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SECONDARY SCHOOL IMPROVEMENT
PROGRAMME (SSIP) 2015
GRADE 12
SUBJECT:
ECONOMICS
LEARNER NOTES
(Page 1 of 65)
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© Gauteng Department of Education
TABLE OF CONTENTS
SESSION
TOPIC
PAGE
1
Macroeconomics: The Circular Flow
3 - 23
2
Macroeconomics: The Business Cycle
24 - 38
3
Macroeconomics: The Public Sector
38 – 54
4
Macroeconomics: Economic growth and
development: the foreign exchange market
(Globalisation)
54 - 65
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SESSION 1:
MACROECONOMICS: THE CIRCULAR FLOW
Learner Note: The circular flow describes the continuous flow of spending,
production and income between the different sectors in an economy.
NATIONAL ACCOUNT
Learner Note: Methods that are used to determine the value of the economy.
THE MULTIPLIER
Learner Note: The multiplier relates to how much the national income will change as
a result of an injection or a leakage.
SECTION A: TYPICAL EXAM QUESTIONS
THE CIRCULAR FLOW
QUESTION 1:
10 minutes Section A – Short Questions
HINT: When answering Section A – short question, it is important not to rush but to
read the questions carefully and to make sure you understand what the question is
asking. Always remember one alternative is completely wrong, one is nearly correct
and one is totally correct. It is easy to eliminate the completely wrong answer, but if
you do not read the question carefully the nearly correct answer will also appear
correct. The answer will NEVER be two options. Only ONE option is correct. Your
answer will immediately be marked incorrect if you write TWO options.
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
The model that illustrates the continuous flow of spending, production and
income between the different sectors in an economy, is known as a(n) …
model.
A.
economic-cycle
B.
circular-flow
C.
business-flow
1.2
The money market is a market for …-term savings and loans.
A.
short
B.
short- and long
C.
long
1.3
The study of individual households in an economy is known as …
economics.
A.
macroB.
microC.
international
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Give the economic term/concept for each of the following descriptions. Write
only the term/concept next to the question number.
1.4
Money taken from the economy, for example savings, taxes and imports.
1.5
An initial change in spending results in a much bigger change in national
income.
(2 x 5) [10]
QUESTION 2:
5 minutes
Section B
(Taken from DBE/Feb.–Mar. 2013)
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.
List the THREE participants in a closed economy.
QUESTION 3:
8 minutes
Section B
(3 x 2)
[6]
(Taken from DBE/Feb.–Mar. 2012)
HINT: When a question requires to “explain”, “discuss”, “differentiate”, etc. You need
to answer in full sentences in bullet format.
Explain the role of the foreign sector as a participant in the circular flow.(4 x 2) [8]
QUESTION 4:
8 minutes
Section B
(Taken from DBE/November 2010)
Explain leakages and injections.
QUESTION 5:
40 minutes Section C
[8]
(Taken from DBE/Feb. – Mar. 2011)
HINT: Section C – the long question, must be answered in THREE sections:
Introduction (definition), Body (headings and full sentence in bullets) and conclusion
(summarising). The mark allocations for Section C have changed with the
introduction of CAPS. The long question will now be 40 marks and no longer 50
marks. NO interpretation marks will be given. The introduction will be 2 Marks, the
conclusion will be 2 marks and the body will be divided into TWO portions the 1 st for
26 marks and the 2nd for 10 marks. It is always important to make sure you know
what the main part of the body is and what the additional part is. NO paragraphs.
Discuss in detail, with the aid of a clearly labelled diagram, the interaction between
the four participants in the open economy circular-flow model.
[50]
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NATIONAL ACCOUNT:
QUESTION 1:
8 minutes
(Taken from various sources)
1.1
South Africa uses a system of national accounts recommended by the …
A. UN.
B. IMF.
C. World Bank.
1.2
Consumption of fixed capital is used to calculate GDP at …
A. basic prices.
B. market prices.
C. factor cost.
1.3
When I + G + X > S + T + M, the level of national income will …
A. rise.
B. fall.
C. remain the same.
1.4
Taxes and subsidies on … are taken into account when calculating
GDP at basic prices.
A. exports
B. commodities
C. production
QUESTION 2:
8 minutes
Section B
(Taken from DBE/Feb.–Mar. 2013)
Explain how the gross domestic product (GDP) at market prices is derived by
using the expenditure method – GDP(E).
(4 x 2) [8]
QUESTION 3:
6 minutes
Section B
(Taken from DBE/November 2010)
List THREE methods by which the gross domestic product can be calculated.
(3 x 2) [6]
QUESTION 4:
10 minutes Section B
(Taken from DBE/November 2012)
Study the table below and answer the questions that follow.
EXTRACT OF NATIONAL ACCOUNTS OF SOUTH AFRICA AT CURRENT
PRICES
R million
2010
Gross domestic product (GDP) at market prices
2 407 689
Primary income from the rest of the world
34 075
Primary income to the rest of the world
A
Gross national product (GNP) at market prices
2 354 171
4.1
Define the concept gross domestic product.
[3]
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4.2
4.3
Why is the gross domestic product of South Africa always greater than the
gross national product?
(2 x 2) [4]
Calculate the primary income to the rest of the world (A).
[3]
QUESTION 5:
10 minutes Section B (Taken from DBE/November 2010)
Study the table below and answer the questions that follow.
NATIONAL INCOME AND PRODUCTION ACCOUNTS OF SOUTH AFRICA
2009
R millions
Compensation of employees
1 086 907
Net operating surplus
728 426
Consumption of fixed capital
332 824
Gross value added at factor cost
2 148 157
Plus other taxes on production
38 173
Less other subsidies on production
5 092
Gross value added at basic prices
2 181 238
Taxes on products
245 198
Less subsidies on products
3 113
Gross domestic product at market prices
2 423 323
[Source: SARB, Quarterly Bulletin, March 2010]
5.1
5.2
5.3
Explain the item subsidies on products.
[3]
Explain the item consumption of fixed capital.
[3]
Calculate the compensation of employees as a percentage of GDP at
market prices. Show ALL calculations.
[4]
QUESTION 6:
10 minutes Section B
(Taken from DBE/November 2011)
Study the table below and answer the questions that follow.
NATIONAL ACCOUNT AGGREGATES
Final consumption expenditure by households
Final consumption expenditure by government
Gross capital formation
Residual item
Gross Domestic Expenditure
Export of goods and services
Import of goods and services
Expenditure on GDP(E) at market prices
R MILLIONS
1 473 490
505 040
467 878
-18 092
2 428 316
657 113
677 740
A
[Source: Quarterly Bulletin, SARB, June 2010]
6.1
6.2
6.3
Explain the concept gross capital formation.
Calculate the value of A.
If one uses the production method to calculate the GDP(P) at market
prices, will GDP(E) be more, equal or less? Motivate your answer.
[3]
[3]
[4]
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THE MULTIPLIER
QUESTION 1
4 minutes
Section A
(Taken from various sources)
1.1
The value of the multiplier increases if the marginal propensity to …
increases.
A.
consume
B.
save
C.
to invest
1.2
The change in the value of income divided by the change in the value of
injections is known as …
A.
the circular-flow model.
B.
Gross National Income.
C.
the macroeconomic multiplier.
QUESTION 2
20 minutes Section B
(Taken from DoE/Exemplar 2008)
HINT: Since 2010 all data interpretation questions count 10 marks made up of 3 or 4
questions. Before 2010 only ONE data interpretation of 20 marks were asked. All
section B questions now have TWO data interpretation questions – each total 10
marks.
Study the graph below that depicts a simplified two-sector economy
(where E = C + I) and answer the questions that follow.
E=Y
Expenditure (E)
E¹ = 30+ 0.5Y
30
E∘ = 20 + 0.5Y
20
Income (Y)
40
2.1
2.2
2.3
60
Name the TWO sectors involved in deriving the macro-economic multiplier.
[4]
What is represented by the line E = Y?
[4]
Use the formula, k = ΔY/ΔJ, to calculate the multiplier (k) for the above
scenario.
[4]
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2.4
2.5
Calculate the multiplier, using the formula, k = 1/(1 – MPC), when the
marginal propensity to consume (MPC) = 0.8. Show calculations.
Explain the relationship between the MPC and the multiplier.
QUESTION 3
10 minutes Section B
[6]
[2]
(Taken from DBE/Feb.–Mar. 2013)
Study the extract below and answer the questions that follow.
MULTIPLIER
Assume an economy is initially in equilibrium where income (Y) equals R100 000m,
savings (S) R40 000m and consumption (C) R60 000m.
[Source: Enjoy Economics, 2012]
3.1
3.2
3.3
3.4
Define the macroeconomic multiplier.
What does the term equilibrium in this extract refer to?
Calculate the marginal propensity to consume (mpc).
Calculate the value of the multiplier. Show ALL calculations.
[2]
[2]
[2]
[4]
HINT: To do question 3.4 you need to use your answer in question 3.3.
QUESTION 4
16 minutes Section B
(Taken from DoE/Feb. – March 2009)
HINT: Before 2010 the Section B questions had ONE 16 mark question. After 2010
all Section B questions have TWO 8 mark question.
Copy the graph below in the ANSWER BOOK. Indicate the new consumption curve,
new equilibrium formed after investment increased by R20 million, and describe the
multiplier effect of the increase of investment of R20 million on the economy.
[16]
Expenditure
C=10+0.5Y
10
/
20
Income
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SECTION B: ADDITIONAL CONTENT NOTES
CIRCULAR FLOW
 Simplified or two-sector model
◦ Households
◦ Business
 Closed or three-sector model
◦ Add Government
 Open or four-sector model
◦ Add Foreign Sector
Looking at the circular flow model, we see the following:
1. PARTICIPANTS
1.1 Households
 The owners of the factors of production
 The consumers of final goods & services
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1.2 Business
 The producers of final goods & services
 The demanders of factors of production
1.3 Government
 Deliver public goods & services
 Levy taxes
1.4 Foreign Sector
 Surplus goods and services are exported
 good & services not available in SA are imported
2. Markets
2.1 Factor Market
 Includes: Raw material, Capital, labour and Entrepreneur
2.2Product Market
 Includes: Services example a doctor
Goods

Durable- a car

Semi-durable – a cell phone

Non-durable – air time
2.3 Financial Market
 The capital market – investments or loans longer than 3 years.
 The money market – investments or loans shorter than 3 years.
3. Flows
3.1Real Flow
 Final Goods and services flows from Business to Households
 Factors of production flows from households to business
3.2 Monetary Flow
 Expenses flows from households and become income to business
 Business expenses flows from business and become household income –
salaries, rent, interest & profit
Money Market (Less than 3 years)
This is a market for short-term savings and loans.
Kinds of securities that change hands in this market:
 Bankers acceptances
 Short-term company debentures
 Treasury bills
 Reserve bank debentures
 Short-term government bonds
 The SARB is a key institution in the money market.
Capital Market (More than 3 years)
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

Long-term deposits and borrowings (e.g. mortgage bonds)
The JSE is a key institution in the capital market.
Foreign exchange market
 Receipts for exports and payments for imports.
 Exchange rate is determined by demand and supply.
STOCKS AND FLOWS
Flows
These are movements of economic variables such as production, income, spending,
etc.
Economist measure flows over a period of time.
Stocks
A stock tells us about the fixed amount of an economic variable at a particular point
in time.
E.g. the number of people employed at a given time.
Leakages and injections
Resource income and spending are not always equal because of leakages.
Flows out of the circular flow that occur when resource income is received and not
spent directly on purchases from domestic firms.



Saving = S
Taxes = T
Import purchases = M
However, at least some of these leakages are returned to the circular flow via various
injections.
Added spending in the circular flow that is not paid for out of current resource income



Investment = I
Government spending = G
Exports bought by foreign buyers = X
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NATIONAL ACCOUNT
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).
In Grade 11, you learnt about the 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
activity 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

The national accounts are published by the SARB in the SARB QB
(http://www.reservebank.co.za). It is also available from Stats SA
(http://www.statssa.gov.za).
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The circular flow model is often referred to as the circular flow of income and
expenditure, but it starts with production.
Wants = production
We can bring the circular flow to life by translating the illustrated flows into real
amounts – the amounts that we find in our national accounts.
Deriving national account
 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
participants, 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 PRICES
+ TAXES on PRODUCT
- SUBSIDIES on PRODUCTS
= GROSS DOMESTIC PRODUCT AT MARKET PRICE
 INCOME METHOD
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 MARKET 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:
o cost of intermediate goods and services
o cost of remuneration of employees
o cost of the consumption of fixed capital
The net operating surpluses show profits and surpluses before taxation.
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 EXPENDITURE METHOD
GDP(E) measures total expenditure of final goods and services produced
within the borders 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) = C + I + G + (X – Z)
THE MULTIPLIER:
This concept was developed by the British economist J.M. Keynes. His theory was
that any increase in injections into the economy (investments, government
expenditure or exports) would result in a proportionally larger increase in the
national income.
 The economy is in equilibrium if LEAKAGES (WITHDRAWALS) =
INJECTIONS
 L=J or S + T +M =I + G +X
 The multiplier is based on the principle that spending by one person
becomes the income of another person, which then becomes that person’s
spending, which turns into the income of yet another person (re-spending
effect).
Example:
 The Government decides to increase its spending by building new roads. This
creates jobs and raises the level of employment. These newly employed
people then use their income to purchase consumer goods. This stimulates
the demand for goods and services and results in an increase in production,
which will in turn increase the level of employment even further. This raises
income and stimulates greater consumer demand and so on and so on.
 This implies that a multiplier process occurs in the economy when injections
into the circular flow of spending, production and income take place.
 The multiplier refers to the ratio used to work out the difference between the
initial investment and the eventual change in income. The size of the multiplier
differs according to the extra income produced or created in each round of
spending, but this depends on the marginal propensity to consume (mpc), that
is, how many of every rand income earners are willing to spend.
EXAMPLE:
Income = R200 000 and Savings = R40 000.
Investment = R40 000 and R10 000 additional Investment is made.
Calculate the Multiplier and the effect of the additional investment.
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STEP 1:
= 40 000/200 000
= 0.2
This means that for every R1 invested, R1 becomes income and 20c is saved and
80c is spend and becomes income again.
STEP 2:
Y= 200 000
S = 40 000
I = 40 000 + 10 000
Additional injection = R10 000
10 000 X 0.2 = R2 000 – (R2 000 goes to Savings as per multiplier and
R8 000 to Income)
Y= 200 000 + 10 000 + 8 000
S = 40 000 + 2 000
I = 40 000 + 10 000
8 000 X 0.2 = R1 600
R1 600 goes to Savings as per multiplier and R6 400 to income
Y= 200 000 +10 000 + 8 000 + 6 400
S = 40 000 + 2 000 + 1 600
I = 40 000 + 10 000
6 400 X 0.2 = R1 280
R1 280 goes to Savings as per multiplier and R5 120 to income
Y= 200 000 +10 000 + 8 000 + 6 400 + 5 120
S = 40 000 + 2 000 + 1 600 + 1 280
I = 40 000 + 10 000
With this example it is clear that the economy was originally in equilibrium
(leakages = injection – R40 000 = R40 000). But then an injection via
Investment was made and the economy was no longer in equilibrium.
The R10 000 injection created a multiplier effect and Savings increased 1st
by R2 000 then by R1 600 and then by R 1 280 – slowly till it will be back in
equilibrium with R10 000.
In the process the national income increased by R10 000 than R 8 000 then
R6 400 then R5 120. Showing how a small increase in an injection lead to a
proportionally larger increase in national income.
This process will take until infinity to complete and therefore do we use a
formula to calculate the effect of a increase or decrease in an injection on the
national income
Formula
Multiplier =
or
 A multiplier = 1 means for every R1 injected R1 is added to income
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 A multiplier < 1 means for every R1 injection less than R1 is added to income
and ripple effect takes LONG to work trough
 A multiplier > 1 means for every R1 injection more than R1 is added to income
ripple effect FAST
In a two sector economy (households and businesses):
 Y=C+I
 Y = E = equilibrium, therefore, you should be able to show I = S.
 We illustrate this by using the Keynesian 45˚ diagram.
3 sector economy: k = _____1_____
MPS + MRT (MRT = marginal rate of taxation)
4 sector economy: k = ________1_______
MPS + MRT + MPM (MPM = marginal propensity to import)
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SECTION C: HOMEWORK
THE CIRCULAR FLOW
QUESTION 1:
10 minutes
(Source: Solutions for all Economics)
1.1
Identify the different flows a, b, c, d, e, f, g, h and i.
c=1 500
[9]
a = ___
Factor
Market
b=100
H
F
G
g=150
d= __
Goods
market
e=350
f=250
Financial
market
i=300
h= 250
Foreign
Market
1.2
Calculate the missing values for flows d and a in the diagram.
[4]
1.3
Identify and calculate the leakages and injection.
[8]
QUESTION 2:
20 minutes (Source: Oxford Successful Economics)
2.1
Differentiate between taxes on products and taxes on production.
[8]
2.2
Subsidies will (increase/decrease) the production of the produces.
[2]
2.3
Study the table below and answer the questions that follow.
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VALUE ADDED IN BILLIONS OF
RANDS
Imports of goods and services
Final consumer spending by the
government
Residual item
Exports of goods and services
Final consumer spending by the consumer
Gross capital formation
2009
248
800
-5
538
1 200
380
2.3.1 Calculate the GDE.
[5]
2.3.2 Write the equation for the calculation of GDP(E), by looking at the information
above.
[2]
QUESTION 3:
12 minutes
(Source: Focus Economics)
3.1
Suppose that the marginal propensity to consume is equal to 0.2 and
investment spending by firms increases by R200 million. Describe the effect
this will have on the level of income in the country.
[6]
3.2
Suppose that the marginal propensity to consume is equal to 0.7 and that there
is a decrease in consumer income of R100 million. Describe the effect this will
have on the level of income in the country.
[6]
SECTION D: SOLUTIONS AND HINTS TO SECTION A
CIRCULAR FLOW
QUESTION 1:
10 minutes Section A
(Taken from various sources)
1.1
B (circular flow)
1.2
A (short)
1.3
B (micro) 
1.4
leakages/withdrawals
1.5
Multiplier




QUESTION 2:
5 minutes
(Taken from DBE/Feb.-Mar. 2013)
 Households/consumers 
 Businesses/producers 
 State/government 
QUESTION 3:
8 minutes
(Taken from DBE/Feb.-Mar.2012)
• There is a flow of goods (imports) to the business from the foreign sector which
the business pays for 
• This will be regarded as expenditure for the business 
• There is also a flow of goods from the business to the foreign sector 
• This will be income for the business 



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QUESTION 4:
8 minutes
(Taken from DBE/November 2010)
• Leakages is any flow that does not give rise to a further round of income also
known as withdrawals  because it represents a withdrawal of money from the
economy.
• (e.g.) of leakages are taxes (T) expenditure on imports (Z/M)  and savings
(S)  (Max 4)
• Injections represent the introduction of additional money into the economy 
• (e.g.) of injections are government spending (G) income earned from exports
(X) investment spending (I)




(Max 4) (8)
QUESTION 5:
40 minutes
(Taken from DBE/Feb. – Mar. 2011)
INTRODUCTION
The circular-flow model of the economy is a simplification showing how the economy
works and the relationship between income, production and spending in the economy
as a whole. 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.




(max 3)
Accept any other appropriate introduction.
BODY
Participants = 4 x 2 = 8
Injections = 1 x 1 = 1
Withdrawals = 1 x 1 = 1
Correct indication of
money and real flow
(1 x 2) = 2
Total = 12 marks
Accept any other clearly labelled diagram
• There is a flow of money and goods and services between the household sector
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and business sectorHouseholds earn income in the form of wages by selling
their factors of production to business.Business uses factors of production to
produce goods and services on which the household sector spendsThus the
business will receive income.

• 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, hospitals for which they pay taxes.This is income for the
state.

• There is a flow of money and goods and services between the business sector
and State.The business sector provides the state with goods and services for
which the state pays.The state provides the business sector with public goods
and services for which they pay taxes.

• There is a flow of goods (imports) to the business from the foreign sector
which the business pays for. This will be regarded as expenditure for the business
There is also a flow of goods from the business to the foreign sector.This
will be income for the business.

• 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.The spending on
capital equipment by firms is regarded as investment. 
(Any 14 x 2)
CONCLUSION
Any appropriate conclusion. 
NATIONAL ACCOUNT
QUESTION 1:
8 minutes
1.1
1.2
1.3
1.4
(Max 2)
(Taken from various sources)
B (IMF) 
C (factor cost)
A (rise) 
C (production)
QUESTION 2:
8 minutes
(Taken from DBE/Feb.-Mar.2013)
 Expenditure on GDP measures total expenditure on final goods and
services produced within the borders of the country.
 It is calculating by adding together expenditures of the participants in an
open economy/(households, state, businesses)
 Households spend on durable goods/ semi-durable goods/ non- durable
goods and services.
 State spends on public goods 
 Businesses spends on capital goods 
 The residual item is included as balancing item.
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
The exports of the foreign sector are added and the imports are
subtracted. 
GDP(E) = C + G +I + (X – M) (Any 4 x 2)(8)



QUESTION 3:
6 minutes
(Taken from DBE/November 2010)
• Production method / Value Added Method 
• Income method 
• Expenditure method 





( 3 x 2 ) (6)
QUESTION 4:
10 minutes
(Taken from DBE/November 2012)
4.1
GDP is defined as the total value of all final goods and services  produced
within the geographical boundaries of a country  in a particular period
(usually one year) 







[3]
4.2
Foreigners' contributions to our economy are more than our contribution
to theirs 
Only a few SA companies operate globally 
(Accept any other relevant response)
(2 x 2 ) [4]
4.3
R87 593 m OR
2 354 171 – (2 407 689 + 34 075) OR
2 407 689 + 34 075 – 2 354 171 





[3]
QUESTION 5:
10 minutes
(Taken from DBE/November 2010)
5.1
A subsidy (grant) on a product is paid on the outputs to reduce the price to
make it more affordable E.g. R1 for each loaf of bread

[3]
5.2
5.3
Consumption of Fixed Capital is the diminishing value of an asset over a
period of time, also called depreciation E.g. depreciation in the value of
equipment, machinery, vehicles 





[3]
X
= 44,84%/ 44,9% / 45%






[4]
QUESTION 6:
10 minutes
(Taken from DBE/November 2011)
6.1
Expenditure on assets used repeatedly in the process of production  /
Increase in the stock of capital 
[3]
6.2
R2 407 689m  /
GDE = 2 428 316 
+ Exports= 657 113 
- Imports = 677 740 (If the answer is incorrect, a maximum of 2 marks can
be allocated if mathematically correct) 




[3]
6.3
Equal 
Production GDP(P) = Income GDP(I) = Expenditure GDP(E) 
when calculating the GDP / because of the residual item 


[4]
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THE MULTIPLIER
QUESTION 1:
4 minutes
1.1
A ( consume)
1.2
C (macroeconomic multiplier) 
(Taken from various sources)
QUESTION 2:
20 minutes
(Taken from DoE Exemplar 2008)
2.1
Households/Consumers 
Business sector/Firms/Producers  



( 2 x 2 )[4]
2.2
It shows all the possible levels of expenditure and output at which the
economy is in equilibrium  
( 2 x 2 ) [4]
2.3
k = 
= 2 








[4]
2.4
k=
2.5
=
= 5  








The bigger the mpc, the bigger the multiplier (and vice versa)  

[6]
[2]
QUESTION 3:
10 minutes
(Taken from DBE/Feb.-Mar. 2013)
3.1
A small increase in spending produces a proportionately larger increase in
national income 







[2]
3.2
Injections = Leakages 
[2]
3.3
mpc = R100 000 – R40 000 = R60 000
60 000 = 0,6 or 0,6  






100 000
[2]
3.4
K=
=

= 2,5  








[4]
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QUESTION 4:
16 minutes
(Taken from DoE/Feb.-Mar. 2009)
C=30+0.5Y
E1

60

(Max. 6 marks)
In the diagram above, a change in investment of R20 million, with an mpc of (0,5)
will result in equilibrium moving from E to E
– R60 million).
1
R 20 million, will be (2 x R20 million = R40 )(Max. 4 marks)
The multiplier describes the situation where a change in spending causes a
disproportionate change in the level of aggregate income
M = (change in Y) 
change in J
The multiplier effect starts off with unused resources in the economy(e.g.)
increase in investment, like construction of roads leads to more jobs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This raises
income and stimulates greater consumer demandThe size of the eventual
change in the income will depend on mpc (marginal propensity to consume)
(Max. 6 marks)
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SESSION 2: MACROECONOMICS: BUSINESS CYCLES
Learner Note: Business cycles is the recurring fluctuations (ups and downs) in
economic activity, relative to the economic trend value
SECTION A: TYPICAL EXAM QUESTIONS
QUESTION 1:
12 minutes Section A
(Taken from various sources)
1.1
The number of new motor cars sold is a … business cycle indicator.
A. lagging
B. coincident
C. leading
1.2
A focus on the improvement of input efficiency is a characteristic of the …side policy.
A. demand
B. supply
C. demand- and supply
1.3
The GDP of a country is an example of a … economic indicator in
forecasting.
A. lagging
B. leading
C. coincident
1.4
Changes in technology will lead to a … business cycle.
A. demand-driven
B. supply-driven
C. political
1.5
Indicators which change before the business cycle changes are
called … indicators.
A. lagging
B. leading
C. coincident
1.6
The new economic paradigm is embedded in … policy/policies.
A. demand-side
B. supply-side
C. demand and supply-side
(2 x 6) [12]
QUESTION 2:
8 minutes Section B (Taken from DBE/Feb.–Mar. 2013)
Briefly discuss lagging indicators as a feature underpinning forecasting.
( 4 x 2 ) [8]
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QUESTION 3:
16 minutes Section B (Taken from DoE/Feb. – March 2010)
Differentiate between exogenous and endogenous reasons for business cycles.
(8 x 2 ) [16]
QUESTION 4:
8 minutes Section B (Taken from DBE/Feb. – Mar. 2011)
Discuss the trend line in the forecasting of business cycles.
( 4 x 2 ) [8]
QUESTION 5:
10 minutes Section B (Taken from DoE/November 2008)
Study the diagram below and answer the questions that follow.
BUSINESS CYCLES
E
Index of economic activities
F
A
Trend
line
D
B
C
Time
5.1
Define a business cycle.
[3]
5.2
Identify the labels for the following periods in the business cycle as indicated
in the above diagram:
(a)
Upswing or expansion
(b)
Length or duration of a cycle
( 2 x 3 ) [6]
5.3
At which point/phase in the above diagram will unemployment be at its
highest?
[2]
5.4
Name ONE exogenous factor that gives rise to business cycles.
5.5
Explain how government can stimulate economic activity in an effort to
smooth out cycles.
[3]
5.6
Name the method of predicting future business cycles based on the patterns
of previous ones.
[3]
[3]
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QUESTION 6:
40 minutes Section C (Taken from BDE/November. 2012)
Analyse the different business cycle indicators and features used in forecasting.
Draw a fully labelled diagram of a typical business cycle to support your analysis.
• Link your analysis to the phases of the business cycle.
[50]
SECTION B: ADDITIONAL CONTENT NOTES
BUSINESS CYCLES
Phases of the Business Cycle
Peak: The highest
level of economic
activity in a particular
cycle
E
c
o
n
o
m
ic
Contraction: A
A
noticeable drop in
ct
the level of
iv
business activity
it
yThe expansion phase
Expansion: A
rising level of
business
activity
Trough: The
lowest level of
business activity in
aTime
particular cycle
 The expansion phase occurs when economic activity rises. This is reflected in
an increase in spending, GDP and employment.
Peak
 Peak is the point where the economic expansion is at its highest. It is followed
by a contraction.
The contraction phase
 The contraction phase is the downward phase of the business cycle. During
this phase, spending declines, GDP falls, employment decrease, business
confidence declines and income falls.
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Trough
 Trough is the point where the economic contraction is at its lowest. It is
followed by an expansion.
Examples of Trough's
 Recession – refers to a decline in the level of economic output (a downturn in
the business cycle) that lasts for six months or longer.
 Depression – refers to a sustained, long-term economic downturn in the
business cycle that is more severe than a recession.
Terminology




Period – Measuring a cycle from peak to peak or trough to trough
Amplitude- measures the distance of the variable from the trend line
Time series – frequency of data – daily, weekly, monthly, quarterly or annually
Trends (trend line) – the general direction in which the indexes are moving
Explanation of the Cyclical patterns as shown in the above curve
Phase
Recovery
Prosperity
Recession
Depression
 The recovery
 Upswing or
 The
 Sometimes a
of a recession
recovery
prosperity
recession can
or depression
builds
becomes a
become so
- relevant
momentum,
recession.
severe that it
business
there is a
can change into
 Consumer
builds up
presence of
a depression.
spending,
stock.
optimism in
especially on
 Unemployment
the economy.
 Investments in
durable
increases
capital goods
 Obstacles
goods, begins
dramatically
increases.
appear in the
to decrease.
and consumer
economy:
request for
 More workers
 Downwards
skilled labour
goods decline
are employed.
tendency in
and
raw
sharply.
investments.
 Employment,
material
 Prices flats
total income
 High interest
deficits, it
down and may
and consumer
rates and a
hampers
the
even decline.
spending
diminution in
provision in
increases - in
price
 Businesses’
the request
increased
increases.
profits
for goods and  More
production,
decreases and
services.
sales and
in many cases
businesses
 Production
profits.
becomes a
are
costs
loss.
liquidated.
increases.
 Production
 Increased
levels, life
import of
standards
goods.
and
 Surpluses in
employment
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the current
account
decreases.
 Investment
and
consumer
spending
stays high.
 Interest rates
increases.


decreases.
Decreasing
income and
spending
leads to
shrinking
requests fewer goods
are produced.
Request of
imported
goods
increases and
the current
account
improves.
Causes of business cycles:
 Exogenous explanations-The Monetarist approach – The Monetarist approach
holds the view that markets are inherently stable.
Definition
Exogenous factors occur from outside, and then impact on the economy.
(i)
(ii)
(iii)

Weather conditions
Changes in weather patterns affect agricultural
production and therefore also the total level of economic activity.
Structural Changes
It occurs when there is a long term change in the
makeup of a country’s economy. The major structural changes that took place
in the South African economy was the move of emphasis from the primary to
the secondary sectors and then later to the tertiary sector.
Disasters Sometimes, events occur that affect the economies of all
countries, including South Africa. For example the September 11, 2001
terrorist attacks on the World Trade Centre in New York; and the Tsunami in
2004 and 2013 in Japan.
Endogenous explanations - The Keynesian approach holds the view that
markets are inherently unstable.
Definition
Endogenous factors are an inherent part of the economy, unlike factors that impact
from outside the economy.
(i)
Monetary Causes Commercial Banks and the South African Reserve Bank
play an important role in business cycles as far as the amount of money
available is concerned. Banks make profits by lending out money. When
banks make money available at a low interest rate, they encourage people to
borrow money and consumption increases. This stimulates production, new
businesses start and an upswing occurs.
After a time, people cannot
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pay the borrowed money back due to an increase in prices. Banks increase
the interest rates and people borrow less.
Real Reason
Entrepreneurs are continually looking for new, more costeffective methods to produce goods and services to be more profitable.
Therefore new technology is often introduced when such a method is found,
competitors will be eager to get involved. This causes a chain reaction which
stimulates demand, higher prices and even more competitors coming into the
market
Psychological Reasons The way people think largely impacts the business
cycle. When people expect an upswing they spend more and borrow more.
This causes producers to expect an increase in demand; they employ more
people and produce more. In fear of unfavourable conditions they start
spending less and pay back their loans.
ii)
iii)
Types of business cycles
 Kitchin cycles – are business cycles that last between 3 and 5 years and are
caused by business adapting their inventory levels.
 Juglar cycles – are business cycles that last between 7 and 11 years and are
caused by the changes in net investments by business and government.
 Kuznets cycles - are business cycles that last between 15 and 20 years and
are caused by the changes in the building and construction industry.
 Kondratieff cycles – are business cycles that last 50 years and longer and
are caused by technological innovations, wars and discoveries of new deposits
of resources.
(Taken from Focus Economics)
Smoothing of the business cycle:
Government policy with regard to business cycles
In a market economy, the authorities have three functions in particular:
protection, an affluent function and a management and administrative function.
It is the authorities’ responsibility to protect the communal interests of its
citizens.
Economic policy refers to specific measures used by the State to intervene in the
economy in order to achieve certain aims.





High and continuous economic growth
Complete employment
Price stability
Balance of payments equilibrium
Fair and equal division of income
Government policy with regard to business cycles:
 The authorities strive to level out the course of the economic cycle so that the
top fulcrum (peak) is not too high and the bottom fulcrum (trough) is not too
deep. There are two particular ways of accomplishing this:
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Monetary policy
Fiscal policy
Monetary policy
Monetary policy refers to the decisions made by the authorities to influence the
interest rate and the amount of money in circulation.
The SARB can then apply several measures to prevent this rise from
becoming too high. Examples of these measures include:
(i)
(ii)
(iii)
(iv)
(v)
Discount rate
This is the interest rate that the Reserve Bank imposes on loans to other
banks. It is also called the bank rate. It withdraws money from circulation,
which levels the business cycle.
Open market transactions
This means that the Reserve Bank buys or sells government stock in order to
affect the amount of money in circulation.
Management of national debt
The authorities can borrow money for large projects locally or abroad, thereby
either decreasing or increasing the amount of money in circulation.
Reserve requirements
As prescribed by law, depository institutions have to set aside a certain
percentage of their reserves to meet their daily cash withdrawals by clients.
Moral persuasion
Encouraging commercial banks to increase or decrease their granting of credit
to their clients.
Fiscal policy
Fiscal policy is the deliberate action of the authorities to influence the economy by
means of government expenditure, tax and Government loans.
The new economic paradigm
• Inflation:
–– Aggregate demand and supply are in equilibrium.
–– When the demand increases, the supply will react in the same way.
–– If the supply does not react to an increase in demand, prices will increase (a new
equilibrium).
–– This will lead to inflation.
• Unemployment:
–– Demand-side policies are effective in stimulating economic growth.
–– The demand for labour will increase due to economic growth, and that leads to
reduced unemployment.
–– A decrease in unemployment results in an increase in inflation because more
people are employed, which causes an increase in demand for labour.
–– This relationship between unemployment and inflation can be illustrated by the
Phillips curve.
Supply-side policies
• Reduction of costs
–– Infrastructural services
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–– Administrative costs
–– Cash incentives
• Improving the efficiency of inputs
–– Tax rates
–– Capital consumption
–– Human resources development
–– Free advisory services
• Improving the efficiency of markets
–– Deregulation
–– Competition
–– Levelling the playing field
(Taken from Mind the Gap)
Forecasting of business cycles
 Leading indicators - the turning points of these variables tend to always lead
the reference turning points.
 Lagging indicators - these variables tend to always lag with the reference
turning points
 Coincident Indicators - the turning points of these variables tend to always
coincide with the reference turning points.
X is a lagging indicator
Y is a leading indicator
Extrapolation
 This means using historical data and predicting the future on that basis. For
example: If the economy grows or decreases continually, predictions can be
made by means of extrapolation along the same trend line.
Moving averages
 This refers to the average price of an indicator over a specified time period.
Moving averages are used to look at price trends. Tables indicating the
moving averages of share prices are used to indicate whether they are moving
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© Gauteng Department of Education
upwards or downwards. Information can be gathered from this on a daily,
monthly or annual basis.
 As the new members (for the day, week or month) are added and the older
members are deleted, the average ‘moves’.
SECTION C: HOMEWORK
QUESTION 1:
6 minutes
(Source: Solutions for all Economics)
Give some reasons why an expansion phase might turn into a contraction phase. [6]
QUESTION 2:
6 minutes
(Source: Solutions for all Economics)
Differentiate between endogenous and exogenous factors of the business cycle and
give an example of each.
[6]
QUESTION 3:
16 minutes
(Source: Focus Economics)
Both fiscal and monetary policy can be used to create economic stability and
minimise the impact of fluctuations in the business cycle.
3.1
Differentiate between monetary and fiscal policy.
3.2
[8]
Compare how monetary and fiscal policy would be used to curb an economic
expansion in order to create economic stability.
[8]
SECTION D: SOLUTIONS AND HINTS TO SECTION A
QUESTION 1:
12 minutes
1.1
C (leading)
1.2
B (supply)
1.3
C (coincident)
1.4
B (supply-driven)
1.5
A (leading)
1.6
B (supply)
(Taken from various sources)
QUESTION 2:
8 minutes
(Taken from DBE/Feb.-Mar. 2013)
• Follow coincident indicators
• Serve to confirm the behaviour of the coincident indicators 
• If it does not confirm the upswing or downswing for instance, it signals that the
upswing or downswing is weak and will most likely end at an early stage 
• Change direction after reference turning points in the business cycle has been
reached
• Confirm changes that were first indicated by the leading indicators and then the
coincident indicators
• Provide an advance signal of a turning point in the business cycle 
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• First to reflect imbalances that intensify (increase) or subsidise (decrease) in the
economy 
• Influence of movements on subsequent movements in the leading indicators help
explain the view that one business cycle generates the next one  (Any 4 x 2) [8]
QUESTION 3:
16 minutes
(Taken from BoE/Feb.-Mar. 2010)
Exogenous reasons (explanations)
 The monetarist school of thought started in 1960 by Professor Milton
Friedman
 The classical economists believed that the markets were inherently (naturally)
stable.
 They then presented exogenous explanations (conditions that originate
outside of the market system) for periodic recessions and revivals.
 They saw these fluctuations in economic activity as temporary due to external
factors.
 (E.g.) inventions, technological innovations, natural causes etc.
 These fluctuations can also occur because of ineffective government
policy.
 This results in fluctuations in the rate of increase in the money supply, which
causes changes in the rate of increase in prices, production and
employment.
Any (4 x 2)
Endogenous reasons (explanations)
 Also known as the interventionist approach.
 The Keynesians hold the view that markets are inherently unstable.
 These economic fluctuations are caused by endogenous (Internal)
causes.
 There is a self-correcting mechanism in the market system that acts to correct
any economic boom or recession.
 (e.g.) If business conditions improve, there will be an increase in economic
output, resulting in increased interest rates, increase in imports and a fall in
foreign exchange. 
 All of these factors combine to dampen the economic growth and curb the
boom 
 The reverse is also true, interest rates and import rates can decrease and
foreign exchange can increase, leading to a recession.
 The Keynesians believe that these fluctuations are part of the market
economy and governments have a duty to use monetary and fiscal policy to
intervene.
 When the government intervenes, this brings stability to the economy and
helps to smooth out the peaks and troughs in the business cycles
 Accept fusion of reasons (explanations)
Any (4 x 2)
QUESTION 4:
8 minutes
(Taken from BoE/Feb.-Mar. 2011)
• It represents the average position of a cycle.
• Indicates the general direction in which the economy is moving.
• An upward trend suggest that the economy is growing.
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• Trendline usually has a positive slope, because production capacity increases over
time. 
• Diagram showing trendline. 
Accept any other relevant facts 
(Any 4 x 2) [8]
QUESTION 5:
10 minutes
(Taken from BoE/November. 2008)
5.1
Refer to successive periods  of increasing (expansion/upswing) and
decreasing (contraction/downswing) economic activities
OR
Successive periods  of economic  fluctuations
[3]
(a) CDE / CE 
(b) CG / AE
[6]
5.3
Point C / point G / trough
[2]
5.4
• inappropriate government policies / interventions
• change in money supply
• climatical conditions (sunspot theory)
• shocks (e.g. war, major increase in fuel price) 
• structural change to the economy
• technology
• accept any other relevant factor from an approved resource
[3]
• Using expansionary monetary policies
• Reducing interest rates 
• Expansionary fiscal policies
• Reducing tax 
• Increased government expenditure
Any other relevant examples
[3]
Extrapolation
[3]
5.2
5.5
5.6
QUESTION 6:
40 minutes
(Taken from BDE/November. 2012)
INTRODUCTION
Accurate prediction is not possible in Economics. The best the economists can do is
to try and forecast what might happen. There are a number of techniques available to
help economists to forecast business cycles, e.g. economic indicators OR
Successive periods of contraction and expansion of economic activities 
(Accept any other relevant introduction)
Max 3
BODY
Business cycle indicators
1. Leading economic indicators
 These are indicators that change before the economy changes / coincide with
the reference turning point 
 They give consumers, business leaders and policy makers a glimpse
(advance warnings) of where the economy might be heading / peak before a
peak in aggregate economic activity is reached / most important type of
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

indicator in helping economists to predict what the economy will be like in the
future 
When these indicators rise, the level of economic activities will also rise in a
few months' time/an upswing
E.g. job advertising space/inventory/sales ratio 
2
Coincident economic indicators 
 They move at the same time as the economy / if the turning point of a specific
time series variable coincides with the reference turning point 
 It indicates the actual state of the economy 
 E.g. value of retail sales. If the business cycle reaches a peak and then begins
to decline, the value of retail sales will reach a peak and then begin to decline
at same time 
3
Lagging economic indicators 
 They do not change direction until after the business cycle has changed its
direction 
 They serve to confirm the behaviour of co-incident indicators
 E.g. the value of wholesalers' sales of machineryIf the business cycle
reaches a peak and begins to decline, we are able to predict the value of new
machinery sold
LEADING INDICATORS
CO-INCIDENT
INDICATORS
LAGGING INDICATORS
• Nett new companies
registered
• Number of new vehicles
sold
• Nett gold and other
foreign reserves
• Number of residential
building plans passed
• Share prices
• Real export of goods
(gold excluded)
• Gross operating surplus
as % of GDP
• Labour productivity in
manufacturing
• Job advertisements in
newspapers
• Commodity prices in US
$ for a basket of SA export
commodities
• Opinion survey of the
average hours of work per
factory worker in the
• Registered unemployed
• Physical volume of
manufacturing production
• Real retail sales
• Real merchandise
imports
• Utilization of capacity in
manufacturing
• Gross value added at
constant prices excluding
agriculture, forestry and
fishing
• Industrial production
index
• Value of wholesale, retail
and new vehicle sales at
constant prices
• Total formal nonagricultural employment
• Employment in nonagricultural sectors.
• Hours worked in
construction
• Cement sales in tons
• Number of commercial
vehicles sold
• Real investment in
machinery and equipment
• Unit labour cost in
manufacturing
• Wholesale sales of
metals, machinery and
equipment
• Prime overdraft rate of
banks
• Value of non-residential
buildings completed at
constant price
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manufacturing sector
• Opinion survey on stocks
in relation to demand:
manufacturing and trade
• Opinion of business
confidence of
manufacturing,
construction and trade
• Opinion survey of volume
of orders in manufacturing
4
Length
 This is the time that it takes for a business cycle to move through one
complete cycle (measured from peak to peak) 
 E.g. Useful to know the length because the length tends to remain relatively
constant over time. 
 If a business cycle has the length of 10 years it can be predicted that 10 years
will pass between successive peaks or troughs in the economy. 
o Longer cycles show strength. 
o Cycles can overshoot.
o Ways to measure lengths:
 Crisis to crisis 
 Historical records 
 Consensus on businesses experience 
5
Amplitude 
 It is the difference between the total output between a peak and a
trough./ It measures the distance of the oscillation of a variable from the
trend line / It is the intensity (height) of the upswing and downswing
(contraction and expansion) in economic activity
 A large amplitude during an upswing indicates strong underlying forces –
which result in longer cycles
 The larger the amplitude the more extreme the changes that may occur /
extent of change 
 E.g. During the upswing inflation may increase from 5% to 10%. (100%
increase)
6
Trend 
 A trend is the movement of the economy in a general direction
 It usually has a positive slope because the production capacity of the economy
increases over time 
 Also known as the long term growth potential of the economy
 E.g. The diagram above illustrates an economy which is growing – thus an
upward trend (positive slope) 
 Trends are useful because they indicate the general direction in which the
economy is moving – it indicates the rate of increase or decrease in the level
of output 
 Forces to overcome: resistance points  channels
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7
Extrapolation 
 Forecasters use past data e.g. trends and by assuming that this trend will
continue, they make predictions about the future 
 Means to estimate something unknown from facts or information that are
known 
 E.g. if it becomes clear that the business cycle has passed through a trough
and has entered a boom phase, forecasters might predict that the economy
will grow in the months that follow 
 It is also used to make economic predictions in other settings e.g. prediction of
future share prices 
 Can apply: trend line  use a ruler and lengthen the trend line 
 Shape of the curvecontinue with the curve to complement the completed
section
8
Moving average 
 It is a statistical analytical tool that is used to analyse the changes that occur
in a series of data over a certain period of time / repeatedly calculating a
series of different average values along a time series to produce a smooth
curve 
 E.g. the moving average could be calculated for the past three months in order
to smooth out any minor fluctuations 
 It is calculated to iron out (minimize) small fluctuations and reveal long-term
trends in the business cycle 
PLEASE NOTE:
* If the different phases of the business cycle are mentioned, allocate a
maximum of 8 marks (max 2 marks per phase) plus 22 marks for
forecasting.
* If a candidate analyses the different business cycle indicators and
features used in forecasting he/she can obtain 15 X 2 = 30 marks.
* Diagram maximum 10 marks.
DIAGRAM
Labelling of axes = 1 mark each
Indication of amplitude = 1 mark
Length of cycle = 1 mark
Trend line = 1 mark
Shape of cycle = 1 mark
Labelling on graph = 1 mark each
(peak, trough, recession etc.)
Maximum: 10 marks
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Recovery
Trough
Peak
Recession
Depression
Peak
Prosperity
Index of economic activities
Time
CONCLUSION
Business cycles will continue to have an effect on the economic well-being of
South Africa in future. Although we may understand the causes of business
cycles and how the economy may respond to certain policies, accurate
prediction of business cycles is beyond us. 
Max 2
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SESSION 3:
MACROECONOMICS: THE PUBLIC SECTOR
Learner Note: To evaluate the role of the public sector in the economy with special
reference to its socio-economic responsibility in the South African context. The
government is one of the four main participants in the economy.
Section A: Typical Exam Questions
QUESTION 1:
12 minutes Section A
(Taken from various sources)
1.1 Policymakers who watch trends and change policies when the economy is not
performing satisfactorily make use of … stabilisers.
A. automatic
B. manual
C. discretionary
1.2 The curve which illustrates the degree of inequality in the distribution of income
in South Africa, is known as the … curve.
A. Lorenz
B. Laffer
C. Gini
1.3 A fixed amount paid by consumers on water and electricity irrespective of the
units consumed is known as …
A. municipal tax.
B. user charge.
C. a flat rate.
1.4 Large public corporations or business entities in the public sector are known as
…
A. parastatals.
B. corporates.
C. public companies.
1.5 Parastatals are business entities of a … sector.
A. commercial
B. private
C. public
1.6 The government's medium-term expenditure framework (MTEF) provides an
outline of income and expenditure for the next … years.
A. four
B. three
C. two
(2 x 60 [12]
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QUESTION 2:
5 minutes
Section B
(Taken from DBE/Feb.–Mar. 2013)
Study the Laffer curve below and explain the relationship between the tax rate and
taxable income.
Tax
revenue
(R)
R¹
t¹
t
t²
100%
Tax rate (%)
( 4 x 2 ) (8)
QUESTION 3:
3 minutes Section B (Taken from DBE/Feb.–Mar. 2013)
Give THREE reasons for the necessity of the public sector.
( 3 x 2 ) (6)
QUESTION 4:
3 minutes Section B (Taken from DBE/November 2012)
Name any THREE services provided by government.
( 3 x 2 ) (6)
QUESTION 5:
10 minutes Section B (Taken from DBE/November 2012)
Study the cartoon below and answer the questions that follow.
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The private
sector
More
pay!
You are
causing
an
inequality
gap
20%
now!
5.1
What is the message of the cartoon?
5.2
What can the private sector do to improve the living conditions of these
workers?
( 2 x 2 )[4]
5.3
How can the government alleviate the level of poverty?
[2]
( 2 x 2 )[4]
QUESTION 6:
10 minutes Section B (Taken from DBE/November 2012)
Study the extract below and answer the questions that follow.
NATIONALISATION BENEFITS STILL NOT CLEAR
Cosatu is calling for the nationalisation of mines and banks, as well as strategic
businesses previously under state control – including petrochemicals company
PetroSA and steel company ArcelorMittal.
There are claims that talk of nationalisation discouraged investment. Malikane,
Cosatu's head of policy, said that '… previously foreign investment was used to
blackmail the labour movement'. That is why South Africa needs to change the
historical inequalities which existed before 1994. Government should invest in
strategic minerals such as platinum and coal, 'but not gold as it is a sunset industry'.
[Adapted from Business Times, 7 August 2011]
6.1
What does nationalisation mean?
[2]
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6.2
What effect will the nationalisation of mines and banks have on the man in
the street?
( 2 x 2 )[4]
6.3
Why, do you think, are mines targeted for nationalisation?
[2]
6.4
Why is gold referred to as a 'sunset industry'?
[2]
QUESTION 7:
10 minutes Section B (Taken from DBE/November 2012)
List any THREE problems of public sector provisioning.
( 3 x 2 ) (6)
QUESTION 8:
10 minutes Section B (Taken from DoE/Feb. – March 2009)
Name any THREE advantages of privatisation.
( 3 x 2 ) (6)
QUESTION 9:
10 minutes Section B (Taken from DoE/Feb. – March 2011)
Study the budget information below and answer the questions that follow.
R MILLION
REVENUE
Total revenue
Total expenditure
Gross domestic
product
REVISED
ESTIMATE
2008/09
611 124
633 907
2 304 111
MEDIUM-TERM ESTIMATES
2009/10
642 990
738 562
2 474 214
2010/11
709 074
792 354
2 686 254
2011/12
781 226
842 971
2 952 989
[Adapted: National Treasury (2009)]
9.1
During which month of the year is the main budget presented to
parliament?
[2]
9.2
Name the main source of revenue for the government.
[2]
9.3
Was there a surplus or a deficit on the budget during the 2009/2010 fiscal
year? Motivate your answer and show calculations.
[4]
9.4
Define medium-term expenditure framework.
[2]
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QUESTION 10:
10 minutes Section B (Taken from DoE/Feb. – March 2012)
Study the graph below and answer the questions that follow.
V
Tax
Revenue
(R)
B
A
R¹
10%
40%
80%
100%
Tax Rate (%)
10.1
10.2
10.3
10.4
10.5
What is illustrated by the Laffer curve?
[2]
At what point will government revenue maximise?
[2]
What will be the effect on government revenue if the tax rate increases from
40% to 80%?
[2]
What is the implication for the government if the tax payer is taxed at 100%?
[2]
What illegal behaviour by the worker will be encouraged if the tax rate is too
high?
[2]
QUESTION 11:
10 minutes Section B
Explain the reasons for public sector failure.
(Taken from DoE/November 2008)
[16]
QUESTION 12:
10 minutes Section B (Taken from DoE/November 2008)
List any THREE reasons for the existence of a public sector.
( 3 x 2 ) (6)
QUESTION 13:
40 minutes Section B (Taken from DBE/November. 2010)
Due to problems experienced in the Department of Public Enterprises, Nomsa
Dlamini, the Minister of Public Enterprises, writes a memorandum to personnel in
her Department to discuss the necessity of the public sector and the
macroeconomic objectives of the government in detail.
Write the memorandum on behalf of Mrs Nomsa Dlamini.
[50]
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SECTION B: ADDITIONAL CONTENT NOTES
The composition of the public sector.
General government
 Central government
 Provincial Government
 Local Government
 Public corporations
Necessity of the public sector (See Question 3 on pg 39)
 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
 To provide public goods & services
◦ Community goods – defence, police
◦ Collective goods – parks, beaches
◦ Merit goods – health, education
 To provide merit goods
◦ Positive externalities
 To protect natural resources
◦ Negative externalities
 The redistribution of wealth and income
◦ Progressive taxation system
 To manage the economy
 To encourage competition
Problems in the public sector (See Question 7 pg41 and Question 11 pg 42)
 Accountability
 Efficiency
 Assessing needs
 Pricing policy
 Parastatal
 Privatisation
 Nationalisation
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Macro-economic aims of the public sector
(i)
Economic growth
(ii)
Complete employment
(iii)
Price stability
(iv)
Exchange rate stability
(v)
Economic fairness
BUDGET
Main estimates
Preparations for the main estimate start in the April of the previous year, and the
Minister of Finance (currently Pravin Gordhan) delivers his medium-term budget
policy statement (MTBPS) to parliament during the last week of October.
The Medium-term Expenditure Framework MTEF gives the Minister the opportunity
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.
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
Provincial Legislature in the weeks following the main estimate. The largest part of
the provincial 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
 Direct and indirect taxes
 Direct Tax – SITE & PAYE
 inheritance tax & fuel levy
The effect of the fiscal policy
Income distribution
–– 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 unchanged.
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. (Taken
from Mind the Gap)
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 reducing 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 government.
 Governments would like to be at point T, because it is the point at which the
government collects maximum amount of tax revenue while people continue to
work hard.
Point T
Failures in the public sector
I.
Characteristics
 Ineffectiveness
 Unproductiveness
II.



Reasons
Management & accountability
Pricing & market forces
Long term motivation
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III. Factor contributing
 Political interference
 Bureaucracy
 Rent-seeking groups
 Other factors
SECTION C: HOMEWORK
QUESTION 1:
15 minutes
(Source: Clever Economics)
1.1
a)
A/an …… is a business under control of the government.
b)
…. consists of provincial and local governments.
c)
…. mostly formulates legislation, policies and plans to address
economic and social issues.
d)
…. have non-rivalry and non-excludability.
e)
The private sector undervalues …. And does not provide enough of
them.
f)
Public transport and rubbish removal are examples of ….
g)
The pollution that is caused by factories is a …..
[14]
1.2
Distinguish between merit and demerit goods.
(4 x 2) [8]
QUESTION 2:
10 minutes
(Source: Solutions for all Economics)
2.1
a)
Define nationalisation.
[2]
b)
Define privatisation.
[2]
c)
Give THREE reasons for the state ownership of an industry.
[3]
d)
Give THREE reasons why private enterprise might be preferred to state
ownership of business.
[3]
2.2
Explain why VAT is a regressive tax.
[3]
2.3
Explain why a reduction in income tax might act as an incentive to work.
[3]
QUESTION 3:
10 minutes
(Source: Via Afrika Economics)
3.1
Discuss reasons for government intervention in the economy.
[8]
3.2
[8]
Mention and discuss the features of fiscal policy.
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SECTION D: SOLUTIONS AND HINTS TO SECTION A
QUESTION 1:
12 minutes Section A
(Taken from various sources)
1.1
C (discretionary) 
1.2
A (Lorenz) 
1.3
C – a flat rate 
1.4
A parastatals 
1.5
C – public 
1.6
B (three) 

QUESTION 2:
5 minutes Section B (Taken from DBE/Feb.–Mar. 2013)
 The curve shows that as tax increase government revenue increases up to a
certain point (e.g. t1) 

If the tax rate rises beyond t, e.g. at t2 there will be a decline in government
revenue 
 When the tax rate is high people are less likely to work hard 
 If tax is 100% then nobody will work because all income would go to the
government 
 Too high tax rates may lead to tax evasion and avoidance 
 Reduction in tax rates will lead to a decrease in tax evasion and increase the
incentive to work, save and invest 
 If tax rate is zero, no government revenue will be raised 
 Economists use this to justify a reduction in the level of income tax 
 The apex of the curve shows the tax rate where government revenue can be
maximised 
 This point can vary from country to country – the Laffer curve may not always
be symmetrical – it can peak at 40% or even at a 90% rate 
 Evidence suggests that tax rates in most countries are below t. 
 In South Africa individual and company income tax rates were reduced over
the last decade 
(No marks to be allocated for the Laffer curve)
QUESTION 3:
3 minutes Section B (Taken from DBE/Feb.–Mar. 2013)
 Provides public goods and services 
 Manages the economy 
 Takes care of common resources 
QUESTION 4:
3 minutes Section B (Taken from DBE/November 2012)
 Protection e.g. police force 
 Economic e.g. provision of water 
 General e.g. infrastructure 
 Social e.g. pension, grants 
 Public goods 
 Community goods 
 Collective goods 
 Merit goods 
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

Take care of common resources 
Manage the economy 

Allocate 2 marks for any other relevant examples
QUESTION 5:
10 minutes Section B (Taken from DBE/November 2012)
5.1
 People in the private sector are enjoying all the benefits of the market system,
at the expense of others 
 The need for government intervention 
 Shows unequal distribution of income 
 E.g. the Marikana issue 
(Any other relevant answer)
5.2
 Provide subsidies or free housing 
 bursaries to dependants of employees 
 subsidised meals in canteens 
 money that is used to look after the needs of the poor 
 Increase wages 
 Job creation 
 Training (skills development) 
 Employment equity 
 Incentives (accept any relevant examples) 
 CSI (Corporate Social Investment) 
 PPP (Public Private Partnerships) 
 EAP (Employee Assistance Programmes) 
(Any other relevant answer)
5.3
 Social security grants e.g. pensions, disability grants 
 Benefits in kind e.g. free water electricity feeding schemes

 Services sewerage clean water free housing 
 Primary health care free hospitalisation clinics 
 Education no school fees 
 Nationalisation 
 Progressive tax 
 Job creation 
 Skills training 
 Incentive schemes to start businesses 
 EPWP (Expanded Public Works Programme)
 To implement strategies (AsgiSA, Jipsa) 
(Any other relevant answer)
QUESTION 6:
10 minutes Section B (Taken from DBE/November 2012)
6.1
The process of government taking over the ownership and management of
private enterprises with or without compensation.
6.2
POSITIVE EFFECTS: 
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




More revenue (income) comes into the state coffers 
An improved redistribution of income is possible to many 
Job creation 
Higher income per capita 
Increase in the standard of living 
NEGATIVE EFFECTS: 
 Negative impact on share value 
 Negative impact on salaries / conditions of service 
 Corruption 
 Nepotism 
 Disinvestment 
 Poor quality of service delivery 
 Job losses 
(Any other relevant answer)
6.3
 Employment opportunities 
 Revenue generation 
 Political gain/address inequality of the past/alleviate poverty
 Strategic importance 
 Regarded as a national asset 
(Any other relevant answer)
6.4

 It is a natural resource that can become depleted / gold is a dwindling asset

 Mines may close down and no longer mine gold 
 Gold is currently not seen as strategic as platinum and coal 
(Any other relevant answer)
QUESTION 7:
10 minutes Section B (Taken from DBE/November 2012)
 Accountability 
 Efficiency 
 The problem of assessing needs 
 Pricing policy 
 Parastatals 
 Privatisation 

QUESTION 8:
10 minutes Section B (Taken from DoE/Feb. – March 2009)

Improve efficiency of enterprises 

Broaden the tax base

Attracts foreign investment

Lessens pressure on government budget

Promotes BEE / increased share in economy

Provides additional funds to carry out projects 

QUESTION 9:
10 minutes Section B (Taken from DoE/Feb. – March 2011)
9.1
February
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9.2
Income tax
9.3
deficit(R642 990 m. – R738 562 m.) = -R95 572 m
9.4
It consists of a 3-year rolling expenditure and revenue projections for the
national and provincial governments, presented against the backdrop of
economic and fiscal goals and prospects for the economy.
QUESTION 10:
10 minutes Section B (Taken from DoE/Feb. – March 2012)
10.1 Shows the relation between tax rates and tax revenue of the government 
10.2
At point V 
10.3
Tax revenue will decrease
10.4
At 100% tax rate, nobody will be prepared to work and the revenue of
government will also be zero 
10.5 Tax evasion may occur 

QUESTION 11:
10 minutes Section B (Taken from DoE/November 2008)
• Politicians tend to promote policies and spend money on projects as long as they
get votes in return. 
These policies might involve an inefficient allocation of resources. 
• Many public sector entities lack capacity because of a shortage of skills /
management failure / Bureaucracy 
This means that funds are often left unspent and then returned to the treasury.
• Lack of accountability / Parastatals (public enterprise)
leads to inefficiency, corruption / crime, and poor service delivery. 
• Lack of motivation / apathy
Workers rarely receive incentives for successful service delivery. This leads to
services being limited, low in quality and high in cost. 
• Rent seeking / special interest groups / own interest 
Individuals and enterprises influence government to act in their interest e.g. profitable
contracts, favourable regulations etc ignorance, personal and hidden agendas,
questionable motives improve the welfare of someone at the expense of another. 
• Serious structural weakness in the economy / Privatisation 
This can result in social goals not being attained.
• Objectives are not attainable / overpopulationemployment, housing and feeding
programmes not possible with limited resources
• Assessing needs leads to under and oversupply
• Pricing policy problems in determining the price for public goods and services


QUESTION 12:
10 minutes Section B (Taken from DoE/November 2008)
• Market failure / inefficient resource allocation
• Provision of public goods and services 
• Problems with externalities require government intervention. e.g. negative
externalities - government restricting output
• Provision of merit goods - broad social benefit 
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• Discourage demerit goods - taxes to discourage consumption and production.
• Prevention of monopolies or encourage competition.
• Redistribution of income for the benefit of society.
• Managing the economy/stabilising the economy /enforcing a legal structure 
QUESTION 13:
40 minutes Section B
(Taken from DBE/November. 2010)
DEPARTMENT OF PUBLIC ENTERPRISES 
MEMORANDUM 
TO : ALL PERSONNEL
FROM : MINISTER OF PUBLIC ENTERPRISES, NOMSA DLAMINI 
SUBJECT : NECESSITY OF THE PUBLIC SECTOR AND ITS OBJECTIVES. 
DATE : ____________________ (Format: maks 5)
All countries have public sectors and there are good reasons for the existence of
such sectors.The public sector is necessary for the following reasons.
1. To provide public goods
• Public goods are mostly in the form of services.
• Government use policies such as taxation and government spending 
• Community goods are characterized by non-excludability and nonrivalness.
Non-excludability (e.g.) defence forceThe protection available
to everyone living in a country irrespective of whether they are willing to pay for
it or not. 
• Collective goods e.g. parks, beaches can exclude free-riders by levying
fees 
2. To take care of common resources
• Environment consists of resources that no one owns yet everyone can use free
of charge.
• (e.g.) oceans for fishing / the air we breathe / natural scenery we enjoy
• Governments have to intervene in order to protect the environment and prevent
the creation of negative externalities / protection and enforcement of legal
structure 
3. To manage the economy.
• Governments manage the collective interests of its people
• Government has to ensure a social and legislative environment in which
businesses and individuals can pursue their own interests to the maximum 
• Government must also apply suitable and credible economic and other policies
in order to achieve internationally respected economic objectives
• Public policy needed to secure high employment, price stability and socially
desired rate of economic growth
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4. Externalities 
• benefits or costs from production of goods and services 
• government can subsidize or restrict production 
5. Merit and demerit goods 
• merit goods benefit the public more than private goods 
• e.g. health care and education 
• demerit goods are goods considered to be harmful to society 
• government impose taxes and regulations to discourage consumption 
• e.g. cigarettes ��
6. Monopolies and imperfect competition 
• Government should intervene and prevent economically inefficient and
imperfect competition from occurring 
In developing countries governments have FIVE macroeconomic objectives.
A. Economic growth 
• Refers to an increase in the production of goods and services in the
economy.
• it is measured in terms of real GDP 
• For economic development to occur, economic growth rate must be higher than
the population growth rate.
• Growth and development in a country benefits its citizens because it often
leads to a higher standard of living.
B. Full employment 
• Accept any relevant definition
• Government is always trying to attain high levels of employment.
• Unemployment rate increased from 14,0% in 1994 to 26,5% in 2005.
• Employment increased mainly due to informal sector activities.
• The GEAR strategy was implemented to create a climate that was conducive to
employment creation by the private sector.
C. Exchange rate stability 
• The government should manage the economy through effective fiscal and
monetary policies, so that the exchange rate remains relatively stable
• Depreciations and appreciation of a currency could create uncertainties for
producers and traders and should be limited.
• The SARB changed the exchange rate from a managed floating system to a
free-floating exchange rate system.
D. Price stability 
• SARB has succeeded in keeping inflation within the target range of
3% - 6% 
• Market economies produce better results in terms of economic growth and
development when prices are relatively stable.
• Interest rates, based on the repo rate are the main instrument used in the
stabilization policy.
• The stable budget deficit also has a stabilizing effect on the inflation rate.
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E. Economic equity 
• Redistribution of income and wealth is essential in market economies.
• In South Africa, the progressive tax system is used. 
• Progressive income tax tax on profits , wealth and expenditure are used
to finance free social services(e.g.) health educationand to pay
cash grants to the poor(e.g.) pensionsand other vulnerable people 
(max 40)
_________________________________________________________
MRS NOMSA DLAMINI 



DATE
MINISTER OF PUBLIC ENTERPRISE
SESSION 4:
MACROECONOMICS: ECONOMIC GROWTH AND
DEVELOPMENT: FOREIGN EXCHANGE MARKET (GLOBALISATION)
Learner Note: No country in the world can be self-sufficient. Countries rely in one
another for the necessary resources, and goods and services to satisfy the large
range of needs and wants of their people.
SECTION A: TYPICAL EXAM QUESTIONS
QUESTION 1
8 minutes
Section A
(Taken from various sources)
1.1 The systematic record of all the transactions of a country's inhabitants with the
rest of the world, is known as the …
A. trade balance.
B. balance of payments.
C. national budget.
1.2 South Africa is currently following a … exchange rate system.
A. managed floating
B. free floating
C. fixed
1.3 A demand for US dollar will occur when …
A. placing a deposit with an American bank.
B. buying shares in South African firms.
C. receiving interest from the World Bank.
1.4Deliberate action by the South African Reserve Bank to lower the value of the
and is known as …
A. depreciation.
B. appreciation.
C. devaluation.
(2 x 4) [8]
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QUESTION 2
6 minutes
Section B
(Taken from DoE/Exemplar 2008)
List any THREE sub accounts/components of the balance of payments.
QUESTION 3
8 minutes
Section B
(3 x 2)(6)
(Taken from DBE/November. 2012)
Distinguish between appreciation and depreciation of the rand against the dollar.
[8]
QUESTION 4
20 minutes Section B
(Taken from DoE/Feb. – March 2009)
Study the extract of the balance of payments (BOP) below and answer the questions
that follow.
BALANCE OF PAYMENTS
ANNUAL FIGURES
Current account
2004
Merchandise exports, free on board ……...
281 827
Net gold exports …………………………….
28 698
Service receipts ……………………………..
62 197
Income receipts ……………………………..
20 973
Less: Merchandise imports, free on board
311 759
Less: Payments for services ……………...
66 418
Less: Income payments …………………...
48 823
Current transfers (net receipts +) ………….
-11326
Balance on current account ……………..
-44 631
Financial account
-3 566
Net direct investments ……………………...
40 629
Net portfolio investments …………………..
8 718
Other investments …………………………..
45 781
Balance on financial account …………...
2005
325 129
27 023
70 896
29 550
358 519
77 384
60 975
-17 899
62 179
2006
399 030
35 470
81 294
40 234
476 545
96 985
75 985
-18 894
112 346
36 354
29 903
9 762
76 019
-49 078
129 192
21 928
102 042
4.1
Define the term balance of payments.
[3]
4.2
Name ONE other account that forms part of the BOP.
[2]
4.3
Which item captures the effect of a foreigner purchasing shares on the JSE
Securities Exchange?
[2]
4.4
Why is gold exports listed as a separate item in the BOP?
[3]
4.5
Calculate the trade balance on the current account for 2006.
[5]
4.6
What negative impact will the recent trend in the current account have on the
BOP?
[3]
4.7
Name ONE way in which the BOP deficit can be reduced or eliminated. [2]
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QUESTION 5
16 minutes Section B (Taken from DoE/Feb. – March 2009)
Explain any FOUR supply factors that cause international trade.
[16]
QUESTION 6
40 minutes Section C (Taken from DoE/Feb. – March 2010)
Analyse the components of the balance of payments and suggest ways in which the
government can correct a sustained deficit.
[50]
SECTION B: ADDITIONAL CONTENT NOTES
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 increase
in the per capita income of people results in more disposable income
that can be spent on local goods and services, some of which may
then have to be imported.
• An increase in the wealth of the population leads to greater demand
for 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.
• 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.
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• 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.
Buying and selling goods and services from other countries:
 The purchase of goods and services from abroad that leads to an outflow of
currency from SA – Imports (M)
 The sale of goods and services to buyers from other countries leading to an
inflow of currency to SA – Exports (X)
Different factor endowments mean some countries can produce goods and services
more efficiently than others – specialisation is therefore possible:
 Absolute Advantage:
 Where one country can produce goods with fewer resources than
another
 Comparative Advantage:
 Where one country can produce goods at a lower opportunity cost –
it sacrifices less resources in production
Russia
Scotland
Oil (Barrels)
10 or
20 or
Whisky (Litres)
5
40
One unit of labour in each country can produce either oil OR whisky.
A unit of labour in Russia can produce either 10 barrels of oil per period OR 5 litres
of whisky.
A unit of labour in Scotland can produce either 20 barrels of oil OR 40 litres of
whisky.
Comparative Advantage:
Opportunity Cost = sacrifice/ gain
Russia: if it moved 1 unit of labour from whisky to oil it would sacrifice 5 litres of
whisky but gain 10 barrels of oil (OC = 5/10 = ½)
Moving 1 unit of labour from oil to whisky production would lead to a sacrifice of 10
barrels of oil to gain 5 litres of whisky (OC of whisky is 10/5 = 2)
Scotland: if it moved 1 unit of labour from whisky to oil it would sacrifice 40 litres of
whisky but gain 20 barrels of oil (OC = 40/20 = 2)
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Moving 1 unit of labour from oil to whisky production would lead to a sacrifice of 20
barrels of oil to gain 40 litres of whisky (OC of whisky is 20/40 = ½ )
For Scotland the OC of oil is four times higher than that in Russia
(2 compared to ½)
 In Russia, oil can be produced cheaper than in Scotland (Russia only
sacrifices 1 litre of whisky to produce 2 extra barrels of oil whereas Scotland
would have to sacrifice 2 litres of whisky to produce 1 barrel of oil.
 There can be gains from trade if each country specialises in the production of
the product in which it has the lower opportunity cost – Russia should produce
oil; Scotland, whisky.
BALANCE OF PAYMENTS
The balance of payments is a systematic record of all transactions between one
country and the rest of the world.
 Trade in goods
 Trade in services
 Income flows
1. The current account
 The balance of the current account is an indication of whether the country can
afford its day to day transactions.
2. The capital transfer account
 The balance shown reflects the net amount of the capital transfer, either
negative or positive.
3. The financial account
 Records all international transactions in assets and liabilities are recorded
4. The reserve account
 South Africa’s balance of gold and foreign exchange reserves are not shown
in the balance of payment account – this represents stock. Only the changes
to the gold and foreign reserves are shown.
Format of the Balance of payments
R Millions
Current accounts
Export of goods
Net gold exports
Revenues from services
Revenues from income
Minus: Import of goods
Minus: Payments for services
Minus: Income payments
Current transfers (net receipts +)
Balance on current account
Capital transfer account
(net receipts +)
2012
R million
743 811
71 050
124 332
48 501
854 439
145 006
121 428
-31 369
-164 548
239
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Financial account
Direct investments
Liabilities
Assets
Net direct investments
Portfolio investments
Liabilities
Assets
Net portfolio investments
Other investments
Liabilities
Assets
Net other investments
Balance on financial account
Un-noted transactions
Changes in net gold and other foreign
reserves
Changes in liabilities relative to reserves
SDR allocations and valuation settlements
Change in gross gold and other foreign
reserves
37 428
-24 528
12 900
95 039
-40 562
54 477
66 828
40 860
107 688
175 065
-1 801
8 955
16
24 141
33 123
Quarterly bulletin SARB – December 2013
EXCHANGE RATES
Determinants of Exchange Rates:
 Exchange rates are determined by the demand for and the supply of
currencies on the foreign exchange market
The demand and supply of currencies is in turn determined by:
 Relative interest rates
 The demand for imports
 The demand for exports
 Investment opportunities
 Speculative sentiments
 Global trading patterns
 Changes in relative inflation rates
Appreciation of the exchange rate:
 A rise in the value of R in relation to other currencies – each R buys more of
the other currency e.g.
 SA exports appear to be more expensive
( Xp)
 Imports to the SA appear to be cheaper
(
Mp)
Depreciation of the Exchange Rate
 A fall in the value of the R in relation to other currencies – each R buys less of
the foreign currency e.g.
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 SA exports appear to be cheaper
( Xp)
 Imports to the SA appear more expensive
(
Mp)
The floating exchange rate
 Price determined only by demand and supply of the currency – no government
intervention
The Fixed Exchange Rates
 The value of a currency fixed in relation to an anchor currency – not allowed to
fluctuate
The Dirty Floating or Managed Exchange Rate
 The rate is influenced by government via central bank around a preferred rate
Correcting disequilibria in the balance of payments
The solution to correct balance of payments disequilibrium lies in earning
more foreign exchange through more exports and reducing imports.
• Export promotion = government can help to promote exports
• Import substitution = government can help to reduce imports, making a
country more self-reliant
SECTION C: HOMEWORK
QUESTION 1:
10 minutes (Source: Oxford Successful Economics)
Study the value in the box and answer the questions that follow:
R1 = US$0.20
1.1
How much does US$1 equal in terms of the rand?
[2]
1.2
As a result of increase in imports, ceteris paribus, the rand depreciates such
that R! = US$0,10. How many Rands are there now to the US$?
[2]
1.3
A computer costs US$1 000. How many Rands are required to buy the
computer before it has depreciated, and after it has depreciated? Has the
computer become more or less expensive in terms of Rands?
[6]
1.4
Give the equation for the terms of trade.
[2]
QUESTION 2:
10 minutes
(Source: Via Afrika Economics)
2.1
Name any TWO sources for the demand for dollars.
( 2 x 2 )[4]
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2.2
Make use of a graph and explain how the rand-dollar exchange rate will be
determined in a perfectly competitive foreign exchange market.
[10]
QUESTION 3:
15 minutes
(Source: Focus Economics)
Read the following paragraph on South Africa international trade activities:
In January 2011, South Africa’s trade balance recorded a deficit of R4.pbn.
The market expected a slightly smaller deficit of R2.3bn; but this was based on
a very small number of analyses. In December 2010, the trade balance
recorded a surplus of R10.3bn. The amount of service imports increased.
During the month, the value of exports fell by a discouraging 17.0% month on
month, while imports rose by a substantial 14.0% month on month. The fall-off
in exports, which amounted to R9.2bn during the month, was mainly due to a
decrease in mineral exports (coal) (-R2.5bn), lower precious metal exports (R2.95bn) and reduced vehicle exports (-R2.23bn). These declines were
partially offset by a R0.75bn increase in metal exports.
On the import side (which rose by R6.1bn in January) machinery and
equipment imports jumped by R1.8bn, while imports of vehicles rose by
R1.43bn and chemicals imports increased by R0.91bn.
3.1
Explain the cause of deficit and surplus on the balance of payments account.
(6 + 6) [12]
3.2
How do governments generally react to such disequilibria?
[4]
3.3
Analyze the deficit on the current account of South Africa. Give possible
causes according to your view.
[10]
3.4
Briefly explain policies to be implemented by governments to reduce large
persistent deficits of BoP.
[10]
SECTION D: SOLUTIONS AND HINTS TO SECTION A
QUESTION 1
8 minutes Section A
(Taken from various sources)
1.1
B - balance of payments
1.2
B- free floating 
1.3
A-placing a deposit with an American bank
1.4
C-devaluation 

QUESTION 2
6 minutes Section B (Taken from DoE/Exemplar 2008)
 Current account 
 Capital transfer account 
 Financial account 
 Official reserve account 

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QUESTION 3
8 minutes Section B (Taken from DBE/November. 2012)
Appreciation
•Definition: Appreciation of a currency implies an increase in the value of the
domestic currency relative to currencies of other countries due to market forces

Appreciation of a currency: exports will decrease and imports will increase 
It will have a negative effect on the Balance of Payments 
E.g. A lower price or exchange rate reflects an appreciation of the local currency
against the foreign currency 
A fall in the rand/dollar exchange rate from $1 = R10,51 to $1 = R6,36 therefore
implies an appreciation of the rand against the dollar 
Simply because we then need fewer rands to purchase the required amount of
dollars 
Depreciation
• Definition: Depreciation of a currency implies a decrease in the value of the
domestic currency relative to the currencies of other countries due to market
forces 
Depreciation of a currency: exports will increase and imports will decrease 
It will have a positive effect on the Balance of Payments 
E.g. A higher price or exchange rate reflects a depreciation of the local currency
against the foreign currency. 
An increase in the rand/dollar exchange rate from $1 = R6,11 to $1 = R10,51
therefore implies a depreciation of the rand against the dollar, 
because we will then need more rands to purchase the required amount of dollars
(Any 2x4)
QUESTION 4
20 minutes Section B (Taken from DoE/Feb. – March 2009)
4.1
It is a record of all transactions between one country and the rest of the world
or record of all transactions relating to goods, services and money across
international borders. 
4.2


Capital transfer account
Reserve account 
4.3
Portfolio investment
4.4
Because it is a key export commodity in earning foreign exchange
4.5
Merchandise exports + gold exports – Merchandise imports (R 399 030 m+
R 35 470 m)- R 476 545 m= - R 42 045
4.6



Reduction of gold and foreign reserves. 
Increase in liabilities related to reserves/borrowing money to offset the deficit.

Exerts pressure on the financial account in that net inflows of money is
required.
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4.7



Depreciate a country’s currency. 
Decrease in aggregate demand.
(Increase interest rates, increase in tax rates, and reduction in government
spending, Increase tariffs on imports). 
Borrowing from IMF


QUESTION 5
16 minutes Section B
(Taken from DoE/Feb. – March 2009)
1. Natural resources - are not evenly distributed over the surface of the earth,
therefore they can be traded with countries that lack such resources. 
e.g. South Africa is well endowed with natural resources such as gold, platinum,
diamond etc. 
2. Climate - many crops can only be cultivated in certain climatic conditions and in
certain types of soil e.g. Brazil is the largest producer of coffee in the world 
3. Labour resources - are not the same everywhere
Some individuals have greater ability and aptitude for certain tasksSome
countries have developed and perfected a particular skill and aptitude for the
production of a certain commodity , therefore their skills will be imported 
4. Technology / Capital - is not always easily obtained in every country 
Developed countries usually enjoy an advantage over underdeveloped countries

Due to lack of capital, countries cannot produce all products they wish to produce /
Underdeveloped countries import capital from developed countries
5. Mass production / Specialisation - Because of specialization countries take
advantage of economies of scale and produce at a lower unit cost 

6. Cost differences / opportunity cost – Goods and services can be produced at a
lower cost in one country in relation to another 
The law of comparative cost states that nations will find it profitable to trade with
other countries when they have different alternative cost ratios
Countries tend to trade when it appears that the cost of the trade is less than the
benefits gained (Any 4 x 4)
QUESTION 6
40 minutes Section C (Taken from DoE/Feb. – March 2010)
INTRODUCTION
The balance of payments is a record of all transactions between one country and the
rest of the world. 
(Accept any other relevant introduction)
(Max 3)
BODY
It consists of FOUR accounts: viz.
1. The Current Account
Merchandise (goods) imports and exports 
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- It includes transactions in movable goods that change ownership between S.A.
residents and non-residents. 
Net Gold exports 
- Shows net foreign gold sales + the change in gold of the SARB. 
- It is indicated as a separate item because of its importance to SA in earning foreign
exchange and is the world’s largest producer of gold
Services receipts and payments 
- This includes transportation, travel, financial, insurance, professional, technical,
recreational etc. services between South African residents and nonresidents.
Income receipts and payments - Income receipts refers to income earned by
South African residents in the rest of the world and income payments income earned
by non-residents from South African e.g. salaries, dividends etc. 
Current transfers 
- This involves transfers from SA residents to non-residents and vice versa.
- They include donations gifts, social benefits and taxes. 
- This figure can be negative or positive. 
A surplus or deficit may occur on the current account balance, depending on outflows
and inflows of money.(Max 12)
2. The Capital Transfer Account
- The balance shown reflects the net amount. This amount can be either negative or
positive. 
The capital transfer account includes:
• Transactions and grants relating to the ownership of fixed assets and other asset
transfers by migrants. (Max 3)
3. The Financial Account
THREE categories in the Financial Account:
• Direct investments: 
- Include transactions relating to investments in foreign businesses (10%+) and fixed
property. 
Portfolio investments:
- Consist of equities (ordinary shares) and debt securities (bonds or gilt-edged
shares) that are not part of direct investments. 
- These investments are mainly affected through stock exchanges.
• Other investments: 
- Consist of transactions that cannot be classified as direct investments, portfolio
th
investments or reserves(4 account of BoP). E.g. trade credits, loans, currency
and deposits. 
- With regard to each of the above liabilities, assets and net amounts are shown.
- Liabilities that are obtained from abroad e.g. loans are positive on the South
African
BoP because it means that money flows into the country. 
- If assets are obtained abroad it is a negative because it means that money flows
out of South Africa. 
- However it would be the opposite effect on the BoP if foreigners obtained assets
(positive) in South Africa.(Max 10)
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Unrecorded transactions : This is an entry that is used to capture the effects of
errors, omissions and timing differences(Max 3)
4. The Reserves Account
• South African foreign reserves include gold, Special Drawing Rights (SDR’s), the
reserve position at the International Monetary Fund (IMF) and foreign exchange
currencies. 
These are liquid assets available for financing deficits due to BoP
transactions.
South Africa's reserves are not shown in BoP account because it represents a stock.

The BoP shows flows only; therefore only changes to gold and foreign reserves
are shown.
Deficits due to BoP transactions decrease reserves and surpluses increase
reserves. (Max 5)
Body maximum: 30
Correction of Balance of payments deficit
Using methods, which will reduce imports and promote exports, can reduce deficits.
The following ways can be considered:
1. Borrowing money from the IMF
2. Policies of export promotion an import substitution
3. Increase in aggregate supply will reduce prices. Exports are promoted through
cheaper prices. 
4. Higher interest rates help to decrease spending on imports.Increase in
import tariffs and controls, although SA complies with policies of the WTO to reduce
its import controls. (Trade liberalisation) 
5. Exchange control that allows central banks to ration foreign exchange.
6. Currency depreciation/devaluation makes imports expensive (reduction)
exports cheaper for foreign countries.(increase exports) 
7. Increase in tax which reduces disposable income which decreases demand
in imports. 
8. Reduction of reserves by SARB to correct deficits if we adopted a managed
floating exchange rate.(Max 10)
Conclusion
The Balance of Payments will always play an important role in the economy of our
country, because it clearly shows the contribution of each component (account) and
in case of a deficit, which problem we will have to address.  (Max 2)

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