplus on the balance of payments account raises South Africa’s level of gold and foreign exchange reserves and is described as a favourable balance (reserves have been received): South Africa earns more than has to be paid out. An unfavourable balance denotes a deficit or loss in foreign exchange reserves: South Africa pays out more than has been earned.

Definition: The balance of payments is a systematic record of all the transactions of a country’s inhabitants with the rest of the world over a given period.

The main component of the balance of payments is the current account. This includes exports, imports, gold production (which is really an export but shown separately because of its unique position in South Africa) and receipts and payments for services. Transfers (net receipts +) include migrant funds such as gifts, retention of taxes on dividends and interest paid abroad. The second component of the balance of payments is the capital account that consists of long-term and short-term capital movements. The third component of the balance of payments is the official reserve account.

Interest rates

Interest rates are effectively the “prices’ governing lending and borrowing. The borrower pays interest to the lender at a certain percentage of the capital sum, as the price for the use of the funds borrowed. As with other prices, supply and demand effects apply. For example, the higher the rates of interest that are charged, the lower the demand for funds from borrowers will be.

BA rate

The B A rate is the benchmark short term interest rate.