SECONDARY SCHOOL IMPROVEMENT

PROGRAMME (SSIP) 2025

GRADE 12

SUBJECT: ECONOMICS SATURDAY CLASSES

LEARNER WORKBOOK

(Page 1 of 111)

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 TABLE OF CONTENTS

SESSION TOPIC PAGE

- ACTION VERBS 3-4

1 Macroeconomics: The Circular flow: Part 1 5-20

Macroeconomics: The Circular Flow: Part 2 21-33

2 Macroeconomics: The Business Cycles: Part 1 34-45

Macroeconomics: The Business Cycles: Part 2 46-57

3 Macroeconomics: Public Sector: Part 1 58-70

Macroeconomics: Public Sector: Part 2 71-81

4 Macroeconomics: Foreign exchange markets: Part 1 82-97

Macroeconomics: Foreign exchange markets: Part 2 98-111

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 ECONOMICS VERBS TO BE INTRODUCED DURING
TEACHING AND LEARNING

WORD MEANING

Account to answer for - explain the cause of - so as to explain why

Analyse separate, examine and interpret critically
Apply use knowledge or skill to solve a particular problem
Arrange to prepare for an event, to put in proper order
Argue put forward reasons in support of or against a proposition
Calculate find an answer using mathematical methods (show the working unless in-
structed not to do so)
Classify to divide into groups or types so that things with similar characteristics are
in the same group - to arrange according to type or sort
Collaborates to work jointly with, to cooperate with others
Comment write generally about
Compare to point out or show both similarities or differences
Concur to agree with a position
Contrast stress the differences, dissimilarities, or unlikeness of things, qualities,
events or problems
Critically Evaluate state a point or a fact then argue for or against
Define give the concise and clear meaning
Demonstrate to show or make clear - to illustrate and explain - to prove by reasoning
and evidence - can give examples
Derive manipulate a mathematical equation to give a new equation or result
Describe list the main characteristics of something - give an account of
Determine to resolve, to fix conclusively, resolve, settle, decide
Discuss examine by means of argument, presenting both sides and reaching a con-
clusion
Distinguish* to recognise or understand the difference between two things
Differentiate* highlight the difference between two things, linking particular differences
Elaborate explain in more detail, in-depth analysis
Evaluate to make an appraisal or express an opinion/ argue for or against
Examine to look at or closely or carefully and in detail in order to discover something
Explain to make clear, interpret and spell out the material you present
Give to state facts without discussions
How In what way/ by what means / in what manner
Identify give the essential characteristics of to name
Impact implication e.g., positive or negative
Interpret to give an explanation of – to give the meaning of in you
Interview to obtain facts or opinions through inquiry or examinations or various
sources
Justify prove or give reasons for decisions or conclusions, using logical argument
List write an itemised series of concise statements / words
Mention refer to relevant points
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 WORD MEANING

Motivate support your argument, normally taking a positive or negative stance

Name to state something – give, identify or mention
Outline give a summary, using main points and leaving out minor details
Persuade to urge, influence, move, entice, impel by argument
Predict / forecast to say what you think will happen – to foretell – to say in advance
Provide to state facts without discussions
Quote take the answer verbatim from the case study/ extract/ scenario
Recommend to suggest a course of action
State to present information plainly without discussion
Substantiate to validate, authenticate or prove
Suggest / propose to propose an explanation or solution
Show to make clear – to point out – to explain
Tabulate to put in table form, set up in columns and rows
What Contextualise the question like: What benefits…; What negative impact…;
What advice...
Why Why involves discussing and explaining a process, outcome or point of
view using evidence to back up you ideas.

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CIRCULAR FLOW PART 1 LEARNER NOTES

Circular flow
• The circular-flow model of the economy is a simplification showing how the econ-
omy works and the relationship between income, production and spending in the
economy as a whole.
• The circular-flow model of an open economy shows the workings of an economy
that is open to foreign trade.
• It is different to a closed economy because it includes the foreign sector.

Participants:
Households
• There is a flow of money and goods and services between the household sector
and business sector.
• Households are the owners of the services of 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 produc-
tion to business.

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 • In exchange for the use of the factors of production, households receive an in-
come from firms in the following forms:
- salaries or wages in return for their labour services
- interest on their capital
- rent from the ownership of natural resources such as agricultural land
- profit from entrepreneurial activities
The characteristics of households may be summarised as follows:
- They are owners of production factors.
- They are sellers of production factors.
- They are consumers of goods and services.
- They are buyers of consumer goods and services

Business Sector
• Businesses do not only produce the consumer goods and services that house-
holds demand. They also produce capital goods (factories, machines and tools)
that are used in the production of consumer goods and services. This creation of
capital goods is known as real investment
• Business uses 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
• While households try to maximise their satisfaction from their limited income,
firms try to maximise their profits. Profit is the difference between revenue and ex-
penditure. Revenue is earned from the selling of goods and services to house-
holds in the goods market. Firms are therefore active participants as supplier
(sellers) in the goods market. Firms strive to keep their revenue as high as possi-
ble and their expenditure – which is determined by their cost of production – as
low as possible.
The general characteristics of firms may be summarised as follows:
- They are buyers of factors of production.
- They are producers of goods and services.
- They are sellers of goods and services.

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 receive income.
• The state provides the household with public goods and services (e.g.) parks, hos-
pitals
• Households pay taxes to the state.

This is income for the state.

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 • 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.
• Business pays taxes to the state.

Foreign Sector

• There is a flow of goods (imports) to the business from the foreign sector
• Businesses that import these goods, pays for it.
• This will be regarded as expenditure for the business
• There is also a flow of goods (exports) from the business in the country to the for-
eign sector.
• Businesses export their goods and services to other countries and earn money
for it.
• This will be income for the business.

The relationship of the financial sector in the circular flow

• The financial sector consists of banks, insurance companies and pension funds.
• They act as a link between households and firms who have surplus money and
others in the economy who require funds.
• The money which households and firms provide to the financial sector is known as
savings.
• Businesses can Borrow money from the financial institutions and use it to pur-
chase capital goods.
• This spending on capital equipment by firms is regarded as investment.

Money flow:
• Factor remuneration represents the expenditure of producers

• And the income of households e.g., wages, rent, interest and profit

• Consumption expenditure represents the expenditure of households and the

income of producers

• Government and foreign sector payments

• Import payments (expenditure) and export earnings (income)

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Real flow:
• Factors of production flow from the owners (households) to producers via the
factor markets

• Goods and services flow from the producers via the goods markets to house-
holds and other users of goods and services √√

• Factors of production and goods and services flow from foreign countries to
South Africa (imports)

• Factors of production and goods and services flow from South Africa to foreign
countries (exports)

Model equations
Consumption spending (C) the total value of all spending by households on goods and
services
Government spending (G) the total value of expenditure by the government on goods
and services

To calculate value of the income in a country: Y=C+I+G+(X-M)

To calculate the value of production in a country we use the following equation
GDP=C+I+G+(X-M)

Leakages-any flow of money which does not give rose to a further round of income from
within the economy
• The amount of money that leave the circular flow

• Savings (S); Taxes (T) and spending on imported goods (M)

• L=S+T+M

Injections-any spending which is not derived from income

• The amounts of money that are added to the circular flow

• Investment (I); Government expenditure (G) and export income (X)

• J=I+G+X

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The markets
• Any contact or communication between buyers and sellers to determine the price
of a good or service.

• Any platform where buyers and sellers interact to exchange goods or services for
a price.

PRODUCT / GOODS/ OUTPUT MARKET-A market where goods and services are ex-
changed

❖ These are the markets for consumer goods and services

❖ Goods are defined as tangible items, like food, clothes, cars, etc. that satisfies
some human wants or needs
❖ Services are defined as non-tangible actions and include wholesale and retail,
transport and financial markets.
❖ Buying and selling of goods that are produced in markets e.g.
- Capital Goods market for trading of buildings and machinery
- Consumer goods market for trading of durable consumer goods, semi-durable
consumer goods and non-durable consumer goods.
- Semi-durable goods last short period of time and can be used more than once.
They are used up gradually i.e., pen, printer cartridge
- Durable goods can be used over again and do not wear out very easily i.e., ve-
hicles, furniture and computers. Durable goods depreciate over time
- Non-durable goods are those items which are used up when they are con-
sumed and cannot be re-used i.e., cool drink, petrol and electricity
FACTOR / RESOURCE/ INPUT MARKETS

The market in which the factors of production are traded-factor market includes the la-
bour market and the capital market

❖ Households sell factors of production on the markets: rent for natural resources,
wages for labour interest for capital and profit for entrepreneurship
❖ The factor market includes the labour, property and financial markets.
❖ The market where services of factors of production are traded e.g., labour is hired
and capital is borrowed – these services earn wages, interest, rent and profits
FINANCIAL MARKETS

❖ They are not directly involved in the production of good and services, but act as a
link between households, the business sector and other participants with surplus
finds
❖ E.g., banks, insurance companies and pension funds
❖ The financial market serves those who wish to save and those who wish to bor-
row.
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 ❖ The money, capital and foreign exchange markets are part of the financial market.

❖ The money market in South Africa is the market for short-term and very short-term
(three years and shorter) savings and loans.

❖ The South African Reserve Bank is a major institution in the money market.

❖ Some examples are banker’s acceptances, short-term debentures, Treasury bills,

Reserve Bank debentures and short-term government bonds.

❖ The capital market exists when consumers and producers make long-term depos-
its and borrow on long term, such as a mortgage bond, shares, debentures and
unit trusts.

❖ The Johannesburg Securities Exchange is the major institution in the capital mar-
ket.

❖ The foreign exchange market exists when a person buys foreign currency – for ex-
ample dollars, travellers’ cheques to travel abroad.

❖ When businesses buy foreign exchange to pay for imports or receive foreign ex-
change in exchange for exports.

❖ The South African rand is exchanged (traded) in all leading foreign exchange cen-
ters and capitals of the world.
MONEY MARKETS-The market for short-term savings and loans

❖ In the money markets short term loans, and very short term funds are saved and
borrowed by consumers and business enterprises
❖ Products sold in the market are bank debentures, treasury bills and government
bonds
❖ The simplest form exists when parties make demand and short-term deposits and
borrow on short term
❖ The SARB is the key institution in the money market
CAPITAL MARKETS-The market where long-term deposits and borrowings are negoti-
ated

❖ In the capital markets long term funds are borrowed and saved by consumers and
the business sector
❖ The Johannesburg Security Exchange (JSE) is a key institution in the capital
❖ Products sold in this market are mortgage bonds and shares
FOREIGN EXCHANGE MARKET -Made up of the financial institutions i.e major com-
mercial banks where foreign currency is bought and sold

❖ On the foreign exchange markets businesses buy/ sell foreign currency to pay for
imported goods and services

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 ❖ These transactions occur in banks and consists of electronic money transfers from
one account to another
❖ The leading centres/ most important foreign exchange markets are in London,
New York and Tokyo
❖ e.g. traveler’s cheques to travel abroad
❖ Exchange rates are determined by the forces of demand and supply, which are in-
fluenced by the volume of imports and exports
❖ Exchange rate -the price of the currency in terms of another

NATIONAL ACCOUNT AGGREGATES AND CONVERSIONS

Gross Domestic Product (GDP): The total market value of all final goods and services
produced within the boundaries of a country in a particular period (usually one year).

Three methods of calculating GDP

• Expenditure method – GDP(E)

• Income method – GDP(I)
• Production method – GDP(P)

These measures of economic activity are useful not only as an indicator of economic ac-
tivity within a country, but also:

• to determine the standard of living in a country

• to compare prosperity levels between countries
• to measure economic growth from one year to the next

PRODUCTION METHOD

• Production takes place in the primary, secondary and tertiary sectors.

• However, we cannot merely add up all the market values of all outputs of all par-
ticipants, because such a calculation would amount to double counting.
• By subtracting intermediate goods form final goods we find the value that was
added by each sector.

Primary Sector
Secondary Sector
Tertiary Sector
= GROSS VALUE ADDED AT BASIC
+ TAXES on PRODUCT
-subsidies on products
=GDP at market prices

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INCOME APPROACH

The income approach equates the total output of a nation to the total factor income re-
ceived by residents or citizens of the nation. The main types of factor income are:

• Employee compensation (cost of fringe benefits, including unemployment, health,

and retirement benefits);
• Interest received net of interest paid;
- Rental income (mainly for the use of real estate) net of expenses of land-
lords.
- Royalties paid for the use of intellectual property and extractable natural re-
sources.
- All remaining value added generated by firms is called the residual or profit
or business cash flow.
Formula:

GDI (gross domestic income, which should equate to gross domestic product) = Com-
pensation of employees + Net interest + Rental & royalty income + Business cash flow.

GDI adds together the income earned by the owners of the factors of production.

Compensation of employees
+ net operating surplus
+ Consumption of fixed capital
= GROSS VALUE ADDED AT FACTOR
COST
+ TAXES on PRODUCTION
- SUBSIDIES on PRODUCTION
= GROSS VALUE ADDED AT BASIC
PRICES
+ TAXES on PRODUCT
- SUBSIDIES on PRODUCTS
= GROSS DOMESTIC PRODUCT AT MAR-
KET PRICES (GDI)

Compensation of employees (1) consists mainly of gross salaries and wages.

Net operating surplus (2) includes mainly the total value of goods and services that are
produced, less cost. Cost has 3 elements:
• cost of intermediate goods and services

• cost of remuneration of employees

• cost of the consumption of fixed capital

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 • The net operating surpluses show profits and surpluses before taxation.

In an economy, households receive wages that they then use to purchase final goods
and services. Since wages eventually are used in consumption (C), the expenditure ap-
proach to calculating GDP focuses on the end consumption expenditure to avoid double
counting. The income approach, alternatively, would focus on the income made by
households as one of its components to derive GDP.

Expenditure Approach

GDP (E) measures total expenditure of final goods and services produced within the bor-
ders of a country.
C -Final consumption expenditure by households
+ G - Final consumption expenditure by government

+ I - Gross capital formation

+ Residual item

= GROSS DOMESTIC EXPENDITURE

+ X Exports of goods and services

- M LESS imports of goods and services

EXPENDITURE ON GDP at MARKET PRICES

- GDP(E) measures total expenditure of final goods and services produced within
the borders of a country.
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 - GDP(E) = C + I + G + (X – Z)
The expenditure approach attempts to calculate GDP by evaluating the sum of all final
good and services purchased in an economy. The components of SA

GDP identified as “Y” in equation form, include Consumption (C), Investment (I), Gov-
ernment Spending (G) and Net Exports (X – M).

Y = C + I + G + (X − M) is the standard equational (expenditure) representation of GDP.

• “C” (consumption) is normally the largest GDP component in the economy, consist-
ing of private expenditures (household final consumption expenditure) in the econ-
omy. Personal expenditures fall under one of the following categories: durable
goods, non-durable goods, and services.
• “I” (investment) includes, for instance, business investment in equipment, but does
not include exchanges of existing assets. Spending by households (not govern-
ment) on new houses is also included in Investment. “Investment” in GDP does
not mean purchases of financial products. It is important to note that buying finan-
cial products is classed as ‘saving,’ as opposed to investment.
• Examples include construction of a new mine, purchase of software, or purchase
of machinery and equipment for a factory. Spending by households (not govern-
ment) on new houses is also included in Investment.
• “G” (government spending) is the sum of government expenditures on final goods
and services. It includes salaries of public servants, purchase of weapons for the
military, and any investment expenditure by a government. However, since GDP is
a measure of productivity, transfer payments made by the government are not
counted because these payments do not reflect a purchase by the government,
rather a movement of income. They are captured in “C” when the payments are
spent.
• “X” (exports) represents gross exports. GDP captures the amount a country pro-
duces, including goods and services produced for other nations’ consumption,
therefore exports are added.
• “M” (imports) represents gross imports. Imports are subtracted since imported
goods will be included in the term’s “G”, “I”, or “C”, and must be deducted to avoid
counting foreign supply as domestic.

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NATIONAL ACCOUNTS

The aim of National accounts

• It is to provide a systematic and comprehensive record of national economic activ-

ities.

• National income figures are NOT 100% accurate.

• There are many shortcomings or problems when we calculate or determine na-

tional income figures.

• Irrespective of all these problems and shortcomings, it remains important eco-

nomic statistics.

National Account Conversions

• All countries use national account figures

• South Africa uses the SYSTEM OF NATIONAL ACCOUNTS (SNA) prescribed by
the United Nations.
• GDP, GDE, and GDI have a great deal to do with the prices we use such as nomi-
nal and real prices, prices before or after taxes.
• Indirect taxes and subsidies are the most important determinants of the end val-
ues of the circular flow aggregates.
Converting basic prices to factor prices

TYPES OF TAX ON PRODUCTS AND SUBSIDIES ON PRODUCTION

• Taxes on products: Any tax is levied per unit of the good or service and includes
VAT, import duties, other tax on imports and tax on exports.

• Other tax on production: Any tax on production not linked to a specific good or
service and includes payroll taxes, business licensees and tax on land and build-
ings

TYPES OF SUBSIDIES IN THE NATIONAL ACCOUNT

• Subsidies on products: These are direct subsidies that are made per unit of the
good or services and are always linked to a specific product i.e., a government
subsidy on bread.

• Other subsidies on production: These are subsidies that are not linked to a
specific goods or services i.e., a subsidy made on employment.

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FACTOR COST TO GDP at basic prices/GDP at market prices

• Basic prices to market prices: + taxes on products-subsidies on products

• Factor cost to market prices: + taxes on production – subsidies on production

• Factor cost to basic prices:-taxes on production + subsidies on production

• Market prices to factor cost: -other taxes on products + subsidies on products

• Market prices – paid by consumers for goods and services including taxes less
subsidies

• Basic prices- the initial prices in production of final goods-before taxes and subsi-
dies are considered

• Factor cost- the amount to be paid for the various factors of production used to
produce goods and services.

Net figures

• Net operating surplus = surplus after taxes

• Net income = income after taxes
• Net fixed capital formation = After consumption of fixed capital (depreciation)
• Net exports = exports – imports
Conversion of Domestic to National figures

• Domestic figures (GDP) relate to the income and production happening within the
borders of the country. (GDP: Domestic production includes foreigners operating
in South Africa.)
• National figures (GNP) relate to the income or production by the citizens of the
country. (GNP: Only includes the production/income of South Africans.)
• In South Africa national accounts, the GDP is converted to the GNP as follows
• GDP + Primary income from the rest of the world - primary income to the rest of
the world=GNP
• GNP - Primary income from the rest of the world + primary income to the rest of
the world=GDP
CONVERTING GDP TO NET DOMESTIC PRODUCT

• During production of goods and service the capital items like machinery and
equipment, depreciate and lose value. COST OF PRDOUCTION IS NOT TAKEN
INTO ACCOUNT

• GDP measures the value of production before provision has been made for con-
sumption of fixed capital. The consumption of fixed capital is the amount by which
capital goods depreciate during the year.

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 • Net domestic production (NDP): is a measure of the value of production once ad-
justments have been made for consumption of fixed capital

• GDP is converted to NDP as follows

• GDP- consumption of fixed capital=NDP

Nominal figures vs Real figures

Nominal GDP X 100/Deflator

Nominal figures
• It is also known as market or money value.
• It is also known as national product at current prices.
• Nominal value of production is calculated by multiplying the volume of the final
goods and services by their prices.
• Inflation has not yet been taken into consideration.
Real figures
• It is also known as national product at constant prices.
• The rate of inflation as expressed by the consumer price index (CPI) has been
taken into account.
• Real values of production are the nominal values of national product adjusted for
price increase.
• Real national product is the national product expressed in prices which applied in
a certain base year.

The Multiplier

Definition
• The multiplier shows how an increase in spending (injection) produces a more
than proportional increase in national income.
• The multiplier must always be more than 1.
• The multiplier works in opposite directions.
THE MULTIPLIER IN A TWO SECTOR MODEL

The multiplier derived from the marginal propensity to consume (mpc)

• The size of the multiplier depends on the proportion of any increase in income that
is spent.
• The larger the mpc the bigger the multiplier and the smaller the mpc the smaller
the multiplier.
• It is the money that stays in the economy.

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Y= R100 000
S= R40 000=40% =0.4%
C=R60 000=60% =0.6%
• marginal propensity to consume (mpc) = 0,6
• marginal propensity to save (mps) = 0,4

• mpc + mps is always = 1

• • mps = 1 – mpc
• • mpc = 1 - mps

THE MULTIPLIER IN A GRAPH

Consumption function – relationship between consumption expenditure by house-

holds and total income.

(a) consumption increases as income increases – positive relationship between con-

sumption spending and income
(b) Consumption is positive even if income is zero
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(c) When income increases, consumption increases but the increase in consumption is
less than the increase in income.

Consumption = c, income = y

• Autonomous consumption = is that part of consumption that is independent of the

level of income.
• Total consumption = autonomous consumption + induced consumption.

• Marginal propensity to consume (c) – the ratio changes between the change in
consumption and the change in income.
• Marginal propensity C = change in consumption C divided by change in income.

Factors that affect consumption:

(a) interest rate

(b) expectations
(c) wealth
(d) income distribution
(e) Other factor – non income factors – level of taxation.

Investment spending:
• Investment spending called capital formation in the national accounts. Main cause
of fluctuations in economic activity.
• Refers to the production and purchase of capital goods that is man-made means
of production – buildings, plant, machinery and equipment. Investment thus re-
lates to capital as a Factors of Production.

Investment decision

Involves 3 important variables

(a) Cost of the capital goods

(b) Interest rate and
(c) The expected revenue to be earned from the capital gods.
• The higher the interest rate the lower the expected return – ceteris
paribus. There is an inverse relationship between interest rate and the expected
return on investment spending, ceteris paribus.

Explain the Multiplier effect

• The multiplier relates to how much national income changes as a result of an in-
jection or withdrawal such as an investment.
• Initially there is an increase in injections into the economy (investment, govern-
ment spending or export), which would lead to a proportionate increase in national
income.
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 • The extra spending would have knock-on effect and create even more spending
• The size of the multiplier will depend on the level of leakages.

Discuss the multiplier and its aggregate effect on the economy, if the marginal propensity
to consume (mpc) is 0,6 and investment increases by R10bn.

A relatively small investment produces a proportionately larger increase in national in-

come
1/1-mpc
1/1-0.6
=2.5

The multiplier effect =2.5 x R10bn=R25bn

• Therefore, an investment of R10bn will produce a R25bn increase in national in-

come
• One person’s spending becomes another person’s income.
• The new workers would then have income to purchase consumer goods which in
turn stimulates the demand for goods and services and this results in increased
levels of production which further increases the level of employment

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SESSION 1: MACROECONOMICS: THE CIRCULAR FLOW PART 2

SECTION A: TYPICAL EXAM QUESTIONS

THE CIRCULAR FLOW

QUESTION 1: Section A – Short Questions

(Taken from various sources)

HINT: You need to study your concepts to do well in Section A.

When answering Section A – short questions, 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 an-
swer will NEVER be two options. Only ONE option is correct. Your answer will imme-
diately be marked incorrect if you write TWO options.

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 The flow of goods, services, and money between the different
participants in an economy is illustrated by a …

A Business cycle
B Laffer curve
C Circular flow model
D The multiplier

1.1.2 An economy that includes the foreign sector is called a/an …

economy.

A Closed
B Open
C Free
D Restricted

1.1.3 Payments made on imports of goods and services are called …

South African Reserve Bank is an example of:

A Injections
B Taxes
C Leakages
D Earnings

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 1.1.4 If GDP at current prices is R2 400m and the CPI is 127, then GDP
at constant prices…

A R2 400m
B R3 048m
C R2 547m
D R1 889.76m

1.1.5. An injection into an economy, with a marginal propensity to con-

sume of 0,75, leads to a total increase in national income of R224
million. What was the value of the initial injection?

A R22.4 million
B R56 million
C R168 million
D R896 million (10)

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 – 1.2.6) in the
ANSWER BOOK.

COLUMN A COLUMN B
1.2.1 Autonomous con- A Movement of income and expenditure be-
sumption tween the participants in the economy.

1.2.2 Treasury bills B The portion of household spending which is

independent.
1.2.3 Marginal rate of
taxation C short-term debt instruments denominated in
South African Rands (ZAR)
1.2.4 Money flow
D the amount of additional tax paid for every
1.2.5 Disposable income additional rand earned as income.

E Benefit of being excluded from paying tax.

F Income that is available for household to

spend after deductions have been made

(5 × 1) (5)

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1.3 Provide the economic term/concept for each of the following descriptions. Write
only the term/concept next to the question number.
ABBREVIATIONS, ACRONYMS AND EXAMPLES WILL NOT BE
ACCEPTED.

1.3.1 This sector serves as both a source and destination for goods, ser-
vices, savings and loans

1.3.2 These services earn wages, interest, rent, and profits respectively

1.3.3 Adding primary income from the rest of the world subtracting primary
income to the rest of the world

1.3.4 The number by which the change in initial spending must be multi-
plied to determine the changes in income

1.3.5 Account for the production and income within the borders of the
Country

1.3.6 A compulsory payment made to the government by the economic par-

ticipants

1.3.7 A mechanism that brings buyers and sellers together

1.3.8 Payments received without any productive work rendered

1.3.9 Short – term savings and loans are traded in the market

1.3.10 Method that measures total spending of final goods and services pro-
duced within the borders of a country
(10x1) (10)

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SECTION B

QUESTION 2: 20 minutes Section B (Adapted from various sources)

LOWER ORDER QUESTIONS

: When the question requires you to “list” or “name”, you need not write a
sentence but merely the word 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 Name any TWO features/characteristics of money market (2x1) (2)

2.2 List any TWO leakages (2x1) (2)

2.3 Name any TWO components of an economy in equilibrium (2x1) (2)

2.4 Name any TWO active participants in a closed economy (2x1) (2)

2.5 Provide any TWO national account conversions (2x1) (2)

2.6 List TWO types of flows in the economy (2x1) (2)

2.7 Name TWO types of subsidies in the national account (2x1) (2)

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QUESTION 3: (Taken from various sources)
MIDDLE ORDER QUESTIONS
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 What is the main purpose of subsidies on production? (2)

3.2 Why is it important to prepare the national accounts of a (2)

country?

3.3 What is the role of the residual item when the expenditure method is (2)
used to calculate national income?

3.4 Why indirect taxes are not included in factor cost? (2)

Data Response

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:
Study the table below and answer the questions that follow

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 4.1 Identify the participant that owns the factors of production in diagram (1)
above.

4.2 Name the payment made at B (1)

4.3 Briefly describe the term injections (2)

4.4 What is meant by intermediate goods and services (2)

4.5 How do savings contribute to investment in the economy (2x2) (4)

QUESTION: 5
Study the table below and answer the questions that follow.

GDP FIGURES FOR SOUTH AFRICA

5.1 Identify the base year according to the table above. (1)

5.2 Which economic participant is impacted with changes of CPI (1)

5.3 Briefly describe the term real GDP (2)

5.4 How does an increase in real GDP affect factor market? (2)

5.5 Calculate the nominal GDP for 2020 labelled B. Show all calcula-
tions. (4x1) (4)

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QUESTION: 6
Study the table below and answer the questions that follow.

6.1 Identify the line of equality (1)

6.2 Which formula is used to calculate the multiplier in a four-sector (1)

model

6.3 Briefly describe the term marginal propensity to save (2)

6.4 How does high income tax rate reduce the multiplier effect? (2)

6.5 Calculate the multiplier value. Show all calculations (2x2) (4)

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QUESTION: 7
Study the table below and answer the questions that follow.

[Source: SARB September 2020 Quarterly Bulletin]

7.1 Identify the component (figure) that will increase the GDP at basic (1)
price in the above table

7.2 Name any other method that can be used to calculate GDP? (1)

7.3 Briefly describe the term gross domestic product (2)

7.4 What is this main purpose of subsidies on production? (2)

7.5 Calculate subsidies on production as a percentage of the gross do-

mestic product at market prices. Show ALL calculations. (4x1) (4)

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QUESTION 08 Paragraph type questions – Middle Cognitive

8.1 Explain the importance of goods market in the economy (4x2) (8)

8.2 Briefly discuss the role of financial and foreign exchange markets to (8)
the participants of the circular flow (4x2)

8.3 Briefly discuss income method (GDP(I) to determine GDP (4x2) (8)

8.4 Discuss taxes and subsidies on production as the national account (8)
conversions (4x2)

8.5 With an aid, of a graph, explain the multiplier concept (4x2) (8)

8.6 Explain the causes of a negative multiplier effect. (4x2)(8)

QUESTION 9 Paragraph type questions – Higher cognitive

TYPICAL EXAM QUESTION: THESE HIGHER ORDER QUES-

TIONS REQUIRE THE LEARNERS TO USE HER/ HIS CRITI-
CAL 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 have an awareness of their current eco-
nomic climate. Content (covered by examine/ analyse/evaluate/compare/assess/jus-
tify/construct/calculate/How/Why) can be assessed as higher-order questions.
Answers will not necessarily be found in textbooks.

9.1 How can households as primary participant in the circular flow model (8)
contribute to the economy?

9.2 Why is it important for a country to calculate the national income? (8)

9.3 Analyses the impact of a change in a flow within the four-sector (8)
model

9.4 Why is it important for a country to calculate the national income? (8)

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SECTION C

HINT: All section C questions have TWO questions 5 & 6; candidates

should only answer one questions.
The essay type questions are highlighted in the examination of 2021.

ESSAY STRUCTURE

HINT: Section C – Use the structure grid below for guidance to answer an essay type
question.
the essay question, must be answered in FOUR sub - sections: Introduction (defini-
tion/description of the concept), Body/Main (headings and full sentences in bullets) addi-
tional part and conclusion (summarising).

The mark allocations for Section C is outlined in the grid below:

MARK ALLO-
STRUCTURE OF ESSAY
CATION
Introduction
The introduction is a lower-order response. Max. 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 discuss/ Ana- Max. 26
lyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Draw a graph and ex-
plain/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/ De- Max. 10
duce/Compare/Distinguish/Interpret/How? /Suggest
A maximum of 2 marks may be allocated for mere listing facts.
Conclusion
Any higher-order conclusion should include: Max. 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 13

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 • Discuss in detail the markets within the four-sector model (26 marks)

• How could a negative multiplier effect be reversed? (10 marks)

CIRCULAR FLOW LEARNER HOMEWORK

QUESTION 1 20 MARKS – 20 MINUTES

1.1 Various options are provided as possible answers to the following questions.
Write down the question number (1.1.1 – 1.1.8), choose the answer and write the
letter (A – D) of your choice next to the question number in the ANSWER BOOK.
1.1.1 South Africa Revenue Services falls under…in the circular flow
model.
A injections
B real flow
C leakages
D money flow

1.1.2 …is a factor of production and is traded in the factor market

A Physical capital
B Financial capital
C Capital
D Land

1.1.3 Which of the following aggregate spending components is sub-

tracted from aggregate income?

A Subsidies on production
B Factor income earned in South Africa
C Imports of goods and services by South Africans
D Subsidies on products
1.1.4 The ratio used to work out the difference between the initial invest-
ment and the eventual change in income

A Multiplier
B Autonomous consumption
C Multiplier effect
D Marginal propensity to consume

1.1.5. There is a flow of goods or imports from the… and are paid for by
the individual sectors

A Household sector
B Government sector
C Business sector
D Foreign sector (10)
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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 – 1.2.8) in the
ANSWER BOOK, for example 1.2.9 J.

COLUMN A COLUMN B
1.2.1 Factor cost A GDP at constant prices where the effect of in-
flation on prices is considered
1.2.2 Circular flow
B It provides the health and education services
1.2.3 Government necessary for modern economies more effi-
spending ciently and effectively than the market could
provide.
1.2.4 Real GDP
C The surplus/deficit earned from production by
1.2.5 Mixed income firms

1.2.6 Equilibrium D the economy in which the major exchanges

are represented as flows of money, goods,
and services

E amount to be paid for the various factors of

production used to produce goods and ser-
vices
F the point at which a business is able to sell all
of the goods it planned to
(6 × 1) (6)

1.3 Give ONE term for each of the following descriptions. Write only the term next
to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations,
acronyms and examples will NOT be accepted.

1.3.1 A measure of the value of production once adjustments have been

made for consumption of fixed capital

1.3.2 The initial prices in production of final goods before taxes and sub-
sidies are considered

1.3.3 The proportion of additional income which household don’t spend

1.3.4 The economy mainly dominated with 3 participants and focus more
on domestic production (4x1) 4

TOTAL SECTION A: 20

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 SECTION B

QUESTION 2: MACROECONOMICS

2.1 Answer the following questions

2.1.1 Name any TWO leakages found in the four-sector model of the
multiplier (2 x 1) (2)

2.1.2 What is the significance of the national account’s aggregates?

(1x2) (2)

2.2 Study the following diagram and answer the questions that follow

NET INTER-SECTORAL FLOW OF FUNDS, 2020

Source: https://www.resbank.co.za/en/home/publications/publication-detail-pages/quar-
terly-bulletins/articles-and-notes/

2.2.1 Which participant controls parastatals in the circular flow model of (1)
an open economy
2.2.1 Give the equation used to calculate the total value of production (1)

2.2.3 Briefly describe the term money flow (2)

2.2.4 Why are inflows treated as negative (2)
2.2.5 Discuss the impact of the COVID-19 pandemic on financial inter-
mediation. (2 x 2) (4)

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2.3 Study the following information and answer the questions that follow

MULTIPLIER EFFECT

Business rev-
spending enues
Income and em- Induced con-
ployment sumer spending

Source: Focus page 16; Figure 1.6

2.3.1 Which participant of a 3-sector economy increase the value of the (1)
multiplier

2.3.2 What are the examples of autonomous consumption? (1)

2.3.3 Briefly describe the term induced consumption (2)

2.3.4 When marginal propensity to consumer is 0.7. What is the multi- (2)
plier?

2.3.5 Discuss the multiplier effect illustrated above (2 x 2) (4)

2.4 Discuss how the expenditure method is used to determine GDP (4 x 2) (8)

2.5 Analyse the importance of converting gross domestic product to gross na- (8)
tional product
[40]

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BUSINESS CYCLE LEARNER NOTES
BUSINESS CYCLE

• Successive periods of expansion and contraction in economic activities

• Refers to successive periods of growth and decline in economic activities over a
given period of time
• Forecasting relates to the economic indicators used to forecast the trends in the
business cycle.
The composition and features of business cycles

• Changes in economic activity are recurring but never exactly the same or of the
same magnitude.
• Different circumstances and expectations cause consumers and producers to re-
spond differently to initiating forces.
• The duration and amplitude of every business cycle will be different.
• Business cycles are recognized by the following:
–– Two periods namely contraction and expansion;
–– Two turning points namely trough and peak;
–– Four phases, namely recovery, prosperity, recession and depression.

Diagram of a business cycle

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Recovery phase
• Economic recovery is the process of reallocating resources and workers
from failed businesses and investments to new jobs and uses after a reces-
sion.
• An economic recovery follows after the recession and leads into a new ex-
pansionary business cycle phase.

• There is a greater demand for goods and services.

• This lead to an increase in Production.
• More jobs are created
• Business confidence rises and there is increased spending by firms
• There is increased economic activity and the country enters into a period of pros-
perity

Expansion phase
• There is a great degree of optimism in the economy
• Entrepreneurs borrow more money to buy machines and equipment (Investment)
• Employment levels rise, and this give rise to a rise in salaries and wages and
spending increases
• A peak is reached
• There is a larger amount of money in circulation and this leads to an inflationary
situation in the economy and lead to a recession.

Recession phase
• A recession phase is when there is negative economic growth rate for two consec-
utive quarters.
• It is introduced by a decrease in profits of businesses that is the result of inflation
and over production.
• There is a decrease in production that lead to a drop in employment.
• Unemployment increase and this give rise to a feeling of pessimism.
• There is a decrease in economic activity, and the economy slows down.

Depression phase
• During a depression money is in short supply, leading to a further decline in
spending.
• There is a negative impact on investment spending.
• Economic activity is at its lowest, and a trough is reached.
• Cost of production decreases.
• This encourages foreign trade and leads to a recovery.

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Real (actual) business cycle
• A real business cycle occurs when the effects of irregular events / seasonal / long-
term growth trends are removed from the time series data

• The length or duration of the cycle is measured from trough to trough or peak to
peak.
• The distance of the peaks and troughs from the trend line is known as the ampli-
tude and shows the severity of cyclical fluctuations.
• The percentage point difference of successive peaks and troughs can be calcu-
lated e.g. a + b (3 + 5 = 8) compared to b + c(5 + 1.5 = 6.5).

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 Endogenous approach Exogenous approach:
• This follows the belief that economic • Refer to those independent factors that
growth is primarily the result of endog- can influence business cycles and origi-
enous and not external forces nate outside the economy
• This is often called the Keynesian • Some economists believe that business
view. This approach holds the view cycles are caused by exogenous factors
that markets are inherently unstable such as those described below
and therefore government • The monetarists believe markets are in-
intervention may be required herently stable and disequilibrium is
• The price mechanism fails to co-ordi- caused by incorrect use of policies, e.g.
nate demand and supply in markets monetary policy
and this gives rise to upswings and The following are examples:
downswings • Weather conditions and shocks cause up-
• Prices are not flexible enough√√ (e.g. swings and downswings
wages)√ • Governments should not intervene in the
• A business cycle is an inherent feature market
of a market economy • Sunspot theory based on the belief that
• Indirect links or mismatches between increased solar radiation causes changes
demand and supply are normal in weather conditions
features of the economy • Technological changes

TYPES OF BUSINESS CYCLE

Kitchen cycles:
• Last between 3 to 5 years caused by adapting inventory levels in businesses.
Juglar cycles:
• Last from 7 to 11 years and are caused by changes in net investments by govern-
ment and businesses.
Kuznets cycles:
• Last between 15 to 20 years, caused by changes in activity in the building and
construction industry.
Kondratieff cycles:
• Last longer than 50 years, caused by technological innovations, wars and discov-
eries of new deposits of resources e.g. gold.
Government policy
• Government can use monetary and/or fiscal instruments to help stabilize busi-
ness cycles, also called “fine tuning” the economy.

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Monetary policy.
Interest rate changes
• It is used to influence credit creation by making credit more expensive or
cheaper
• Stabilisation of the exchange rate by encouraging capital inflows or outflows in or-
der to take care of deficit
• Surplus on the current account of the balance of payments
Open market transactions
• SARB selling securities to restrict bank credit
• Banks have less money to lend and cannot extent as much credit as before
• To encourage credit the SARB buys securities in the open market and money
then flows back into the system
• Bank uses money to create credit

Moral suasion
• SARB consults with the banks and persuade them to act in a –manner desirable
to the prevailing economic conditions
• Sells paper such as bills and bonds

Cash reserve requirement

• This is the minimum percentage of total deposits that banks have to keep as cash
and that may be used for lending or investing
• A change in the cash reserve requirement makes more or less money available in
the banking system
Exchange control policy
• A measure taken to prevent capital assets from being transferred to other coun-
tries
• A policy usually developed by developing countries where the central bank fears
that large amounts of foreign currency will be removed from a country
• These have been reduced in South Africa recently

FISCAL POLICY
• This is the process of using taxation and public expenditure to even out the
swings of the business cycle. Governments, through their fiscal policy have a
powerful weapon for stabilizing /ironing out/smoothing of cycles, to stop peaks
from ending in high inflation and troughs in too high levels of unemployment.

Total demand is low and unemployment is high.

The State can increase total demand by increasing expenditure, the multiplier will
kick in. The state has THREE options:

• Raising government spending (G) with borrowed money (Budget

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 Deficit). Aggregate expenditure increases and so does demand.
The economy is stimulated and employment is likely to increase.
• Decreasing taxes. Consumers and producers have a larger
part of their incomes available to spend on goods and services.
• Aggregate expenditure increases. The economy is stimulated and employment is
likely to increase.
• Raising government spending and simultaneously decreasing taxes.
• This will have a double effect. Government spending increases and consumers
and producers also have more to spend. Demand increases substantially. Em-
ployment increases.

2. Aggregate demand is too high and leads to demand pull-inflation.

• The state can decrease spending, decrease aggregate demand, the multiplier will
kick in negatively and total spending will decrease.

To achieve this, the government has THREE options:

• Cut down on government spending (G). The unspent money is preserved. Ag-
gregate expenditure is less and demand drops. Inflation is likely to decrease.
• Increasing taxes (T). Workers pay more tax and this results in consumers having
less income to spend and demand dropping. Inflation is likely to decrease.
• Reducing government spending (G) and simultaneously increasing taxes (T).
This will have a double effect. Government spending decreases and consumers
and producers also have less to spend. Demand drops substantially. Inflation de-
creases.
A COMBINATION OF MONETARY AND FISCAL POLICY:

Where demand is too high, restrictive policies can be combined as follows:

Monetary policy:
➢ SARB can increase interest rates, increase reserve requirements of banks.
plus
Fiscal policy:
➢ Reduce government spending and increase taxes – budget for a surplus.

Doing these things simultaneously triggers negative money multiplier and a nega-
tive income multiplier, which doubles the effect of the measures.
If aggregate demand is too low, expansionary policies can be combined as fol-
lows:
Monetary policy:
❖ SARB lowers interest rates and cash reserve requirement of banks.
Fiscal policy:
❖ Government decreases taxes and increases spending by budgeting for a deficit.
A combination of the above policies will lead to a positive money multiplier and ac-
tivate a positive income multiplier, which will double the effect of measures.
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The new economic paradigm
• The “new economic paradigm” discourages policy makers from using monetary
and fiscal policies to fine-tune the economy, but rather encourages achieving sta-
bility through sound long-term policy decisions relating to demand and supply in
an economy.
Demand-side policies
• It focuses on aggregate demand in the economy
• When households, firms and the government spend more, demand in the
economy increases.
• This makes the economy grow but lead to inflation.
Inflation:

❖ Aggregate demand increases more quickly than aggregate supply and this causes
price increases.
❖ If the supply does not react to the increase in demand, prices will increase.
❖ This will lead to inflation (a sustained and considerable in the general price level)
Unemployment:

❖ 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 increase.
❖ As unemployment decreases inflation is likely to increase.
❖ This relationship between unemployment and inflation is illustrated in the Phillips
curve.
❖ The PC curve shows the initial situation. A is the point of intersection of the PC
curve with the x-axis. It shows the natural rate of unemployment, for instance 14%
❖ At point A inflation rate is zero.
❖ If unemployment falls to C for instance, 8%, inflation caused by wage increases is
at 6%.
❖ If unemployment increases from C to B to A, inflation falls from 6% to 2% to 0%.

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Supply-side policies
Reduction of costs

• Infrastructural services: reasonable charge and efficient transport, communica-

tion, water services and energy supply.
• Administrative costs: these costs include inspection, reports on applications of
various laws, regulations and by-laws, tax returns and returns providing statisti-
cal information. It adds to costs and businesses carry a heavy burden
• Cash incentives: it includes subsidies for businesses to locate in neglected ar-
eas where unemployment is high and compensation to exporters for certain
costs they incur in development of export markets.
Improving the efficiency of inputs

• Tax rates: low tax rates can serve as an incentive to workers. It will improve
the productivity and output.
• Capital consumption: replacing capital goods regularly creates opportunities for
businesses to keep up with technological development and better outputs
• Human resource development: to improve the quality of manpower by improv-
ing health care, education and training.
• Free advisory service: these promote opportunities to export.
Improving the efficiency of markets

• Deregulation: removal of laws, regulations and by-laws and other forms of gov-
ernment controls makes the market free.
• Competition: encourages the establishment of new businesses

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 • Levelling the play field: private businesses cannot compete with public enter-
prises
Features underpinning forecasting with regard to business cycle
Leading indicators
• Changes before the economy changes.

• They peak before the peak in aggregate economic activity is reached and they
reach a trough before aggregate economic activity reaches a trough.

• They give advance warning of changes in aggregate economic activity.

• They give consumers, business leaders and policy makers a glimpse into where
the economy might be headed.

• If leading indicators rise today, then the rest of the economy is likely to rise in the
coming year.

• Examples of leading economic indicators: Job advertising space, average manu-

facturing hours worked, building plans approval.

Co-incident indicators
• Move together with the aggregate economic activity.

• They indicate actual state of the economy

• Coincidence indicators change at the same time as the economy.

• They reach a peak / trough at the same time as the business cycle.

• Economists use them to compile the business cycle.

• They follow leading indicator after some time has elapsed but they tend to con-
firm the turning points of the leading indicator.

• Examples of coincident indicator: Industrial production index, Volume of im-

ports, Value of wholesale, retail and new vehicle sales

Lagging indicators
• Do not change direction until after the business cycle has changed its direction.

• They reach a peak/ trough months after the business cycle has reached a
peak/trough.

• Follow coincident indicators after a further time elapse

• They therefore may serve to confirm the behaviour of the coincident indicators.

• If they do not confirm an upswing or a downswing, this signals that the upswing or
downswing is weak and will mostly end at an early stage.

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 • Economists use them to estimate whether individual indicators gave false signals.

• Examples of lagging economic indicators: Unemployment rate, Number of com-

mercial vehicles sold, Real machinery and equipment sold, Number of hours
worked in construction.

Composite indicators
• A summary of various indicators of the same type into a single value.

• The three composite indicators are often used to calculate a single composite indi-
cator, which is single number to benchmark a country’s economic performance.

Trend
• The trend indicates the general direction in which the indexes that were used in
the business cycle, moves

• When the economy is growing, there is an upward trend, but when the economy is
decreasing, there is a downward trend

• The trend will change when the time series data change their behaviour patterns
of the past

• Resistance points indicates forces in the economy preventing it from repeating the
performance – unfavourable forces need to change or be removed for growth to
exceed previous tendencies

• It normally has a positive slope because the production capacity of the economy
increases over time

• Channels are formed when output growth reaches successive higher turning
points (upward channel)

Length
• Length is measured from peak to peak or from trough to trough

• Longer cycles show strength and shorter cycles show weakness with regard to
economic activities

• Cycles may overshoot with the effect that some composite indicators increase to
beyond its normal level

Amplitude
• It is the difference between the value of total output between peak and trough
measured from the trend line to the peak and trough

• Amplitude reflects the intensity of the upswing and downswing in economic activity

• The amplitude shows two things: - The power of the underlying forces, e.g. inter-
est rates, exports or consumer spending

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 • A large amplitude during the upswing signifies strong underlying forces – which
result in longer cycles

• The extent of change: the larger the amplitude, the more extreme the changes
that may occur

• During an upswing, unemployment may decrease from 20% to 10% (a decrease

of 50%) / inflation may increase from 3% to 6% (i.e. 100%) / a surplus on the cur-
rent account (BOP) can change from a surplus to a deficit

Extrapolation
• Past data is used, where predictions are made about the future based on assump-
tions related to trends

• Extrapolation means to estimate something unknown from the facts and infor-
mation that is known

• Extending a trend into the future may provide information on what is likely to hap-
pen

• If a business cycle has passed through a trough and entered into a boom phase,
forecasters may predict that the economy will grow in the months to follow

• Extrapolation techniques are sometimes used to predict future share prices The
trend of the curve must be followed to complement the completed section.

• Take a calculated decision to continue beyond the level of a resistance point

Moving averages
• A moving average is a tool used to analyse changes that occur in a series of data
over a period of time

• It is calculated to iron out small fluctuations and reveal trends in the business cy-
cles

• The data given can be used to calculate the moving average for the business cy-
cle for the past three years in order to smooth out any minor fluctuations and to in-
dicate the trend over the past three years

• The quantitative method does forecasting based on mathematical models, statis-

tics and historical time series data

• It is evident from the historical time series data given, that numbers that were col-
lected at regular intervals or for a certain period showed a specific trend

• These can be the GDP figures over the past five years

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• This method is accurate when used for short-term to medium-term forecasting

• Moving averages are calculated over a certain time (e.g. a few months) to smooth
out minor fluctuations in the data

• By using moving averages determined from the given data, economists get a
clearer picture of the general trends in the business cycle

• The qualitative method does forecasting based on intuitive judgement, own opin-
ions, market research and subjective probability estimates

• It is also known as the judgemental method

• This method is appropriate to use when previous data is not available and when
long-term forecasting is done

• E.g. is when various economics experts use their knowledge and their intuitions
about the future to make predictions about the economy

• The five year moving average for above table would be:

• - (5 + 8 + 9 + 11 + 4) / 5 = 7.4

• - (8 + 9 + 11 + 4 + 6) / 5 = 7.6

• - (9 + 11 + 4 + 6 + 10) / 5 = 8

• By calculating the moving average, economists or businesses will be able to

analyse economic trends (by 7 to 8%)

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SESSION 2: MACROECONOMICS: BUSINESS CYCLES

SECTION A: TYPICAL EXAM QUESTIONS

BUSINESS CYCLES

QUESTION 1: 20 minutes Section A – Short Questions

(Taken from various sources)

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 cor-
rect. Your answer will immediately be marked incorrect if you write TWO options.

1.2 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 A business cycle begins at the lowest point, the…

A Recovery
B Trough
C Depression
D Peak

1.1.2 Monetary policy is determined by Monetary policy committee of

the…which is led by the Governor Kganyago

A South Africa Blood Services

B Moody’s
C South Africa Reserve Bank
D South Africa Revenue Service

1.1.3 An …is a statistic used to measure some aspect of the economy.

A Forecasting
B Social indicator
C Real GDP
D Economic indicator

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 1.1.4 The …is the unemployment rate that does not trigger inflation

A Natural rate of unemployment

B Unemployment percentage
C Inflation percentage
D Trade off

1.1.5. When individuals are levied with high rates of personal income,
they could become ….

A Incentivised to work.
B Disincentives producers
C Incentive to produce.
D Disincentives to work (10)

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 – 1.2.5) in the
ANSWER BOOK.

COLUMN A COLUMN B
1.2.1 Length A Aims to increase economic growth without
increasing inflation.
1.2.2 Lagging indicator
B When there is negative economic growth for
1.2.3 New economic two consecutive quarters
paradigm
Changes direction before the business cycle
1.2.4 Moral suasion C has changed its direction.

1.2.5 Recession D Measured from peak to peak, or from trough

to trough.

E The lowest turning point of business cycle

F Changes in the direction of these indicators

only take place after the economy changes
direction.

G SARB convinces commercial banks to extend

credit responsibility
(5 × 1) (5)

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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
WILL BE ACCEPTED.

1.3.1 Refer to those independent factors that can influence business cy-
cles and originate outside the economy

1.3.2 The rising line indicates a growing economy

1.3.3 These cycles last between three and five years and are thought t be
caused by business adapting their inventory levels

1.3.4 Banks turn to the South African Reserve Bank if they experience a
general shortage of funds in the money market

1.3.5 The distance of the oscillation of a variable from trend line

SECTION B

QUESTION 2: 20 minutes Section B (Taken from various sources)

LOWER ORDER QUESTIONS

HINT: When the question requires you to “list” or “name”, you need not write
a sentence but merely one or two words. This MUST be done in bullet form. This
types of questions are applicable for 2.1.1, 3.1.1 and 4.1.1

2.1 Name any TWO characteristics of recession (1)

2.2 Name any TWO types of business cycles (1)

2.3 Name any TWO coincident indicators (1)

2.4 Name any TWO fiscal policy instruments used to dampen economic (1)
growth

2.5 Name TWO features of Philips curve (1)

QUESTION 3: (Taken from various sources)

MIDDLE ORDER QUESTIONS
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

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 3.1 What is the role of the trend line in business cycle (1)

3.2 What are the problems associated with the business cycle? (1)

3.3 Why do economists use extrapolation? (1)

3.4 Why does SARB increase repo rate (1)

3.5 Explain why Keynesian tend to favour government (1)

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:
Study the extract below and answer the questions that follow.

BUSINESS CYCLES
The analysis of the source of shocks has been a recurrent theme in business cycle lit-
erature. Not only is it relevant for understanding the forces driving economic fluctua-
tions but, in addition, the identification of sources of shocks is needed to inform the op-
timal policy response. Producers and consumers will not respond to the same extent to
the initiating forces, and therefore the duration of business cycles differs. Business cy-
cles can range from 3 years (Kitchin) to more than 50 years (Kondratief).
[Adapted from www.google.com]

4.1 Identify ONE factor from the extract which cause economic fluctua- (1)
tions

4.2 Name the type of business cycle caused by changes in (1)

investment in equipment and machinery

4.3 Briefly describe the term business cycle (2)

4.4 Explain the reason why government intervention is not needed un- (2)
der exogenous explanations.
4.5 How can fiscal policy be used to ‘stimulate’ a depressed economy?
(2x2) (4)

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QUESTION :5
Study the table below and answer the questions that follow.

5.1 Identify the trend shown by GDP growth between 2020 and 2021? (1)

5.2 Provide a term that refers to the use of past data to predict the future. (1)

5.3 Briefly describe the term moving averages (2)

5.4 Explain the effect of exogenous factors on the economy. (2)

5.5 How can monetary policies be used to smooth-out fluctuations on

business cycles? (2x2) (4)

QUESTION: 6
Study the graph below and answer the questions that follow

[Adapted from www.google.com]

6.1 Identify the point where inflation is the highest (1)

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 6.2 Name the economic indicator that shows the general direction in (1)
which the economy is moving

6.3 Briefly describe the term amplitude (2)

6.4 Why is a recession an undesirable in the economy (2)

6.5 How can the government lower the demand in the business cycle
(2x2) (4)

QUESTION: 7
Study the table below and answer the questions that follow.

[Adapted from https://www.businesslive.co.za/bd/opinion/2022-04-19-cartoon-the-per-

fect-storm/]

7.1 Identify any endogenous factor (1)

7.2 Which economic indicator will move with factors above (1)

7.3 Briefly describe the term real business cycle (2)

7.4 Why insurance companies are necessary for business (2)

7.5 How does exogenous factors contribute to unemployment (2x2) (4)

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QUESTION 8 Paragraph type questions – Middle Cognitive

8.1 Discuss the exogenous (monetarist) explanation (4x2) (8)

8.2 Briefly discuss the composition of fiscal policy (4x2) (8)

8.3 Briefly discuss open market transactions and cash reserve require-
ments as tools of monetary policy. (4x2) (8)

8.4 Discuss in detail moving averages as a non-economic indicator.

Show all calculations (4x2) (8)

8.5 Briefly discuss different phase in a business cycle (4x2) (8)

QUESTION 9 Paragraph type questions – Higher cognitive

TYPICAL EXAM QUESTION: THESE HIGHER ORDER QUES-

TIONS REQUIRE THE LEARNERS TO USE HER/ HIS CRITICAL
THINIKING SKILLS.

Higher order questions are grounded in the content. These types of questions test crit-
ical thinking, where candidates should be able to apply their knowledge, through logi-
cal reasoning and also have an awareness of their current economic climate. Content
(covered by discuss/examine/describe/ analyse/explain/evaluate/compare/assess/justify/con-
struct/calculate) can be assessed as higher-order questions. Answers will not neces-
sarily be found in textbooks.

9.1 Analyse the impact of loadshedding during the contraction phase (8)

9.2 Evaluate reduction of costs as a supply-side policy (8)

9.3 Analyse benefits of natural rate of unemployment rate (8)

9.4 Why does the government implement regulations that impact busi- (8)
ness cycles?

9.5 Evaluate the South African government’s initiatives to reduce the (8)
economic downturn caused by the Covid-19 pandemic. (4x2)

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SECTION C

HINT: All section C questions have TWO questions 5 & 6 NOT 13 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 ALLO-
STRUCTURE OF ESSAY
CATION
Introduction
The introduction is a lower-order response. Max. 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 discuss/ Ana- Max. 26
lyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Draw a graph and ex-
plain/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/ De- Max. 10
duce/Compare/Distinguish/Interpret/How? /Suggest
A maximum of 2 marks may be allocated for mere listing facts.
Conclusion
Any higher-order conclusion should include: Max. 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 13

• Discuss in detail features underpinning forecasting (26 marks)

• Analyse the negative impact of business cycles on the economy. (10 marks)

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BUSINESS CYCLES LEARNER HOMEWORK

QUESTION 1 20 MARKS – 20 MINUTES

1.1 Various options are provided as possible answers to the following questions.
Write down the question number (1.1.1 – 1.1.8), choose the answer and write the
letter (A – D) of your choice next to the question number in the ANSWER BOOK.
1.1.1 During a period of …there is a high degree of optimism about the
economy before the economy reaches a peak.
A recession
B recovery
C prosperity
D depression

1.1.2 The … measures the vertical difference between a trough and the
trend line of severe expansion

A high Amplitude
B trend line
C low amplitude
D economic activity

1.1.3 The government applies policies to affect business cycles to ensure

that:

A Periods of contraction last as long as possible.

B Inflation and unemployment are as low as possible.
C The troughs and peaks are unstable.
D Periods of expansion last as short as possible.

1.1.4 Which of the following is an example of a coincident indicator?

A Investment in capital goods

B Employment
C Real exports
D Volume of manufacturing production

1.1.5. The SARB can use a… policy that implies that the forces of supply
and demand determine the currency

A free-floating
B supply-side
C fiscal
D exchange rate (10)

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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 – 1.2.8) in the
ANSWER BOOK, for example 1.2.9 J.

COLUMN A COLUMN B
1.2.1 Trough A It is used to influence both expansion and
contraction of GDP as a measure of eco-
1.2.2 Economic expansion nomic growth.

B claims that with economic growth comes in-

1.2.3 Fiscal policy flation, which in turn should lead to more jobs
and less unemployment.

1.2.4 Philips’s curve C Used to measure trends in the economy

1.2.5 Paradigm shift D The lowest point of a depression and a turn-

ing point in a business cycle
1.2.6 Economic indicator
E A decrease in unemployment and an in-
crease in income

F A change in the basic assumptions within the

ruling theory

G Economic activity is at its lowest. Deepening

of the recession

(6 × 1) (6)

1.3 Give ONE term for each of the following descriptions. Write only the term next
to the question number (1.3.1 – 1.3.4) in the ANSWER BOOK. Abbreviations,
acronyms and examples will NOT be accepted.

1.3.1 Economic statistics that analyse the performance of the economy

and predict future performances

1.3.2 Shows how an increase in the stock of money can lead to an in-
crease in the inflation rate and a decrease in the buying power of
money

1.3.3 Encourages achieving stability through sound long-term policy deci-

sions relating to demand and supply in an economy

1.3.4 These business cycles last from 7 to 11 years and are caused by
changes in net investments by government and businesses (4x1) 4

TOTAL SECTION A: 20

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SECTION B

Answer ALL questions from this section in the ANSWER BOOK.

QUESTION 2: MACROECONOMICS (COMPULSORY)

2.1 Answer the following questions

2.1.1 Name any TWO supply side policies for smoothing of business cy-
cles (2 x 1) (2)

2.1.2 How does structural change affect the economy of South Africa?
(1 x 2) (2)

2.2 Study the following diagram and answer the questions that follow

INTEREST RATES GOES UP IN SOUTH AFRICA

Date Key rates

11/19/2021 3.75%
07/24/2020 3.50%
05/22/2020 3.75
04/15/2020 4.25%
03/20/2020 5.25%
01/17/2020 6.25%
Source: https://countryeconomy.com/key-rates/south-africa

2.2.1 Name the type of business cycles associated with the information
above (1)
2.2.1 Give any other instrument that SARB can use to stimulate the
economy (1)

2.2.3 Briefly describe the term monetary policy (2)

2.2.4 Explain the use of interest rate in the new economic paradigm (2)
2.2.5 How can the supply-side be stimulated by the government?
(2 x 2) (4)

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2.3 Study the following information and answer the questions that follow

EXOGENOUS VS ENDOGENOUS
Weather Money sup- Technological
condtions ply innovations

Consumer Investment
spending spending Production

These factors change regularly

Source: examiner

2.3.1 Which economic sector is mainly affected by structural changes in (1)

the economy

2.3.2 Name any one feature of a business cycles why government must (1)
intervene in the market(economy)

2.3.3 Briefly describe the term economic fluctuations (2)

2.3.4 Explain reasons for the existence of the Kondratieff cycle (2)

2.3.5 Discuss government’s responsibility in exogenous and endogenous

explanation. (2 x 2) (4)

2.4 Broadly outline the real business cycle (4 x 2) (8)

2.5 Why does unemployment rise during the recession phase of the business (8)
cycle?
[40]

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PUBLIC SECTOR PART 1
TOPIC 3: PUBLIC SECTOR
The composition of the public sector

Local government

Provincial government

Central gov-
ernment

General government
• Central government- looks after the country as a whole and deals with matters
that are important to the entire nation. Consisting of the President, the Deputy
President and Ministers. Various departments: Department of Health, Department
of Education, etc. Mostly formulates legislation, policies and plans to address eco-
nomic and social issues,
• Provincial Government – 9 provincial governments, implement the national gov-
ernment’s legislation, policies and plans.
• Local Government-municipalities responsible for service delivery to ensure the
daily running of a city or a town and the informal settlements and farms of the
area.
• Public corporations – businesses that the government controls by law or in which
the government has a majority shareholding. Examples : Eskom, Denel, SAA

Necessity of the public sector

Adam Smith identified the following traditional responsibilities of government:

 To protect its citizens against threats
 To maintain law and order inside the economy
 To provide certain necessity goods and services
The SA Constitution and the public sector
 Transparency
 Accountability
 The effective financial management of the economy, debt and the public sector

Reasons for government intervention

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 To provide public goods & services: Public goods are non-rivalry and non-excluda-
bility, so the private sector does not supply them willingly.
◦ Non-rivalry – see definitions Example: when someone uses a traffic light to
his or her advantage, the traffic light is still there and is still working for the
next person.
◦ Non-excludability- see definitions Example: it is impossible to charge motor-
ists for every traffic light that they enjoyed the benefit of using.
• The public sector will provide goods when it is in the best interest of the People
- Community goods – goods supplied for the benefit of all citizens. Example:
defence, police
- Collective goods – goods for which it is possible to exclude free riders by
levying fees or tolls. parks, beaches
- Merit goods – goods that would be too expensive for some people to afford,
yet consuming them increases the welfare of the country. Examples:
health, education
 To protect natural resources- our environment consists of resources that no one
owns and yet everyone can use free of charge. Examples: the oceans for fishing,
the air we breathe. Government has to intervene in order to protect the environ-
ment.
◦ Negative externalities
 The redistribution of wealth and income
◦ Progressive taxation system- people in higher income groups pay a higher
tax rate than people in lower income groups.
 To manage the economy – to ensure a social and legislative environment in which
individuals and businesses can pursue their own interest and to apply suitable and
credible economic and other policies in order to achieve international respected
economic objectives.
 To encourage competition – the government acts to prevent monopolies and en-
courage competition. - Pricing policy
- Parastatals
- Privatisation/Nationalisation

Problems in the public sector

Always Eat Apples, Peaches, Pears, Pineapples and Naartjies
(Mnemonic - AEAPPPN)

1. Accountability
• Government is required to make and implement policies.
• Accountability requires government to explain one’s decisions, actions and ex-
penditure.
• Accountability is underpinned by
o Ministerial responsibilities – ministers act as spokesperson for their individ-
ual departments while the director-general of each department is accounta-
ble for its affairs.
o Parliamentary questioning – ministers are required to respond to any ques-
tions relating to their departments. Government ‘s opposition party mem-
bers question irregularities.
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 o Treasury control- the National Treasury controls the expenditure of govern-
ment departments, which must apply for their share of government income.
o The Auditor-general– provides parliament with annual written reports on the
standard of financial management in each department.
• Public servants are required to explain their decisions and actions.
• The public holds government accountable for the effective delivery of services and
the implementation of policies.

2. Efficiency
• Efficient provisioning: Public servants provide the public with goods
and services promptly and in the desired quantity and quality.
• The resources are allocated in such a way that no one can be made better off
without making someone else worse off.
• Public servants fail to deliver services to the public because of
o Bureaucracy and red tape – officials may be focused on rigidly following proce-
dure instead of considering individual needs.
o Incompetence or lack of training – civil servants do not always have access to
the proper skills training required for their position.
o Corruption – a lack of proper supervision and lower-than-average wages can
make corruption attractive

3. Assessing of needs
• Government provides goods and services according to the needs of people. As-
sessing these needs is difficult.
• Market forces determine the price of goods and services in the private sector.
• State enterprises are not subjected to the forces of demand and supply.
• Public enterprises do not operate under market conditions and do not have a
mechanism to communicate the needs of the consumer to civil servants.
• This leads to an undersupply of public goods or inefficient forecasting of future
needs.

4. Pricing policy
• Free of charge: Certain services are provided free of charge from taxes,
• e.g. public health services (Tax revenue is used to cover the costs.)
• Price value: It is difficult for government to establish the correct pricing.
• Paid services: People pay for some services, e.g. TV licences.
• Subsidised products: The public pay less for goods because government subsi-
dises (pays towards) the cost, e.g. the price of bread is subsidised by government.
• Providing goods for less than they cost, or free of charge, means that some users
have to cover the shortfall.
• In supplying services, governments have three pricing options:
i. Free-of-charge services
• Community goods. No price can be charged for these goods. Exam-
ples defence, police services etc.
• Collective goods- Charges can be levied, free-riders are excluded by
levying fees, charges and tolls, examples visiting a museum
ii. User-charges

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 • Technical reasons – charge for example the use of a road
• Economic reasons – at a zero-price demand would be so high that a
misallocation of resources would happen examples electricity, water
etc
• Political reasons – where income distribution is significantly unequal,
some form of administrative rationing must be imposed example
public healthcare and education, poorer people do not pay but be-
yond a certain level fees are staggered according to income levels.
iii. Subsidies
• Direct and indirect subsidies – a direct subsidy is used to cover part
of the costs example urban bus services. An indirect subsidy is
used when accumulated losses are written off. Example South Afri-
can Airways
• Standing charges –levied on electricity and water, the charges are
fixed irrespective of the units consumed
• Price discrimination – different users have different elasticities of de-
mand and are kept separately example commercial and manufactur-
ing businesses pay higher rates than households.
• Free services and goods are frequently abused and encourage waste.

5. Parastatals
• State Owned Enterprises (SOEs) can be created because of nationalisation.
• Service provisioning: SOEs support service delivery, e.g. Eskom, SABC and
Transnet. Can lead to monopolies, high prices and inefficiency.
• Infrastructure provisioning: SOEs provide essential infrastructure, especially when
there are insufficient funds in the private sector, e.g. the road network.
• Limited liability: SOEs have limited liability in South Africa because they are finan-
cially supported by government.
• In recent years SOEs have been changed from non-profit into profit-seeking enter-
prises with limited liability, they are focussed on making profit and minimising
costs.
• Parastatals have constitutional obligations to provide for certain human rights, but
limited resources may prevent them from delivering this service.

6. Privatisation/Nationalisation
• Privatisation refers to the transfer of functions and ownership from the public to
the private sector.
• The aim of privatisation is to reduce the relative size of the public sector.
Advantages of privatisation:
o Privatisation stimulates growth and improves the overall efficiency and per-
formance of the economy.
o Privatisation provides additional funds to the government.
o Privatisation attracts foreign investment.
• Nationalisation is the opposite of privatisation.
o It is the process whereby the state takes control and ownership of privately-
owned assets and private enterprises.
o Some argue that the state-owned enterprises e.g. ESKOM should be pri-
vatised.
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 Macro-economic aims of the public sector

Macroeconomic Explanation
objective
Economic Growth – an in- Goods and services must be produced to satisfy want and needs,
crease in the real GDP this create jobs, creates income, creates expenditure, creates
production. Economic growth leads to economic development.
Full Employment –implies Goods education and training leads to people being employable,
all people who want to work leads to employment leads to income leads to expense leads to
and are looking for work must production, leads to employment.
be able to find employment Government supports education, labour-intensive businesses and
the informal sector.
Price Stability – prices in the When prices are stable, and inflation is low, markets can function
economy do not change optimally and government achieve economic growth and develop-
much over time – the oppo- ment.
site of inflation The SARB have an inflation target of 3% to 6%.
The interest rate (repo rate) is the main instrument to keep infla-
tion stable
Exchange Rate Stability – Fluctuations, like depreciation and appreciation of a currency can
the exchange rate expresses create uncertainties for investors, producers and traders.
the value of one country’s South Africa has a floating exchange rate; however, government
currency in relation to the must still make sure that the exchange rate remains relatively sta-
value of another country’s ble to ensure a stable international market.
currency
Economic Equity – the rea- The government must prevent the rich from getting richer and the
sonable division of income poor getting poorer.
among the population The following methods are used to redistribute the wealth of a
country
▪ Progressive tax system – higher income pays more tax
▪ Tax used to finance social goods and services such as
housing, educations and healthcare
▪ Government pays cash grants such as old-age grants, dis-
ability grants, child support grants
▪ The government implements policies to achieve BBBEE

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Economic growth
• Economic growth refers to an increase in the production of goods and services by
the economy.
• It is measured in terms of real GP.
• For economic development to occur the economic growth rate must be higher
than the population growth rate.
• The growth and development of a country’s economy and its people are important
because they are the key to higher standards of living.

Full employment
• It is when all the people who want to work, who are looking for work must be able
to get work.
• A high level of employment is the most important economic objective of the gov-
ernment.
• The unemployment rate increased over the past few years.
• Informal sector activities must be promoted because it is an area where employ-
ment increases.
• GEAR as a strategy was implemented to create a positive climate that was condu-
cive to employment creation by the private sector.

Exchange rate stability

• Effective Fiscal and Monetary policy can be used to keep the exchange rate rela-
tively stable.
• Depreciation and appreciation of the currency creates 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 prices lead to better results in terms of job creation and economic growth.
• The SARB inflation target is 3% – 6% and have been successful in keeping infla-
tion within this target.
• Interest Rates, based on the Repo Rate are the main instruments used to achieve
price stability.
• A stable budget deficit also has a stabilizing effect on the inflation
rate.

Economic equity
• Redistribution of income and wealth is essential.
• South Africa uses a progressive income tax system – taxation on profits, taxation
on wealth, capital gains tax and taxation on spending, are used to finance free
services.
• Free social services are basic education; primary health and to finance basic eco-
nomic services. E.g. Cash Grant to the poor, e.g. child grants and cash grants to
vulnerable people, e.g. disability grants.
Progressive taxation means that the higher income earners pay higher/more tax.
BUDGET

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Medium-term budget policy statement (MTBPS)
• The Minister of Finance (currently Tito Mboweni) delivers his medium-term
budget policy statement (MTBPS) to parliament during the last week of October
every year.
• The Medium-term Expenditure Framework MTEF gives the Minister the oppor-
tunity to inform parliament about the changes that have arisen since the reading of
the previous main estimate in February, as well as about developments in public
policy. Changes in this budget can also be announced at this stage.
Main budget
See definitions. The Minister of Finance presents the main budget also known as the
national Budget in his budget speech to parliament each year in the last week of Febru-
ary.
Important decisions that influence the planning phase.
• Financial considerations
• Economic factors
• Policy considerations
Provincial
South Africa’s nine provinces each have their own budget that is submitted to the Provin-
cial Legislature in the weeks following the main estimate. The largest part of the provin-
cial budget is intended for education and health.
Municipal budgets
Besides the grants municipalities receive from the State, they are in a position to impose
rates on properties and to charge consumer tariffs on electricity, water, refuse removal
and drainage.
Fiscal policy

Composition
• Government expenditure: consists of government consumption and government
investment.
o Reasons for government spending
▪ Provide necessity goods and services – free or at subsidised prices
▪ Redistribute income
▪ Influence aggregate supply and demand to stimulate or dampen the
economy
▪ Pay interest on government debt
▪ Pay off government debt
• Taxes: compulsory levy charged on persons, companies and goods and services
in order to finance government expenditure.
o Reasons for government imposing taxes
▪ Raise money to finance government spending
▪ Discourage the consumption of demerit goods
▪ Convert external costs into private costs
▪ Discourage imports of certain products
▪ Redistribute income
▪ Influence aggregate supply and demand to stimulate or dampen the
economy

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 o Direct Tax – charged on persons and businesses income earned, paid di-
rectly to the government and the individual tax payer is accountable. Exam-
ple: PAYE
o Indirect Tax – on goods and services sold. Examples: VAT, inheritance tax
& fuel levy
• State debt: a budget must always balance. If in a deficit, a loan must be made in
order to balance.

Features of fiscal policy

• Neutral fiscal policy: when government runs a balanced budget, government
spending i.e. equal to tax revenue. This policy is used when the economy is in
equilibrium and there is no need to influence the economy in any direction.
• Expansionary fiscal policy: aimed at stimulating economic activity. When gov-
ernment expenditure exceeds tax revenue. Applied during a recession in order to
lift the economy out of contraction.
• Contractionary fiscal policy: when government runs a budget surplus. Used to
slow down a fast-growing economy that is accompanied by high inflation. Aim to
increase revenue above spending.
• Goal-bound: government determines the country’s economic and social goals.
The fiscal policy is used the achieve these goals.
• Demand-bias: Fiscal policy is used mostly on the demand side. More tax less
spending less tax more spending.
• Cyclical: follow same cycle as the business cycle has an expansion, contraction,
peak and trough. The fiscal policy should be deliberately anti-cyclical to smooth
out extreme fluctuations.

The effect of the fiscal policy

Income distribution
• Taxes: the government levies different types of taxes that have different effects
on income redistribution.
▪ Progressive: Fiscal policy ensures a more even distribution of income.
▪ Regressive: Fiscal policy causes an uneven distribution of income.
▪ Proportional: Fiscal policy results in income distribution remaining un-
changed.
• Subsidies: Most government subsidies aim to promote growth in the industry and
to maintain prices at an affordable level
o Direct subsidies: when government pays cash grants or provides interest-
free loans to producers
o Indirect: when government gives interest rate discounts and rebates to
cover some of the producer’s expenses
• Social grants: a sum of money that government gives to a person in need or who
is unable to care for himself or herself.

Consumption
▪ Direct and indirect taxes influence people’s spending patterns.
▪ Minimal savings cause decreasing consumption.
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Price level
▪ Direct tax reduces inflationary pressure.
▪ A rise in indirect taxes will raise the general price level.
Disincentives
▪ High and progressive income tax rates discourage people from entering the labour
market, from accepting promotions, and from working longer hours.
[Mind the Gap & Clever Economics ]
Promoting skills development
• Can finance the promotion of employment and skills training as part of the Skills
Development Levies Act.
[Oxford Successful Economics]
LAFFER CURVE

What Does Laffer Curve Mean?

Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax
revenue collected by governments.

 The curve suggests that, as taxes increase from low levels, tax revenue collected
by the government also increases. It also shows that tax rates increasing after a
certain point (T) would cause people not to work as hard or not at all, thereby re-
ducing tax revenue.
 Eventually, if tax rates reached 100% (the far right of the curve), then all people
would choose not to work because everything they earned would go to the gov-
ernment.
 Governments would like to be at point T, because it is the point at which the gov-
ernment collects maximum amount of tax revenue while people continue to work
hard.
 Government collects the same tax revenue at point A and point B.
 At point A people are happy to pay the tax at point B people are not happy to pay
tax and will find creative ways to hide their income or stop working as tax is too
high.

Failures in the public sector

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I. Characteristics
• Ineffectiveness: when the public sector is not efficient in the allocation and use of
resources. The public sector tends to be less productive than the private sector.
• Unproductiveness: when the policies of the public sector do not accomplish their
intended purposes.

II. Reasons
• Accountability: the duty of an individual or organisation to explain their decisions
and actions and accept responsibility for their behaviour.
• Pricing & market forces
• Long term motivation or incentives: government employees rarely receive in-
centives for successful service delivery. Not enough systems in place to evaluate
the services that government employees give.
• Delays in the formulation and implementation of fiscal policy: Government
cannot change its spending and taxes overnight. Sometimes by the time the fiscal
policy is implemented, the economy has changed so much that new fiscal policy
has unsuitable and unwanted effects.
• Short-term solutions for long-term problems: quick fixes. Example Eskom.
• Self-interest: Politicians promote policies and continue to spend money on pro-
jects if they can get votes in return, through corruption, personal and hidden agen-
das and suspicious motives.
• Limited information: no government has all the information it needs to make ob-
jective decisions. This can lead to undersupply or oversupply of public goods and
services.
• Objectives are not realistic or attainable: Serious structural shortcomings in the
economy cause governments not to reach their macroeconomic objectives. Exam-
ple it is impossible to provide for all the needs of all the unemployed and poor peo-
ple with the limited resources available.
• Lack of capacity: due to a lack of skills and management.

III. Effects
• Resources are wasted and not allocated optimally
• Economy becomes more unstable
• Income is distributed more unfairly
• Economic growth declines, inflation increases and unemployment levels increase
• When services are not provided despite promises by politicians, people turn to ille-
gal practices
• Social unrest occurs, protests against lack of housing and basic services.
• Degradation of the environment.

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SESSION 3: MACROECONOMICS: PUBLIC SECTOR PART 1

SECTION A: TYPICAL EXAM QUESTIONS

PUBLIC SECTOR

QUESTION 1: Section A – Short Questions

(Taken from various sources)

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 com-
pletely 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 incor-
rect if you write TWO options.

1.3 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 The feature of public sector failure where government miss in-
flation and growth targets is related to …

A Ineffectiveness
B The Pareto efficiency
C Inefficiency
D bureaucracy

1.1.2 Debt is carefully manged and monitored by:

A Household
B Firms
C Government
D Foreign sector

1.1.3 The institution that provides parliament with annual written reports on
the standard of financial management of each government department:

A Treasury control
B Auditor-General
C Ministerial responsibilities
D Parliamentary questioning

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 1.1.4 Public goods where free riders are excluded through fees,
charges or tolls are called…goods

A Private
B Collective
C Community
D Consumable

1.1.5. The … is used to indicate the relationship between tax revenue

and tax rate

A Lorenz curve
B Phillip’s curve
C Laffer curve
D Indifference curve (10)

1.2 Choose a description from COLUMN B that matches the item in COLUMN A.
Write only the letter (A-F) next to the question number (1.2.1 – 1.2.5) in the
ANSWER BOOK.

COLUMN A COLUMN B
1.2.1 Bureaucracy A Laws that have been put in place to control
economic activities.
1.2.2 Parastatals
B Government aims regarding the national
1.2.3 Regulation economy.

1.2.4 Gini coefficient C Civil servants may feel overwhelmed by the

rules and regulations.
1.2.5 Macroeconomic
objectives D Provide strategic services in South Africa
which are vital for the country.

E Measures income distribution and income in-

equality within a country

F Influenced to favour certain services provid-

ers who tender for projects by receiving kick-
backs
(5 × 1) (5)

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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
WILL BE ACCEPTED.

1.3.1 An indirect tax on goods and services consumed in economy

1.3.2 A document that details expected revenue and projected expendi-

ture

1.3.3 Civil servants continue to be fully remunerated for roles in which they
are inefficient

1.3.4 Higher income groups pay a lower rate of tax than their lower income
counterparts

1.3.5 Refers to expenditure by the state on improving the capacity building

of the economy

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SECTION B

QUESTION 2: Section B (Adapted from various source)

LOWER ORDER QUESTIONS

HINT: When the question requires you to “list” or “name”, you need not
write a sentence but merely one or two words. This MUST be done in bul-
let form. This types of questions are applicable for 2.1.1, 3.1.1 and 4.1.1

2.1.2 Name any TWO components of the national budget

2.1.3 Name any TWO features pf public sector failure

2.1.4 Name any TWO characteristics of Laffer curve

2.1.5 Name any TWO necessities of the public sector

QUESTION 3: (Taken from various sources)

MIDDLE ORDER QUESTIONS
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

3.1.1 What is the relationship between the main budget and the MTEF?

3.1.2 How does government determine price control?

3.1.3 Why are stated owned enterprises inefficient?

3.1.4 How can management failure lead to poor performance of state-

owned enterprises?

3.1.5 Why does South Africa fail to achieve its economic goals?

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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:
Study the cartoon below and answer the questions that follow

[Adapted from www.google.com]

4.1 Which government level is responsible for issuing housing in South (1)
Africa.

4.2 Provide any ONE reason for inefficiency in public sector (1)

4.3 Briefly describe the term public sector failure (2)

4.4 Why is there housing crisis in South Africa? (2)

4.5 Analyse impact of municipal infrastructure basic service delivery in

South Africa (2x2) (4)

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QUESTION: 5
Study the extract below and answer the questions that follow.

THE PRICE OF BEING MIDDLE-CLASS IN SOUTH AFRICA

While financial issues are hardly unique to South Africa’s middle-class, especially with the coun-
try’s expanded unemployment rate sitting at a record 42.6%, taxpayers in the upper brackets
are also getting far less for their tax money compared to other countries. Basically, one of the
world’s smallest middle classes pays the world’s tenth highest personal income tax to GDP.
South Africa’s middle-class taxpayers receive vanishingly little for what they pay in taxes – and
are burdened with further costs which can be seen as additional taxes. These include Higher -
property taxes; power charges; water charges; private health insurance; private school fees;
private security service fees.

Adapted source. https://businesstech.co.za/news/wealth/579368/the-true-cost-of-being-

middle-class-in-south-africa/

5.1 Identify any ONE source of government revenue (1)

5.2 What is the proportional taxation rate currently used in South Africa (1)

5.3 Briefly describe the term bracket creeping (2)

5.4 Explain benefits of reduced tax (2)

5.5 Examine the significant influence of fiscal policy on economies(2x2) (4)

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QUESTION: 6
Study the map below and answer the questions that follow.

Source: https://www.dreamstime.com/south-africa-map-black-white-detailed-outline-re-
gions-country-vector-illustration-image184838810

6.1 Name any ONE example of national government department (1)

6.2 Which letter represents the provincial government (1)

6.3 Briefly describe the term national government (2)

6.4 Explain the importance of local government (2)

6.5 How does nationalization occur in the public sector (2x2) (4)

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QUESTION: 7

Study the graph below and answer the questions that follow

[Adapted from https://poweroptimal.com/2021-update-eskom-tariff-increases-vs-inflation-

since-1988/

7.1 Identify an example of structural weaknesses (1)

7.2 Name ANY one problem of public sector provision linked to Eskom (1)

7.3 Briefly describe the term management failure (2)

7.4 Explain the importance of saving electricity in South Africa (2)

7.5 Analyse the graph with reference to Eskom average tariffs (2x2) (4)

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QUESTION 8 Paragraph type questions – Middle Cognitive

8.1 Discuss conserving resources as a function of the state. (4x2) (8)

8.2 Briefly discuss the composition of the public sector. (4x2) (8)

8.3 Briefly explain the effects of public sector failure. (4x2) (8)

8.4 Distinguish between Medium Term Expenditure Framework

(MTEF) and Mid- Term Budget Policy Statement (MTBPS). (4x2) (8)

8.5 Discuss parastatals as a problem of public sector provisioning.

(4x2) (8)

QUESTION 9 Paragraph type questions – Higher cognitive

TYPICAL EXAM QUESTION: THESE HIGHER ORDER QUES-

TIONS REQUIRE THE LEARNERS TO USE HER/ HIS CRITICAL
THINIKING SKILLS.

Higher order questions are grounded in the content. These types of questions test crit-
ical thinking, where candidates should be able to apply their knowledge, through logi-
cal reasoning and also have an awareness of their current economic climate. Content
(covered by discuss/examine/describe/ analyse/explain/evaluate/compare/assess/justify/con-
struct/calculate) can be assessed as higher-order questions. Answers will not neces-
sarily be found in textbooks.

9.1 Evaluate the provisioning of public goods and services in South Af- (8)
rica.

9.2 How can lack of accountability lead to government failure? (8)

9.3 How will public sector failure negatively influence economic stability (8)
in South Africa?

9.4 Why is South Africa likely to fail to achieve its economic goals? (8)

9.5 Evaluate price stability as a main objective of our government (8)

SECTION C
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 HINT: All section C questions have TWO questions 5 & 6 NOT 13 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 (defini-
tion), Body (headings and full sentences in bullets) additional part and conclusion (summaris-
ing). The mark allocations for Section C is as follows:
MARK ALLO-
STRUCTURE OF ESSAY
CATION
Introduction
The introduction is a lower-order response. Max. 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 dis- Max. 26
cuss/ 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/ De-
duce/Compare/Distinguish/Interpret/How? /Suggest
A maximum of 2 marks may be allocated for mere listing facts.
Conclusion
Any higher-order conclusion should include: Max. 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

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QUESTION 13

• Discuss in detail the reasons for public sector failures by linking them to the prob-
lems experienced through public sector provisioning. (26marks)
• In your opinion, what could be the reason for the state not to price public goods
and services according to demand and supply? (10 marks) (40)

PUBLIC SECTOR LEARNER HOMEWORK

QUESTION 1 20 MARKS – 20 MINUTES

1.1 Various options are provided as possible answers to the following questions.
Write down the question number (1.1.1 – 1.1.8), choose the answer and write the
letter (A – D) of your choice next to the question number in the ANSWER BOOK.
1.1.1 The effect of public sector failure can be that…
A inflation decreases and unemployment levels.
B the economy becomes more unstable.
C income is distributed more fairly.
D resources are allocated optimally.

1.1.2 People in all income groups pay a fixed percentage of taxes

A Value added tax

B Progressive tax
C Regressive tax
D Proportional tax

1.1.3 Shortages in the … causes further economic problems.

A balance of payment
B price stability
C repo rate
D inflation
1.1.4 Which of the following is not an effect of fiscal policy?

A Income distribution
B Price level
C Discretion
D Economic instability

1.1.5. Pollution and environmental damage are examples of…

A positive externalities.
B merit goods.
C negative externalities.
D public goods. (10)

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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 – 1.2.8) in the
ANSWER BOOK, for example 1.2.7 J.

COLUMN A COLUMN B
1.2.1 Deregulation A An increase in the real value of production

1.2.2 Medium Term B the consumption of a good by one person

Expenditure precludes its consumption by another person
Framework
C provides Government with a tool to manage
1.2.3 Value Added Tax the tension between competing policy priori-
ties and budget realities
1.2.4 Community goods
D reduces the restrictions in a particular indus-
1.2.5 Economic growth try to improve business operations and in-
crease competition
1.2.6 Public goods
E the current percentage in the economy is
15%

F Provided by the state for use by all the mem-

bers of a society

G An official in a government department

(6 × 1) (6)

1.3 Give ONE term for each of the following descriptions. Write only the term next
to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations,
acronyms and examples will NOT be accepted.

1.3.1 The best possible allocation and use of resources with the least
waste

1.3.2 It is possible to exclude free riders by levying fees or tolls

1.3.3 The state may decide to levy a fee for the use of a public good on
the person who consumes the good or service

1.3.4 A situation in which a price reduction causes consumers to buy

more of the cheaper goods (4x1) 4

TOTAL SECTION A: 20

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SECTION B

Answer ALL questions from this section in the ANSWER BOOK.

QUESTION 2: MACROECONOMICS

2.1 Answer the following questions

2.1.1 Name any TWO examples of administrative income (2 x 1) (2)

2.1.2 How does economic instability affect South African economy?

(1x2) (2)

2.2 Study the following cartoon and answer the questions that follow

Source: google images

2.2.1 Name one main variable of fiscal policy which source income of the (1)
above parastatals
2.2.1 Which level of government controls parastatals (1)
2.2.3 Briefly describe the term nationalisation (2)
2.2.4 How can SOEs increase the efficiency of state delivery of public
goods? (2)
2.2.5 Discuss accountability as a factor contributing to poor public sector
provisioning (2 x 2) (4)

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2.3 Study the following information and answer the questions that follow

CONSUMER INFLATION HOLDS STEADY IN OCTOBER

The annual change in the consumer price index (CPI) in October 2021 was
5,0%, unchanged from the 5,0% recorded in September. The monthly rate also
held steady, remaining at 0,2%. Food and non-alcoholic beverages (NAB) and
transport were the most significant contributors to both the annual and monthly
rates.

Source: http://www.statssa.gov.za/?p=14905

2.3.1 Which objective of the public sector is associated with consumer (1)
inflation

2.3.2 Name any one category of main budget (1)

2.3.3 Briefly describe the term macroeconomic objectives (2)

2.3.4 Explain the effect of stable budget in the economy (2)

2.3.5 Emphasises public debt as a percentage of gross domestic product

(2 x 2) (4)

2.4 With an aid of graph, interpret the Laffer curve (4 x 2) (8)

2.5 How does public sector contribute to the economic development of a nation (8)
[40]

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SESSION 4: FOREIGN EXCHANGE MARKETS -PART 1
LEARNER NOTES
THE REASONS FOR INTERNATIONAL TRADE

The main reasons for international trade

Demand reasons

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.

The population’s income levels effect demand.

• Changes in income cause a change in the demand for goods and services. An in-
crease 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 im-
ported.

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 tastes

• can play a part in the determining of prices, e.g. customers in Australia have a
preference for a specific product which they do not produce and need to import,
and it will have a higher value than in other countries.

The 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 services but a
lower demand for luxury goods.

Supply reasons

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.

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Climatic 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.

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.

Technological resources

• are available in some countries that enable them to produce certain goods and
services at a low unit cost, e.g., Japan.

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.

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.
• Different factor endowments mean some countries can produce goods and ser-
vices more efficiently than others – specialisation is therefore possible:

Absolute advantage
• Takes place where one country can produce goods or services cheaper than an-
other.
• In the table below, both South Africa and Kenya can produce wheat and tea, but
South Africa has absolute advantage in the production of wheat and Kenya has
absolute advantage in the production of tea
• South Africa will export wheat to Kenya while Kenya will export tea to south Af-
rica.

Countries Wheat (tons) Tea (tons)

South Africa 10 2
Kenya 2 10

Comparative advantage
• A situation where one country has a relative advantage in the production of goods
or services.
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 • In the table below, South Africa has a comparative advantage in the production of
sugar while Mauritius has a comparative advantage in the production of cotton
• South Africa will specialise and export sugar to Mauritius while Mauritius will spe-
cialise and export cotton to south Africa.

Countries Sugar (tons) Cotton (tons)

South Africa 10 40
Mauritius 5 30

• In South Africa, the opportunity cost of sugar to cotton is 1:4 (40/10) while in Mau-
ritius the opportunity cost of sugar to cotton is 1:6 (30/5) /South Africa will have to
sacrifice 40 tons of cotton to produce 10 tons of sugar and Mauritius will have to
sacrifice 30 tons of cotton to produce 1 ton of sugar.

The effects of international trade

Specialisation

• Specialisation refers to the tendency of countries to specialize in certain products

which they trade for other goods, rather than producing all consumption goods on
their own.
• Countries produce a surplus of the product in which they specialize and trade it
for a different surplus good of another country.
• E.g. Angola has oil so it can specialize in oil products while Mozambique has no
oil resources and cannot specialize in these resources.

Effects of specialisation

• Specialisation could lead to the development of new techniques that lead to huge
increases in productivity and provide comparative advantage for the country.
• Higher productivity and efficiency – more goods can be produced within a certain
period; this can improve the export potential of a country.
• Lower unit costs due to mass production techniques. Goods can be exported at a
cheaper rate than other countries.
• Encourages investment in specific capital – economies of scale. Countries will
specialize in certain and specific industries.
• Specialisation could increase the standard of living especially when the area of
specialization is in great demand due to a shortage of supply.
• Mass production becomes possible if the domestic demand is added to foreign
demand, e.g. manufacturing of cell phones.
• World prices for a product might fall leading to declining revenues for the special-
ist country.
• Risk of over-specialising and structural unemployment. x Might lead to over-ex-
traction of a country's natural resources.

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 • Loss in demand. If a country specialises in the production of one product, it be-
come dependent on the market demand for the product. The country becomes
vulnerable if the market demand decrease for some reason.

Mass production

• Mass production is the manufacturing of large quantities of standardized products,

often using assembly lines or automated technology.

Effects of mass production

• Mass production could result in surplus production which can be exported.

• An increase in production as a result of mass production would lead to an in-
crease in the supply of goods and services on foreign markets.
• An increase in exports will lead to an inflow of foreign exchange which will im-
prove the balance of payments of the country.
• This will lead to an appreciation in the value of the currency (Rand)
• Create more employment that will lead to an increased demand for foreign goods
that might facilitate international trade and lead to an access to a greater variety of
goods and services of most manufactured products.

Efficiency

• Improvements in production efficiency mean that countries can produce more

goods and services with the same amount of resources.

Effects of efficiency

• Specialisation can cause production to become more efficient over time.

• This could result because the country’s producers become larger and exploit
the economies of scale causing increased production.
• This increased output will be channelled to the global market.
• Imports expose domestic firms to greater competitive pressure, while giving
them access to more and better inputs.
• Exporters increase productivity by learning from overseas customers and
through exposure to competition from foreign producers.

Globalisation

• Globalization refers to the interdependence between countries arising from the in-
tegration of different aspects of the economy, such as trade. International trade
can stimulate economic growth of countries that are now so interconnected.

Effects of globalisation

• Globalization has resulted in greater interconnectedness among markets around

the world and increased communication and awareness of business opportunities
in the world.
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 • More investors can access new investment opportunities and study new markets
at a greater distance than before.
• Through globalization, foreign direct investment tends to increase at a much
greater rate resulting in the growth in world trade, promotion of technology trans-
fer, industrial restructuring, and the growth of global companies.
• international trade could increase the country's debt when the number of imports
exceeds the amount of exports
• International trade is known to reduce real wages in certain sectors, leading to a
loss of wage income.
• However, cheaper imports can also reduce domestic consumer prices, and the im-
pact may be larger than any potential effect occurring through wages.

BALANCE OF PAYMENTS

Description
• The Balance of Payments (BoP) is a statement of all transactions made between
one country and the rest of the world over a defined period, e.g., a year.

The purpose of the Balance of Payments (BoP)

• BOP statement can be used as an indicator to determine whether the country's

currency value is appreciating or depreciating.
• BOP statement helps the Government to decide on fiscal and trade policies.
• It provides important information to analyse and understand the economic deal-
ings of a country with other countries.

COMPOSITION OF THE BALANCE OF PAYMENTS

Current account

• The current account is the account in the BoP that records international transac-
tions relating to production, income, and expenditure.
• It represents a country's imports and exports of goods and services, payments
made to foreign investors, and transfers such as foreign aid.
• In calculating the balance on the current account, 5 groups of items are taken into
account.
• They are merchandise (goods), gold, services, income and current transfers.

Capital transfer account

• Capital transfers consist of transfers of ownership of fixed assets, transfers of

funds.
• These transactions consist of imports and exports of goods, services, capital, and
transfer payments such as foreign aid and remittances.
• The capital account indicates whether a country is importing or exporting capital.
• The balance shown reflects the net amount of the capital transfer, either negative
or positive.
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The balance is a net amount and includes:

• Transactions and grants relating to the ownership of fixed assets, e.g. a grant by a
foreign NGO for a housing project in South Africa,
• debt forgiveness,
• the value of households and personal effects, and financial claims and liabilities
of migrants.

Financial account

• The financial account is a component of a country's balance of payments that co-

vers claims on or liabilities to non-residents, specifically with regard to financial as-
sets.
• The financial account deals with money related to foreign reserves and private in-
vestments in businesses, real estate, bonds, and stocks.
• It also includes government-owned assets such as special drawing rights at the
International Monetary Fund (IMF), or private sector assets held in other countries,
local assets held by foreigners—government and private—and foreign direct in-
vestment (FDI).
• The financial account shows records of investments by South Africans in other
countries and by foreigners in South Africa.

The sub accounts of the financial account:

Direct investments
• A foreign direct investment (FDI) is an investment made by a firm or individual in
one country into business interests located in another country.
• Foreign direct investment (FDI) refers to investment in real estate (fixed property)
and obtaining a meaningful share (10%+) or control of such business.
• E.g. USA Walmart’s takeover of the local chain Massmart was a foreign direct in-
vestment of US$2.2 billion.

Portfolio investments

• Portfolio investments are investments in the form of a group (portfolio) of assets,

including transactions in equity, securities, such as common stock, and debt secu-
rities, such as banknotes, bonds, and debentures.
• It refers to the buying of financial assets such as shares in companies on the stock
exchange of another country.
• These investments are highly liquid, and their flows can be reversed at any time.
• Portfolio investment money is also known as ‘hot money’.

Other investments

• Other investments are a residual category.

• Transactions that cannot be classified as direct investments, portfolio investments
or reserve assets and liabilities are classified as other investments.

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 • It also refers to other financial transactions not covered by FDI. x e.g., short-term
investment that flows in and out of a country, trade credits and short-term loans

Reserve account

• The reserve account records changes to the amount of gold and foreign ex-
change reserves (Dollars, Pounds, Euros) held by the country.
• These changes reflect the international transactions recorded in all the other ac-
counts on the BoP.
• South Africa’s total gold and foreign exchange reserves are a stock item and are
not shown in the reserve account. Only the changes to the gold and foreign re-
serves are shown.

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 Tangible goods: iron ore, Records transac-
oil, clothes, machines tions related to
Production, in-
come, expendi-
1. CURRENT ACCOUNT ture
Inflows of Goods exports
foreign ex- + Net gold exports
change + Services receipts Wages, salaries
+ Income receipts Dividends, inter-
Outflows of less Merchandise imports est, financial capi-
foreign ex- less Payment for services tal
change less Income payments
Current transfers (net receipts) Gifts in cash, Social
Balance on Current Account insurance, social in-
Memo item: trade balance surance contribu-
tions
2. CAPITAL TRANSFER ACCOUNT
NET LENDING TO (+) OR BORROWING
FROM (-) REST OF THE WORLD Profes-
sional,tech-
nical,travel,in-
surance,trans-
portation,gov-
Deals with money related to foreign ernment ser-
reservesACCOUNT
3. FINANCIAL and private investment, vices
Investment made by a firm Net directreal estate,bonds,stocks
investment
in one country into business Net portfolio investment
interests located in other Net financial derivatives
country Net other investments
FDI-real estate, meaningful Reserve assets (SDR allowances) Investments in the form of
share 10% Balance on Financial Account a group of assets e.g. eq-
Memo item: balance on Financial Account uity, securities, stock, debt
excluding reserve assets. securities
Unrecorded transactions b

Transactions which
cannot be classified as
direct, portfolio invest-
ments

Records changes to the amount

of gold and foreign exchange
Balance on the financial account
reserves held by a country e.g.
Reserve assets
pounds, euros
Memo item: Balance on Financial
SDRs are form of credit that
account excluding reserve asset
the IMF can use when a coun-
try experiences BOP difficulties

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CORRECTIONS OF BALANCE OF PAYMENTS SURPLUS AND DEFICIT (DISEQUI-
LIBRIA)
• Balance of payments disequilibria exist when the outflow of foreign currency con-
tinuously exceeds or is less than the inflow of foreign currency.
• A disequilibrium in the balance of payment exits, it is either a surplus or deficit.
• A deficit on the balance of payments implies that the outflow of foreign currency
exceeds the inflow of foreign currency.
• A surplus exists when the outflow of currency is less than the currency inflow.
Methods used to correct disequilibria of the balance of payments
Change in demand.
The following four instruments are used in various countries to restore the equilibrium:
Interest rates
• Domestic demand can be changed by changing interest rates.
• Higher interest rates help to decrease spending on imports. a higher interest rate
in the domestic market will attract foreign funds which can be used for correcting
disequilibrium
• Foreign traders will try to take advantage by increasing their investment in the
country with the higher interest rate.
• An increase in interest rates can lead to an appreciation of the currency as de-
mand for the currency increases.
• This increases the price of exports as the value of the currency increases.
• The opposite happens when interest rates are decreased.
• Lower interest rates encourage consumer spending; therefore there will be a rise
in spending on imports. This will cause a deterioration in the current account.
However, lower interest rates should cause a depreciation in the exchange rate
• However, lower interest rates should cause a depreciation in the exchange rate.
This makes exports more competitive, and if demand is relatively elastic, the im-
pact of a lower exchange rate should cause an improvement in the current ac-
count. Therefore, it is not certain how the current account will be affected.
Import control
The following import control methods can be used to restore a disequilibrium balance
of payments:

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Import Quotas
• Restricting imports by applying imports quotas.
• Under the quota system, the government may permit the maximum amount or
value of a commodity to be imported during a given period.
• By restricting imports through the quota system, deficit is reduced or elimi-
nated and thereby the balance of payments position is improved.
Tariff (Import Duties)
• Tariffs are duties (taxes) imposed on imports.
• When tariffs are imposed, the prices of imports will increase.
• The increased prices will reduce the demand for imported goods and at the same
time encourage domestic producers to produce more of import substitutes Borrow-
ing and lending
• Countries with surpluses often lend money to countries with deficits. Countries
with deficits often borrow. This is why some developing countries have so much
foreign debt.
• In the event of a fundamental disequilibrium, member countries may borrow from
the International Monetary Fund (IMF).
• Borrowing is nevertheless not a long-term solution for fundamental balance of
payments disequilibrium.
Export promotion
• To correct disequilibrium in the balance of payments, it is necessary that exports
should be increased.
• Government may adopt export promotion programmes for this purpose.
• Export promotion is applied to encourage the production of goods that can be ex-
ported.
• An export promotion programme includes subsidies, tax concessions to export-
ers, marketing facilities, incentives for exports, loan priorities to the export sector
under the credit policy of the central bank, etc.

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Import substitution.
• Import substitutes steps may be taken to encourage the production of import
substitutes.
• Local production is encouraged, rather than importing goods from other coun-
tries.
• This will save foreign exchange in the short run by replacing the use of im-
ports by these import substitutes.
Changes in exchange rate
Exchange Control Exchange control refers to the control over the use of foreign ex-
change by the central bank.
Foreign exchange is restricted among the licensed importers. Only essential imports are
permitted.
Exchange Rate Depreciation
- Exchange rate depreciation means that the value of the domestic (local) currency
is reduced in relation to foreign currency.
- Currency depreciation or devaluation makes imports more expensive for domes-
tic consumers and exports cheaper for foreign buyers.
- On the other hand, a downward shift in the value of a country’s currency makes it
more expensive for its citizens to buy imports and increases the competitiveness
of their exports.
- For example, when the rand depreciates, South African goods (exports) become
cheaper for foreign buyers. Imports become more expensive for South Africans.
The World Trade Organisation (WTO) is trying to phase export promotion and tariff
measures for the sake of trade liberalisation.

FOREIGN EXCHANGE MARKETS

• A foreign exchange market is a market engaged in the buying and selling of for-
eign exchange. The leading markets are in London, New York and Tokyo.

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 • A foreign exchange rate is the price of one country’s currency in terms of another.
It is expressed (quoted) as the domestic price of one unit of a foreign currency,
for example, $1=R10.00.
• In South Africa, the forex market is known as the interbank foreign exchange mar-
ket. It does not have a physical location or corporate form, such as the Johannes-
burg Stock Exchange (JSE). It is a worldwide practice, transactions are done
electronically by computers, in writing by e-mail, fax or letter or by phone

FACTORS THAT WILL INFLUENCE DEMAND AND SUPPLY

Demand factors for foreign exchange Supply factors of foreign exchange

• Importing goods • Exporting goods
• Payment for services from foreign • Providing services to foreign countries
countries • Receiving dividends on shares invested
• Buying shares in another country in foreign countries
• Tourists spending money overseas • Inflow of foreign capital
• Repayment of debt borrowed from for- • Expenditure of money by foreign tour-
eign countries ists
• Raising new loans in foreign countries

DEMAND FOR AND SUPPLY OF EXCHANGE RATES

Appreciation of the exchange rate
Appreciation of a country’s currency is an increase in the price of the currency in terms of
another currency due to market forces. For example, when the dollar goes from $1 = R9
to $1 = R10, then the dollar has appreciated against the rand (the rand has depreciated).
Depreciation of the exchange rate
Depreciation of a currency is a decrease in the price of the currency in terms of
another country’s currency due to market forces. For example, if the dollar goes
from $1 = R9 to $1 = R8, then the dollar has depreciated against the rand (the rand has
appreciated).

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• A demand for dollars exists when, for example, South African importers wish to
exchange rands for dollars to pay for goods/services to be imported from the
United States of America.
• On the other hand, the holders of dollars seek to exchange dollars for rands when,
for example, the American importer wants to pay for goods/services to be im-
ported from South Africa.
• There might be an excess supply or excess demand for dollars when the price
rises above or falls below the market price of QP in the above graph.

• The above graph represents a graph which depicts a free-floating exchange

rate.
• The vertical axis shows the rand per dollar exchange rate.
• The horizontal axis shows the quantity of dollars.
• DD represents the original demand curve for dollars.
• SS represents the original supply curve for dollars
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 • Point E is the original equilibrium point
• The original rand/dollar exchange rate was $1 = R14.60
• Those who demand dollars (DD) are the holders of Rands who are seeking to ex-
change them for Rands.
• Those who supply dollars (SS) are the holders of dollars seeking to exchange
them for Rands.
• The dollar appreciates when its value changes from $1 =R14.60 to $1 = R15.00.
Of course, for the rand, this is a depreciation. The dollar has become more expen-
sive in terms of the rand. This will make imports expensive for South Africans.
• Quantity of dollars demanded increases from 18 to 20. Therefore, DD shifts to
D1D1.
• A new equilibrium point is at point E1.

FOREIGN EXCHANGE RATES

Appreciation
• Currency appreciation refers to the increase in price of one currency relatively to
another country’s currency. It is subjected to market forces in the forex market.
• For example, if the dollar goes from $1 = R9 to $1 = R10, then the dollar has ap-
preciated.
Depreciation
• Currency depreciation refers to the decrease in the price of one currency rela-
tively to another country’s currency. It is subjected to market forces in the forex
market.
• For example, if the dollar goes from $1 = R9 to $1 = R8, then the dollar has de-
preciated against the rand.
Revaluation
• When a government or central bank intervenes in the market to increase the
value of their currency relative to another country’s currency.
• This occurs under a fixed exchange system.
Devaluation
• When a government or central bank intervenes in the market to decrease the value
of their currency relative to another country’s currency intervention in the market
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 • A symbiotic (mutually dependent) relationship exists between the exchange rate
of a country and its balance of payments. This relationship invites continuous at-
tention from the central bank. Central banks often intervene when the currency is
either overvalued or undervalued.
Overvalued
• When a country’s currency is valued too high, for example, the South African rand
is R7 rather than R8 for a US dollar. This can lead to continuous deficits on the
current account of the balance of payments.
Undervalued
• When a country’s currency is not valued high enough, for example, the South Af-
rican rand is R9 rather than R8 to a US dollar. Such undervaluation can be
demonstrated by continuous surpluses on the current account of the balance of
payments.

Two methods of intervention are traditionally used:

Direct intervention
• The Central bank buys foreign exchange when the currency is overvalued and
sells foreign exchange when the currency is undervalued.
Indirect intervention
• The most important instrument used by the central bank for indirect intervention is
interest rate changes. When a currency is overvalued an increase in interest rates
invites an inflow of investments. A surplus is created on the financial account that
balances out the deficit on the current account. When the currency is undervalued
interest rates can be decreased to cause an outflow of foreign currency and drain
excess liquidity from the economy and release inflation pressure. The surplus on
the current account will then decrease.

EXCHANGE RATES
A foreign exchange market is a market engaged in buying and selling of foreign ex-
change. Exchange rate is the rate at which one currency is exchanged for another. It is
also considered the value of one country’s currency in terms of another country’s cur-
rency.

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Types of exchange rates
(a) The floating exchange rates: price determined only by demand and supply of the
currency – no government intervention.
(b) The fixed exchange rates: the value of a currency fixed in relation to an anchor
currency – not allowed to fluctuate.
(c) The dirty floating or managed exchange rates: the rate is influenced by govern-
ment via central bank around a preferred rate.

TERMS OF TRADE
Terms of trade compares a country’s export prices with its import prices by means of in-
dexes.
Formula
𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠
X 100
𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠

The effect of terms of trade on the economy

(a) An improvement in the terms of trade may be the result of the following:
- An increase in export prices. This has the result, all things being equal,
of increasing economic welfare because more revenue is earned with the
same expenditure.
- A decrease in import prices. This has the result, all things being equal, of
increasing economic welfare because expenditure on imports is less.
(b) A deterioration in the terms of trade may be the result of the following:
- A decrease in export prices. This has the result, all things being equal,
that welfare is lost because more resources were used to produce bigger
volumes of exports that were needed to compensate for the fall in their
prices.
- An increase in import prices. This has the result, all things being equal,
that welfare is lost because more resources were used to produce more
units of exports to finance the higher costs of imports.

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SESSION 4: MACROECONOMICS: FOREIGN EXCHANGE MARKET

SECTION A: TYPICAL EXAM QUESTIONS

FOREIGN EXCHANGE MARKET

QUESTION 1: 20 minutes Section A – Short Questions

(Taken from various sources)

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 com-
pletely 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 incor-
rect if you write TWO options.

1.4 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 If the rand/dollar exchange rate changes from R6,80 to R7,00 to
the dollar, …

A imports from USA will increase.

B the number of American tourists to SA will decrease.
C exports to the USA will increase.
D the dollar will depreciate against the rand

1.1.2 When a country experiences balance of payment difficulties, the

IMF uses…as a form of credit.

A Special drawing rights

B Foreign bank notes
C Trade credits
D Long term loans

1.1.3 The purchasing power of a currency in terms of how much of

other currencies
it can buy is called …rate

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 A Interest
B Exchange
C Money
D purchasing

1.1.4 When a currency is …, interest rates can be decreased which will

result in an outflow of foreign currency.

A Overvalued
B Depreciated
C Undervalued
D Appreciated

1.1.5. An increase in export prices shows a(n) … in terms of trade of a

country.

A Improvement
B Deterioration
C Balance
D Disequilibrium (10)

1.2 Choose a description from COLUMN B that matches the item in COLUMN A.
Write only the letter (A-F) next to the question number (1.2.1 – 1.2.5) in the
ANSWER BOOK.

COLUMN A COLUMN B
1.2.1 Specialisation C A the increase in the price of one currency
relatively to another country’s currency
1.2.2 Portfolio invest-
ments D B the amount by which the value of a country's
1.2.3 Appreciation A imports exceeds the value of its exports.

1.2.4 Trade deficit B C The advantage of international trade that al-

lows countries to produce according to their
comparative advantage.
1.2.5 Balancing item on
the BOP E D Purchase of shares on the JSE by a foreigner

E an amount that accounts for any statistical er-

rors and assures that the current and capital
accounts sum to zero.

F It includes any foreign money held by a cen-

tral bank

(5 × 1) (1)
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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, AC-
RONYMS AND EXAMPLES WILL BE ACCEPTED.

1.3.1 a nominal exchange rate that is set firmly

by the monetary authority with respect to a foreign currency or a
basket of foreign currencies

1.3.2 When a government or central bank intervenes in the market to de-

crease the value of their currency relative to another country’s cur-
rency

1.3.3 component of a country's balance of payments

that covers claims on or liabilities to non-residents

1.3.4 Imports expose domestic firms to greater competitive pressure,

while giving them access to more and better inputs

1.3.5 it is quoted as the domestic price of one unit of a foreign currency

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SECTION B

QUESTION 2: 20 minutes Section B (Taken from various sources)

LOWER ORDER QUESTIONS

HINT: When the question requires you to “list” or “name”, you need not
write a sentence but merely one or two words. This MUST be done in bul-
let form. These types of questions are applicable for 2.1.1, 3.1.1 and 4.1.1

2.1.1 List TWO effects of international trade

2.1.2 Name TWO examples of current transfers

2.1.3 Name TWO reasons for the supply of foreign exchange

2.1.4 List any TWO exchange rate system

2.1.5 Name any TWO measures to correct balance of payments

QUESTION 3: (Taken from various sources)

MIDDLE ORDER QUESTIONS
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

3.1.1 How can high government debt affect exchange rates negatively?
(1x2) 2

3.1.2 Why are liabilities added when calculating net direct investments in
the financial account of the balance of payments? (1x2) 2

3.1.3 Why are natural resources a cause for international trade? (1x2) 2

3.1.4 How can South Africa correct the balance of payments deficit
through exchange rate control? (1x2) 2

3.1.5 How does terms of trade impact the economy? (1x2) 2

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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 num-
bered in this document

QUESTION 4:
Study the table below and answer the questions that follow

MINING AND MINERALS IN SOUTH AFRICA

South Africa is a world leader in mining. The country is famous for its abundance of
mineral resources, accounting for a significant proportion of world production and re-
serves, and South African mining companies are key players in the global industry

[Source: https://www.brandsouthafrica.com/investments immigration /business / econ-

omy /mining-and-minerals-in-south-Africa]

4.1 Name any ONE commodity which South Africa export to foreign (1)
countries

4.2 Name the economic sector in which mining is classified (1)

4.3 Briefly describe the term net gold exports (2)

4.4 How does mining contribute to the reduction of the Balance of Pay- (2)
ments disequilibrium?

4.5 Discuss the impact of exchange rate fluctuations on the mining sec-
tor. (2x2) (4)

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QUESTION : 5
Study the table below and answer the questions that follow

THE SOUTH AFRICAN BALANCE OF PAYMENTS (BOP) - 2020

Q.1 Q.2 Q.3 Q.4 YEAR (Rm)
Current account (receipts)
Merchandise exports 1288 984 1376 1497 1286
Net gold exports 97 79 129 129 108
Service receipts 212 87 87 98 121
Current account (payments)
Merchandise imports 1185 1064 1064 1199 1109
Service payments 205 141 141 151 160

[Source: Adapted from SARB Quarterly Bulletin, 2020]

5.1 How many accounts are found in the balance of payments (BOP)? (1)

5.2 Name ONE example of services receipts (1)

5.3 Briefly describe the term balance of payments disequilibria (2)

5.4 What was the trend of the trade balance in 2020? (2)

5.5 Use the information in the table above to calculate the trade balance
for quarter 4 of 2020. Show ALL calculations. (2x2) (4)

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QUESTION : 6
Study the table below and answer the questions that follow

[Adapted from https://ecoaim.in/2020/07/12/how-disequilibrium-can-be-corrected/. Ac-

cessed on 21 November 2021.]

6.1 Which letter represents imports from the above data (1)

6.2 Which international institution can help countries with funds to cor- (1)
rect fundamental deficit?

6.3 Briefly describe the term balance of payment (2)

6.4 Explain the relationship between the exchange rate of a country and
its balance of payment (2)

6.5 Why is it important to analyse a country’s balance of payments data?

(2x2) (4)

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QUESTION: 7
Study the table below and answer the questions that follow

YEAR July Jan July Jan July Jan July

2019 2020 2020 2021 2021 2022 2022
TERMS OF 109.3 109.5 120.4 118.9 131.9 116.1 117
TRADE

7.1 Name any ONE exchange rate system (1)

7.2 Which institution is responsible for determining the terms of trade (1)

7.3 Briefly describe the term export prices (2)

7.4 How does terms of trade affect balance of payments (2)

7.5 Use the data above to analyse terms of trade from July 2019 to July (4)
2022 (2x2)

QUESTION 8 Paragraph type questions – Middle Cognitive

8.1 Briefly discuss in detail absolute advantage (4x2) (8)

8.2 Explain export promotion and import substitution as measures to

reduce disequilibrium on the balance of payments. (4x2) (8)

8.3 Make use of a graph and explain how an increase in exports to the
USA will affect the value of the rand. (4x2) (8)

8.4 Differentiate between appreciation and revaluation. (4x2) (8)

8.5 Briefly discuss the components of the financial account in the BOP
(4x2) (8)

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QUESTION 9 Paragraph type questions – Higher cognitive

TYPICAL EXAM QUESTION: THESE HIGHER ORDER QUES-

TIONS REQUIRE THE LEARNERS TO USE HER/ HIS CRITICAL
THINIKING SKILLS.

Higher order questions are grounded in the content. These types of questions test crit-
ical thinking, where candidates should be able to apply their knowledge, through logi-
cal reasoning and also have an awareness of their current economic climate. Content
(covered by discuss/examine/describe/ analyse/explain/evaluate/compare/assess/justify/con-
struct/calculate) can be assessed as higher-order questions. Answers will not neces-
sarily be found in textbooks.

9.1 How can foreign direct investment benefit the South African econ- (8)
omy?

9.2 Why is there an interdependence between the exchange rate of a (8)

country and its balance of payments?

9.3 Evaluate the effects of a currency depreciation in an economy (8)

9.4 Why is a free-floating exchange rate system considered as a better

option than a fixed exchange rate system? (8)

9.5 Why can large and persistent surpluses on the current account be a (8)
problem for some countries?

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SECTION C

HINT: All section C questions have TWO questions 5 & 6 NOT 13 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 ALLOCA-
STRUCTURE OF ESSAY
TION
Introduction
The introduction is a lower-order response. Max. 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 discuss/ Ana- Max. 26
lyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Draw a graph and ex-
plain/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/ De- Max. 10
duce/Compare/Distinguish/Interpret/How? /Suggest
A maximum of 2 marks may be allocated for mere listing facts.
Conclusion
Any higher-order conclusion should include: Max. 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 10

• Discuss in detail the demand reasons for international trade (26 marks)

• Evaluate the effects of a currency in an economy (10 marks)

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FOREIGN EXCHANGE MARKETS LEARNER HOMEWORK

QUESTION 1 20 MARKS – 20 MINUTES

1.1 Various options are provided as possible answers to the following questions.
Write down the question number (1.1.1 – 1.1.5), choose the answer and write the
letter (A – D) of your choice next to the question number in the ANSWER BOOK.
1.1.1 The balance of exports and imports of goods is referred to as…
A balance on current account.
B trade balance.
C balance on financial account.
D current account deficit.

1.1.2 The central bank can intervene directly when a country’s currency
is…

A undervalued.
B Appreciated.
C overvalued.
D Depreciated.

1.1.3 A … is an exchange rate that the government allows fluctuate as a

result of supply and demand factors

A manged floating exchange rate

B free-floating exchange rate
C fixed exchange rate
D forex market
1.1.4 Which of the following is not a trade measure to correct the balance
of payment surplus and deficit

A Export promotion
B Import substitution
C Import controls
D Exchange control

1.1.5. International trade is the core of…

A specialisation
B mass production
C globalisation
D efficiency (10)

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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 – 1.2.8) in the
ANSWER BOOK, for example 1.2.9 J.

COLUMN A COLUMN B
1.2.1 Free trade A SARB practised a managed floating ex-
change rate
1.2.2 Net trade
B to stabilise the value of the local currency,
1.2.3 Pegged rate keeping it at a fixed rate to avoid exchange
rate fluctuations
1.2.4 Special drawing
rights C an increase in import prices

1.2.5 Deterioration D It increases competition between countries

1.2.6 Specialisation
E The variance between the value of exports
and imports

F an interest-bearing international reserve as-

set created by the IMF to supplement other
reserve assets of member countries

G has the effect of increasing living standards

(6 × 1) (6)

1.3 Give ONE term for each of the following descriptions. Write only the term next
to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations,
acronyms and examples will NOT be accepted.

1.3.1 Unrestricted international trade increases competition

1.3.2 Records net changes in a country’s financial assets and liabilities

1.3.3 Refers to the increase in value of one currency relative to another in

the forex markets

1.3.4 The ratio of index of export prices and the index of import prices
(4x1) 4

TOTAL SECTION A: 20

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SECTION B

Answer ALL questions from this section in the ANSWER BOOK.

QUESTION 2: MACROECONOMICS (COMPULSORY)

2.1 Answer the following questions

2.1.1 Name any TWO inflows in the current account (2 x 1) (2)

2.1.2 Explain correlations across Industrial Countries with Respect to

Currency Appreciation? (1x2) (2)

2.2 Study the table below and answer the questions that follow

BALANCE OF PAYMENTS TRANSACTIONS

R billions 2020
First half Second half Year
Net lending to, or borrowing from, -22.2 130.7 108.4
the rest of the world
Net direct investment 57.4 26.2 83.6
Net portfolio investment -22.6 -90.0 -112.7
Net financial derivatives -13.7 2.6 -11.1
Net other investment -102.6 -44.1 -146.6
Reserve assets 64.2 -10.1 54.2
Balance of financial account -17.3 -115.4 -132.7
Memo item: balance on financial A B C
account excluding reserve assets
Unrecorded transactions 39.5 -15.2 24.3

Source: https://www.resbank.co.za/en/home/publications/publication-detail-
pages/quarterly-bulletins/boxes/2021/march-2021---the-interaction-between-
the-current-account-and-the

2.2.1 Give one form of credit that the International Monetary Fund can (1)
use when a country experiences balance of payments difficulties
2.2.1 Name any ONE transactions of capital transfer account (1)

2.2.3 Briefly describe the term foreign direct investment (2)

2.2.4 Explain the importance of unrecorded transactions (2)
2.2.5 Calculate the balance on financial account excluding reserve as-
sets for the year 2020 (2 x 2) (4)

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2.3 Study the graph below and answer the questions that follow

INCREASE IN THE DEMAND FOR DOLLARS

2.3.1 What is the current exchange rate (1)

2.3.2 Name any ONE reason for the supply of dollars (1)

2.3.3 Briefly describe the term free floating exchange rate (2)

2.3.4 Why are exchange rates important for a trading economy (2)

2.3.5 How do changes in interest rates affect a country currency (2 x 2) (4)

2.4 Briefly discuss the theory of absolute and comparative advantage (4 x 2) (8)

2.5 How can exchange controls be used as a measure to correct the balance of (8)
payment
[40]

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