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ECONOMICS PAPER 1 MACROECONOMICS & ECONOMIC PURSUITS

MARCH 2016

NATIONAL SENIOR CERTIFICATE

GRADE 12

ECONOMICS P1

FEBRUARY/MARCH 2016


GRADE 12

Economics/P1 2 DBE/Feb.–Mar. 2016 NSC


INSTRUCTIONS AND INFORMATION 1. Answer FOUR questions as follows in the ANSWER BOOK:

SECTION A: COMPULSORY SECTION B: Answer TWO of the three questions. SECTION C: Answer ONE of the two questions.

2. Answer only the required number of questions. Answers in excess of the

required number will NOT be marked.

3. Number the answers correctly according to the numbering system used in this

question paper.

4. Write the question number above each answer. 5. 6.

Read the questions carefully. Start EACH question on a NEW page.

7. Leave 2–3 lines between subsections of questions. 8. Answer the questions in full sentences and ensure that the format, content

and context of your responses comply with the cognitive requirements of the questions.

9. Use only black or blue ink. 10. You may use a non-programmable pocket calculator. 11. Write neatly and legibly.



SECTION A (COMPULSORY) QUESTION 1 30 MARKS – 20 MINUTES 1.1 Various options are provided as possible answers to the following questions.

Choose the answer and write only the letter (A–C) next to the question number (1.1.1–1.1.8) in the ANSWER BOOK, for example 1.1.9 C.

1.1.1 A measure used to indicate the economic prosperity of a country is

called the …

A

B C

gross domestic income. per capita national income. net national income.

1.1.2 Exogenous factors such as … can cause fluctuations in the level of

economic activity.

A

B C

weather patterns inflexibility of markets demand patterns

1.1.3 An example of a positive externality is … A

B C

education. pollution. tobacco smoking.

1.1.4 Which ONE of the following can cause a deficit on the balance of

payments?

A

B C

Inward foreign investments Increase in foreign currency reserves Decline in mineral exports

1.1.5 When the government sells more than 50% of the state-owned

shares of a public enterprise, it is called …

A

B C

privatisation. nationalisation. free trade.

1.1.6 The North-South divide highlights the economic … that exist

between the developed and developing countries.

A

B C

similarities programmes differences



1.1.7 The industrial development policy that aims at promoting long-term industrialisation is called …

A

B C

the Industrial Policy Action Plan. Special Economic Zones. Spatial Development Initiatives.

1.1.8 The main objective of the Skills Support Programme is to … A

B C

reduce government expenditure. encourage greater investment in training. build five million houses. (8 x 2)

(16) 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.

COLUMN A COLUMN B 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.2.8

Gross domestic product Peak Monetary policy Production price index Special Drawing Rights BRICS Industrial policy Economic indicator

A B C D E F G H I

uses interest rates to influence the level of expenditure gives member countries the opportunity to obtain financial support from the IMF laws and regulations to enhance manufacturing operations assess the performance of the economy the total value of all final goods and services produced within the borders of a country in a given year the weighting of domestically manufactured outputs the upper turning point of the business cycle output produced by permanent residents a trade agreement between a group of emerging markets

(8 x 1) (8)



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.

1.3.1 The process whereby the standard of living of people in a country

improves

1.3.2 The trade policy whereby the country encourages the local

production of goods rather than importing the goods

1.3.3 When authorities deliberately increase the value of a currency 1.3.4 The turning point in the business cycle where the level of economic

activities is at its lowest

1.3.5 A country's record of transactions with the rest of the world over a

period of time

1.3.6 The introduction of money into the circular flow (6 x 1) (6) TOTAL SECTION A: 30



SECTION B Answer any TWO of the three questions in this section in the ANSWER BOOK. QUESTION 2: MACROECONOMICS 40 MARKS – 30 MINUTES 2.1 Answer the following questions: 2.1.1 Name TWO instruments of fiscal policy. (2 x 1) (2) 2.1.2 How can the appreciation of the rand affect the exports of goods

and services? (1 x 2)

(2) 2.2 Study the extract below and answer the questions that follow. THE MULTIPLIER EFFECT

The government of Valspar has decided to expand the national road network by R200 million this year. The tendency of households is to save 20 per cent of their income.

2.2.1 What percentage of their income do households spend? (2) 2.2.2 Explain the term multiplier. (2) 2.2.3 What impact will a tax increase have on the multiplier? (2) 2.2.4 Calculate the size of the multiplier. Show ALL calculations. (4) 2.3 Study the cartoon below and answer the questions that follow. [Source: Sheneman, Tribune Media Services] 2.3.1 What message is depicted in the cartoon above? (2) 2.3.2 Give a reason for the current state of the economy. (2)

IT'S TIME TO SPEED UP THE RECOVERY



LIFE EXPECTANCY TRENDS IN SOUTH AFRICA

YEAR LIFE EXPECTANCY

AT BIRTH WITHOUT HIV

LIFE EXPECTANCY AT BIRTH WITH HIV

2002 64,2 53,4 2005 65,5 52,1 2008 66,3 56,0 2011 67,1 58,7 2014 67,9 61,2

2.3.3 What main economic indicator is used to determine the state of the

South African economy?

(2) 2.3.4 How can the government speed up the recovery of the economy? (4) 2.4 Differentiate between real flows and money flows in the circular-flow model.

(2 x 4)

(8) 2.5 In your opinion, how can the Reserve Bank reduce the deficit on the balance

of payments? (4 x 2)

(8) [40]

QUESTION 3: ECONOMIC PURSUITS 40 MARKS – 30 MINUTES 3.1 Answer the following questions.

3.1.1 Name TWO indicators related to foreign trade. (2 x 1) (2) 3.1.2 What is the effect of increased investment spending on the

economy? (1 x 2)

(2) 3.2 Study the table below and answer the questions that follow. [Source: www.statssa.gov.za]

3.2.1 Which year, according to the table above, indicates the highest life

expectancy without HIV?

(1)

3.2.2 Which institution is responsible for publishing life expectancy trends in South Africa?

(1)

3.2.3 Explain the term life expectancy. (2) 3.2.4 What impact will HIV/Aids have on productivity levels? (2) 3.2.5 In your opinion, what brought about the improvement in life

expectancy from 53,4 years to 61,2 years? (2 x 2)

(4)

http://www.statssa.gov.za/



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

OUR FUTURE: MAKE IT WORK – NDP 2030 The NDP aims to eliminate poverty and reduce inequality by 2030. South Africa can realise these goals by drawing on the energies of its people, growing an inclusive economy, building capabilities, enhancing the capacity of the state, and promoting leadership and partnerships throughout society.

[Source: www.nda.org.za]

3.3.1 What does the abbreviation NDP stand for? (2) 3.3.2 What is meant by an inclusive economy? (2) 3.3.3 Give a reason why it is important to eliminate poverty and reduce

inequality in South Africa.

(2) 3.3.4 What impact does the Expanded Public Works Programme have

on your local community? (2 x 2)

(4) 3.4 Briefly discuss employment as an economic indicator. (4 x 2) (8) 3.5 How will the new demarcated special economic zones (SEZs) benefit regional

development in South Africa? (4 x 2)

(8) [40]



E E

QUESTION 4: MACROECONOMICS AND ECONOMIC PURSUITS 40 MARKS – 30 MINUTES

4.1 Answer the following questions. 4.1.1 Name TWO items in the financial account of the balance of

payments. (2 x 1)

(2) 4.1.2 What effect does inflation have on the poor? (1 x 2) (2) 4.2 Study the graph below and answer the questions that follow.

MARKET FOR US DOLLARS

D S2 S S1 R12 E2 E E1 S2 S S1 D

0 30 40 50 Millions

4.2.1 Which supply curve indicates a decrease in the supply of dollars? (1) 4.2.2 What type of exchange rate system is currently used in

South Africa?

(1) 4.2.3 Explain the term exchange rate. (2) 4.2.4 State ONE factor that could have led to an increase in the supply of

dollars.

(2) 4.2.5 Use the above graph to explain the effect of the increase in the

supply of US dollars on the R/US$ exchange rate. (2 x 2)

(4)

EXCHANGE RATES

Quantity of dollars

R10

R11

Exch

ange

rate

R

/US$



4.3 Study the table below and answer the questions that follow.

[Adapted from The National Treasury: Budget Review]

4.3.1 What does the abbreviation MTEF stand for? (2) 4.3.2 What is the international benchmark for budget deficits as a

percentage of the GDP?

(2) 4.3.3 Calculate the budget deficit as a percentage of the GDP (A). (2) 4.3.4 In your opinion, what can the government do to reduce the budget

deficit?

(4) 4.4 Explain how the amplitude and trend line can be used in the forecasting of

business cycles. (2 x 4)

(8) 4.5 How can taxation be used to stimulate employment in South Africa? (4 x 2) (8)

[40]

TOTAL SECTION B: 80

PUBLIC SECTOR'S BUDGET FRAMEWORK R BILLION REVISED MEDIUM-TERM ESTIMATES

(MTEF) 2012/2013 2013/2014 2014/2015 2015/2016

Revenue Percentage of GDP

Expenditure Percentage of GDP

Surplus/Deficit Percentage of GDP

830 27%

972 32%

–142 –4%

904 27%

1 058 32%

–153 –4%

1 005 27,8%

1 149 31%

–143 –4%

1 118 28%

1 239 31%

–12 A

Gross domestic product 2 995 3 301 3 622 3 997


Copyright reserved

SECTION C Answer any ONE of the two questions in this section in the ANSWER BOOK. Your answer will be assessed as follows:

STRUCTURE OF ESSAY MARK ALLOCATION

Introduction Max. 2 Body Main part: Discuss in detail/In-depth discussion/Examine/Critically discuss/Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/ Assess/Debate Additional part: Give own opinion/Critically discuss/Evaluate/Critically evaluate/Draw a graph and explain/Use the graph given and explain/ Complete the given graph/Calculate/Deduce/Compare/Explain/ Distinguish/Interpret/Briefly debate/How?/Suggest

Max. 26

Max. 10

Conclusion Any higher-order conclusion should include: • A brief summary of what has been discussed without repeating facts

already mentioned • Any opinion or valued judgement on the facts discussed • Additional support information to strengthen the discussion/analysis • A contradictory viewpoint with motivation, if required • Recommendations

Max. 2

TOTAL 40 QUESTION 5: MACROECONOMICS 40 MARKS – 40 MINUTES To be internationally competitive, a country needs to have suitable trade policies in place. They have to grow their industries if they want to increase the standard of living.

• Discuss, in detail, the arguments in favour of protectionism. (26 marks)

• In your opinion, how can the government use subsidies to ensure that local industries are protected against unfair competition from abroad? (10 marks)

[40]

QUESTION 6: ECONOMIC PURSUITS 40 MARKS – 40 MINUTES Internationally, the main instruments on which growth and development policies are based are called demand and supply-side approaches. The supply-side approach focuses more on microeconomic goals.

• Examine, in detail (without using a graph), the supply-side approach in terms of South Africa's efforts to promote economic growth and development. (26 marks)

• In your opinion, have the RDP and GEAR been successful as growth and development policies? (10 marks)

[40]

TOTAL SECTION C: GRAND TOTAL:

40 150


MARKS: 150

This memorandum consists of 19 pages.

ECONOMICS P1

FEBRUARY/MARCH 2016

MEMORANDUM


GRADE 12

Economics/P1 DBE/Feb.–Mar. 2016 NSC – Memorandum


2

SECTION A (COMPULSORY) QUESTION 1 1.1 MULTIPLE-CHOICE QUESTIONS 1.1.1

1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 1.1.7 1.1.8

B (per capita national income) 33 A (weather patterns) 33 A (education) 33 C (decline in mineral exports) 33 A (privatisation) 33 C (differences) 33 A (the Industrial Policy Action Plan) 33 B (encourage greater investment in training) 33 (8 x 2)

(16)

1.2 MATCHING ITEMS 1.2.1

1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.2.8

E - the total value of all final goods and services produced within the borders of a country in a given year 3 G - the upper turning point of the business cycle 3 A - uses interest rates to influence the level of expenditure 3 F - the weighting of domestically manufactured outputs 3 B - gives member countries the opportunity to get financial support from the IMF 3 I - a trade agreement between a group of emerging markets 3 C - laws and regulation to enhance manufacturing operations 3 D - assess the performance of the economy 3 (8 x 1)

(8)

1.3 GIVE THE CONCEPT 1.3.1

1.3.2 1.3.3 1.3.4 1.3.5 1.3.6

Economic development 3 Import substitution 3 Revaluation 3 Trough 3 Balance of payments (BOP) 3 Injections 3 (6 x 1)

(6)

TOTAL SECTION A: 30



3

SECTION B Answer TWO questions from this section in the ANSWER BOOK. QUESTION 2: MACROECONOMICS 2.1.1 Name TWO instruments of fiscal policy.

• Government spending 3 • Taxation 3 (2 x 1)

(2)

2.1.2 How can the appreciation of the rand affect the exports of goods and

services? • There will be a reduction in exports • It makes goods and services more expensive 33 (1 x 2)

(2)

2.2 Data Response 2.2.1 What percentage of their income do households spend?

Income equals consumption plus savings. Households will spend 80% of their income 33

(2)

2.2.2 Explain the term multiplier.

It occurs when a small increase in spending produces a larger increase in national income 33

(2)

2.2.3 What impact will a tax increase have on the multiplier?

• Implementation of a tax (VAT) effectively means that less

money will be available to spend 33 • The expectation is that the multiplier will decrease and thus

the total value the multiplier amount will decrease as well 33

(2)

2.2.4 Calculate the size of the multiplier. Show ALL calculations.

mpc−=∂

11 3 OR

8,011−

=∂ 3

Thus the multiplier is 5. 33

(4)

1/mps 3 = 1/0.2 3 = 5 33



4

2.3 Data Response 2.3.1 What message is depicted in the cartoon above?

The economy is slowing down/recession 33 (Accept any other relevant explanation)

(2)

2.3.2 Give a reason for the current state of the economy.

• Aggregate demand decreases 33 • Bankrupts businesses 33 • World slows down in economic activities 33 • Inflation rate increases 33 (Accept any other relevant answer)

(2)

2.3.3 What main economic indicator is used to determine the state

of the South African economy? Real Gross Domestic Product 33

(2)

2.3.4 How can the government speed up the recovery of the

economy? Government has TWO important fiscal policy instruments : • Taxes 3

- They can reduce taxes 33 - E.g. Income tax/company tax 3 - That will give consumers and companies more money to

spend on goods and services and for companies to expand their production capacity 33

• Government spending 3

- They can increase spending 33 - E.g. Spending on salaries, infrastructure and creating

more job opportunities (EPWP) 3 - That will increase expenditure which will stimulate

economic activity 33 (Accept any other relevant fact) (Any 2 x 2)

(4)



5

2.4 Differentiate between real flows and money flows in the circular flow

model. Real flows • The flow of goods and services the between the various participants are

called real flow 33 This includes: • Factors of production from household to firms 33 • Goods and services from firms to households 33 • Goods and services from the government 33 • Goods and services from the foreign sector to households, businesses

and the government (imports) 33 • Goods and services to the foreign sector (exports) 33 Money flows • The flow of money earned and spent between the various participants

33 This includes: • Payment for factors of production in the form of rent, profit, wages and

salaries and interest from firms to households 33 • Payment for goods and services from households to firms 33 • Payment for goods and services from households to the foreign

sector 33 • Payment for goods and services by households 33 • Payment of taxes by households and firms to government 33 • Payments for exports by the foreign sector 33 (Accept any other relevant fact) (Any 2 x 4)

(8)

2.5 In your opinion how can the Reserve Bank reduce the deficit on the

balance of payments? • Countries experiencing deficits will borrow money from other countries.

That is why developing countries have so much foreign debt 33 • In the event of a fundamental disequilibrium, member countries may

borrow from the International Monetary Fund (IMF) 33 • Borrowing is nevertheless not a long-term solution for fundamental

balance of payments disequilibrium 33 • South Africa will decrease imports by depreciating the currency. Exports

will become cheaper for foreign buyers 33 • Increasing interest rates will decrease spending, including on imports 33 • Increasing FDI in the country with the higher interest rate 33 • There are domestic regulations that allow central banks to ration foreign

exchange 33 Those who require foreign exchange have to apply to the central bank 33 (Accept any other relevant response) (Any 4 x 2)

(8) [40]



6

QUESTION 3: ECONOMIC PURSUITS 3.1.1 Name TWO indicators related to foreign trade.

• Terms of trade 3 • Exchange rate 3 (2 x 1)

(2)

3.1.2 What is the effect of increased investment spending on the economy?

• Expansion in infrastructure development 33 • Increased employment, productivity and production 33 • Increased economic growth 33 (Accept any other relevant answer) (1 x 2)

(2)

3.2 Data Response 3.2.1 Which year according to the table above indicates the highest

life expectancy without HIV? 2014 9

(1)

3.2.2 Which institution is responsible for publishing life expectancy

trends in South Africa? Statistics SA/Stats SA 9

(1)

3.2.3 Explain the concept life expectancy.

Life expectancy expresses the number of years a new-born infant will live if the prevailing patterns of mortality remained the same throughout his or her life 99

(2)

3.2.4 What impact will HIV/Aids have on productivity levels?

• Low productivity 33 • High levels of absenteeism 33 • High loss of working hours 33 (Accept any other relevant answer)

(2)

3.2.5 In your opinion, what brought about the improvement in life

expectancy from 53,4 to 61,2 years? • Community awareness campaigns on the illness 99 • Improved medical services 99 • Improved drugs dealing with the illness 99 • More emphasis of the negative effects of the illness on the

education front 99 (Accept any other relevant response) (2 x 2)

(4)



7

3.3 Data Response 3.3.1 What does the abbreviation NDP stand for?

National Development Plan 33

(2)

3.3.2 What is meant by an inclusive economy?

Inclusive means having an integrated approach, all aspects of the economy being considered 33

(2)

3.3.3 Give a reason why it is important to eliminate poverty and

reduce inequality in South Africa. • Redress 33 • To address the legacy of apartheid 33 • To ensure a better standard of living for all 33 • SA need a broad based participation in economic activities 33 (Accept any other relevant answer) (1 x 2)

(2)

3.3.4 What impact does the Expanded Public Works Programme

have on your local community? • Community projects are earmarked 33 • Jobs are created while at the same time, community upliftment

taking place 33 • Poverty is alleviated 33 • Providing an income for the unemployed 33 (Accept any other relevant argument) (Any 2 x 2)

(4)

3.4 Briefly discuss employment as an economic indicator.

• Data relating to employment is an important indicator that is used to determine the success or state of the economy 33

• It indicates the number of workers employed, as well as the total number of people that are unemployed 33

• If the employment rate is compared with the economically active population, the unemployment rate can be determined 33

• It indicates the productivity of labour in the country 33 • E.g. the productivity rate could be used as a useful tool to justify the

income per worker 3 • It relates to the employment rate in various sectors of the economy 33 • Employment indicators can be used by government to formulate the best

policies to decrease unemployment and reduce poverty 33 (Accept any other relevant answer) (Any 4 x 2)

(8)



8

3.5 How will the new demarcated Special Economic Zones (SEZs) benefit

regional development in South Africa? • Expand the manufacturing sector 33 • Create jobs 33 • Produce for the export market 33 • Create additional industrial hubs so that the national industry base will be

diversified 33 • Investments in the SEZs are based on Public-Private Partnerships (PPP),

where the state provides the infrastructure and the private sector sets up business 33

• Various incentive schemes are offered to attract businesses into the SEZs 33

• Reduced tax benefits 33 (Accept any other relevant answer) (Any 4 x 2)

(8) [40]



9

QUESTION 4: MACROECONOMICS AND ECONOMIC PURSUITS 4.1.1 Name TWO items in the financial account of the balance of payments.

• Direct investments 3 • Portfolio investments 3 • Other investments 3 • Derivatives 3 • Assets 3 (Any 2 x 1)

(2)

4.1.2 What effect does inflation have on the poor?

The poor becomes poorer/The poor will be able to purchase less goods 33 (Accept any other relevant response) (1 x 2)

(2) 4.2 Data Response 4.2.1 Which supply curve indicates a decrease in the supply of

dollars? S2S2 3

(1)

4.2.2 What type of exchange rate system is currently used in South

Africa? Free floating exchange rate system 3

(1)

4.2.3 Explain the term exchange rate.

It is the price of one currency in terms of another 33

(2)

4.2.4 State one factor that could have led to an increase in the

supply of dollars. • Increase in the number of US tourists visiting South Africa 33 • Increase in imports from SA to the US 33 (Accept any other relevant answer)

(2)

4.2.5 Use the above graph to explain the effect of the increase in the

supply of US dollars on the R/US$ exchange rate. US$ - Depreciates 3 Reason: The supply of dollars increase SS to S1S1 and the equilibrium point move from E to E1 The price for dollars will be fixed at P1 which is lower 33 R - Appreciates 3 Reason: The demand for rand increase from DD to D1D1 and the equilibrium point from E to E1 The price of rands will be fixed at P1 which is higher 33 (2 x 2)

(4)



10

4.3 Data Response

4.3.1 What does the abbreviation MTEF stands for? Medium Term Expenditure Framework 33

(2)

4.3.2 What is the international benchmark for budget deficits as an

percentage of the GDP? 3% 33

(2) 4.3.3 Calculate the budget deficit as a percentage of the GDP (A).

A : 3,0% 33

(2)

4.3.4 In your opinion what can the government do to reduce the

budget deficit? • Government can increase its revenue 33, e.g. increasing

taxes/improve on efficiency/more productive labour force 3 • Government can reduce public sector expenditure 33, e.g.

stricter financial procedures/control/appointment of competent employees/training of employees3

(Accept any other relevant fact)

(4)

4.4 Explain how the amplitude and trend line can be used in the forecasting

of business cycles. Amplitude:

The power of the underlying forces – for example interest rates, exports or consumer spending 33 • A large amplitude during upswing demonstrates strong underlying

forces 33 • The duration of a cycle with a large amplitude is usually longer than one

with a smaller amplitude 33

The extend of change – the larger the amplitude the more extreme the changes that may occur 33

• For example during an upswing unemployment may decrease from 20% to 10% (a decrease of 50%) inflation may increase from 3% to 6% (by 100%) or a surplus on the current account (of the balance of payments) can change from surplus to a deficit 33



11

Trend line: • The trend line that rises gradually will be positively sloped in the long run,

the rising line indicates a growing economy 33 • The trend indicates the general direction in which indexes that were used

in the business cycle move 33 • The trend will change when the time series data change their behaviour

patterns of the past 33 • However some forces have to be overcome for that to happen e.g.

Resistance points and Channels 33 (Accept any other relevant facts) (Any 2 x 4)

(8)

4.5 How can taxation be used to stimulate employment in South Africa?

Individual Income Tax • Lower taxes effectively increases the disposable income of people33 • This could lead to an increase in the demand for goods and services 33 • Businesses (suppliers) will have to increase their production to

compensate for the increased demand 33 • This could lead to job creation 33 Company Tax: • Lower company tax increase investment possibilities to expand the

business 33 • This will create the opportunity to employ more people 33 Taxes on imports: • Import/custom duties reduce imports 33 • Stimulate local production and create more jobs 33

(Accept any other relevant facts) (Any 4 x 2)

(8) [40] TOTAL SECTION B: 80



12

SECTION C Answer any ONE of the two questions in this section in the ANSWER BOOK. Your answer will be assessed as follows:

STRUCTURE OF ESSAY MARK ALLOCATION

Introduction Max. 2 Body Main part: Discuss in detail/In-depth discussion/Examine/Critically discuss/Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/ Assess/Debate Additional part: Give own opinion/Critically discuss/Evaluate/Critically evaluate/Draw a graph and explain/Use the graph given and explain/ Complete the given graph/Calculate/Deduce/Compare/Explain/ Distinguish/Interpret/Briefly debate/How?/Suggest

Max. 26

Max. 10

Conclusion Any higher-order conclusion should include: • A brief summary of what has been discussed without repeating facts

already mentioned • Any opinion or value judgement on the facts discussed • Additional support information to strengthen the discussion/analysis • A contradictory viewpoint with motivation, if required • Recommendations

Max. 2

TOTAL 40 QUESTION 5: MACROECONOMICS To be internationally competitive, a country needs to have suitable trade policies in place. They have to grow their industries if they want to increase the standard of living. • Discuss, in detail, the arguments in favour of protectionism. (26 marks)

• In your opinion, how can the government use subsidies to ensure that local

industries are protected against unfair competition from abroad? (10 marks)



13

INTRODUCTION Protectionism refers to a deliberate policy on the part of the government to erect trade barriers, such as tariffs and quotas, in order to protect domestic industries against international competition. 99 (Accept any other relevant definition) (Max. 2) BODY MAIN PART Arguments in favour of Protectionism: 1. Raising revenue for the government 9

• Import tariffs raise revenue for the government 99 • In smaller countries the tax base is often small due to low incomes of individuals

and businesses 99 • Low incomes do not provide much in the form of income taxes 99 and

therefore custom duties on imports is a significant source of income or revenue 99

2. Protecting the whole industrial base 9

• Maintaining domestic employment 99 • Countries with high unemployment are continuously pressured to stimulate

employment creation and therefore resort to protectionism in order to stimulate industrialisation 99

• It is thought that using protectionism the country's citizens will would purchase more domestic products and raise domestic employment 99

• These measures on domestic employment creation at the expense of other countries, led to such measures as 'beggar-my-neighbour' policies 99

• Applying import policies is likely to reduce other countries ability to buy country's exports and may provoke retaliation 99

3. Protecting workers 9 • It is argued that imports from other countries with relatively low wages represent

unfair competition 99 and threaten the standard of living of the more highly paid workers of the local industries 99

• Local industries would therefore, be unable to compete because of higher wages pushing up the price levels of goods 99

• Protection is thus necessary to prevent local wage levels from falling 99 or even to prevent local businesses from closing down due to becoming unprofitable 99

• Competition from low-wage countries may also reflect the fact that those countries have a comparative advantage in low-skilled labour-intensive industries 99



14

4. Diversifying the industrial base 9 • Overtime counties need to develop diversified industries to prevent over-

specialisation 99 • A country relying too heavily on the export of one or a few products is very

vulnerable 99 • If a developing country's employment and income is dependent on only one or

two industries, there is the risk that world fluctuations in prices and demand and supply-side problems could result in significant fluctuations in domestic economic activity 99

• Import restrictions may be imposed on a range of products in order to ensure that a number or domestic industries develop 99

5. Develop strategic industries 9

• Some industries such as the iron-ore and steel, agriculture, (basic foodstuffs, such as maize), energy (fuels) and electronics (communication) among others, are regarded as strategic industries 99 Developing countries a may feel that they need to develop these industries in order to become self-sufficient 99

Protecting specific industries

6. Dumping 9

• Foreign industries may engage in dumping because government subsidies permit them to sell at very low prices 99 or because they are seeking to raise profits through price discrimination 33

• The reason for selling products at lower prices may be to dispose of accumulate stocks of the goods 99 and as a result consumers in the importing country stand to benefit 99however, their long term objective may be to drive out domestic producers and gain control of the market 99 and consumers are likely to lose out in the reduction in choice 99 and higher prices that the exporters will be able to charge 99

7. Infant industries 9 • Usually newly established and find it difficult to survive due to their average

costs being higher than that of their well-established foreign competitors 99 however, if they are given protection in their early years they may be able to grow and thereby take advantage 99 lower their average costs and become competitive 99 and at this point protection can be removed 99

8. Declining industries/sunset industries 9 • Structural changes in the demand and supply of a good may severely hit an

industry 99 such industries should be permitted to go out of business gradually 99 declining industries are likely to be industries that no longer have a comparative advantage 99 and however, if they go out of business quickly there may be a sudden and large increase in unemployment 99

• Protection may enable an industry to decline gradually thereby allowing time for resources including labour to move to other industries 99

• Protecting domestic standards 99 domestic regulations of food safety 99 human rights 99 and environmental standards have been increasingly acting as trade restrictions 99 (Max. 26)

(Accept any other relevant fact)



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ADDITIONAL PART

In your opinion, how can the government use subsidies to ensure that local industries are protected against unfair competition from abroad? South Africa promotes exports through subsidies. Direct subsidies: Strict screening measures should be put in place when companies apply for financial assistance 99 Government expenditure can provide direct financial support to domestic producers for their exports 99 e.g. • Cash grants offered to South African exhibitors to exhibit their products at

exhibitions overseas. explore new markets 9 • Foreign trade missions to explore new markets Imposition of tariffs on imports • Funds for the formation of formal export councils 9 • Subsidies for training or employing personnel 9 • Funds for the export market research 9 • Product registration and foreign patent registrations 3

Indirect subsidies: Government can refund companies certain taxes to promote exports 99 These types of indirect subsidies are: • General tax rebates (Part of the cost of production can be subtracted from the tax

that has been paid) 9 • Tax concessions on profits earned from exports or on capital invested to produce

export goods 9 • Refunds on import tariffs in the manufacturing process of exported goods,

companies often use – custom duties are paid on these goods and the government refunds them 9 (Max 10) (Allocate a max of 2 marks for examples)

CONCLUSION

Most countries agree that protectionism is harmful to the economy if not well managed. My opinion is that protectionism in certain areas of importance is needed especially where young industries come into existence 99 (Accept any other relevant higher order conclusion) (Max 2)

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QUESTION 6: ECONOMIC PURSUITS Internationally, the main instruments on which growth and development policies are based are called demand and supply-side approaches. The supply-side approach focuses more on microeconomic goals. • Examine, in detail (without using a graph), the supply-side approach in terms

of South Africa's efforts to promote economic growth and development. (26 marks)

• In your opinion, have the RDP and GEAR been successful as growth and

development policies? (10 marks)

INTRODUCTION • Anything that can influence the supply of goods or resources is a supply-side

measure • Supply-side policies focus on supply and its microeconomic components, such as

competition and potential output. 99 (Accept any other relevant introduction) (Max. 2) BODY MAIN PART The supply-side explanations are based on the monetarist approach 99 and maintain that government intervention in the economy is only necessary if it improves the smooth operations of markets 99 supply in the economy is fairly fixed particularly in the short term 99 because for the economy to produce more, more workers are needed/more machines need to be built and installed/more electricity needs to be produced/and better roads need to be provided. 99 The South African approach The South African government uses the supply-side approach complementing or in addition to a demand-side approach 99 Its objective of growth and development 99 higher levels of employment and equity distribution (equity) are embedded in the budget. 99 The Medium Term Expenditure Framework (MTEF) was created to give certainty to the trend 99 and emphasise the real magnitude of the expenditure 99 the aim is to shift the supply curve in the above figure to the right – important focus of growth and development is government's industrial development policy and maintenance 99 upgrading and creation of new infrastructure 99 supply-side policies are also designed to create an environment where businesses and markets can function optimally 99 The effectiveness and efficiency of markets 9 If businesses accomplish their aims, (profitability and growth), the business is effective 99 In South Africa, government imposes aims on markets by laws, which they are forced to follow 99 and they become effective when they meet these aims together with their own aims which are in fact merged with their own 99



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• Effectiveness 9 Government demands that markets function in a manner that

ensures that more black people are absorbed into the mainstream economy because they were previously deliberately disadvantaged 99 Two Acts were promulgated to enforce preference for black workers and the businesses of black people99 - The Employment Equity Act 9 The Act prohibits discrimination and requires

that the workforce reflects the racial and gender profile of the population at large 99 enterprises have to file an employment equity plan with the Department of Labour, and inspectors from the department visit business sites to ensure compliance 99

- Broad-Based Black Economic Empowerment Act 9 The Act provides the legal basis for the transformation of the South African economy 99 it requires redress so that the number of black people who won, manage and control businesses in the country can increase significantly and income inequalities can be decreased substantially 99

• Efficiency 9 Pareto efficiency means that given the constraints of the effectiveness parameters, it is not possible to change the allocation of resources in such a way that someone is made better off without making someone else worse off 99 it includes productive and allocative efficiency 99

• Competition 9 Competition in the markets was increased in three ways: by

establishing new businesses (small businesses) 33 recruiting Foreign Direct Investment (FDI) 33 and the reduction or removal of import restrictions that hampered competition from abroad 99 in addition the competition regulator network was created to enforce competitive practices among domestic businesses 99 The Competition Act (1998) is aimed at anti-competition practices eliminating the abuse of dominant positions and strengthening merger controls 99 the Act provides for the operation of the Competition Commission, a Competition Tribunal and a Competition Appeal Court and in spite of all these, the Global Competition Index shows that South Africa's competitiveness is slipping by 99

• Deregulation 9 Private sector causes imbalances that inhibit the free operation of

markets have been revised and some were even abolished in the mid-1990s 99 government maintains it is committed to improving the ease of doing business in the country 99 exchange control measures were occasionally relaxed 99

• Business efficiency 9 Some measures serve as incentives to increase efficiency 99 while others assist in establishing and improving efficiency 99 the end result is greater profitability 99 - Taxes 9 the corporate income tax rate is 28% 99 small business pay a lower

rate as long as their income is less than the SARS income tax threshold 99 individual income tax starts at 18% and increases slightly as determined by SARS on tax review yearly 99 the effect of tax bracket creeping on personal income tax has been attended to in almost every budget with adjustments to income tax brackets 99 the increase for the individuals was 33% 99 VAT remained the same fixed at 14% 99 the level of taxation in South Africa are reasonable compared to developed countries 99 however, as a developing country, lower tax rates would be helpful to promote economic growth 99



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- Capital formation 9 Depreciation of capital goods used by businesses is designed to encourage investment 99 e.g. new machinery may be depreciated over four years at 40% in the first year/and computers and electronic equipment over three years 9 government through the DTI and the IDC also promote capital and loans to SMMEs and bigger business 99 and this serve as an incentive to promote business efficiency 99

- Human resources 9 education receives proportionally a bigger slice of the

budget expenditure 99 Sector Education and Training Authorities (SETAs) have to facilitate post-school, work-related training 99 the labour relations Act that came into operation in 1998, promotes economic development, social justice, and peaceful labour relations in the promotion of efficiency 33

- Free advisory services 9 the development of export markets/managing and

running SMMEs/agricultural production/weather forecasts/and prevention and curing of animal diseases 9

• Cost of doing business 9 In South Africa government controls most physical

infrastructure components 99 the availability and cost of infrastructure services play an important role in the financial viability and profitability of businesses 99 - Transport costs 9 transport options in air, road, rail and sea are available 99

government controls air and sea transport in South Africa. 99 government has committed to improving the efficiency and reliability of its rail transport services and to make it more affordable 99

- Communication costs 9 communication options are in cable, signal and mail 99 government controls cable( land or fixed lines) and mail communication services 99 cable communication services in South Africa is one of the most expensive in the world but reasonably efficient 99 high costs make IT services for businesses and individuals expensive and inhibits global competitiveness 99

• Energy costs 9 electricity and liquid fuels are the main sources of energy in South

Africa 99 Eskom is the only supplier (monopoly) 9 government regulates the prices for petrol and paraffin 99 the prices for imported crude oil are linked to international market prices, which are high 99 high liquid energy prices undermine the efficiency of the economy 99 (Max. 26)


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ADDITIONAL PART In your opinion, have the RDP and GEAR been successful as growth and development policies?

Positive response: • The introduction of the RDP programme shot the economy from negative four

per cent (-4%) to about 3% 99 • The housing infrastructure of the majority of the people started to improve 33 • More electrification of the rural communities was put in place 99 • The RDP programme became the original route map for economic growth and

development of the country 99 • The GEAR policy improved the economy from a 3% point growth to 6% 99 • The resultant growth in the economy trickled down to more social welfare of the

communities 99 • The trade deficit of the country decreased 99

Negative response: • Unemployment rate kept on going up 99 • Poverty and service delivery were never improved 99 (Accept any other relevant facts) (Max. 10) CONCLUSION

Policy mix application can best help the government trade off strategies in dealing with the economy 33 (Accept any other relevant higher order conclusion) (Max. 2)

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TOTAL SECTION C: 40

GRAND TOTAL: 150

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