GAUTENG DEPARTMENT OF EDUCATION 2024 INFORMAL ACTIVITIES FOR GRADE 12 SUBJECT: ECONOMICS LEARNER SOLUTION (Page 1 of 368) TABLE OF CONTENTS ECONOMICSGrd12 P a g e 1 | 368 V3 TERM WEEK SUBTOPIC/SECTION PAGE 1-2 CIRCULAR FLOW 3 3-4 BUSINESS CYCYLES 21 5-6 PUBLIC SECTOR 53 7-8 FOREIGN EXCHANGE MARKETS 83 1-2 PERFECT MARKETS 105 3-4 IMPERFECT MARKETS 127 5-6 MARKET FAILURES 171 7 -8 PROTECTIONISM & FREE TRADE 205 ECONOMIC GROWTH & DEVELOPMENT 227 REGIONAL DEVELOPMENT 256 ECONOMIC & SOCIAL INDICATORS 275 TOPIC 1 2 3 4 INFLATION 5 TOURISM 6 ENVIRONMENTAL SUSTAINABLITY ECONOMICSGrd12 296 321 P a g e 2 | 368 V3 343 TOPIC 1: CIRCULAR FLOW SOLUTIONS 1.1 Various options are provided as possible answers to the following questions. Choose the answer and write only the letter (A–D) next to the question number. 1.1.1 B Model 1.1.2 A Production, income, and spending 1.1.3 C Injections exceed leakages 1.1.4 D Treasury bills, and bank debentures. 1.1.5 A Gross Value Added 1.1.6 A GDP deflator 1.1.7 C Factor cost 1.1.8 A Factor cost 1.1.9 D System of National Account 1.1.10 B Residual item 1.2 Choose a description from COLUMN B that matches the item in COLUMN A. Write only the letter (A-I) next to the question number (1.2.1 –1.2.10) in the ANSWER BOOK. 1.2.1 E 1.2.2 D 1.2.3 C 1.2.4 B 1.2.5 F 1.2.6 H 1.2.7 G 1.2.8 I 1.2.9 K 1.2.10 J The flow of goods and services. The ration between the eventual change in income and the initial investment. The portion of an increase in income that is not consumed. The flow of money Savings Total value of all goods and services produced within the boundaries of a country in a given period Inputs into the production of goods and services Where labour, entrepreneurship, land, and capital are traded A simplified representation of reality Pensions added to the national income figures 1.3 Provide the economic term/concept for each of the following descriptions. Write only the term/concept next to the question number. No abbreviations, acronyms or example will be accepted. 1.3.1 Leakage. 1.3.2 Multiplier. 1.3.3 Foreign sector. 1.3.4 Closed economy. 1.3.5 Multiplier. 1.3.6 Circular flow 1.3.7 Open economy 1.3.8 Gross Domestic Product (GDP). ECONOMICSGrd12 1.3.9 Injection. 1.3.10 Money flow. 1.3.11 Household. 1.3.12 Foreign trade 1.3.13 Savings. 1.3.14 Financial market 1.3.15 National income. P a g e 3 | 368 V3 SECTION B QUESTION 2: HINT: When the question requires you to “list” or “name”, you need not write a sentence but merely few words or a phrase. This MUST be done in bullet form. These types of questions are applicable for 2.1.1, 3.1.1 and 4.1.1 2.1 • • • List the TWO participants in a closed economy. Household Government Business sector (2 x 1) [2] • • • List TWO methods by which the gross domestic product can be calculated. Income method Production method Expenditure method (2 x 1) [2] • • • List the TWO examples of injections in the circular flow. Government spending Investment Export income (2 x 1) [2] • • • List the TWO most important sub types of financial market. Money market Foreign exchange market Capital market (2 x 1) [2] • • • List the TWO sectors that are used to calculate the gross value added at basic prices. Primary sector Secondary sector Tertiary sector (2 x 1) [2] • • Name TWO real flows between business and government. Public goods Goods and services (2 x 1) [2] 2.2 2.3 2.4 2.5 2.6 2.7 Name TWO examples of leakages in the circular flow. • Savings • Tax • Imports 2.8 (2 x 1) [2] Name TWO examples according to which product market can be divided. ECONOMICSGrd12 P a g e 4 | 368 V3 • • Public goods and services Goods and services (2 x 1) [2] • • Name TWO components of composition of employees. Salaries Wages 2.9 2.10 Name TWO examples of government expenditure. • Spending on roads • Spending on hospitals • Spending on schools (2 x 1) [2] (2 x 1) [2] QUESTION 3: HINT: 3.1 These types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2. Answers must be provided in full sentences; learners must ensure that their answer addresses the question asked. Why is the gross national product of South Africa generally lower than the gross domestic product? • 3.2 • 3.3 • Foreigner’s contribution to our economy is more than our contribution to their economies. (1 x 2) How does the MPC relate to the multiplier? The higher the MPC the higher the multiplier. (1 x 2) How will the multiplier be influenced when a country experience net leakages? The multiplier will be negatively affected as money is withdrawn from the economy (1 x 2) 3.4 When is the circular flow in equilibrium? • When injections are equal to leakages. (1 x 2) 3.5 What is the effect of adding the value of intermediate goods when calculating GDP? • It will result in double counting which will cause national account to reflect an incorrect higher total. (1 x 2) 3.6 How will savings be affected by an increase in the marginal propensity to consume? • Savings will be negatively affected as there will be less money left after an increase in spending(1 x 2) 3.7 What determines the size of the multiplier? ECONOMICSGrd12 P a g e 5 | 368 V3 • The increase or decrease in marginal propensity to consume/save / MPC / MPS (1 x 2) 3.8 What is the effect of adding the value of intermediate goods when calculating GDP? • It will lead to double counting which will lead to incorrectly recorded national accounts (1 x 2) 3.9 How is national income determined in the four-sector economy? The national income is calculated by adding the contribution of each sector to the national income, it includes the consumption levels of households, investment spending of businesses, government spending and net trade between countries (imports vs exports). (1 x 2) (Accept any other correct relevant response.) • 3.10 Why is it important to calculate real GDP? • GDP is important because it gives information about the size of the economy and how an economy is performing. • The growth rate of real GDP is often used as an indicator of the general health of the economy. • In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well. • Real GDP makes comparing GDP from year to year and from different years more meaningful because it shows comparisons for both the quantity and value of goods and services. • Real GDP measures an economy's total goods and services in a given year, taking into account changes in price levels. (1 x 2) (Accept any other correct relevant response.) QUESTION 4 : DATA RESPONSE & PARAGRAPH TYPE QUESTIONS HINT: All section B questions have TWO data interpretation questions – each total 10 marks. Section B consist of Questions 2-4 not as numbered in this document All section B questions have TWO paragraph questions, one Middle Order & ONE Higher Order TYPICAL EXAM QUESTION: THESE HIGHER ORDER QUESTIONS REQUIRE THE LEARNERS TO USE HER/ HIS CRITICAL THINIKING SKILLS. Higher order questions are grounded in the content. These types of questions test critical thinking, where candidates should be able to apply their knowledge, through logical reasoning and also have an awareness of their current economic climate. Content (covered by discuss/examine/describe/ analyse/explain/evaluate/compare/assess/justify/construct/calculate) can be assessed as higher-order questions. Answers will not necessarily be found in textbooks. QUESTION 4.1: DATA RESPONSE 4.1.1 Name one production factor • Labour ✓ (1) ECONOMICSGrd12 P a g e 6 | 368 V3 4.1.2 Give one example of taxes on products. • VAT, Sin Tax, excise tax, Fuel levy ✓ (1) 4.1.3 How will national income be influenced by the above leakages and injections? National income will increase because investment J exceeds savings. (2) 4.1.4 How would you convert GDP to GNP? • GDP plus primary income from the rest of the world the world minus primary income to the rest of (2) 4.1.5 Calculate the change in national income caused by the investment above. Show ALL calculations. • • M= 4 Effect: R120m x 4 = R480m (4) MIDDLE ORDER PARAGRAPH 4.1.6 How can the household, as an important participant in the circular flow model, contribute to building the economy? • • • • • • The owners of the four factors of production can try to increase the quality. thereof to make a better contribution to the economy Households can sell their factors of production at lower rates to help to lower the inflation rate and build the economy Households (labourers) can limit labour unrest and strikes where they usually claim unreal increases in payment (much more than the current inflation rate) Households can increase their savings and contribute indirectly to increased production in the manufacturing sector P Households can limit their spending on luxury goods that will limit the aggregate demand and stabilise prices Households can concentrate on buying South African goods to stimulate local production, future exports, and increased penetration of markets internationally (8) 4.1.7 Discuss the multiplier and its effect on the national income if the marginal propensity to consume (MPC) is 0,6 and investment increases by R10 bn. • A relatively small investment produces a proportionately large increase in national income. • K= = 2,5 = ECONOMICSGrd12 P a g e 7 | 368 V3 • • • Therefore, an investment of R 10bn will produce a R 25bn increase in national income. If a learner shows a graphical representation of the effect, the graph should indicate the change in investment of R 10bn, and the change in national income of R 25bn. Accept if the learner explains the effect based on one person’s spending becomes another person’s income. (4 x 2) (8) HIGHER ORDER PARAGRAPH 4.1.8 Analyse the importance of calculating real GDP? • GDP is important because it gives information about the size of the economy and how an economy is performing. • The growth rate of real GDP is often used as an indicator of the general health of the economy. • In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well. • Real GDP makes comparing GDP from year to year and from different years more meaningful because it shows comparisons for both the quantity and value of goods and services. • Real GDP measures an economy's total goods and services in a given year, taking into account changes in price levels. (8) (Accept any other correct relevant response.) 4.1.9 Evaluate the impact on the circular flow if leakages are greater than injections. • • Leakages reduce the flow of income in an economy. There will be less funds available for economic activities which leads to national income decreasing. (2 x 2) (Accept any other correct relevant response.). QUESTION 4.2: DATA RESPONSE 4.2.1 Name the TWO sectors involved in deriving the macro-economic multiplier. • Business sector • Household. (2) 4.2.2 What is represented by the line E = Y? • It shows all the possible levels of expenditure and output at which the economy is in equilibrium. (2) 4.2.3 Explain is the relationship between mpc and multiplier? ECONOMICSGrd12 P a g e 8 | 368 V3 • The bigger the mpc, the bigger the multiplier as more injections increases the national income (and vice versa) (2) 4.2.4 Use the formula, k = ΔY/ΔJ, to calculate the multiplier (k) for the above scenario k= (2) = 2 • 4.2.5 Calculate the multiplier, using the formula, k = 1/(1 – MPC), when the marginal propensity to consume (MPC) = 0.8. Show calculations. k= = = 5 (4) MIDDLE ORDER PARAGRAPH 4.2.6 Explain leakages and injections. (8) • • • • • Leakage is any flow that does not give rise to a further round of income also known also withdrawals because it represents a withdrawal of money from the economy. (e.g.) of leakages are taxes (T) expenditure on imports (Z/M) and savings(S) (Max 4) Injections represent the introduction of additional money into the economy (e.g.) of are injections government spending (G) income earned from exports (X) investment spending (Max 4) (8) 4.2.7 Discuss the role government plays in the circular flow model. (4 x 2) (8) • Provides public goods (roads) and services (education) • The state provides the households and business with public goods and services that are produced from factors of production bought in factor market • Receives tax from households e.g. income tax and from business sector e.g. company tax • Government regularly borrows money from private sector and from abroad to balance its budget (2 x 4)(8) HIGHER ORDER PARAGRAPH 4.2.8 How does business sector contribute to the circular flow? ECONOMICSGrd12 P a g e 9 | 368 V3 • • • • Providing goods and services to other participants. Investing their profits with financial institutions. Contributing taxes to the public sector through corporate taxes. Providing the area for investment to other participants. (8) (Accept any other correct relevant responses) (Allocate a maximum of 2 marks for mere listing of facts) 4.2.9 Why is it important for a country to calculate national income? • • • • It is important for a country to calculate its national income because: National income figures estimate the performance of aggregate economic activities which indicates the yield of the economy. National statistics become a useful tool for policy makers when planning and forecasting for future policies. It serves an indicator for economic growth and can be used as a steppingstone to bring about economic development in the country. ECONOMICSGrd12 P a g e 10 | 368 V3 • They are used as a benchmark when determining the stage of development for the country. • National figures are used as a tool to get a glimpse of how each economic sector contributes towards the national wealth of the country. (8) (Accept any other correct relevant responses) (Allocate a maximum of 2 marks for mere listing of facts) QUESTION 4.3 4.3. DATA RESPONSE 4.3.1 Name any ONE leakage in an economy. • Savings/ Imports. (1) 4.3.2 What does the 45° line in the graph above represent? • Equilibrium line (1) 4.3.3 Briefly describe the term autonomous consumption. • Consumption which is not directly related to income (2) 4.3.4 Explain the shift from AE0 to AE1. • The shift from AE0 to AE1 indicates an increase in aggregate expenditure (2) 4.3.5 Calculate the multiplier when individual spending on consumption is 60%. Show all calculations. K = 1 ÷ (1-mpc) = 1 ÷ (1- 0,6) = 1 ÷ 0,4 = 2.5 (The multiplier (4) MIDDLE ORDER PARAGRAPH 4.3.6 Discuss the participants’ interaction in the economy with the product and foreign exchange markets. • • • PRODUCT MARKET Product market is the market for consumer goods and services. The product market receives goods and services that are produced in the factor market. Participants would not be able to exchange goods and services in the product market without the factor market. ECONOMICSGrd12 P a g e 11 | 368 V3 • Participants buy and sell goods that are produced in markets. e.g., household furniture, clothing, food. • Participants can also buy and sell services in the product market. • The capital goods market is where capital goods are traded. e.g., buildings, machinery, and equipment. (2x2) FOREIGN EXCHANGE MARKETS • • • • In the foreign exchange markets the participants can buy or sell foreign currency. The foreign currencies exchange by businesses are used to pay for imported goods and services. Participants can exchange currencies in banks and consists of electronic money transfers from one account to another. Tourists use foreign currencies to pay for goods and services when they travel abroad. (2x2) (8) (Allocate a maximum of 4 marks for mere listing of facts/examples) (Accept any other relevant answer) 4.3.7 Explain the interrelationship between households and businesses in the circular-flow model. • Households supply factors of production such as labour to businesses to produce goods and services • Households receive income when businesses pay for factors of production • Households buy goods and services from businesses to satisfy their needs and wants. • Businesses receive income/sales revenue when households pay for goods and services • Household provide money capital for businesses through saving with commercial banks or buying shares on stock exchange markets (Accept any other correct relevant response) (A maximum of 4 marks may be allocated for mere listing of facts/examples (4 x 2) (8) HIGHER ORDER PARAGRAPH 4.3.8 How has the covid 19 been contributing to a lower gross domestic product in South Africa in 2021? • • • • reducing production of goods and service as the economy continued to be in a national lockdown in order to reduce the spread of the virus reducing aggregate demand of goods and services as many people had not been earning income due to loss of jobs limiting the sale of some products such as alcohol resulting in many small businesses such as taverns closing down. setting up a curfew which meant even economic activities which normally are carried out over 24 hours had to have limited time ECONOMICSGrd12 P a g e 12 | 368 V3 • decreasing demand for services such as tourism as some countries advised their citizens to stay away from South Africa as the corona virus in the country was more transmittable after it had mutated (changed form) from the original one in 2020 (8) (Accept any other correct relevant responses) 4.3.9 How could an increase in investment contribute towards a higher national income in the economy? Investments will benefit national income by: • increasing the capital base of the economy, to expand the production capacity • creating more job opportunities and increasing income levels of households, stimulating aggregate demand • increasing competition when new businesses are established, resulting in increased efficiency in production • encouraging the introduction of new production technologies resulting in higher productivity • expanding the tax base for the government, leading to higher tax revenue/ to finance infrastructure development projects • increasing the competitiveness of local businesses on global markets/ stimulating the demand for exports (Accept any other correct relevant response) (A maximum of 2 marks will be allocated for mere listing of facts/examples) QUESTION 4.4: 4.4. DATA RESPONSE. 4.4.1 Identify the value of marginal propensity to save (mps) in the diagram above. • 0,2 (1) 4.4.2 Name the leakage that relates to the foreign sector. • Imports. (1) 4.4.3 Briefly describe the term autonomous consumption. The level of spending that is independent of the level of income or changes in income. (2) 4.4.4 Explain the importance of savings in the economy. • • • Savings ensure the availability of loanable funds in financial institutions for investments Savings help to control excess demand in the economy thereby reducing demand-pull inflation Households will enjoy financial freedom as they will be able to pay. for their future needs using their savings (2) ECONOMICSGrd12 P a g e 13 | 368 V3 (Accept any other correct relevant response) 4.4.5 Use the marginal propensity to consume (MPC) in the diagram above to determine the value of the multiplier. Show the formula and ALL calculations. Multiplier (K) = 1/(1-mpc) = 1/(1-0.8) = 1/0.2 = 5 (4) MIDDLE ORDER PARAGRAPH 4.4.6 Discuss how the expenditure GDP(E) method is used to determine Gross Domestic Product. (8) The expenditure method is a system for calculating gross domestic product. (GDP) that combines consumption, investment, government spending, and net exports. • • • • • • • It is the most common way to estimate GDP. It includes everything that the private sector, including consumers and private firms, and government spend within the borders of a particular country, which must add up to the total value of all finished goods and services produced over a certain period. This method produces nominal GDP, which must then be adjusted for inflation to result in the real GDP. The formula for expenditure is GDP=C+I+G+(X−M). The most dominant component in the calculation of GDP under the expenditure method is consumer spending, which accounts for the majority of South African GDP. Consumption is typically broken down into purchases of durable goods (such as cars and computers), non-durable goods (such as clothing and food), and services. The second component is government spending, which represents expenditures by state, local and provincial government on defence and non-defence goods and services, such as weaponry, healthcare, and education. Business investment is one of the most volatile components that goes into calculating GDP. It includes capital expenditures by firms on assets with useful lives of more than one year each, such as real estate, equipment, production facilities, and plants. The last component included in the expenditure approach is net exports, which represents the effect of foreign trade of goods and services on the economy. (4 x 2) (Accept any other correct relevant response.) (Maximum of 4 marks for mere listing) 4.4.7 Discuss the multiplier effect on the national income. • The multiplier relates to how much national income changes as a result of an injection such as an investment. ECONOMICSGrd12 P a g e 14 | 368 V3 • • • • • • • • • • Initially there is an increase in injections (J) into the economy (I, G or X), which would lead to a proportional increase in national income. The extra spending would have a knock-on effect and create even more spending. The size of the multiplier will depend on the level of leakages. Assume firms increase investment spending by R1 000. This is done by ordering capital goods from domestic firms to the value of R1 000. Total spending (AE) has increased by R1000. Thus, total production has increased by R1 000, which also leads to an increase of R1 000 in the national income (Y). Now the increase in spending = the increase in production = an increase in income. When households earn income (R1 000) leakages (L) can occur, through income tax, savings or spending on imports. If this amounts to R300 (saving) then spending on goods will increase by R700. At this stage the multiplier starts to kick in. (8) (Note: Learners could use any amount to explain the multiplier effect) HIGHER ORDER PARAGRAPH 4.4.8 How do export and imports affects the economy? • • • • Exports bring money into the country, which increases the exporting nation's GDP. When a country imports goods, it buys them from foreign producers, the money spent on imports leaves the economy, and that decreases the importing nation's GDP. When exports are greater than imports, net exports are positive Purchase of domestic goods and services increase GDP because it increases domestic production. (8) (Accept any other correct relevant response) (A maximum of 2 marks will be allocated for mere listing of facts/examples) 4.4.9 How does gross capital formation impact the economy positively? • • • • The increased capital base of the country will increase production capacity. Gross capital formation will contribute to the growth potential of the economy through value-adding process. Balance of Payments problems will decrease by an increase in export production. Households may benefit from employment opportunities thus reducing poverty/government will achieve its goal of full employment and collect more tax revenue. (8) (Accept any other correct relevant response) ECONOMICSGrd12 P a g e 15 | 368 V3 (A maximum of 2 marks will be allocated for mere listing of facts/examples) QUESTION 4.5: 4.5. DATA RESPONSE 4.5.1 What is depicted in the diagram above? • Open economy, foreign sector or rest of the world included. (1) 4.5.2 Which participant is the major consumer in the economy? • Household (1) 4.5.3 Briefly describe the term circular flow. • The circular flow model demonstrates how money moves through the various participants. (2) 4.5.4 Discuss the role of the factor market in the circular flow • the factor market is the place where Factors of productions are bought and sold. (2) 4.5.5 Evaluate the difference between "constant" and "current" prices in calculating economic growth. • • Real GDP is also referred to as GDP at constant prices, which is more useful as it excludes the effects of inflation. ✓✓ Nominal GDP is also referred to as GDP at current prices, which includes the effect of inflation, so it is difficult to know whether the value of production increased due to more products being produced, or simply because their prices increased. ✓✓ (4) MIDDLE ORDER PARAGRAPH 4.5.6 Why is the multiplier effect on manufacturing important in the economy? • • Manufacturing has so many substantial links with so many other sectors throughout the economy, its output stimulates more economic activity across society than any other sector. Creates job and investment opportunities in all the other sectors that use its products, such as transportation, construction, and retail. It also spurs growth in services such as finance and transportation. (Accept any other correct relevant response.) ECONOMICSGrd12 (2 x 2) (4) P a g e 16 | 368 V3 4.5.7 Discuss the interactions between economic participants in a closed economy. Households • There is a flow of money and goods and services between the household sector and business sector. Households are the owners of the factors of production, and they place their factors of production on the market so that it can be bought. Households earn income in the form of wages by selling their factors of production to business. • • Business Sector • Businesses use the factors of production to produce goods and services on which the household sector spends their income. • Businesses place goods and services on the product market which is bought by households to satisfy their needs. • Business receives an income. State/Government • • • • • • • • There is a flow of money and goods and services between the household sector and State. Household sector provides the state with labour and receives income. The state provides the household with public goods and services (e.g.) parks, hospitals Households pay taxes to the state. This is income for the state. There is a flow of money and goods and services between the business sector and state. The business sector provides the state with goods and services for which the state pays. The state provides the business sector with public goods and services. e.g. Roads, Electricity, harbours, etc. Businesses pay taxes to the state, which is used for infrastructure. (Accept any other correct relevant response.) (2 x 4) (8) HIGHER ORDER PARAGRAPH 4.5.8 How can the households as an important participant in the circular- flow model contributes to building the economy? (8) • • The owners of the four factors of production can try to increase the quality therefore to make a better contribution to the economy. Households can sell their factors of production at lower rates to help to lower inflation rate and build the economy. ECONOMICSGrd12 P a g e 17 | 368 V3 • • • Households can limit labour unrest and strikes where they usually claim unreal increase in payment. Households can increase their savings and contribute indirectly to increased production in the manufacturing sector. Households can limit their spending on luxury goods that will limit the aggregate demand and stabilise prices. (Max 8 marks) (Accept any other relevant response) 4.5.9 Highlight how one individual’s spending becomes another person’s income (the multiplier effect). • • • • • • • • • • • • The multiplier relates to how much national income changes as a result of an injection such as an investment. Initially there is an increase in injections (J) into the economy (I, G or X), which would lead to a proportional increase in national income. The extra spending would have a knock-on effect and create even more spending. The size of the multiplier will depend on the level of leakages. Assume firms increase investment spending by R1 000. This is done by ordering capital goods from domestic firms to the value of R1 000. Total spending (AE) has increased by R1000. Thus, total production has increased by R1 000, which also leads to an increase of R1 000 in the national income (Y). Now the increase in spending = the increase in production = an increase in income. When households earn income (R1 000) leakages (L) can occur, through income tax, savings or spending on imports. If this amounts to R300 (saving) then spending on goods will increase by R700. At this stage the multiplier starts to kick in. (Note: students could use any amount to explain the multiplier effect) SECTION C HINT: All section C questions have TWO questions 5 & 6 NOT like in this document. In the examination you will need to answer only one. ESSAY STRUCTURE HINT: Section C – the long question, must be answered in FOUR sections: Introduction (definition), Body (headings and full sentences in bullets) additional part and conclusion (summarising). The mark allocations for Section C is as follows: MARK ALLOCATION STRUCTURE OF ESSAY ECONOMICSGrd12 P a g e 18 | 368 V3 Introduction The introduction is a lower-order response. • A good starting point would be to define the main concept related to the question topic. • Do not include any part of the question in your introduction. • Do not repeat any part of the introduction in the body. • Avoid mentioning in the introduction what you are going to discuss in the body. Body Main part: Discuss in detail/In-depth discussion/Examine/Critically discuss/ Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Draw a graph and explain/Use the graph given and explain/Complete the given graph/Assess/Debate A maximum of 8 marks may be allocated for headings/examples Additional part: Critically discuss/Evaluate/Critically evaluate/Debate/ Deduce/Compare/Distinguish/Interpret/How? /Suggest A maximum of 2 marks may be allocated for mere listing facts. Conclusion Any higher-order conclusion should include: • A brief summary of what has been discussed without repeating facts already mentioned • Any opinion or value judgement on the facts discussed • Additional support information to strengthen the discussion/analysis • A contradictory viewpoint with motivation, if required • Recommendations Max. 2 Max. 26 Max. 10 TOTAL Max. 2 40 [40] QUESTION 5 Discuss in detail the markets within the four-sector model under the following headings: INTRODUCTION The circular-flow model of the economy is a simplification showing how the economy works and the relationship between income, production and spending in the economy as a whole. ✓✓ (Accept any relevant introduction.) (max 2) BODY MAIN PART Factor / Resources Market ECONOMICSGrd12 P a g e 19 | 368 V3 • This is the market where the factors of production are sold to the producers in the enterprises.✓✓ • The four factors of production (land, labour, capital and entrepreneurship) ✓✓ are traded for income in form of wages/salaries, interest, economic rent and profit on this market. ✓✓ • The price and quantity traded is also determined by the interaction of demand and supply.✓✓ (max 8) Money market • Short term loans and very short-term funds are saved and borrowed by consumers and business enterprises. ✓✓ • Banks, Insurance companies are examples. ✓ • The money market is a financial market in which financial instruments with high liquidity and very short maturities are traded in the short term (less than a year). ✓✓ • The price of money is determined in the money market by the forces of demand and supply.✓✓ • This is used by participants as a means for borrowing and lending in short term, from a few days to just less than a 3 years. ✓✓ • In short, it is a market for short-term savings and loans. ✓✓ • Kinds of securities that change hands in this market are: o Treasury bills✓ o Reserve bank debentures✓ o Banker’s acceptances✓ o Short-term government bonds✓ o Short-term company debenture✓ (max 8) Product / goods market • Goods and services are traded on the product market. Households, government, and the foreign sector purchase these goods and services from firms on this market. ✓✓ • Goods are tangible items, and they include consumer goods, capital goods, durable, semidurable and non-durable goods. ✓✓ o Examples include computers, paper, bread, etc. ✓ • • • • Services are non-tangible actions that satisfy people’s needs and wants. ✓✓ o Examples are services offered by accountants, teachers, doctors, drivers, etc. ✓ • The forces of supply and demand determine the equilibrium price and quantity. ✓✓ Households purchase consumer goods for consumption and businesses purchase capital goods for use in the production process. ✓✓ Non-durable goods are goods that cannot be re-used. ✓✓ e.g. an apple. ✓ Semi-durable goods only last for a short period of time but can be used more than once✓✓ e.g. chalk. ✓ • Durable goods can last for more than a year because they do not wear out easily. ✓✓ e.g. a chalkboard. ✓ (max 10) ECONOMICSGrd12 P a g e 20 | 368 V3 (Accept any other relevant answer.) (Allocate a maximum of 6 marks for the mere listing of facts / examples.) (max 26) ADDITIONAL PART Explain how changes in income affect the multiplier. • • • • • • • The multiplier relates to how much national income changes as a result of injection or withdrawal. ✓✓ An injection into the economy (investment, government spending or exports) will lead to a proportionate increase in national income. ✓✓ The extra spending would have a knock-on effect and create even more spending. ✓✓ The size of the multiplier will depend on the level of leakages. ✓✓ Assume a firm increases investment spending, initially total spending increases, total production increases, which also leads to an increase in income /Increase in spending = increase in production = increase in income. ✓✓ When more income is earned, a leakage can occur in the form of income tax, savings or spending on imports. ✓✓ At this stage the multiplier starts to kick in. ✓✓ (max 10) CONCLUSION Markets are important in the circular flow because they bring together the producers and consumers ensuring that the demand and supply of participants are being met. ✓✓ (Accept any relevant conclusion.) (max 2) [40] TOPIC 2: BUSINESS CYCLES QUESTION 1: 1.1 Section A – Short Questions Various options are provided as possible answers to the following questions. Choose the answer and write only the letter (A–D) next to the question number. 1.1.1 B 1.1.2 C 1.1.3 C 1.1.4 D 1.1.5 A 1.1.6 A 1.1.7 D 1.1.8 A 1.1.9 D 1.1.10 A recovery ✓✓ extrapolation ✓✓ peak ✓✓ unemployment ✓✓ trough ✓✓ business ✓✓ demand-and-supply side ✓✓ high demand for credit ✓✓ downswing – trough – upswing – peak ✓✓ trendline ✓✓ ECONOMICSGrd12 P a g e 21 | 368 V3 1.2 Choose a description from COLUMN B that matches the item in COLUMN A. Write only the letter (A-I) next to the question number (1.2.1 –1.2.10) in the ANSWER BOOK. 1.2.1 B ✓ 1.2.2 E ✓ 1.2.3 C ✓ 1.2.4 G ✓ 1.2.5 J ✓ 1.2.6 A ✓ 1.2.7 I ✓ 1.2.8 D ✓ 1.2.9 H ✓ 1.2.10 F ✓ 1.3 Provide the economic term/concept for each of the following descriptions. Write only the term/concept next to the question number. No abbreviations, acronyms or examples will be accepted. 1.3.1 Juglar cycle ✓ 1.3.2 Composite indicator ✓ 1.3.3 Trendline ✓ 1.3.4 Kuznets cycle ✓ 1.3.5 Extrapolation ✓ 1.3.6 Amplitude. ✓ 1.3.7 Recession ✓ 1.3.8 Business cycle ✓ 1.3.9 Length ✓ 1.3.10 Contraction ✓ 1.3.11 Monetarist approach ✓ 1.3.12 Upswing ✓ 1.3.13 Expansion ✓ 1.3.14 Endogenous factors ✓ 1.3.15 Kondratieff cycle ✓ SECTION B QUESTION 2: 2.1 List any TWO types of business cycles • • Kuznets cycle Juggler cycle ECONOMICSGrd12 P a g e 22 | 368 V3 • • Kitchin cycle Kondratieff cycle Accept Any TWO (2 x 1) 2.2 Name any TWO turning points of a business cycle • • Peak Trough 2.3. (2 x1) List any TWO instruments used by the government to help stabilise the business cycle. • Monetary Policy • Fiscal Policy 2.4 (2 x 1) Name TWO phases of business cycle − Recession phase − Depression phase − Recovery phase − Prosperity phase 2.5 (2 x 1) List any TWO types of business cycle indicators used in forecasting economic activities. − Composite indicators − Length − Amplitude − Extrapolation − Moving averages 2.6. (2 x 1) How are business cycles measured? − Length − Trend line 2.7 (2 x 1) List TWO periods in a business cycle − Expansion − Contraction 2.8 (2 x 1) Name TWO new economic paradigms of the business cycle − Demand-side policy ECONOMICSGrd12 P a g e 23 | 368 V3 − Supply-side policy 2.9 (2 x 1) Name TWO indicators of the business cycle. − Leading indicators − Lagging indicators − Co-incident indicators (2 x 1) 2.10 List TWO theories used to explain the causes of the business cycles. − Monetarist Approach − Keynesian Approach (2x1) QUESTION 3: HINT: These types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2. Answers must be provided in full sentences; learners must ensure that their answer addresses the question asked 3.1 How can the South African government use government spending as fiscal measure to stimulate the economy? (1x2) Reducing taxes: − which will give consumers and companies more money to spend on goods and services and for companies to expand their production capacity✓✓ Increasing government spending − which will increase aggregate expenditure and demand and thus stimulate economic activity and employment. ✓✓ − increasing government spending and simultaneously decreasing taxes✓✓ (Accept any other correct relevant response) 3.2 What negative effect did COVID-19 have in the manufacturing sector? (1x2) − COVID-19 led to a total shutdown of the economic activities. ✓✓ (Accept any other correct relevant response) 3.3 How are leading indicators used in the forecasting of business cycles? (1x2) − Leading indicators are used by economists to get an idea of what to expect soon as they change before a business cycle changes. ✓✓ ECONOMICSGrd12 P a g e 24 | 368 V3 − They give consumers, businesses, and the state a glimpse of the direction in which the economy might be heading. ✓✓ (Accept any other correct relevant response) 3.4 Why is it important to use moving averages to forecast business cycles? (1x2) - It removes fluctuations in economic data which makes it easier to predict business cycles. ✓✓ (Accept any other correct relevant response.) 3.5 How can the reserve Bank use cash reserve requirement to stimulate the economy? (1x2) − By decreasing the percentage of the cash reserve which commercial banks keep at SARB which will lead to more money available in the banks for lending. ✓✓ (Accept any other correct relevant response) 3.6 Why does the endogenous school of thought encourage government intervention in the economy? (1x2) − Markets are unstable therefore government should intervene in the economic processes to stabilise the economy (to smooth out peaks and troughs) ✓✓ − The price mechanism fails to coordinate supply and demand in the product and factor market ✓✓ (Accept any other correct relevant response) 3.7 What is the purpose of a trend line in a business cycle? (1x2) − The trend indicates the general direction in which indexes move, that were used in the business cycle ✓✓ (Accept any other correct relevant response) 3.8 What can the government do during a period of recession to stimulate the economy? (1x2) The government can: − apply an expansionary fiscal policy ✓✓ − reduce taxes / lower personal income tax which will allow people to spend more ✓✓ − increase government spending ✓✓ ECONOMICSGrd12 P a g e 25 | 368 V3 − Provide new infrastructure which help in supporting businesses to produce more ✓✓ − support SMME’s and informal sector activities ✓✓ (Accept any other correct relevant response) 3.9 How accurate are leading indicators? (1x2) − Leading indicators often face trade-offs between accuracy, precision, and lead time in predicting future events ✓✓ − Looking at several leading indicators in conjunction with other types of data can help provide information about the future health an economy ✓✓ (Accept any other correct relevant response) 3.10 Why is price stability important to prevent extreme fluctuations in business cycles? (1x2) − Price stability controls speculative behaviour among businesses and consumers thereby reducing supply-side and demand-side influences on economic fluctuations. ✓✓ − Positive consumer confidence is encouraged which enables businesses to maintain steady growth in production levels. ✓✓ (Accept any other correct relevant response) DATA RESPONSE HINT: All section B questions have TWO data interpretation questions – each total 10 marks. Section B consist of Questions 2-4 not as numbered in this document QUESTION 4.1: 4.1. Read the extract below and answer the questions that follow. 4.1.1 Name the period of business cycle during which the level of economic activities increases − Upswing / expansion ✓ (1) 4.1.2 Mention ONE type of a business cycle. (1) − Kitchin cycle ✓ − Kondratieff ✓ − Juggler cycle ✓ − Kuznets cycle ✓ ECONOMICSGrd12 P a g e 26 | 368 V3 4.1.3 Briefly describe the concept business cycle. (2) − Successive periods of increasing and decreasing economic activity. ✓✓ (Accept any other correct relevant response.) 4.1.4 How can natural disasters influence fluctuations in business cycles? (2) Bad weather can influence fluctuations by: − Reducing the productivity of the agricultural sectors hence causing a downturn in the economy. ✓✓ − Causing contractions in business cycles because of a decline in the supply of agricultural product. ✓✓ − Decreasing raw material used to produce other goods thus causing a retarded growth in the level of economic activities. ✓✓ (Accept any relevant correct response.) 4.1.5 How has the Keynesian (endogenous) school of thought influenced business cycles? (4) − The Keynesian (endogenous) view is that markets are inherently unstable, therefore government intervention is necessary to stabilise the economy ✓✓ − They argue that changes in value of total expenditure bring about changes in demand ✓✓ − Government can intervene through fiscal policy which includes taxes and government spending ✓✓ − During a recession, government can increase its spending and reduce taxes. (stimulate) ✓✓ − This will increase the level of economic activity e.g., production, employment, income and demand ✓✓ − During a peak the government can increase taxes and reduce government spending ✓✓ − This will result in reduced income, reduced demand for factors of production, and expenditure ✓✓ (Accept any other relevant response.) QUESTION 4.2: 4.2. Study the information below and answer the questions that follow. ECONOMICSGrd12 P a g e 27 | 368 V3 4.2.1 Identify the socio-economic challenge that increased when the economy went into a slump. (1) − Unemployment/job losses✓ 4.2.2 Name the lower turning point of a business cycle (1) − Trough✓ 4.2.3 Briefly describe the term economic recession (2) − A negative economic growth rate for at least two consecutive quarters/a decline of economic output that lasts for 6 months or longer. ✓✓ (Accept any other correct relevant response.) 4.2.4 Explain the relationship between GDP and business cycles (2) − the business cycle model shows how a nations real GDP fluctuates overtime going through phases as aggregate output increases and decreases✓✓ − Over the long-term the business cycle shows a steady increase in the potential output in a fast-growing economy✓✓ 4.2.5 Why does inflation tend to fall during recessions? (4) Inflation falls during recession because: − businesses have unsold goods and will try discounting their goods to get rid of their excess stock✓✓ − reduced prices of goods lead to lower costs – pushing inflation down. ✓✓ − as unemployment rises, it becomes harder for workers to bargain for higher wages✓✓ − low confidence in an economy usually reduces inflation expectation✓✓ (Accept any other correct relevant response.) QUESTION 4.3: 4.3. Study the graph below and answer the questions that follow. 4.3.1 List ONE example of a lagging indicator. (1) − Unemployment rate ✓ − Real investment in machinery and equipment ✓ − Hours worked in construction ✓ (Accept any other correct relevant response) 4.3.2 Identify the year in which GDP employment and investment were at the lowest? (1) ECONOMICSGrd12 P a g e 28 | 368 V3 − 2020 ✓ 4.3.3 Briefly describe the term Juglar business cycles (2) − Juglar business cycles are business cycles which are caused by changes in investment of capital goods, and they last for a period of 7 to 11 years. ✓✓ 4.3.4 What economic activities take place during the recession phase? (2) − Consumer spending, especially on durable goods begins to decrease. ✓✓ − Downwards tendency in investments. ✓✓ − High interest rates and a diminution in price increases. ✓✓ − More businesses are liquidated due to inability to pay bank loans. ✓✓ − Business costs increase leading to retrenchment of the workers. ✓✓ (Accept any other correct relevant response) 4.3.5 How can the length be used in forecasting of business cycles? (4) − Because the length remains relatively constant, one can forecast that the next cycle will be of a similar length✓✓ − If a business cycle has a length of 12 years, it can be predicted that 12 years will pass between successive peaks or troughs or that it will take 6 years for the economy to pass through a recession✓✓ − Longer cycles show strength which will indicate that the next cycle will also be strong (or vice versa) ✓✓ (Accept any other correct relevant response) QUESTION 4.4: 4.4. Study the diagram below and answer questions that follow. 4.4.1 Identify the letter that represent the trend line in the illustration above (1) −K✓ 4.4.2 Which letter represents a trough in the diagram above? (1) −D✓ 4.4.3 Briefly describe the term real business cycle. (2) − An actual business cycle is obtained when the effects of irregular events, seasons and long-term growth trend are removed from the time series data ✓✓ 4.4.4 Explain economic activity during phase EF in the business cycle. (2) ECONOMICSGrd12 P a g e 29 | 368 V3 − Economy is growing and improving rapidly. ✓✓ − More businesses open up and employment increase. ✓✓ − Higher demand and higher prices for capital goods. ✓✓ − Firms make higher profits and household salaries increase. ✓✓ 4.4.5 How can the length of business cycles be used in forecasting? (4) − The length is remains relatively stable and can be used to forecast the next cycle with similar length. ✓✓ − If a business cycle has 13 years, it can be predicted that 12 years will pass between successive peaks or trough, or it can take 6 years for an economy to pass through a trough. ✓✓ − Longer cycles show strength which will indicate that the next cycle will also be strong. ✓✓ QUESTION 4.5: 4.5. Study the extract below and answer the questions that follow. 4.5.1 Identify ONE exogenous factor which can cause business cycles in the extract above? (1) − COVID‐19 variants/New waves of Covid-19 infections ✓ − Continued interruptions in power supply ✓ − Global interest rate increases ✓ 4.5.2 Name ONE fiscal policy instrument which the government can use to bolster economic growth and employment. (1) − Government spending ✓ − Taxation ✓ − Public debt ✓ 4.5.3 Briefly describe the term real economic growth. (2) − The real economic growth rate measures economic growth as expressed by gross domestic product (GDP) from one period to another adjusted for inflation. ✓✓ (Accept any other correct relevant response) 4.5.4 What is the purpose of a trend line in a business cycle? (2) ECONOMICSGrd12 P a g e 30 | 368 V3 − The trend indicates the general direction in which indexes move that were used in the business cycle. ✓✓ (Accept any other correct relevant response) 4.5.5 How can the government improve the efficiency of markets to revive the economy? (4) − By removing rules and regulations that interfere in the functioning of markets. ✓✓ − Promotion of healthy competition by reducing anti-competitive behaviour and encouraging foreign direct investment in the economy ✓✓ − By levelling the playing field so that private sector can compete with public sector without government support and protection. ✓✓ (Accept any other correct relevant response) ECONOMICSGrd12 P a g e 31 | 368 V3 QUESTION 5 Paragraph type questions – Middle Cognitive 5.1. Draw a correctly labelled diagram of a business cycle, clearly indicating trend line, length, the amplitude, and the trough. (8) 5.2 Distinguish between the Keynesian and the Monetarist explanation of the causes of business cycles (8) Keynesian explanation: - Internal factors cause expansions and contractions in economic factors. ✓✓ - They believe that markets are inherently unstable. ✓✓ - They believe that the price mechanism fails to efficiently regulate the market. ✓✓ - Government intervention is needed to smooth out business cycles. ✓✓ - Monetarist explanation: - Business cycles originate from factors that affect the economy from the outside. ✓✓ - They believe that markets are inherently stable. ✓✓ - They believe that when imbalances in the economy occur, the market forces of demand and supply and the price will self-regulate and bring the economy back to equilibrium. ✓✓ - The government should not interfere in markets ✓✓ ECONOMICSGrd12 P a g e 32 | 368 V3 5.3 Briefly discuss lagging indicators as a feature underpinning forecasting. (8) - Lagging follows immediately after the coincident indicators ✓✓ - Serve to confirm the behaviour of the coincident indicators. ✓✓ - If it does not confirm the upswing or downswing, for instance, it signals that the upswing or downswing is weak. ✓✓ - A weak downswing will most likely end at an early stage ✓✓ - Change direction after reference turning points in the business cycle has been reached. ✓✓ - Confirm changes that were first indicated by the leading indicators and then the coincident indicators. ✓✓ - Provide an advance signal of a turning point in the business cycle. ✓✓ - First to reflect imbalances that intensify (increase) or subsidize (decrease) in the economy. ✓✓ - Influence of movements on subsequent movements in the leading indicators help explain the view that one business cycle generates the next one. ✓✓ 5.4 Illustrate a typical business cycle (8) Graph illustration marks Y axis/Economic activities – 1 mark X axis/Time – 1 mark Correct labelling of the four phases – 1 mark Trend line – 1 mark Max. marks = 4 marks - Economic activity is shown by the upward and downward movements of the curve. ✓✓ ECONOMICSGrd12 P a g e 33 | 368 V3 - A period where there is a general increase in economic activity is known as an upswing. ✓✓ - A period of general decline in economic activity is called a downswing. ✓✓ The business cycle oscillates between the upper (peak) and lower (trough) turning points along a trend line. ✓✓ - The length of the business cycle is measured from peak to peak or from trough to trough. ✓✓ 5.5 Briefly explain how the government uses the new economic paradigm to smooth out business cycles - (8) Governments need to apply policies that will prevent peaks ending with inflation or troughs that end with unemployment. ✓✓ - The new economic paradigm in terms of the smoothing of business cycles encourages achieving stability through sound, long term decisions relating to demand and supply in the economy.✓✓ - The new economic paradigm refers to government policies designed to ensure a high rate of economic growth without having supply limitations and price inflation. ✓✓ - This new way of thinking (new economic paradigm) lies in demand – side and supply side policies. ✓✓ 5.6 Compare the endogenous and exogenous causes of business cycles (8) ECONOMICSGrd12 P a g e 34 | 368 V3 - 5.7 Briefly discuss the prosperity phase of a business cycle (8) - Businesses and consumers have gained confidence in the economy. ✓✓ A sustained increase in the production process is evident. ✓✓ - Employment levels are at highest, wages and salaries rise and spending increases. ✓✓ - The demand for goods and services rises. ✓✓ - The high demand of goods and services will cause a rise in the inflation rate. ✓✓ 5.8 Discuss the length and amplitude as features underpinning forecasting of business cycles. (8) Length - The length is measured from peak to peak or trough to trough. ✓✓ - The length is remains relatively stable and can be used to forecast the next cycle with similar length. ✓✓ - If a business cycle has 13 years, it can be predicted that 12 years will pass between successive peaks or trough, or it can take 6 years for an economy to pass through a trough. ✓✓ ECONOMICSGrd12 P a g e 35 | 368 V3 - Longer cycles show strength which will indicate that the next cycle will also be strong. ✓✓ Amplitude - Measures the distance of the variable from the trend line. ✓✓ - Amplitude is the vertical (height) difference between a trough and the next peak in the cycle. ✓✓ - A larger amplitude means more extreme changes that occur in cycle. ✓✓ - The duration of a cycle with a large amplitude is usually longer than one with a smaller amplitude. ✓✓ 5.9 Explain the coincidence and the lagging indicators used in forecasting of business cycles. (8) Lagging indicators: - Won't change direction until after the business cycle has changed its direction / the specific turning points tend to follow the reference turning points✓✓ - They serve to confirm the behaviour of the coincident indicators✓✓ - Serve to confirm the behaviour of the coincident indicators✓✓ - If it does not confirm the upswing or downswing, for instance, it signals that the upswing or downswing is weak. ✓✓ - Examples of these indicators are hours worked in construction and total of commercial vehicles sold✓✓ Coincident indicators -The turning points of these variables tend to always coincide with the reference turning points.✓✓ - They provide information about the current situation of the economy. ✓✓ - Examples: the real GDP, registered unemployment, volume of imports and the volume of manufacturing production. ✓✓ (Accept tabular format) (A maximum of 1 mark allocated for examples per indicator) 5.10 Differentiate between amplitude and the trendline as features underpinning forecasting (8) Trend line ECONOMICSGrd12 P a g e 36 | 368 V3 - The trend is the general direction of the economy. ✓✓ - The trend line that rises gradually will be positively sloped in the long run. ✓✓ - This rising line indicates a growing economy. ✓✓ - The trend line represents the average position of a business cycle. ✓✓ Amplitude - Amplitude refers to the deviation from the trend line to the trough and from the trend line to the peak of the business cycle. ✓✓ - It shows the severity of each phase of the business cycle, the shorter the amplitude – indicates a mild recession. ✓✓ - The larger the amplitude, the more extreme the changes that occur. ✓✓ - If the peak is far from the trend line it means the underlying causes of expansion are very strong / If the peak is close to the trend line, the underlying causes are weak. ✓✓ - (Allocate a maximum of 4 marks for mere listing of facts / examples) ECONOMICSGrd12 P a g e 37 | 368 V3 QUESTION 6 Paragraph type questions – Higher cognitive 6.1 How can South Africa’s fiscal policy contribute to a higher economic growth rate? (8) - Increasing government spending to encourage economic activity directly from the private sector. ✓✓ - Transferring funds to individuals who may then spend that money to buy goods and services. ✓✓ - Decreasing tax revenue to encourage economic activity which increases individuals’ disposable income. ✓✓ - The disposable income will increase demand for consumer goods and services. ✓✓ - The increase in demand for goods and services leads to decreased unemployment✓✓ - The expansionary fiscal policy can be beneficial when the economy is in recession. ✓✓ 6.2 - Why is price stability important to prevent extreme fluctuations in business cycles? (8) contributes to high levels of economic activity and employment. ✓✓ - improves the transparency of the price mechanism so that people can recognize changes in relative prices without being confused by changes in the overall price. ✓✓ - allows people to make well-informed consumption decisions. ✓✓ - encourages foreign investment to promote growth. ✓✓ - helps to allocate resources more efficiently. ✓✓ - avoids unproductive activities that are sometimes used to protect one against the impact of high inflation. ✓✓ - avoids the risk of deflation which makes it more difficult implement policies guarding against it ✓✓ - implements targeting inflation by reducing distortion of inflation or deflation which exacerbates the distortionary impact on the economic behaviour of tax and social security✓✓ - prevents an arbitrary redistribution of wealth and income as a result of unexpected fluctuations. ✓✓ - keeps interest rates unchanged to ensure continued growth in the economy without big fluctuations. ✓✓ ECONOMICSGrd12 P a g e 38 | 368 V3 - adapts the cash reserve requirements which will compel banks to limit credit/money in circulation. ✓✓ (Accept any correct relevant response.) 6.3 Evaluate the potential success of South Africa’s fiscal policy in smoothing out fluctuations in the economy (8) The following fiscal policy instruments can stimulate a depressed (weakened) economy effectively: - Increasing government expenditure with borrowed money (budget deficit) will lead to more job opportunities. ✓✓ - An increase in government spending increases aggregate demand and expenditure, therefore the aggregate demand and employment will increase (the economy will move from contraction to expansion) ✓✓ - Decreasing taxes – a decrease in personal income tax results to an increase in disposable income of households ✓✓ - Consumers and producers will have a larger part of their incomes available to spend on goods and services ✓✓ - A decrease in tax rate enables the economy to move from slump to recovery / boom because households will demand more goods and services with higher disposable income ✓✓ - Increasing government spending and simultaneously decreasing taxes ✓✓ - there will be a strong effect as consumers and producers will have more to spend ✓✓ - demand increases substantially and employment increases ✓✓ 6.4 Evaluate RSA’s efforts in improving the efficiency of inputs (8) Greater efficiency is usually achieved with incentive schemes and measures such as: - Tax rates – high rates of personal income tax are a disincentive to work. ✓✓ - High rates of corporate income tax are a disincentive to invest because they increase costs and reduce net profits. ✓✓ - High indirect taxes such as VAT are a disincentive to produce because they increase selling prices. ✓✓ - Capital consumption – replacing capital goods regularly creates opportunities for businesses to keep up with technological development. ✓✓ ECONOMICSGrd12 P a g e 39 | 368 V3 - Depreciation allowances are subtracted from gross profit before taxes are calculated and therefore reduce the amount of tax liability. ✓✓ - Human resource development – the quality of labour can be improved by improving health care, education, training or the mobility of labour. ✓✓ - Free advisory services – these promotes opportunities to export and establish businesses in foreign countries; improve the quality of human resources through the skills development act. ✓✓ 6.5 With reference to the Phillips curve analyse the relationship between inflation and unemployment (8) - The Phillips curve shows that inflation will increase if there is less unemployment ✓✓ - A very high inflation can lead to stagflation ✓✓ - The demand for goods and services can be stimulated without increased employment ✓✓ - Capital intensive production processes would not necessarily contribute to further job creation ✓✓ - The worker might make use of extended credit facilities to enjoy the same standard of living when they experience price increases ✓✓ - Skills development and improved education that increases employment will create an increased demand for goods and services ✓✓ - Inflation targeting (3%–6%) will prevent stagflation ✓✓ (Accept any other correct relevant response.) 6.6 Explain how the Government can stimulate economic activity in an effort to smooth out cycles (8) The government can stimulate economic activity by: - Expansionary fiscal policies ✓✓ - Reducing tax so that people spend more ✓✓ - Increased government expenditure ✓✓ - Using expansionary monetary policies ✓✓ - Reducing interest rates ✓✓ ECONOMICSGrd12 P a g e 40 | 368 V3 6.7 Discuss any monetary policy instrument used by the SARB to smooth out business cycles? (8) Interest rates ✓ - banks go to SARB if they experience a general shortage in funds to make use of its repurchase tender system – repo rate. ✓✓ Cash reserve requirements ✓ - SARB can change balances the banks are required to maintain to manipulate the money creation activities of banks. ✓✓ Open-market transactions ✓ - SARB directly reduces or increases the supply of money in circulation by buying and selling government securities in the open market ✓✓ Moral persuasion ✓ - SARB makes use of consultation and persuasion to convince banks to act in a way that is desirable in the current economic climate. ✓✓ Exchange rate policy ✓ - can be either free-floating (if price of currency is determined by demand and supply) or controlled floating (when central bank interferes in foreign exchange markets by buying and selling currency). ✓✓ 6.8 How can the monetary policy be used to slow down an overheating economy? (8) − Increasing interest rate will discourage too much spending and encourage saving and investment. ✓✓ − Moral suasion can be used to warn banks to act in a manner where credit is given responsibly. ✓✓ − SARB can increase the cash reserve requirement so that banks have less money available for lending. ✓✓ − SARB can decrease the money supply by selling government securities in the open market ✓✓ (Accept any other correct relevant response) (Allocate a maximum of 2 marks for mere listing of facts /examples) ECONOMICSGrd12 P a g e 41 | 368 V3 6.9 Analyse the importance of price stability in preventing extreme fluctuations in business cycles. (8) − Price stability controls speculative behaviour among businesses and consumers thereby reducing supply-side and demand-side influences on economic fluctuations. ✓✓ − Positive consumer confidence is encouraged which enables businesses to maintain steady growth in production levels. ✓✓ − Larger amplitudes in the business cycles are avoided through stable prices and creates more certainty in the economy. ✓✓ − Stable prices result in longer business cycles which show strength of the economy, and the economic growth path will have upward trend. ✓✓ − Maintains positive investors' confidence, allowing the economy to follow a stable economic growth path. ✓✓ − Minimizes government interventions which may reduce extreme economic fluctuations. ✓✓ − Stable prices allow the SARB to keep interest rates unchanged to ensure continued growth in the economy without big fluctuations. ✓✓ − Demand for exports is maintained when prices are stable, which avoids extreme depreciation of the local currency associated with recession. ✓✓ (Allocate a maximum of 4 marks for mere listing of fact and examples) (Accept any other correct relevant response) 6.10 How can the SARB prevent further recessions in the economy? (8) SARB can prevent the recessions by: - Adjusting the repo rate downwards which will lead to lower interest rates. ✓✓ - Decreasing cash reserve requirements to make more money available in the banks, for loans. ✓✓ - Buying securities in the open market (open market transactions) ✓✓ - Stabilizing the exchange rates to increase the money supply. ✓✓ SECTION C HINT: All section C questions have TWO questions 5 & 6 NOT like in this document. In the examination you will need to answer only one. ESSAY STRUCTURE ECONOMICSGrd12 P a g e 42 | 368 V3 HINT: Section C – the long question, must be answered in FOUR sections: Introduction (definition), Body (headings and full sentences in bullets) additional part and conclusion (summarising). The mark allocations for Section C is as follows: MARK ALSTRUCTURE OF ESSAY LOCATION Introduction Max. The introduction is a lower-order response. 2 • A good starting point would be to define the main concept related to the question topic. • Do not include any part of the question in your introduction. • Do not repeat any part of the introduction in the body. • Avoid mentioning in the introduction what you are going to discuss in the body. Body Main part: Discuss in detail/In-depth discussion/Examine/Critically Max. 26 discuss/ Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Draw a graph and explain/Use the graph given and explain/Complete the given graph/Assess/Debate A maximum of 8 marks may be allocated for headings/examples Max. 10 Additional part: Critically discuss/Evaluate/Critically evaluate/Debate/ Deduce/Compare/Distinguish/Interpret/How? /Suggest A maximum of 2 marks may be allocated for mere listing facts. Conclusion Max. Any higher-order conclusion should include: 2 • A brief summary of what has been discussed without repeating facts already mentioned • Any opinion or value judgement on the facts discussed • Additional support information to strengthen the discussion/analysis • A contradictory viewpoint with motivation, if required • Recommendations TOTAL 40 QUESTION 7 • Discuss in detail the new economic paradigm in smoothing-out business cycles. (26 marks) • Evaluate the South African government's initiatives to reduce the economic downturn caused by the Covid-19 pandemic. (10 marks) INTRODUCTION ECONOMICSGrd12 P a g e 43 | 368 V3 - The new economic paradigm suggests that it is possible to implement measures to promote economic growth and reduce unemployment without provoking inflation. ✓✓ - The new economic paradigm is embedded in both demand-side and supply-side policies.✓✓ (Accept any other relevant introduction) (Max 2) BODY: MAIN PART Demand-side policies: ✓ Traditional monetary and fiscal policies focus on aggregate demand ✓✓ Monetary policy ✓ - When the level of economic activity is depressed, the SARB can use expansionary measures to stimulate economic activities ✓✓ - An expansionary monetary policy is implemented when the economy is in recession in order to stimulate economic activities ✓✓ - Interest rates can be reduced to make borrowing cheaper and encourage spending by households and businesses ✓✓ ECONOMICSGrd12 P a g e 44 | 368 V3 The increased spending increases the level of economic activity. Investment will increase and more factors of production will be employed ✓✓ - Higher levels of production and income and expenditure will be achieved ✓✓ - If the supply of goods and services does not increase in line with increase in demand, inflation will increase ✓✓ Fiscal policy: ✓ - When the level of economic activity is low the minister of finance can use expansionary fiscal measures to stimulate growth and reduce unemployment ✓✓ - An expansionary fiscal policy can be implemented when the economy is in recession in order to stimulate economic activities ✓✓ - An increase in government expenditure will increase aggregate demand ✓✓ - When there is an increase in injection in the economy, production which will result in a higher employment of factors of production ✓✓ - The result will be higher income and higher expenditure ✓✓ - Taxes can be reduced, which will lead to an increase in disposable income ✓✓ - This will increase consumer spending and investments, stimulating aggregate demand ✓✓ Inflation ✓ - When the demand increases, the supply will react in the same way. ✓✓ - If the supply does not react to an increase in demand, prices will increase (a new equilibrium). ✓✓ - Aggregate demand and supply are in equilibrium where AD = AS at point C, and again where AD1 = AS1 at point E. ✓✓ - When the demand increases, the supply will react in the same way. ✓✓ - Fig (a) below illustrates that if AD1 increases and AS does not respond, the new equilibrium will be at point F ✓✓. Therefore, real production will increase, and prices will also increase. Inflation will prevail. ✓✓ Unemployment: ✓ - Demand-side policies are effective in stimulating economic growth. ✓✓ - The demand for labour will increase due to economic growth, and that leads to reduced unemployment. ✓✓ ECONOMICSGrd12 P a g e 45 | 368 V3 - A decrease in unemployment results in an increase in inflation because more people are employed, which causes an increase in demand for labour. ✓✓ - This relationship between unemployment and inflation is illustrated using the Phillips curve ✓✓ - The Phillips curve shows the relationship between unemployment and inflation. ✓✓ - PC shows the initial situation, where at point C the PC curve intersects x/axis i.e., natural rate of unemployment is 14%. ✓✓ - If unemployment falls to D i.e., 9% causes wages to increase, thus inverse relationship between unemployment and inflation. ✓✓ - Supply-side measures that can relocate the Phillips curve to shift to the left, due to improved education, effective training, and fewer restrictions on immigration of skilled workers, ✓✓ - Demand-side policies are effective in stimulating economic growth. ✓✓ - Economic growth can lead to an increase in demand for labour. ✓✓ - As a result, more people will be employed, and unemployment will decrease. ✓✓ - As unemployment decreases inflation is likely to increase. ✓✓ Supply-side policies: ✓ A demand-side approach does not render desirable outcome because growth has to be cut due to problems in inflation ✓✓ - Aggregate supply needs to be managed as well by focusing on increased flexibility of supply components ✓✓ ECONOMICSGrd12 P a g e 46 | 368 V3 - If the cost of increasing production is completely flexible, a greater output can be supplied at any given price level ✓✓ - The governments can arrange things in the economy in a way that is cooperative to changes in demand. ✓✓ - Reduction of costs allows greater output to be supplied at any given price level. ✓✓ Government measures that can reduce costs ✓ - Infrastructural services like communication, transport and energy costs ✓✓ - Administrative costs like inspections and regulations add to overall costs ✓✓ - Cash incentives such as subsidies lower the production cost ✓✓ - Compensation to exporters to encourage increased production aimed at foreign market ✓✓ Measures to improve efficiency of inputs ✓ - Lower rates of personal income tax are incentives for high productivity and increase aggregate supply ✓✓ - Capital consumption by replacing capital goods on a regular basis that will create opportunities for businesses to keep up with technological development ✓✓ - Human resources development where the quality of labour can be improved by improving health care, education and training which will increase the efficiency of businesses ✓✓ - Free advisory services to promote opportunities to export and establish business activities in foreign countries which includes weather forecasts, veterinary services, and research ✓✓ Measures to improve efficiency of markets✓ - Deregulation where laws and regulations are removed to make markets free ✓✓ - Competition is encouraged to establish new businesses, invite foreign direct investment, and remove power imbalances ✓✓ - Levelling the economic playing fields because private businesses cannot compete with public enterprises due to legislative protection ✓✓ (Max 26) (Accept any other correct relevant response) (Allocate a maximum of 8 marks for mere listing of facts /examples) ADDITIONAL PART Reduction in repo rate to keep the cost of borrowing low has stimulated consumer spending and investments ✓✓ ECONOMICSGrd12 P a g e 47 | 368 V3 - Loan guarantees for businesses with low turnover has helped them survive extra costs brought by covid-19 ✓✓ - Relaxing regulatory requirements has supported the flow of credit to households and businesses ✓✓ - The government introduced temporary payment holidays and other measures to support debtors ✓✓ - Tax deferral and postponement of new taxes has encouraged businesses to continue operating saving some several jobs ✓✓ - Temporary employment relief scheme has supported workers and reduce retrenchments.✓✓ - Expansion of social grants and other social reliefs increased demand for goods and services encouraging businesses to produce more. ✓✓ - Reallocation of funds among government departments resulted in some departments failing to deliver services e.g., infrastructure development ✓✓ - Restrictions in the trading of non-essential products such as alcohol and tobacco resulted in a decline in tax revenue for the government ✓✓ - Borrowing of funds to fight the pandemic has increased the public debt ✓✓ (Accept any other correct higher order, relevant response) (Allocate a maximum of 2 marks for mere listing of facts /examples) (Max 10) CONCLUSION It is critically important for the government to focus on both demand-side and supply-side measures to ensure stability in the economy ✓✓ (Accept any other correct higher order, relevant conclusion) (Max 2) QUESTION 8 • Discuss in detail the features underpinning the forecasting of business cycles • (26 marks) Why is price stability important to prevent extreme fluctuations in business cycles? (10 marks) INTRODUCTION Business cycles is the recurring fluctuations (ups and downs) in economic activity, relative to the economic trend value. ✓✓ ECONOMICSGrd12 P a g e 48 | 368 V3 BODY MAIN PART Extrapolation ✓ - This means using historical data and predicting the future on that basis. ✓✓ - For example: If the economy grows or decreases continually, predictions can be made by means of extrapolation along the same trend line. ✓ Moving averages ✓ - Refers to the average price of an indicator over a specified period. Moving averages are used to look at price trends. ✓✓ - Tables indicating the moving averages of share prices are used to indicate whether they are moving upwards or downwards. ✓✓ - Information can be gathered from this on a daily, monthly, or annual basis. ✓✓ - As the new members (for the day, week or month) are added and the older members are deleted, the average ‘moves. ✓✓ - By calculating a moving average, a forecaster can smooth out the minor fluctuations in a data series. This makes it easier to spot trends. ✓✓ Trend line ✓ - The trend line that rises gradually will be positively sloped in the long run; the rising line indicates a growing economy. ✓✓ - The trend indicates the general direction in which indexes that were used in the business cycle move. ✓✓ - The trend will change when the time series data change their behaviour patterns of the past. ✓✓ - However, some forces have to be overcome for that to happen✓✓ e.g., Resistance points and Channels. ✓ Length of a cycle ✓ - Measuring a cycle from peak to peak or trough to trough. ✓✓ - Longer cycles show strength and shorter cycles show weakness with regard to economic activities. ✓✓ Amplitude ✓ - Measures the distance of the variable from the trend line. ✓✓ ECONOMICSGrd12 P a g e 49 | 368 V3 - Amplitude refers to the vertical (height) difference between a trough and the next peak of a cycle. ✓✓ The larger the amplitude, the more extreme the changes that occur. ✓✓ Max 8 marks to headings and/or examples [26] ADDITIONAL PART − Price stability leads to inflation stability. ✓✓ − If prices are stable, then the demand for goods and services will be stable. ✓✓ − Production of goods and services will not fluctuate, and employment will be stable. ✓✓ − Unemployment will not increase if prices are stable. ✓✓ − Interest rates will remain unchanged, and the economy will continue to grow without big fluctuation. ✓✓ CONCLUSION Government uses the monetary policy to achieve price stability and control the amount of money in circulation. ✓✓ QUESTION 9 • Discuss in detail the demand-side policies in smoothing of business cycles. (26 marks) • How could the Monetarist’s viewpoint on government policies cause a contraction in the business cycle? (10 marks) INTRODUCTION Smoothing of business cycles is when policy is used to prevent dramatic peaks and troughs ✓✓ (Accept any other correct relevant introduction) BODY MAIN PART - Government’s aim with business cycle policies is to achieve the best possible growth rates ✓✓ - They need to apply policies to smooth out cyclical movements, so that peaks do not end up in high inflation and troughs do not result in high unemployment. ✓✓ - Government uses monetary and fiscal policies to achieve this. ✓✓ - Fiscal policy is instrumental in stimulating a depressed economy. ✓✓ - Monetary policy is more effective when dampening an overheated economy that has rising inflation. ✓✓ MONETARY POLICY ECONOMICSGrd12 P a g e 50 | 368 V3 - When the level of economic activity changes the SARB can use expansionary and contractionary measures to reduce fluctuation of such economic activities. ✓✓ - An expansionary monetary policy is implemented when the economy is in recession to stimulate economic activities. ✓✓ Interest rates can be reduced to encourage spending. ✓✓ - Households and firms can therefore borrow spend more. ✓✓ - The increased spending increases the level of economic activity, investment will increase, and more factors of production will be employed. ✓✓ - Higher levels of production and income and expenditure will be achieved. ✓✓ - The demand will be greater than supply if the supply of goods and services does not increase in line with the increase in demand and inflation will increase. ✓✓ - In the case of contractionary monetary policy, inflation can be curbed by reducing money supply and availability of credit. ✓✓ - To dampen demand at the peak the government will be able to reduce money supply by increasing interest rate. ✓✓ - Selling government bonds and securities (open market transactions) - Reduce the supply of money in circulation ✓✓ - Increase the cash reserve requirement to manipulate money creation activities of banks ✓✓ - Persuade banks to decrease lending (moral suasion) and to devalue the exchange rate (exchange rate policy) ✓ FISCAL POLICY - When the level of economic activity changes, the Minister of Finance can use expansionary and contractionary measures to reduce fluctuation of such economic activities. ✓✓ - An expansionary fiscal policy can be implemented when the economy is in recession in order to stimulate economic activities. ✓✓ - An increase in government expenditure will increase aggregate demand. ✓✓ - This serves as an injection into the economy as production will increase, more factors of production will be employed. ✓✓ - This will lead to higher income and higher expenditure. ✓✓ - Taxes will be reduced, which will lead to an increase in disposable Income. ✓✓ - This serves as an injection into the economy and eventually aggregate demand will increase. ECONOMICSGrd12 P a g e 51 | 368 V3 ✓✓ - In the case of contractionary fiscal policy, when the economy grows too fast government can reduce its spending and increase taxes. ✓✓ - This will lead to a decrease in aggregate demand which will reduce production as fewer goods and services will be needed. ✓✓ DEMAND-SIDE POLICIES Traditional monetary and fiscal policies focus on aggregate demand. ✓✓ - A demand side approach only does not render ideal results. ✓✓ - Often growth has to be cut due to problems in inflation, balance of payments and shortage of skilled labour. ✓✓ ADDITIONAL PART MONETARISTS VIEWPOINTS - Markets are inherently stable and that a disequilibrium in the markets are caused by faulty policies. ✓✓ - The most important cause of economic fluctuations is inappropriate government policies. ✓✓ - The monetarist’s feel that state intervention will cause distortion of equilibrium. ✓✓ - Equilibrium is caused by supply and demand. ✓✓ - If any imbalance occurs, the market forces of supply and demand will always bring the market back to equilibrium. ✓✓ - The bigger the government intervention, the greater the distortion will be. ✓✓ - An undesirable increase in the money supply will lead to a contraction. ✓✓ - An undesirable decrease in the money supply will lead to a decrease in production processes. ✓✓ - Government should carefully control the stock of money in the economy so that it does not distort the equilibrium that markets forces will automatically establish. ✓✓ (Accept any other relevant argument) (A maximum of 2 marks may be allocated for mere listing of facts/example) CONCLUSION - It remains critical that business cycles must be clearly monitored through indicators available. ECONOMICSGrd12 P a g e 52 | 368 V3 ✓✓ - Policy makers must act quickly by using monetary and fiscal instruments in order to prevent instability in the economy. ✓✓ (Accept any other correct relevant response) ECONOMICSGrd12 P a g e 53 | 368 V3 TOPIC 3: PUBLIC SECTOR SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: Section A – Short Questions HINT: When answering Section, A – short question, it is important not to rush but to read the questions carefully and to make sure you understand what the question is asking. Always remember one alternative is completely wrong, one is nearly correct, and one is totally correct. It is easy to eliminate the completely wrong answer, but if you do not read the question carefully the nearly correct answer will also appear correct. The answer will NEVER be two options. Only ONE option is correct. Your answer will immediately be marked incorrect if you write TWO options. 1.1 POSSIBLE ANSWERS 1.1.1. B (Collective) 1.1.2. C (Public) 1.1.3. D (Economic inequality) 1.1.4. B (Laffer curve) 1.1.5. D (a large proportion of their income than high-income earners) 1.1.6. A (Lack of accountability) 1.1.7. B (Nationalisation) 1.1.8. B (Fiscal) 1.1.9. C (Redistribution of Wealth) 1.1.10 D (Competition) 1.2. POSSIBLE ANSWERS 1.2.1. H (Concerned with issues affecting specific province in South Africa.) 1.2.2. J (When a state-owned business is sold to a private sector enterprise) 1.2.3. G (Refers to a company which is partly or wholly owned by the government) 1.2.4. A (Transfer of ownership from the private sector to the public sector.)1.2.5. 1.2.5 F (Removal of unnecessary laws, by laws and power imbalances that inhibit free operations) 1.2.6. I (Dishonest action taken by people in position of responsibility.) 1.2.7. B (This shows the income and expenditure estimates for a three-year period) 1.2.8. D (Shows the relationship between tax rate and tax revenue.) 1.2.9. J (Document containing details of the plan for allocating state revenue & expenditure) 1.2.10. E (The rate at which the SARB lends money to commercial banks.) 1.3. POSSIBLE ANSWERS 1.3.1. Public goods 1.3.2. Privatization ECONOMICSGrd12 P a g e 54 | 368 V3 1.3.3. Fiscal policy 1.3.4. State Owned Enterprise / Parastatals 1.3.5. Demerit goods 1.3.6. Personal income tax / taxation 1.3.7. Social welfare 1.3.8. Public goods 1.3.9. Corruption / Bribery / Fraud 1.3.10 Laffer curve 1.3.11 Pareto efficiency 1.3.12 Laffer curve 1.3.13 Red tape 1.3.14 Deregulations SECTION B QUESTION 2: HINT: When the question requires you to “list” or “name,” you need not write a sentence but merely few words or a phrase. This MUST be done in bullet form. These types of questions are applicable for 2.1.1, 3.1.1 and 4.1.1 2.1 • • • Give any TWO reasons for the necessity of the public sector. (2 x 1) 2 To supply public goods To conserve resources To manage the economy (2 x 1) 2 • • • • Name any TWO composition of the public sector. National government Provincial government Local government Parastatals / State Owned Enterprises 2.3. • • • • • Mention any TWO objectives of the public sector. Economic growth Full employment Price stability Exchange rate stability Economic equity (2 x 1) 2 2.4 (2 x 1) 2 • • • List any TWO examples of indirect tax. Value Added Tax (VAT) Sin tax Excise duty (2 x 1) 2 • Give any TWO reasons for public sector failure. Management failure 2.2 2.5 ECONOMICSGrd12 P a g e 55 | 368 V3 • • • • • • Apathy Lack of motivation Bureaucracy Politicians Structural weaknesses Special interest groups 2.6. List the TWO main characteristics of fiscal policy Goal-bound • Demand-biased • Cyclical (Accept any other correct relevant response) (2 x 1) 2 • 2.7 (2 x 1) 2 • • • 2.8 • • • 2.9 • • • • • • • Give any TWO examples of community goods Defence Political services Streetlights (Accept any other correct relevant response) List any TWO reasons that can contribute to inefficiency of the public sector. (2 x 1) 2 Bureaucracy Incompetence Corruption (Accept any other correct relevant response) Mention the TWO features of public sector failure. Management failure Apathy Lack of motivation Bureaucracy Politicians Structural weaknesses Special interest groups (Accept any other correct relevant response) 2.10 Name any TWO effects of public sector failure. • Allocation of resources • Economic instability • Distribution of income • Social instability (Accept any other correct relevant response) (2 x 1) 2 (2 x 1) 2 2.11 Name any TWO government pricing policies when supplying public goods and services. (2 x 1)2 • Free-of-charge goods and services • Charging a small fee or toll • Subsidies ECONOMICSGrd12 P a g e 56 | 368 V3 (Accept any other correct relevant response) 2.12. Name TWO problems of public sector provisioning • Lack of accountability • Inefficiency • Problem in assessing needs • Pricing policy • Parastatals • Privatisation/nationalisation (2 x 1)2 2.13. Name any TWO examples government sources of income. • Taxes on income • Property tax • Tax on domestic sale of goods and services • Tax on international trade • Estate duties (Accept any other correct relevant answer) (2 x 1) 2 2.14 Give any TWO reasons for public sector failure. • Management failure • Apathy • Lack of motivation • Bureaucracy • Politicians • Structural weaknesses • Special interest group (2 x 1) 2 QUESTION 3: HINT: These types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2. Answers must be provided in full sentences; learners must ensure that their answer addresses the question asked 3.1 Why is it impossible to charge consumer a price for consumption of community goods? (1 x 2) 2 • Because of their no-excludability features a price cannot be charged on the basis of use (Accept any other correct relevant response) 3.2 Why should the public sector participate in the management of the economy? (1 x 2) 2 • To ensure the application of suitable and credible economic policies to ensure equal opportunities to everyone to increase the standard of living / Ensure efficient and effective application and distribution of resources in the economy / limit anti-competitive behaviour/ensure achievement of macro-economic objectives (Accept any other correct relevant response ECONOMICSGrd12 P a g e 57 | 368 V3 3.3 What benefit will government enjoy from selling non-profitable state-Owned enterprises? (1 x 2) 2 • Income will be generated by selling. • State revenue will increase through taxes. (Accept any other correct relevant response) 3.4. What effect will a slow economic growth have on the economy? (1 x 2)2 • A slow economic growth can retard the ability of the government to provide basic services to the citizens. • Economic growth is linked to economic development therefore a slow economic growth rate implies a slow economic development of a country. (Accept any other relevant and correct response) 3.5 Why does the government provide merit goods? (1 x 2) 2 • It will be undersupplied if it is left to the private sector. (Accept any other relevant and correct answer.) 3.6 What impact will an increase in the VAT rate have on the standard of living of the poor? (1 x 2) 2 • It will reduce their consumption spending hence they would buy less than they did before the increase. 3.7 How can South Africa’s fiscal policy contribute to a higher economic growth rate? (1 x 2) 2 • Through lowering taxes and/or increasing government spending government encourages economic growth. (Accept any other correct relevant response) 3.8 Why is it necessary to calculate a country’s total loan debt (1 x 2) 2 • A government’s debt-to-GDP ratio is an indicator of an economy’s health and a key factor for the sustainability of government finance. • Government debt as a percentage of GDP is used by investors to measure a country’s ability to make future payments on its debt, thus affecting the country’s borrowing costs and government bond yields. (Accept any other correct relevant response) 3.9 Why is it important for the government to establish price stability? (1 x 2)2 It is important for the government to establish price stability in order: • To promote economic growth and development in the country. • For firms and households to predict income and expenditure. • To boost investor confidence that will enable businesses to maintain steady growth • To attract more foreign direct investments (Accept any other correct relevant response) QUESTION 4: DATA RESPONSE & PARAGRAPH TYPE QUESTIONS ECONOMICSGrd12 P a g e 58 | 368 V3 HINT: All section B questions have TWO data interpretation questions – each total 10 marks. Section B consist of Questions 2-4 not as numbered in this document. All section B questions have TWO paragraph questions, one Middle Order & ONE Higher Order TYPICAL EXAM QUESTION: THESE HIGHER ORDER QUESTIONS REQUIRE THE LEARNERS TO USE HER/ HIS CRITICAL THINIKING SKILLS. Higher order questions are grounded in the content. These types of questions test critical thinking, where candidates should be able to apply their knowledge, through logical reasoning and also have an awareness of their current economic climate. Content (covered by discuss/examine/describe/ analyse/explain/evaluate/compare/assess/justify/construct/calculate) can be assessed as higher-order questions. Answers will not necessarily be found in textbooks. QUESTION 4.1: DATA RESPONSE 4.1.1 Identify ONE parastatal in the extract above. • ESKOM • SANRAL (1) 4.1.2 Name the main source of the SOES funding. • Taxation (1) 4.1.3 Briefly describe the term parastatal. (2) • Businesses with limited liability operating with the intention to make profit. however, if they make losses, government makes up the losses. • (Accept any other correct relevant response) 4.1.4 Why is the existence of SOEs important to the economy? (2) • The government earn an income with soes which can lead to government spending. (Accept any other correct relevant response) 4.1.5 Briefly discuss management and accountability as a reason for public sector failure (4) • Accountability: arises because the public requires assurance that the public sector delivers the desired quantities and quality of goods and services for which taxes are raised and that it does not abuse the powers it was granted by for example, creating monopolies and tolerating corruption, nepotism, incompetence and apathy. • Management: a government manages the collective interests of the people of its country. with regard to their economic interest, it has to ensure a social and legislative environment in which individuals and businesses can pressure their own interests to the maximum and apply suitable and credible economic and other policies in order to achieve internationally respected economic objectives. (Accept any other relevant response) (any 2 x 2) (4) ECONOMICSGrd12 P a g e 59 | 368 V3 QUESTION 4.2 DATA RESPONSE 4.2.1 Identify the parastatal depicted in the cartoon above. • ESKOM (1) 4.2.2 What does the abbreviation SOE stand for? • State Owned Enterprise (1) 4.2.3 Briefly describe the term privatisation. (2) • Government selling more than 50% of the shares of its enterprises, or other kinds of service entities, to the private sector. (Accept any other correct relevant answer) 4.2.4 Why is efficiency a problem in public sector provisioning? (2) • Inefficiency is caused by bureaucracy, incompetence, and corruption, which occurs due to the incorrect allocation and use of resources. • When the public sector cannot correct the free market’s shortcomings, interventions by the government fail to meet the desired outcome. (Accept any other correct relevant answer) 4.2.5 How can the government use the fiscal policy to stimulate economic growth in South Africa? (4) • Government can lower direct and indirect taxes to boost production, that might have a positive impact on economic growth. • Lower taxes will increase consumer spending which will lead to an increase in the demand for goods and services. • Increased government spending, i.e., upgrading and building new infrastructure will create more jobs; the higher income to households will impact positively on the real GDP. (2 x 2) (Accept any other correct relevant answer) QUESTION 4.3 DATA RESPONSE 4.3.1 Identify the parastatal that is sinking in the above cartoon. • ESKOM (1) 4.3.2 Name any other parastatal in South Africa. • SABC / TRANSNET / DENEL (Accept any other correct relevant answer) (1) 4.3.3 Briefly describe the term state-owned enterprise. (2) • A business owned wholly or partly by the state and run by public authority. 4.3.4 Explain why mismanagement leads to inefficiency. (2) • Politicians tend to promote policies and continue to spend money on products if they can get votes in return. ECONOMICSGrd12 P a g e 60 | 368 V3 • • These resources might involve inefficient allocation of resources. Lack of skills, experience and qualifications lead to poor management which impact poorly on service delivery. 4.3.5 How does public sector failure impact economic stability? (4) • It will lead to an overall decline in economic welfare • Government is unable to use fiscal policy effectively • Government expenditure and taxation cannot be used to stimulate our economy when we are in a recession • Neither can it be used to contract our economy when we are experiencing high levels of inflation. MIDDLE ORDER PARAGRAPH 4.3.6 Discuss the reasons for the existence of a public sector. • Market failure / inefficient resource allocation. • Provision of public goods and services. • Problems with externalities require government intervention. e.g., negative externalities government restricting output. • Provision of merit goods - broad social benefit. • Discourage demerit goods - taxes to discourage consumption and production. • Prevention of monopolies or encourage competition. • Redistribution of income for the benefit of society. • Managing the economy/stabilizing the economy /enforcing a legal structure. (Any 4 x 2) (8) 4.3.7 How can the South African municipalities improve efficiency in service delivery? Municipalities can improve efficiency in service delivery by • Appointing qualified staff with enough experience as top managers. • Training employees continually to equip them with relevant skills to handle the demand of their job. • Eliminate corruption by criminally charging and prosecuting those who are found to be involved in it. • Holding employees accountable for their poor job performance, to ensure that every official take their jobs seriously. • Rewarding employees who perform above expectations rewarded accordingly to encourage them even more. • Improving revenue collection by ensuring the clients pay for the services they consume.(8) (Accept any other correct relevant response) Maximum 2 marks where mere listing of facts occurs) HIGHER ORDER PARAGRAPH 4.3.8 Analyse the problems faced by the South African government in providing public goods and services. ECONOMICSGrd12 P a g e 61 | 368 V3 4.3.9 How can the South African municipalities improve efficiency in service delivery? Municipalities can improve efficiency in service delivery by • Appointing qualified staff with enough experience as top managers. • Training employees continually to equip them with relevant skills to handle the demand of their job. • Eliminate corruption by criminally charging and prosecuting those who are found to be involved in it. • Holding employees accountable for their poor job performance, as a way to ensure that every official take their jobs seriously. • Rewarding employees who perform above expectations rewarded accordingly to encourage them even more. • Improving revenue collection by ensuring the clients pay for the services they consume. (Accept any other correct relevant response) Maximum 2 marks where mere listing of facts occurs) 4.3.10 Why are state owned enterprises (SOEs) seen as a problem in public sector Provisioning? ECONOMICSGrd12 P a g e 62 | 368 V3 • • • • • • The costs of maintaining and managing SOEs are extremely high. These costs result in higher taxes and larger public debt. Private enterprises are more cost-efficient than public enterprises. SOEs are seen as bureaucratic, inefficient, and unresponsive to consumer needs. SOEs do not operate according to the profit motive-they sometimes incur large losses, which must be funded by tax money. SOEs are seen as the exact cause of huge unemployment and a shortage of funds for other developments. (Accept any other correct relevant response.) QUESTION 4.4: DATA RESPONSE 4.4.1 Identify a macroeconomic objective of the public sector in the cartoon. (1) • Economic growth • Full employment 4.4.2 Which level (sphere) of government is responsible for handling issues that affect the country as a whole? (1) • Central/ National 4.4.3 Briefly describe the term full employment. (2) • A situation whereby everyone who is looking for a job is able to find one or create one for themselves (Accept any other correct relevant responses) 4.4.4 Explain how public sector failure can lead to social instability (2) • Poor delivery of public goods and services • Increase in poverty due to lack of skills as a result of poor education (Accept any other correct relevant responses) 4.4.5 Why is South Africa (the truck) likely to fail to achieve its economic goals? (4) • Public servants (have apathy) lack enthusiasm for their jobs, so they do not do it as expected • Officials in management often lack knowledge, implement government policies wrongly, have hidden agendas such as self – enrichment • Government employees lack motivation in carrying out their duties • Lack of efficiency due to incompetence and corruption • Bureaucracy can cause delays in implementation of projects (Accept any other correct relevant responses) (2 x 2) (4) MIDDLE ORDER PARAGRAPH 4.4.6 Briefly discuss distribution of income (economic equity) and price stability as macroeconomic objectives. ECONOMICSGrd12 P a g e 63 | 368 V3 • • • • • • Distribution of income (economic equity): Progressive income tax and tax on profits, wealth and expenditure are used to finance free social services. E.g., education, primary healthcare, basic economic services and to pay cash grants to poor and other vulnerable people. (Max 4) Price stability: Stable prices lead to better results in terms of job creation and economic growth. The SARB inflation target is 3–6% and has been successful in keeping inflation within this target. (Accept above upper limit response) Interest rates, based on the repo rate is the main instrument used to achieve price stability. A stable budget deficit also has a stabilizing effect on the inflation rate and on prices. (Allocate a max of 4 marks for mere listing of facts/examples) (Max 4) (8) 4.4.7 Explain accountability as problems of public sector provisioning. • Government is required to make and implement policies / economic accountability refers to efficient government policies and resource usage / to give an explanation of one’s decisions, actions and expenditures. • Accountability is underpinned by ministerial responsibilities: the DGs are the accounting officers. • Parliamentary questioning: public debates – issues being questioned in parliament where Ministers have to respond. • The National Treasury is responsible for expenditure control. • In South Africa the auditor-general reports annually in writing on each government department. • Responses will earn full marks if the argument/fact is fully explained and within the context of the question. • Public servants are required to give an explanation of their decisions and actions / regular financial reporting / focus on soliciting feedback. • The public holds government accountable for the effective delivery of services and the implementation of policies. • Greater emphasis on output and performance / performance-based management • Increasing accountability on all levels. • The Batho Pele campaign – people-centred. • Financial accountability refers to expenditure control. • Empowerment of users. • Citizens’ charters / participation of citizens • Public complaints mechanisms • Service delivery surveys • Transparency – citizens can make informed decisions (4 x 2) (8) 4.4.8 Explain privatization as problems of public sector provisioning. • Refers to the transfer of functions and ownership from the public to the private sector • The aim of privatization is to reduce the relative size of the public sector. ECONOMICSGrd12 P a g e 64 | 368 V3 • • • • • • • • • • • • • Advantages of privatization: it provides additional funds to the government / generates an income to be used for redistribution of wealth It attracts foreign investment / access to investment, innovative and able to adapt It stimulates growth and improves the overall efficiency and performance of the economy More people can participate in the economy Leads to undersupply or no supply State-owned enterprises are bureaucratic, inefficient, and unresponsive to consumer needs / increase efficiency in the economy / optimal functioning of market forces Public enterprises do not pay tax – privatization broadens the tax base Make funds available for housing, education, health care and the poor / lessens the pressure on government’s budget / eradicates fiscal problems Promotes black economic empowerment / opportunity for all to participate in free market – benefits BEE Restructure ownership of state assets together with Department of Public Enterprises e.g., defence and transport Optimal functioning of market forces / profit maximization Development of SMMEs If services to rural areas are fully privatized, the services to rural areas may be terminated or become more expensive (2 x 2) (4) (8) 4.4.9 Explain inefficiency as a problem in providing public goods and services. • Inefficiency means that goods and services are not provided in the desired quantity and quality • Public goods are efficiently provided if Pareto-Efficiency is achieved i.e. it is impossible to make somebody better off without making the other worse off • Objectives like housing, health, employment etc. are not always possible because of limited resources and serious structural weakness in the economy The following aspects contribute to inefficiency: (Can be question on its own) • • • • • • • • • BUREAUCRACY There is too many rules and procedures (red tape). Officials focus on following rules such that they are indifferent to the quality of service. Sometimes they are insensitive to the needs of the client. Policies take a long time to implement. INCOMPETENCE There is a lack of skills or ability to do a task successfully A reason for this could be improper qualifications, lack of training and experience etc. CORRUPTION Government officials are guilty of sometimes taking bribes, commit fraud, resort to nepotism Politicians sometimes promote policies, which might involve an inefficient allocation of resources in order to secure votes. Sometimes trade unions and business influence government to distribute resources so that they benefit at the country's expense ECONOMICSGrd12 P a g e 65 | 368 V3 (Accept any other relevant facts) (Any 4 x 2) (8) 4.4.10 How effective is the South African government in achieving full employment as a macroeconomic objective? HIGHER ORDER PARAGRAPH 4.4.11 How effective is the South African government in achieving full employment as a macroeconomic objective? (4 X 2) (8) 4.4.12 Evaluate the success of the South African Reserve Bank in maintaining price stability in the economy. (8) The South African Reserve Bank was successful by: ECONOMICSGrd12 P a g e 66 | 368 V3 • • • • • • maintaining the inflation between 3% and 6% for most years since the implementation of the inflation target range. the repo rate has been effectively used to keep inflation within the target. e.g., the inflation rate was higher than 6% in 2016, the SARB has increased the repo rate in 2017. The inflation rate has decreased to under 6% currently. Stable prices also increased investor confidence in South Africa. The South African Reserve Bank was unsuccessful by: Inflation rate was outside the target range in late 2016 and early 2017, exceeded the 3% - 6% target range. This impacted negatively on the economy and the SARB was compelled to increase the repo rate. (Accept any other correct relevant response) (Allocate a max of 2 marks for mere listing/examples) 4.4.13 Why is it important for the government to assess the performance of the economy? • It is important for the government to assess the performance of the economy because it: • Gives policy direction in the country • Develops mechanisms to caution the most affected sectors of the economy promptly • Develops some economic stabilisers to defuse the huge impact that may result from the unexpected economic downturn • Opens some other alternative markets for their goods and services • Research and advice the business community before the actual moment hits • Uses information to stimulate thinking about growth in a number of sectors in the economy (8) (Accept any relevant and correct response) 4.4.14 How can the South African government going about to achieve a more equitable income distribution? Using a progressive tax system • Higher income earners are taxed higher at tax rate. • These taxes are used to finance social development. • The poor benefit more than those with higher incomes • • Providing benefits in kinds These include the provision of education, school meals, and health care Limited quantity of free electricity and water are provided • • Providing cash benefit to the economically venerable Disability grants, child support and unemployment insurance are cash grants. These are known as social security payment • • • Wealth taxes Transfer duties are paid when properties are bought. Estate duties are paid on the estates of the deceased Taxes are used to finance development expenditure which benefit the poor The process of land restitution and land redistribution • To those who lost their land due to discrimination ECONOMICSGrd12 P a g e 67 | 368 V3 • • They can choose to be paid in cash or the retain the land Training and capacitating of new landowners will determine the success of this strategy (8) (Accept any other correct relevant response) 4.4.15 To what extent has the South African government achieved the macroeconomic objectives? • • • • • • • • • • • • • • Economic Growth: SA targets 4 – 5% economic growth. Previously SA had a 5% growth rate In recent years the growth rate decreased steadily Presently the economic growth rate is 1.4% Full Employment: Compared to foreign countries unemployment is remarkably high. Expanded – over 30% currently 25,5 % unemployment in SA for age group of 24 – 34 years of age current figures exceed 36.3% Efforts by SA government to reduce these figures includes the GEAR strategy, focus on small business enterprises, Public Works Program Exchange rate stability: SA now operates on a free-floating exchange rate system in line with international benchmarks Unfortunately, our currency has lost its value, with a general trend of depreciation over the last few years Price stability: For the past few years South Africa has managed to remain within the 3 – 6% target The current increase in the repo rate has put constraints on the inflation rate Economic equity: Economic equity has improved in many areas E.g., BEE, affirmative action, gender equity, progressive income tax Balance of Payments equilibrium: The deficit on the trade balance shows a much bigger increase of imports compared to exports (4 x 2) (8) (Max.8) 4.4.16 Evaluate price stability as a main objective of our government. • Price stability means that prices of goods and services to remain relatively constant over time • The SARB strives towards keeping the inflation rate between the 3% to 6% target range. • SA has been reasonably successful in keeping the inflation rate within the inflation targets of 3% to 6% • However it has become a real struggle for South Africa because of increased fuel prices, loadshedding and the Ukraine- Russia war ECONOMICSGrd12 P a g e 68 | 368 V3 • • • Food inflation has increased above the 6% target The SARB uses interest rates as monetary policy instruments to maintain price stability The Monetary Policy Committee meets on a regular basis to apply measures to maintain price stability (Any 4 x 2) (Accept any other correct relevant response) (Allocate a maximum of 2 marks for mere listing of facts/ examples) QUESTION 4.5 DATA RESPONSE 4.5.1 Identify one example of an indirect tax in the information above. • Fuel levies • Excise duties • Custom duties • VAT (1) 4.5.2 Name the main source of government’s tax revenue. • Personal Income Tax (PAYE) (1) 4.5.3 Briefly describe the term budget. (2) • A document that details expected revenue and projected expenditure 4.5.4 Why does the government impose excise duties on certain goods and services. (2) • To discourage consumer to buy or consume the product • To discourage producers to produce them 4.5.5 How will an increase in company tax impact negatively on economic growth? (4) • QUESTION 4.6: DATA RESPONSE 4.6.1 What does the abbreviation MTEF stand for? • Medium Term Expenditure Framework. (1) 4.6.2 What will be the negative impact of high tax rates. • Tax evasion/ Avoid paying tax. (Accept any other correct relevant response) ECONOMICSGrd12 (1) P a g e 69 | 368 V3 4.6.3 Briefly describe the term balance of payment. (2) • Record of all a country’s trade and financial transactions with the rest of the world in a specific period, usually a year. (Accept any other correct relevant response) 4.6.4 Identify the accounts of the South African balance of payment which motorcar exports and direct investments separately appear. (2) • Motorcar exports in current account and direct investments in financial account. (Accept any other correct relevant response) 4.6.5 How can the government reduce the deficit on the balance of payment? (4) • Borrowing money from the IMF. • Import substitution will reduce imports of goods because it will be produced in the country. • Export promotion will increase in aggregate supply and reduce prices. exports are promoted through cheaper prices. • Higher interest rates help to decrease spending on imports. • An increase in import tariffs and controls, although SA complies with policies of the WTO to reduce its import controls, (trade liberalization). • Exchange control allows central banks to ration foreign exchange. • Reduction of foreign reserves by SARB to correct deficits if we adopted a managed floating exchange rate. QUESTION 4.7 DATA RESPONSE 4.7.1 Who present the budget speech in parliament? • Minister of finance (1) 4.7.2 Identify the type of budget in the extract above • Mini budget / Medium Term Budget Policy Statement (1) 4.7.3 Briefly describe the term budget (2) • A budget is a document showing anticipated revenue and estimated expenditure (Accept any other correct relevant response) 4.7.4 What is the main purpose of levying sugar tax? (2) • Increase state revenue • Discourage people from the excessive use of sugar which causes diabetes and heart diseases. 4.7.5 Explain why an increase in VAT will have a negative impact on the economy (4) An increase in VAT will: • cause an increase in prices of a wide range of products which will lead to an increase in inflation • disadvantage the middle class and poor decrease in disposable income / they will purchase less ECONOMICSGrd12 P a g e 70 | 368 V3 • lower demand influencing production in a negative way and decrease economic growth (2 x 2) (4) (Accept any other correct relevant response) MIDDLE ORDER PARAGRAPH 4.7.6 Briefly discuss the link between the Medium-Term Expenditure Framework (MTEF) and the national budget. (2 X 4) (8) • The Medium-Term Expenditure Framework (MTEF) provides government with a tool to manage the tension between competing policy priorities and budget realities. • This helps to reprioritise expenditure and make informed policy choices that are affordable in the medium term. • MTEFs improve budget formulation by encouraging the development of spending plans based on existing resources and by promoting fiscal discipline. • MTEFs can increase national budget stability by decreasing uncertainty in the financial flows. • MTEFs may enhance effectiveness in the national budget as it opens it to greater accountability and transparency. • The national budget does not propose major changes to government spending or taxes as the MTEF does. (Accept any other correct relevant response.) (Maximum of 2 marks for mere listing and examples) 4.7.7 Distinguish between Medium Term Expenditure Framework and Mid Term Budget Policy Statement MTEF • A plan of estimated revenue and expenditure which covers a period of three years. • It serves to increase the level of transparency on matters of the government budget. • It facilitates long term planning as departments can be certain of policy and funding issues for every three years. (Max.4) • • • MTBPS The statement that is presented in October of each year to give a picture of the following year ‘annual budget in February. It provides the government’s assessment of the state of the economy, the budget priorities and the division of revenue. It is based on the Medium-Term Expenditure Framework (Max.4) (Accept any other correct relevant responses) (Accept a maximum of 4 marks for mere listing of facts) 4.7.8 Analyse the link between the Medium-Term Expenditure Framework (MTEF) • and the national budget. • the medium-term expenditure framework (MTEF) provides government with a tool to manage the tension between competing policy priorities and budget realities. • this helps to reprioritise expenditure and make informed policy choices that are affordable in the medium term. ECONOMICSGrd12 P a g e 71 | 368 V3 • • • • • • • MTEFs improve budget formulation by encouraging the development of spending plans based on existing resources and by promoting fiscal discipline. MTEFs can increase national budget stability by decreasing uncertainty in the financial flows. MTEFs may enhance effectiveness in the national budget as it opens it to greater accountability and transparency. the national budget does not propose major changes to government spending or taxes as the MTEF does. (Accept any other correct relevant response.) (Maximum of 2 marks for mere listing and examples) HIGHER ORDER PARAGRAPH 4.7.9 How can taxation be used to stimulate employment in South Africa? Individual Income Tax • Lower taxes effectively increase the disposable income of people√√ • This could lead to an increase in the demand for goods and services√√ • Businesses (suppliers) will have to increase their production to compensate for the increased demand√√ • This could lead to job creation√√ Company Tax: • Lower company tax increase investment possibilities to expand the business√√ • This will create the opportunity to employ more people √√ • • Taxes on imports: Import/custom duties reduce imports√√ Stimulate local production and create more jobs√√ (Accept any other relevant facts) (4 x 2) (8) 4.7.10 Evaluate the provisioning of public goods and services in South Africa. Provision of public goods and services is adequate because: • More people have access to schools and medical services than before. • More infrastructure has been built, example Gautrain, toll roads, improved airports. ECONOMICSGrd12 P a g e 72 | 368 V3 • • • • • The South African defence force is protecting the people of South Africa as no major security incident has happened. Provision of public goods and services is not adequate because: The standard of education and health care is still not able to compare with other developed countries. Many South Africans still do not have access to basic goods and services like electricity, water, and sewerage The crime rate in South Africa is amongst the highest in the world which indicates the lack of an efficient police force (Accept any other correct relevant response.) (Allocate a max of 2 marks for headings / subheadings / examples.) (Any 4 x 2) (8) QUESTION 4.8 DATA RESPONSE 4.8.1 Name the level of government under which the municipality of Benoni can be classified. • Local government 4.8.2 Other than the repairing of roads, name any other function of the municipality. • Electricity delivery • Municipal roads • Libraries • Traffic control • Refuse removal (1) (1) 4.8.3 Briefly describe the term free riding. (2) • A situation where individuals realise that they will still benefit from a good or service even if they do not pay for it. (Accept any other correct relevant response.) 4.8.4 Explain a benefit of improved road connectivity. (2) • More people will be going to nearby towns and villages for odd jobs like selling wood, vegetables, dairy products and locally made items like pickles and so on, which in turn will generate employment opportunities. • Good road connectivity not only links the village communities to better markets, but also widens work opportunities to distant places. • Better road connectivity will increase sources of income and increased income will help in reducing debt and would increase the buying power of the people, thus improving the overall standards of living. (Accept any other correct relevant response.) 4.8.5 What impact will a lower budget allocation have on road safety? (4) • Reductions in road budgets increase the costs associated with accidents and outweigh the savings of road accident fund (RAF) • Investment in the conservation of roads is more than compensated in terms of the reduction of accidents. • Fatalities may be reduced by increasing the budget for the maintenance of roads. ECONOMICSGrd12 P a g e 73 | 368 V3 • • Traffic congestion will occur on the alternative roads being used due to the closure of roads. (Accept any other correct relevant response.) (2 x 2) MIDDLE ORDER PARAGRAPH 4.8.6 With the aid of a well-labelled Laffer curve, explain the impact of tax rate increases on state revenue. • The Laffer curve shows the relationship between tax rates and tax revenue collected by the government • The curve shows that as tax increase government revenue increases up to a certain point (e.g., t2) • If the tax rate rises beyond ‘t,’ (e.g., at t1 there will be a decline in government revenue • When the tax rate is high people are less likely to work hard • If tax is 100% then nobody will work because all income would go to the government • Too high tax rates may lead to tax evasion and avoidance • Reduction in tax rates will lead to a decrease in tax evasion and increase the incentive to work, save and invest • If tax rate is zero, no government revenue will be raised • Economists use this to justify a reduction in the level of income tax • The apex of the curve shows the tax rate where government revenue can be maximized • This point can vary from country to country – the Laffer curve may not always be symmetrical – it can peak at 40% or even at a 90% rate • Evidence suggests that tax rates in most countries are below t. • In South Africa individual and company income tax rates were reduced over the last decade (Max 4) ECONOMICSGrd12 P a g e 74 | 368 V3 • 4.8.7 Briefly discuss pricing policy and parastatals as problems of public sector provisioning. Pricing policy: • State-owned enterprises do not work within the market system of demand and supply It creates problems in determining the price for public goods and services compared to the private sector where price is determined by demand and supply • The state sets the price of goods in the following ways: - Free of charge: providing community or collective goods such as policing or health is completely funded by increased taxes, placing a burden on taxpayers - User charges: e-toll fees levied on the users of those roads are mostly not paid. - Subsidies: Government may charge the user at a reduced fee - It is difficult for government to establish the correct pricing (Max 4) (Accept any other correct relevant response) (A maximum of 2 marks may be allocated for mere listing of facts/examples) Parastatals: • Service provisioning of parastatals such as Eskom and Transnet lead to monopolies • SOEs are created when government starts a new business or nationalize an existing one • These typical monopolies are known for high prices where the consumer has no say. • Inefficiency in service provisioning such as SAA led to irregular service delivery and a waste of state revenue • Infrastructure is mostly provided by government and sometimes lacks maintenance (Max 4) (Accept any other correct relevant response) (A maximum of 2 marks may be allocated for mere listing of facts/examples) Candidates should indicate the challenge to government because they do not have a market system to determine prices (2 marks). The other two marks can be allocated for any other fact related to the topic. (8) HIGHER ORDER PARAGRAPH 4.8.8 How does corruption influence good governance in South Africa? • Corruption can hamper the smooth running of a government. • It can result in political instability. • Socio-economic problems, like poverty, can increase. • Financial mismanagement, services cannot be provided to citizens • It affects service delivery due to insufficient funds for community projects. ECONOMICSGrd12 P a g e 75 | 368 V3 • National development is handicapped in an atmosphere of political instability and uncertainty, with the result that effective long-term planning is jeopardized. (Accept any other correct relevant response) (4 x 2) (8) QUESTION 4.9 DATA RESPONSE 4.9.1 Identify the marginal tax rate for a person earning between R216 201 and R337 800 per year (1) • 26% 4.9.2 Name the income tax system represented by the table above. • Progressive (1) 4.9.3 Briefly describe the term fiscal policy (2) • It refers to changes in taxation and government expenditure to influence the level of economic activity. (Accept any other correct relevant response) 4.9.4 Explain the effect of high tax rates on taxpayers in a country. (2) • People will be discouraged to work, and they will leave the labour market • Businesses may be discouraged to do production and shut down • Businesses and individuals may evade tax. • Taxpayers’ (consumers’) disposable income will decrease resulting in a decrease in spending. 4.9.5 Use the information in the table above to calculate the income tax payable if one receives an annual income of R480 000 (4) MIDDLE ORDER PARAGRAPH 4.9.7 Discuss any TWO reasons for public sector failure. • Politicians tend to promote policies and spend money on projects as long as they get votes in return. • These policies might involve an inefficient allocation of resources. • Many public sector entities lack capacity because of a shortage of skills / management failure / Bureaucracy • This means that funds are often left unspent and then returned to the treasury. ECONOMICSGrd12 P a g e 76 | 368 V3 • • • • • • • • Lack of accountability / Parastatals (public enterprise) leads to inefficiency, corruption / crime, and poor service delivery. Lack of motivation / apathy Workers rarely receive incentives for successful service delivery. This leads to services being limited, low in quality and high in cost. Rent seeking / special interest groups / own interest Individuals and enterprises influence government to act in their interest e.g., profitable contracts, favourable regulations etc. ignorance, personal and hidden agendas, questionable motives improve the welfare of someone at the expense of another. Serious structural weakness in the economy / Privatization This can result in social goals not being attained. Objectives are not attainable / overpopulation employment, housing and feeding programs not possible with limited resources Assessing needs leads to under and oversupply Pricing policy problems in determining the price for public goods and services (Any 4 x 4) (8) 4.9.8 Explain the reasons for public sector failure. • Politicians tend to promote policies and spend money on projects as long as they get votes in return. These policies might involve an inefficient allocation of resources. • Many public sector entities lack capacity because of a shortage of skills / management failure / Bureaucracy This means that funds are often left unspent and then returned to the treasury. • Lack of accountability / Parastatals (public enterprise) leads to inefficiency, corruption / crime, and poor service delivery. • Lack of motivation / apathy Workers rarely receive incentives for successful service delivery. This leads to services being limited, low in quality and high in cost. • Rent seeking / special interest groups / own interest Individuals and enterprises influence government to act in their interest e.g., profitable contracts, favourable regulations etc. ignorance, personal and hidden agendas, questionable motives improve the welfare of someone at the expense of another. • Serious structural weakness in the economy / Privatization This can result in social goals not being attained. • Objectives are not attainable / overpopulation employment, housing and feeding programs not possible with limited resources • Assessing needs leads to under and oversupply • Pricing policy problems in determining the price for public goods and services (Any 4 x 4) (8) ???? Explain the negative impact of the effects of public sector failure. • • Economic instability one of the macroeconomics objectives of the public sector is not achieved because public sector failure compromises this objective. Although a progressive income tax system is used for the redistribution of income and wealth, income remains unfairly distributed due to an abuse of taxpayers’ money and economic growth cannot be atomized. ECONOMICSGrd12 P a g e 77 | 368 V3 • Social instability featured in a lack of services such as sanitation, clean water, energy, street lighting, storm-water drainage, protection, roads, and cash grants to the poor, by government affects the lives of people negatively and their human rights compromised. it usually leads to community conflict and violent demonstrations. (Accept any other correct relevant answer) ???? Differentiate between productive and allocative Inefficiency (8) Productive inefficiency • In terms of cost, it means that a business does not produce goods at the lowest possible cost. • There is room to reduce costs without producing fewer goods or without producing a lower quality good. • In terms of marginal cost, it means that one producer can produce an additional unit of a good at a lower extra (marginal) cost than others in the economy. Allocative inefficiency • This kind of inefficiency means that the product mix does not reflect consumers' and therefore resources are not allocated in the right proportions. • The quantities preferred by consumers are not available. (Any 2 x 4) (8) HIGHER ORDER PARAGRAPH 4.9.9 How can management failure lead to the poor performance of state-owned enterprises? • Ignorance, by applying conflicting policies or getting the timing of policy changes wrong, causes the current economic situation to worsen. • Lack of leadership is evident in poor quality and expensive services, due to government departments that are inefficient and ineffective. • Government officials lack training and experience that lead to wrong decisions and low productivity, intensified by funds not approved or spent. • Management in SOEs serve their own interests through corruption, personal and hidden agendas, and suspicious, personal motives. • Questionable motives, like allowing rent-seeking, where decision-making improves the welfare of someone at the expense of the welfare of others, e.g., providing. certain individuals or groups with profitable contracts and favourable regulations. (4 x 2) 8 (Accept any other correct relevant answer) 4.9.10 How do lack of motivation and corruption contribute to public sector failure? ECONOMICSGrd12 P a g e 78 | 368 V3 • ECONOMICSGrd12 P a g e 79 | 368 V3 SECTION C HINT: All section C questions have TWO questions 5 & 6 NOT like in this document. In the examination you will need to answer only one. ESSAY STRUCTURE HINT: Section C – the long question, must be answered in FOUR sections: Introduction (definition), Body (headings and full sentences in bullets) additional part and conclusion (summarising). The mark allocations for Section C is as follows: MARK ALSTRUCTURE OF ESSAY LOCATION Introduction The introduction is a lower-order response. • A good starting point would be to define the main concept related to the question topic. • Do not include any part of the question in your introduction. • Do not repeat any part of the introduction in the body. • Avoid mentioning in the introduction what you are going to discuss in the body. Body Main part: Discuss in detail/In-depth discussion/Examine/Critically discuss/ Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Draw a graph and explain/Use the graph given and explain/Complete the given graph/Assess/Debate A maximum of 8 marks may be allocated for headings/examples Additional part: Critically discuss/Evaluate/Critically evaluate/Debate/ Deduce/Compare/Distinguish/Interpret/How? /Suggest A maximum of 2 marks may be allocated for mere listing facts. Conclusion Any higher-order conclusion should include: • A brief summary of what has been discussed without repeating facts already mentioned • Any opinion or value judgement on the facts discussed • Additional support information to strengthen the discussion/analysis • A contradictory viewpoint with motivation, if required • Recommendations TOTAL QUESTION 5 • Discuss in detail the main objectives of the public sector in the economy. (26 • How successful is the implementation of South Africa’s fiscal policy (10) INTRODUCTION ECONOMICSGrd12 P a g e 80 | 368 V3 Max. 2 Max. 26 Max. 10 Max. 2 40 The government provides goods and services that are under-supplied by the market and therefore plays a key role in regulating economic activity and guiding and shaping the economy. (Max 2) BODY: MAIN PART OBJECTIVES Economic growth ▪ Refer to an increase in the production of goods and services ▪ Measured in terms of real GDP ▪ For economic growth to occur, the economic growth rate must be higher than population growth ▪ Growth and development in a country benefit its citizens because it often leads to a higher standard of living Full employment ▪ It is when all the people who want to work, who are looking for a job must be able to get a job ▪ Elevated levels of employment is the most important economic objective of the government ▪ The unemployment rate increased over the past few years ▪ Informal sector activities must be promoted because it is an area where employment increase Exchange rate stability ▪ The economy must be managed effectively, and effective fiscal and monetary policy must be used to keep the exchange rate relatively stable ▪ Depreciation and appreciation of the currency create uncertainties for producers and traders and should be limited ▪ The SARB changed the exchange rate from a managed floating to a free-floating exchange rate. Price stability ▪ Stable price causes better results in terms of job creation and Economic growth ▪ The government's inflation target is 3% - 6% and they are successful in keeping inflation within this target ▪ Interest rates, based on the repo rate are the main instruments used in the stabilization policy ▪ The stable budget deficit also has a stabilizing effect on the inflation rate Economic equity ▪ Redistribution of income and wealth is essential to reduce poverty ▪ South Africa uses a progressive income tax system where the higher income earners pay more tax ▪ Taxation on profits, taxation on wealth, capital gains tax and taxation on spending, are used to finance free services ECONOMICSGrd12 P a g e 81 | 368 V3 Free social services are basic education, primary health, and financing basic economic services ▪ Cash grant to the poor/vulnerable, for example child grants and disability grants (Max. 26) (Accept any other correct relevant response) (Allocate a maximum of 8 marks for the mere listing of facts/examples) ▪ BODY: ADDITIONAL PART Learner responses can be positive or negative • Follow the argument and see if the candidate can produce enough evidence to support his/her answer. The government is successful in reaching these goals by: • reducing unemployment through the EPWP. If it was not for the program, the unemployment rate would have been even higher • managing to keep inflation within the 3–6% target • improving economic equity (BEE through affirmative action, gender equity) • operating on a free-floating exchange rate system in line with international benchmarks The government is not successful in reaching its goals through: • a decreasing economic growth rate: in the last 5 years the average real gross domestic product growth has been below 2% • increasing unemployment rates - unemployment rate have increased to 27.7 in 2017 which was the highest since 2009 • fluctuating value of the rand - in the past 5 years the value of the rand fluctuated against the major trading partners' currencies • BEE only benefitting a few individuals due to corruption and misrepresentations such as fronting (Any 5 x 2) (Accept any other correct relevant response) (Max.10) CONCLUSION: While government has achieved some successes, the fulfilments of some of the objectives are compromised by factors like lack of accountability, corruption, budgeting, nepotism and incompetence (Max. 2) (Accept any other correct and relevant higher order response) [40] QUESTION 6 • Discuss in detail the reasons for public sector failure (link them to typical problems experienced through public sector provisioning) (26) • How can the unfair distribution of income in South Africa be resolved? (10) INTRODUCTION - Public Sector Failure occurs when government intervention in the economy leads to an inefficient allocation of resources and leads to an overall decline in economic welfare. MAIN PART ECONOMICSGrd12 P a g e 82 | 368 V3 1. Management Failure - Management failure is a shortfall of duty or performance in directing and controlling a government department, function or team. -The government officials lack accountability and have ignorance, this is usually because of lack of leadership, experience and training. - This leads to mismanagement which leads to serious failure of duty that leads to losses, errors, omissions and poor service delivery. 2. Apathy - Apathy is when you lack motivation to do anything or just don't care about what's going on around you which is one of the characteristics of some government servants. -Government officials show little or no interest in delivering an efficient service to the public, there is usually long ques in government offices as apathy affect behaviour and ability to complete daily activities. -Corruption and poor service delivery are some of the symptoms of apathy. 3. Lack of motivation -Workers rarely receive incentives for successful service delivery but are only monitored on inputs and correctly following procedures and processes. -This might lead to limited services, high cost, low quality work as workers feel that they are not valued by the employer. 4. Bureaucracy -Bureaucrats tend to obey rules and regulations without judgement, bureaucrats are all about following the law. - There is no emphasis on creating additional competencies and there is less freedom to act within a bureaucracy. - Bureaucrats fosters a structure that doesn't create true productivity and thus lead to poor service delivery. 5. Structural weaknesses - Sometimes an economy’s problems are deeper and longer lasting usually as a result of government policies - Objectives are not met because they may work against each other. - This might happen when government redistributes income and wealth too aggressively without proper projections. 6. Special interest groups - Certain people or groups with powerful influence usually manipulate politicians inside the government to grant economic favours to them for their own selfish gain. - The pressures of the upcoming elections or the influence of interest groups can support an environment in which inappropriate spending and tax decisions can be made. - Farmers tend to demand undeserved subsidies and organised labour tend to influence government to their own advantage (More salary) at the expense of service delivery. ADDITIONAL PART - South Africa uses a progressive income tax system where the higher income earners pay more tax - reducing unemployment through the EPWP. If it was not for the program, the unemployment rate would have been even higher ECONOMICSGrd12 P a g e 83 | 368 V3 - Free social services are basic education, primary health, and financing basic economic services - Taxation on profits, taxation on wealth, capital gains tax and taxation on spending, are used to finance free services CONCLUSION - The government should try to form policies such as private public partnerships as this will bring some motivation and ensure creativity and innovation which will improve service delivery. TOPIC 4: FOREIGN EXCHANGE MARKETS QUESTION 1: Section A – Short Questions 1.1 Various options are provided as possible answers to the following questions. Choose the answer and write only the letter (A–D) next to the question number. 1.1.1 D (Globalisation) 🗸🗸 1.1.2 C (Appreciation) 🗸🗸 1.1.3 B (Decrease in mineral expose) 🗸🗸 1.1.4 A (Citizens buy imported instead of locally produced cars) 🗸🗸 1.1.5 C (Balance of payments) 🗸🗸 1.1.6 A (Terms of trade) 🗸🗸 1.1.7 A (Devaluation) 🗸🗸 1.1.8 A (Current account) 🗸🗸 1.1.9 B (Portfolio) 🗸🗸 1.1.10 B (Free- floating) 🗸🗸 (10 x 2) (20) 1.2 Choose a description from COLUMN B that matches the item in COLUMN A. Write only the letter (A-I) next to the question number (1.2.1 –1.2.10) in the ANSWER BOOK. 1.2.1 J- (A benefit or value of something that must be given up achieving something else) 🗸 1.2.2 C- (Consumers and producers are free to buy goods and services anywhere in the world without any restrictions) 🗸 1.2.3 A- (When a country is the most efficient producer of a good or product) 🗸 ECONOMICSGrd12 P a g e 84 | 368 V3 1.2.4 B - (When a group of countries formally agree to engage in international trade, e.g. European Union) 🗸 1.2.5 H- (When a fixed exchange rate pegs one country’s currency to another country’s currency) 🗸 1.2.6 I- (Money received without any productive service rendered e.g. gifts🗸 1.2.7 D- (A situation where one country has a relative advantage in the production of goods and services) 🗸 1.2.8 K (Sub accounts in the Balance of payments) 🗸 1.2.9 G (Countries who have deficits on their Balance of payments can borrow money from this institution) 🗸 1.2.10 E-(International transactions relating to production, income and expenditure are recorded in this account) 🗸 (10 x 1) (10) 1.3 Provide the economic term/concept for each of the following descriptions. Write only the term/concept next to the question number. No abbreviations, acronyms or examples will be accepted. 1.3.1 Terms of trade🗸 1.3.2 Globalization 🗸 1.3.3 International Monetary Fund🗸 1.3.4 Comparative advantage🗸 1.3.5 Exchange rate 🗸 1.3.6 Balance of payment🗸 1.3.7 Financial account🗸 1.3.8 Foreign exchange rate market🗸 1.3.9 Trade balance/Balance of trade🗸 1.3.10 Appreciation🗸 1.3.11 Depreciation🗸 1.3.12 Devaluation🗸 1.3.13 Revaluation🗸 1.3.14 Managed exchange rates🗸 1.3.15 Fixed exchange rate system🗸 (15 x 1) (15) SECTION B QUESTION 2: HINT: When the question requires you to “list” or “name”, you need not write a sentence but merely few words or a phrase. This MUST be done in bullet form. These types of questions are applicable for 2.1.1, 3.1.1 and 4.1.1 2.1 List any TWO sub accounts/components of the Balance of Payments. • Current account 🗸 • Capital transfer account 🗸 ECONOMICSGrd12 P a g e 85 | 368 V3 • 2.2 Financial account 🗸 (2x1) Name TWO effects of international trade • Specialisation 🗸 • Mass Production 🗸 • Efficiency 🗸 • Globalisation 🗸 (2x1) 2.3. Name TWO items in the financial account of the balance of payments. • Direct investment 🗸 • Portfolio investment 🗸 • Net financial derivatives 🗸 • Other investments 🗸 • Reserve assets 🗸 (2x1) 2.4 List TWO supply reasons for international trade. • Natural resources 🗸 • Climatic conditions 🗸 • Labour resources 🗸 • Technological resources 🗸 (2x1) List TWO types of exchange rates that a country can use. • Free floating 🗸 • Managed/controlled floating 🗸 • Fixed exchange rates 🗸 (2x1) List TWO demand reasons for international trade. • Size of population 🗸 • Income levels 🗸 • Change in the wealth of the population 🗸 • Preference and taste 🗸 • The difference in consumption patterns 🗸 (2x1) 2.5 2.6 2.7 Name any TWO ways/strategies that can be used to correct the BOP disequilibria. • • • • • Interest rates 🗸 Import controls 🗸 Borrowing and lending 🗸 Change in demand 🗸 Export promotion 🗸 ECONOMICSGrd12 P a g e 86 | 368 V3 • • Import substitution 🗸 Change in exchange rates 🗸 (2x1) 2.8 List any TWO factors affecting the demand for foreign exchange. • Goods imported from other countries 🗸 • Payment for services or to the investor 🗸 • Domestic citizens travelling to other countries 🗸 • Loans and interest paid to the country from which money was borrowed 🗸 (2x1) 2.9 List any TWO factors affecting the supply of foreign exchange • Goods exported to other countries 🗸 • Receiving income for services supplied 🗸 • Foreigners visit other countries 🗸 • Income received by the investor 🗸 • Loans and interest received from countries to which loans are made 🗸 (2x1) 2.9.10 List TWO types of import controls • Import tariffs 🗸 • Quotas 🗸 QUESTION 3: HINT: (2x1) These types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2. Answers must be provided in full sentences; learners must ensure that their answer addresses the question asked 3.1 Why is gold exports listed as a separate item in the BOP? (1x2) • Because it is a key export commodity in earning foreign exchange 🗸🗸 3.2 What impact will the depreciation of a currency have on the Balance of Payments account? (1x2) • Positive impact. Exports will increase and imports will decrease. This will cause an inflow. of foreign exchange 🗸🗸 3.3 What negative impact will the recent trend in the current account have on the BOP? (1x2) • Reduction of gold and foreign reserves. 🗸🗸 • Increase in liabilities related to reserves/borrowing money to offset the deficit 🗸🗸 • Exerts pressure on the financial account in that net inflows of money required 🗸🗸 ECONOMICSGrd12 P a g e 87 | 368 V3 3.4 Why is the exchange market important to tourists? (1x2) • Tourists need to exchange their own currency to buy goods and services in other countries. 🗸🗸 3.5 What happens to the value of South African rand, when the supply of US dollars increases? (1x2) • The rand appreciates 🗸🗸 • Increases in the price of the currency (Rand) 🗸🗸 3.6 Why would an increase in terms of trade have a positive effect on the welfare of the country? (1x2) • There will be increasing economic welfare because more revenue is earned with the same expenditure. 🗸🗸 3.7 How can world trade improve through specialisation? (1x2) • Countries specialise in producing the goods for which they have a comparative advantage 🗸🗸 3.8 How can the appreciation of the rand affect the exports of goods and services? • There will be a reduction in exports 🗸🗸 3.9 Why is it important for a country to have a stable exchange rate? • To attract more foreign investments 🗸🗸 • To attract more international tourists 🗸🗸 (1x2) (1x2) 3.10 Why are unrecorded transactions included in the balance of payments? (1x2) • Unrecorded transactions provide for any errors and omissions that may occur 🗸🗸 • If all transactions have not been recorded or an error was committed in writing down the individual components, the record will not balance, and will be corrected by including a net error and omission item under unrecorded transactions 🗸🗸 QUESTION 4: DATA RESPONSE & PARAGRAPH TYPE QUESTIONS HINT: All section B questions have TWO data interpretation questions – each total 10 marks. Section B consist of Questions 2-4 not as numbered in this document All section B questions have TWO paragraph questions, one Middle Order & ONE Higher Order ECONOMICSGrd12 P a g e 88 | 368 V3 TYPICAL EXAM QUESTION: THESE HIGHER ORDER QUESTIONS REQUIRE THE LEARNERS TO USE HER/ HIS CRITICAL THINIKING SKILLS. Higher order questions are grounded in the content. These types of questions test critical thinking, where candidates should be able to apply their knowledge, through logical reasoning and also have an awareness of their current economic climate. Content (covered by discuss/examine/describe/ analyse/explain/evaluate/compare/assess/justify/construct/calculate) can be assessed as higher-order questions. Answers will not necessarily be found in textbooks. QUESTION 4.1 4.1. DATA RESPONSE 4.1.1 Give the economic concept illustrated in the table above. (1) Balance of payments/BOP 🗸 4.1.2 Which current account item is used for recording donations? (1) Current transfers 🗸 4.1.3 Briefly describe the term trade balance. It is the difference between merchandise exports plus net gold export and the merchandise imports. 🗸🗸 (2) (Accept any other relevant and correct response.) 4.1.4 Why are net gold export figures positive in South Africa? This is because South Africa is the world’s largest exporter of gold, and therefore a net exporter. 🗸🗸 (2) 4.1.5. Calculate the balance on the current account for the second quarter of 2019. Show ALL calculations. Current account balance = (inflows) – (outflows) + (current transfers) = (1 233 + 50 + 213 + 106) 🗸–- (1 314 + 229 + 230) 🗸 + (-35) = 1 602 – 1773 – 35 (4) = - 206 🗸🗸 ECONOMICSGrd12 P a g e 89 | 368 V3 MIDDLE ORDER PARAGRAPH 4.1.6 HOW DOES THE INCOME LEVEL AND THE SIZE OF THE POPULATION AFFECT INTERNATIONAL TRADE? (2X4) (8) The Income Level • Changes in income causes a change in the demand for goods and services 🗸🗸 • An increase in the per capita income of people results in more disposable income that can be spent on local goods and services some of which may then have to be imported/more goods bought from foreign countries as the income of local people increases 🗸🗸 The size of the population • If there’s an increase in population growth, in results an increase in demand, as more people needs must be satisfied. 🗸🗸 • Local suppliers may not be able to satisfy this demand 🗸🗸 4.1.7 COMPARE A FREE- FLOATING EXCHANGE RATE SYSTEM WITH A MANAGED FLOATING EXCHANGE RATE SYSTEM Free floating exchange rate system • They work automatically if imports increase the demand for foreign exchange increases. The currency depreciates as the result of the working of market forces 🗸🗸 • • Depreciation makes a country’s imports more expensive and exports cheaper 🗸🗸 Imports decrease and exports increase, and the currency appreciates as the result of the working of market forces 🗸🗸 Managed exchange rates system • A system where central banks intervene in the exchange rates markets stabilising the currency 🗸🗸 • Central banks use their reserves to influence the exchange rates 🗸🗸 • e.g. when the value of the currency declines/depreciate, the central bank will sell currency in the market to increase the demand and price of the exchange rate 🗸🗸 • Over the long- term currencies must find their equilibrium levels 🗸🗸 HIGHER ORDER PARAGRAPH 4.1.8 ASSESS HOW AN INCREASE IN IMPORT PRICES AND AN INCREASE IN EXPORT PRICES (TERMS OF TRADE) AFFECT THE SOUTH AFRICAN ECONOMY (8) An increase in export prices will result in: • The numerical value of the terms of trade index improves 🗸🗸 • Increased economic welfare because more revenue is earned with the same expenditure. ECONOMICSGrd12 P a g e 90 | 368 V3 • • 🗸🗸 However, over the long term the higher export prices may result in a decrease in sales volumes, depending on the price elasticity of demand 🗸🗸 A welfare loss may result 🗸🗸 An increase in import prices will result in: • The terms of trade worsening/numerical value of terms of trade worsen 🗸🗸 • Welfare lost because more resources were used to produce more units of exports to finance the higher cost of imports 🗸🗸 4.1.9 DISCUSS CHANGES IN EXCHANGE RATES AS A METHOD TO CORRECT THE BALANCE OF PAYMENT DISEQUILIBRIA (4X2) (8) Free floating exchange rates • They work automatically. If imports increase, the demand for foreign exchange increases 🗸🗸 • The currency depreciates because of working of market forces 🗸🗸 • Depreciation makes imports more expensive in the depreciating country and exports cheaper in the foreign country 🗸🗸 • Imports decrease and exports increase, and the currency appreciates 🗸🗸 Managed floating exchange rates. • Central banks use their reserves to effect depreciation and appreciation 🗸🗸 • Over the long-term currencies have to find their equilibrium levels 🗸🗸 Fixed exchange rates • Currencies are devalued and revalued. 🗸🗸 • The central government can deliberately decrease the value of its currency to attract business from abroad 🗸🗸 • Increase the value of its currency to discourage imports 🗸🗸 4.1.10 EXPLAIN HOW THE SUPPLY REASONS AFFECT INTERNATIONAL TRADE. • • • • Natural resources are not evenly distributed across all countries of the world. They vary from country to country and can only be exploited in places where these resources exist 🗸🗸 Climatic conditions make it possible for some countries to produce certain good s at a lower price than other countries e.g. Brazil is the biggest producer of coffee 🗸🗸 Labour resources differ in quality, quantity, and cost between countries. Some countries have highly skilled, well- paid workers with high productivity levels e.g. Switzerland 🗸🗸 Specialisation in the production of certain goods and services allows some countries to produce them at a lower cost than others. e.g. Japan produces electronic goods and sells these at a lower price 🗸🗸 ECONOMICSGrd12 P a g e 91 | 368 V3 • Capital allows developed countries to enjoy an advantage over underdeveloped countries. Due to a lack of capital some countries cannot produce all the goods they require themselves. 🗸🗸 (8) QUESTION 4.2 4.2 DATA RESPONSE 4.2.1 Identify the institution responsible for publishing the data above. Statistics South Africa / Stats SA 🗸 4.2.2 • (1) What is the trend in the index of import prices? A decrease / decline 🗸 4.2.3 (1) Briefly describe the concept terms of trade. The ratio of the index of export prices to the index import prices / The relationship between export prices and import prices / It expresses a country’s export prices in terms of its import prices 🗸🗸 (2) (Accept any correct relevant response.) 4.2.4 What can bring an improvement in the country’s terms of trade? An increase in export prices 🗸🗸/ A decrease in import prices. 🗸🗸 4.2.5 (2) Calculate the terms of trade for March 2022 (A). Show ALL calculations. Terms of trade = index of export prices/index of import prices x 100 = 109,7 🗸/107,7 🗸 x 100 🗸 = 101,8 🗸 (4) MIDDLE ORDER PARAGRAPH 4.2.6 EXPAIN NATURAL RESOURCES AND CLIMATIC CONDITIONS AS SUPPLY REASONS FOR INTERNATIONAL TRADE (2X4) (8) Natural resources • They are not evenly distributed across all countries of the world. 🗸🗸 • They vary from country to country and can only be exploited in places where there are such resources. 🗸🗸 ECONOMICSGrd12 P a g e 92 | 368 V3 • Each country has its own unique mix of natural resources that makes it possible for them to produce certain goods and services more efficiently and at a relatively lower price 🗸🗸 • E.g. South Africa’s gold and diamond resources has given us an advantage in producing gold and diamonds 🗸🗸 Climatic conditions • Differences in climatic conditions between countries make it possible for some countries to produce certain goods at a lower price than other countries 🗸🗸 • Many crops can only be cultivated in certain climatic conditions and in certain kinds of soil. 🗸🗸 4.2.7 EXPLAIN LABOUR RESOURCES AS SUPPLY REASONS FOR INTERNATIONAL TRADE (2X4) (8) • The quality, quantity and cost of labour also differ between countries. 🗸🗸 • Some countries have highly skilled labour with highly productivity rates 🗸🗸 • This enables them to produce goods and services at a lower price than they are produced in other countries. 🗸🗸 • Certain individuals have greater ability and aptitude for certain tasks 🗸🗸 • It is a worldwide phenomenon that some countries have developed a skill and aptitude for the production of certain commodity. 🗸🗸 • E.g. The Swiss (watch making) 🗸 HIGHER ORDER PARAGRAPH 4.2.8 HOW CAN THE GOVERNMENT CORRECT A DEFICIT ON THE BALANNCE OF PAYMENTS ACCOUNT? (2X4) (8) • Using methods which will reduce imports and promote exports, can reduce deficits 🗸🗸 The following ways can be considered: • Borrowing money from the IMF 🗸🗸 • Policies of export promotion and import substitution 🗸🗸 • Increase in aggregate supply will reduce prices. Exports are promoted through cheaper prices 🗸🗸 • Higher interest rates help to decrease spending on imports. Increase in import tariffs and controls, although SA complies with policies of the WTO to reduce its import controls. (Trade liberalisation) 🗸🗸 • Exchange control that allows central banks to ration foreign exchange 🗸🗸 • Currency depreciation/devaluation makes imports expensive(reduction)exports cheaper for foreign countries (increase exports) 🗸🗸 • Increase in tax which reduces disposable income which decreases demand in imports. 🗸🗸 • Reduction of reserves by SARB to correct deficits if we adopted a managed floating exchange rates 🗸🗸 4.2.9 HOW CAN IMPORTS BE TARGETTED TO REDUCE THE DEFICIT ON THE BALECONOMICSGrd12 P a g e 93 | 368 V3 ANCE OF TRADE IN SOUTH AFRICA? (8) • South Africa can use import substitution as part of their international trade policy 🗸🗸 • Tariffs can be imposed on imported goods, which will increase the prices of imported goods for domestic consumers, and that will tend to shift demand from imports to domestic products 🗸🗸 • E.g. custom duties, ad valorem, specific tariffs 🗸 • Quotas can be imposed to limit the import of goods and services 🗸🗸 • Subsidies will make local producers more competitive and switch from imported goods to locally produced goods 🗸🗸 • Through exchange control government can reduce imports and limit the amount of foreign exchange made available to those who wish to import 🗸🗸 • Physical control may put a complete ban or embargo on the import of certain goods from a particular country. 🗸🗸 • Trade can be diverted through monetary deposits; time consuming customs procedures and high-quality standards are imposed to make the importing of goods more difficult. 🗸🗸 4.2.10 IN YOUR OPINION WHAT EFFECT DOES THE TERMS OF TRADE HAVE ON THE BALANCE OF THE CURRENT ACCOUNT? (8) The terms of trade compare a country’s export prices with its import prices by means of indexes If the terms of trade improve, the balance would improve on the current account The terms of trade improve when: • An increase in export prices, more revenue is earned with the same expenditure 🗸🗸 • A decrease in import prices, welfare increase because expenditure on imports is less 🗸🗸 • South Africa imports prices decreased by the depreciation of the currency 🗸🗸 • Exports become cheaper for foreign buyers, exports increase, larger injection into the economy, balance on the current account improve 🗸🗸 If the terms of trade deteriorated, the balance on the current account will decrease resulting in the following: • A decrease in export prices, less income is earned with the same expenditure 🗸🗸 • An increase in import prices, welfare is lost because expenditure on imports is more 🗸🗸 • For a surplus balance of exports should be encouraged and imports limited 🗸🗸 QUESTION 4.3 4.3 DATA RESPONSE 4.3.1 Which letter represents imports from the above data? A🗸 4.3.2 (1) Which international institution can help countries with funds to correct fundamental deficit? International Monetary Fund (IMF) 🗸 ECONOMICSGrd12 (1) P a g e 94 | 368 V3 4.3.3 Briefly describe the term balance of payment. A systematic record of all trade and financial transaction of a country with the rest of the world. 🗸🗸 (Accept any other relevant correct response.) (2) 4.3.4 Explain the relationship between the exchange rate of a country and the current account balance. • An overvalued exchange rate means that the country’s ex- ports will be relatively expensive and imports cheaper 🗸🗸 • • Spending on imports increases which leads to continuous deficits on the current account of the balance of payment 🗸🗸 An undervalued country’s currency makes the country’s imports relatively expensive than its exports 🗸🗸leading to fundamental surpluses as more is earned from the import payments 🗸🗸 (2) (Accept any other correct relevant response.) (Any 1 x 2) 4.3.5 Why it is important to analyse a country’s balance of payments data? Balance of payment data: provides detailed information about the supply and demand of the country’s currency. 🗸🗸 can be used to evaluate the performance of the country in international economic competition. 🗸🗸 indicates a country’s international payment gap that must be financed by the government’s official reserve transactions. 🗸🗸 ensures maximum exchange control 🗸🗸 (Accept any other correct relevant response.) (Any 2 x 2) (4) MIDDLE ORDER PARAGRAPH 4.3.6 DISTINGUISH BETWEEN DEVALUATION AND APPRECIATION OF THE RAND AGAINST THE DOLLAR (2X4) (8) Devaluation: • A decrease in the value of the currency by authorities(government) 🗸🗸 • Refers to a fixed exchange rate system 🗸🗸 • The government might devalue a currency to improve exports 🗸🗸 • The government can change the rate from $1=R10 changes to $1=12 🗸🗸 (4) Appreciation: • An increase in the value of a currency due to market forces 🗸🗸 • Typical of a floating exchange rate system 🗸🗸 • $1=R10 changes to $1=R8 🗸🗸 (4) ECONOMICSGrd12 P a g e 95 | 368 V3 4.3.7 EXPLAIN WHY SOUTH AFRICA WOULD HAVE A DEMAND FOR FOREIGN EXCHANGE (2X4) (8) • • • • • Importing goods 🗸🗸 Payment for services from foreign countries 🗸🗸 Buying shares in another country 🗸🗸 Tourist spending money overseas 🗸🗸 Repayment of debt borrowed from foreign countries 🗸🗸 HIGHER ORDER PARAGRAPH 4.3.8 WITH THE AID OF A GRAPH EXPLAIN HOW AN INCREASE IN EXPORTS TO THE U.S.A. WILL AFFECT THE VALUE OF THE RAND (8) • • • An increase in exports in exports to the USA may lead to an increased demand for rand from D1 to D2 🗸🗸 The quantity of rand demanded increased from 50 to 52bn 🗸🗸 The price of rand in terms of dollar increase from 060 dollar per rand to 062 dollar per rand 🗸🗸 4.3.9 HOW CAN CLIMATE CHANGE INFLUENCE INTERNATIONAL TRADE? (8) • A change in climatic conditions might influence international trade by: Leading to different products being produced and exported to other countries than before • • • 🗸🗸 Leading to import of different products produced locally and exported 🗸🗸 Causing other types of industries to arise due to a change in production pattern and types of products delivered 🗸🗸 Causing a serious need for research in unknown fields of production to ensure international trade. 🗸🗸 ECONOMICSGrd12 P a g e 96 | 368 V3 4.3.10 EVALUATE THE EFFECTIVENESS OF THE METHODS TO CORRECT THE BALANCE OF PAYMENTS DISEQUILIBRIA (8) The methods to correct the BOP were successful by: • Achieving a satisfactory balance on the current account 🗸🗸 • An increase in interest rates decreases the cost of borrowing and the demand for imports will decrease 🗸🗸 • Implementing import substitution policy which will increase the demand for local goods. 🗸🗸 • Achieving high levels of international competitiveness which help to keep aggregate demand and output levels high 🗸🗸 The methods to correct the BOP were unsuccessful by: • The deficit on the trade balance shows a much bigger increase of imports compared to exports 🗸🗸 • Import substitution lead other countries to charge high taxes or sanctions 🗸🗸 • A decrease in interest rates decreases the cost of borrowing and the demand for imports will increase 🗸🗸 SECTION C HINT: All section C questions have TWO questions 5 & 6 NOT like in this document. In the examination you will need to answer only one. ESSAY STRUCTURE HINT: Section C – the long question, must be answered in FOUR sections: Introduction (definition), Body (headings and full sentences in bullets) additional part and conclusion (summarising). The mark allocations for Section C are as follows: MARK ALSTRUCTURE OF ESSAY LOCATION Introduction The introduction is a lower-order response. • A good starting point would be to define the main concept related to the question topic. • Do not include any part of the question in your introduction. • Do not repeat any part of the introduction in the body. • Avoid mentioning in the introduction what you are going to discuss in the body. ECONOMICSGrd12 P a g e 97 | 368 V3 Max. 2 Body Main part: Discuss in detail/In-depth discussion/Examine/Critically discuss/ Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Draw a graph and explain/Use the graph given and explain/Complete the given graph/Assess/Debate A maximum of 8 marks may be allocated for headings/examples Additional part: Critically discuss/Evaluate/Critically evaluate/Debate/ Deduce/Compare/Distinguish/Interpret/How? /Suggest A maximum of 2 marks may be allocated for mere listing facts. Conclusion Any higher-order conclusion should include: • A brief summary of what has been discussed without repeating facts already mentioned • Any opinion or value judgement on the facts discussed • Additional support information to strengthen the discussion/analysis • A contradictory viewpoint with motivation, if required • Recommendations TOTAL Max. 26 Max. 10 Max. 2 40 QUESTION 5 • DISCUSS IN DETAIL THE RESONS FOR INTERNATIONAL TRADE. (26) • CRITICALLY DISCUSS THE CHALLENGES FACED BY SOUTH AFICA IN INTERNATIONAL TRADE. (10) INTRODUCTION There are many reasons for international trade. Countries may have a surplus of some goods and a shortage of other goods, and they will trade in order to correct these imbalances. • Trade that takes place between different countries of the world (Accept any other correct relevant answer) (Max 2) MAIN PART DEMAND REASON The size of the population • • If there is an increase in population growth, it causes an increase in demand, as more people’s needs must be satisfied. Local suppliers may not be able to satisfy this demand. • Income levels Changes in income cause a change in the demand for goods and services ECONOMICSGrd12 P a g e 98 | 368 V3 • • • • • • • • • Consumable income for example may increase due to a decrease in tax, or increased employment of factors of production which may lead to increased consumption expenditure Higher income creates more needs, wants, and subsequently greater demand for a greater variety of goods even if it necessary to get the goods from abroad An increase in the per capita income of people results in more disposable income that can be spent on local goods and services, some of which may then have to be imported Change in the wealth of the population An increase in the wealth of the population leads to greater demand for goods. People have access to loans and can spend more on luxury goods, many of which are produced in other countries. Preferences and taste Not all the goods wanted are produced in a country Consumer preferences and taste play a decisive role in demand of goods from foreign countries If consumers in China prefer tea and consumers in America prefer coffee, the relative prices of tea and coffee will differ between these countries This is influenced by international migration in terms of religion and lifestyle The difference in consumption patterns • This is determined by the level of economic development in the country. • e.g. poorly developed country will have a high demand for basic goods and services but a lower demand for luxury goods. SUPPLY REASONS Natural resources • These resources are not evenly distributed across all countries of the world • They vary from country to country and can only be exploited in places where these resources exist • South Africa is well endowed with different natural resources but less well endowed with skilled labour and capital • whilst Japan and Ireland have relative abundance of skilled labour but they lack natural resources Climatic conditions • These conditions make it possible for some countries to produce certain goods at a lower price than other countries • e.g., Brazil is the biggest producer of coffee • Countries have different climatic conditions and are therefore able to produce different products Labour resources ECONOMICSGrd12 P a g e 99 | 368 V3 • • • • • • • • • • Labour differs from country to country in terms of skills, knowledge, training, quality, quantity and cost between them Some countries have highly skilled, well-paid workers and high productivity levels E.g., Switzerland Technological resources The development levels and innovation processes of countries will always differ and as a result other countries may have them in abundance while others may not Countries like Germany, the United States, are able to use capital that embodies high levels of technology while other countries do not have access to the latest technology These countries that have high technological labour force are able to produce certain goods and services at a low unit cost E.g., US and Germany Specialization The production of certain goods and services allows some countries to produce them at a lower cost than others E.g., Japan produces electronic goods and sells these at a lower price International trade enables countries to specialize in the production of goods and services in which they have a comparative advantage Most of such surplus production gets exported to other countries and the revenue earned from these exports can be used to finance imports Capital • Some countries need to modernize their industries and economies with advanced machinery, equipment and plant but cannot manufacture this equipment because they lack capital to do so. • This has then increased the need for international trade (Accept any other correct relevant answer) (26) ADDITIONAL PART South Africa may face the following challenges in international trade: • Unfair international competition occurs due to developed countries supporting their business through subsidies which makes their product cheaper compared to South African products • Developed countries may export their products to South Africa at very low prices (dumping) which could lead to shut down of local businesses • Exporting of South African products may be restricted to prevent the spreading of diseases between countries such as covid-19 • Demand on South African agricultural product may decrease due to tariffs that are much higher than those applied on industrial goods • Quotas and embargos may limit South Africa's export volumes which will decrease inflow of foreign exchange • It is difficult for South Africa to sell agricultural product in developed countries due to subsidies provided by their governments to agricultural producers ECONOMICSGrd12 P a g e 100 | 368 V3 • Current international trade rules on industrial subsidies are not able to effectively tackle government support • Inter-nationalization of state-owned enterprises' operations may create an unhealthy competitive environment as SOEs in some countries benefit from domestic preferential treatment and cheap finance • Most South African businesses lag behind in technological advances and changing business practices which makes them less competitive and failing to integrate fully in the global economy • Over-reliance on primary sector products result in South Africa generating less export earnings from international trade • Unstable exchange rates cause a lot of uncertainties in planning for South African exporters • Social, political, and economic shocks in other countries such as Ukraine and Russia reduce South Africa’s ability to trade internationally • International pressure from the West and the U.S, which happen to be their biggest trading partner/ largest export market on South Africa to disassociate itself with Russia (Accept any other relevant and correct response) (A maximum of 2 marks may be allocated for mere listing of facts/examples) (10 marks) CONCLUSION While the Russia-Ukraine conflict is ongoing, the South African government has to • look at other ways of strengthening its infrastructure and take advantage of future gains in commodity trade boom. (Accept any other correct and relevant higher order response) (Max. 2) QUESTION 6 • Discuss in detail the demand reasons for international trade (26) • Evaluate the effects of a currency depreciation in an economy (10) INTRODUCTION • International trade is the exchange of goods and services between countries. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries, or which would be more expensive domestically. Main body The size of the population impacts demand. • If there is an increase in population growth, it causes an increase in demand, as more people’s needs must be satisfied. Local suppliers may not be able to satisfy this demand. Change in income ECONOMICSGrd12 P a g e 101 | 368 V3 The population’s income levels effect demand . • • Changes in income cause a change in the demand for goods and services. An increase in the per capita income of people results in more disposable income that can be spent on local goods and services, some of which may then have to be imported. • An increase in the wealth of the population leads to greater demand for People have access to loans and can spend more on luxury goods, many of which produced in other countries. Preferences and tastes can play a part in the determining of prices, e.g., customers in Australia prefer a specific product which they do not produce need to import, and it will have a higher value than in other countries. difference in consumption patterns is determined by the level of economic development in the country, e.g., a poorly developed country will have a high demand for basic goods and ser- • • • • goods. are and • The vices but a lower demand for luxury goods. Additional Part Evaluate the effects of a currency depreciation in an economy. Positives of Currency depreciation: • Can be used as an expansionary monetary policy to counter cyclical measures to stimulate demand, profits, output and jobs when an economy is in recession. ✓✓ • Brings an improvement in the balance trade through higher export sales. ✓✓ Provides a competitive boost to an economy through increasing the value of profits and income for a country’s businesses with investments overseas. ✓✓ • Leads to a positive multiplier within the circular flow of income and spending✓✓ Negatives of Currency depreciation: • Makes it harder for the government to finance a budget deficit if foreign investors lose confidence. ✓✓ • Increases the cost of imports e.g., rising prices for essential foodstuffs, raw materials, which affects long Makes it hard to pay for a trade deficit that is owed to overseas -run productive potential of an economy. ✓✓ Accept any other correct relevant response) (8) CONCLUSION ECONOMICSGrd12 P a g e 102 | 368 V3 A country’s level of development and religious, socio-cultural aspects also plays an important role on consumption patterns. (Max. 2) (Accept any higher-order conclusion.) QUESTION 7 • Discuss, in detail, the supply reasons for international trade. (26) • Examine comparative advantage in international trade, by using an appropriate example. (10) INTRODUCTION International trade is the exchange of goods and services across many countries. (Accept any other relevant introduction.) (Max. 2) BODY: MAIN PART The following are supply reasons for international trade: Natural resources • These resources are not evenly distributed across all countries of the world. • They vary from one country to another and can only be exploited in places where the resources exist. • South Africa is well equipped with different natural resources, but less resourced with skilled labour and capital. • Examples are Japan and Ireland, which have an abundance of skilled labour, but lack natural resources. they Labour resources • Labour differs between different countries in terms of skills, knowledge, training, quantity and cost. • Some countries such as Switzerland have highly skilled, well-paid workers, and productivity levels. quality, high The availability of capital • Some countries need to modernise their industries and economies with advanced machinery, equipment (plants), but cannot manufacture this equipment, because lack the capital to do so. • This factor has therefore increased the need for international trade. they Lack of entrepreneurship • Those countries that have good entrepreneurial skills offer more goods and serfor trade. vices ECONOMICSGrd12 P a g e 103 | 368 V3 • Efficiency determines the supply of goods and services produced at lower prices also reduces the opportunity cost of acquiring them. and Climatic conditions • These countries make it possible for others to produce certain goods at a lower price than other countries. • An example is Brazil, which is the largest producer of coffee. • Countries have different climatic conditions and are therefore able to produce differ- ent products. Technological resources • The developmental levels and innovation processes of countries will always differ and as a result some countries may have them in abundance, while others may not. • Countries such as Germany and the USA can use capital which represents high levels of technology, while other countries do not have access to the latest technology, such as basic internet services and healthcare. • Those countries that have high technological labour forces can produce certain goods and services at a low unit cost, such as the developed countries. Specialisation • The production of certain goods and services allows some countries to produce a lower cost than other producers. them at • Japan produces electronic goods and sells them at a much lower price. • International trade enables countries to specialise in the production of goods and services in which they have a comparative advantage above others. • Most of the surplus production gets exported to other countries and the revenue from these exports can be used to finance their imports. earned (Accept any other correct relevant response.) (Max. 26) ADDITIONAL PART Examine comparative advantage in international trade, by using an appropriate example. • A country has comparative advantage when the opportunity cost of producing a good is lower than the other country’s cost. Consider the following example: • South Africa and Botswana have climates in the production of beans and subtropical fruits. • Let us assume the production of both countries are: South Africa Botswana ECONOMICSGrd12 Beans 10 5 Subtropical fruits 40 30 P a g e 104 | 368 V3 • South Africa clearly produces more beans and subtropical fruits than Botswana, however, the principle of opportunity cost principle must be identified. • In South Africa the cost of producing subtropical fruits to beans is 1:4, meaning they will have to sacrifice 40 tons of subtropical fruits to produce 10 tons of beans. • In Botswana, the opportunity cost is 1:6, they must sacrifice 30 tons of subtropical fruits to produce 5 tons of beans. • It is therefore more cost effective for SA to produce subtropical fruit in comparison to Botswana. • SA has comparative advantage in the production of subtropical fruit and Botswana has comparative advantage in the production of beans. • SA will therefore specialise and export subtropical fruits to Botswana, while Botswana will specialise and export beans to SA. (Accept any other correct relevant response.) (Max. 10) CONCLUSION Consumers may exhaust the available supply of locally produced goods while exploring international markets for surplus production and unique products. (Max. 2) (Accept any higher-order conclusion.) (40) ECONOMICSGrd12 P a g e 105 | 368 V3
