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1 SECONDARY SCHOOL IMPROVEMENT PROGRAMME (SSIP) 2015 GRADE 12 SUBJECT: ECONOMICS LEARNER NOTES (Page 1 of 128) © Gauteng Department of Education 2 TABLE OF CONTENTS SESSION TOPIC PAGE 11 Economic Pursuit: Economic and Social performance indicators 3 – 15 12 Contemporary Economic issues: Inflation 16 – 25 13 Contemporary Economic issues: Tourism and Economic redress 26 – 34 14 Contemporary Economic issues: Environmental sustainability 35 – 47 15 Consolidation- Paper 1 June Exams 48 – 76 16 Consolidation- Paper 2 June Exams 77 – 99 17 Consolidation- Paper 1 and 2 100 – 127 © Gauteng Department of Education 3 SESSION 11: ECONOMIC AND SOCIAL PERFORMANCE INDICATORS Learner Note: Success must be measured, how else will you know whether you are successful. For this reason we have to measure economic growth and economic development. We use economic indicators to measure economic growth and social performance indicators to measure economic development. SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: 5 minutes Section A – Short Questions 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 inflation target range of the South African Reserve Bank is … A. 2% - 3% B. 3% - 4% C. 3% - 6% 1.2 Which ONE of the following is a developmental policy? A. Broad-based Black Economic Empowerment B. Growth, Employment and Redistribution C. Industrial Development Corporation 1.3 The policy that was introduced to increase employment, promote economic growth and redistribute income. A. Asgisa B. GEAR C. RDP 1.4 Its objective is to encourage greater investment in training and to stimulate the development of new skills. A. Spatial Development Initiatives B. Industrial Development Zones C. Skills Support Programme 1.5 An example of an economic indicator is … A. labour productivity B. life expectancy C. housing 5 x 2 (10) © Gauteng Department of Education 4 QUESTION 2: 5 minutes Section B (Taken from Eastern Cape prelim September 2012) Study the following extract and answer the questions that follow. State of the Eastern Cape: Population Dynamics and the Poverty Trap Health and Mortality The Eastern Cape province lags behind other parts of the country in a number of critical and objective health indicators. Although the rates of infant mortality (65 per thousand in 1996 to an estimated level of 57 per thousand in 2010) and the child mortality (88 per thousand in 1996 to a projected 86 per thousand in 2010) have declined, they remain among the highest in the country. Life expectancy rates have increased from 49,4 years in 2001 – 2006 to 54,8 in 2006 – 2010, with these rates being slightly higher for women. [Adapted from www.ngopulse.org] 2.1 Define the term “infant mortality”. (2) 2.2 List any TWO services that can improve the lifestyles of people. (4) 2.3 Mention TWO indicators that are used to monitor the health of the Population. (4) QUESTION 3: 10 minutes Section B (Taken from DBE/November 2012) Discuss employment as an economic indicator. QUESTION 4: 20 minutes 4 x 2 (8) Section C (Taken from Eastern Cape prelim Sept 2011) “Social indicators are sometimes called development indicators or human development indicators.” Write a detailed essay on social indicators. [40] SECTION B: ADDITIONAL CONTENT NOTES 1. The performance of an economy Economic indicators are statistics that show general trends in the economy. They are used to analyse economic performance and to predict future performance. The government, private sector and international investors must know how the economy of a country is performing. © Gauteng Department of Education 5 The South African Reserve bank and Statistics South Africa provide the data that government uses to assess economic performance. Other organisations also supply important statistics for private and international investors. SARB South African Reserve Bank • Quarterly bulletins • Annual reports Reviews of banks and other financial institutions • Standard Bank • ABSA • FNB • Nedbank STATISTICS SOUTH AFRICA • Census reports • Unemployment data • GDP data • Standard of living data UNITED NATIONS • UNESCO – reports • Environmental reports INTERNET • Newspaper financial sections JSE indices WORLD BANK • Data for countries • Indicators for development Publications The macroeconomic indicators show the following: the changes taking place in the country – an increase in the real GDP per capita can indicate economic growth one country can be compared to another country 2. Economic Indicators The economic indicators measures the macroeconomic objectives of government as discussed in Session 3. The following macroeconomic aims were given: • • • • • Economic Growth – Real GDP per capita. Full employment – look at economically active population (EAP) and the use of productive resources, usually measured in terms of the unemployment rate. Balance of payments stability – exchange rate stability (terms of trade). Price stability – Inflation rate An equitable distribution of income - the aim should be for a more fair distribution of income – use of the Gini coefficient. 2.1 Inflation (This will be discussed in detail in Session 12) Inflation may be defined as a significant and continual rise in the general price level of goods and services over a given time, with the result that the purchasing power of money will decrease. Two measures are used: a) Consumer price index (CPI) b) Producer price index (PPI) © Gauteng Department of Education 6 Consumer price index(CPI) This is an indicator that measures the change in the cost of a fixed basket of goods and services that an average household will purchase. Producer Price Index (PPI) This is the indicator of changes in the price of manufactured goods as they leave the factories and imported goods as they enter the country. The formula to determine inflation: x South Africa experienced double digit inflation for many years until the government and the South African Reserve Bank introduced the inflation target of 3% - 6%. 2.2 Employment It is not so easy to measure employment as there are a lot of people employed in the informal sector, they are not registered or recorded. The economically active population figures are used (this was done in grade 11) All the people willing and able to work between 15 and 64 in a country. Unemployed are all the EAP, they were actively looking for work 7 days prior to the investigation and can start work 7 days after the investigation. 2.3 Foreign Trade (This was discussed in detail in Session 4 – Balance of Payment, Foreign exchange and Terms of trade) Terms of trade The Terms of Trade looks at the relationship between the price received for exports and the amount of imports we are able to buy with that money. Average Price of Exports Terms of Trade = ---------------------------------------- x Average Price of Imports Balance of payment The balance of payments is a systematic record of all transactions between one country and the rest of the world. The balance on the current account provides an indication of the difference between exports and imports of goods and services. A positive balance shows that exports exceed imports. © Gauteng Department of Education 7 The foreign capital flowing into the country is also important, through foreign direct investments. Exchange rates The rate at which one currency can be exchanged for another currency. Exports and imports are strongly influenced by the exchange rate of the domestic currency. (Look at your notes in Session 4 in appreciation and depreciation of the currency) 2.4 Productivity Productivity measures the relationship between input and outputs. The more outputs you can produce for the same or less inputs the more productive you are. Productivity is linked to cost – the more productive you are the lower costs are. Example if one labourer can produce more than another labourer the cost of labour will reduce. Productivity will increase the Real GDP per Capita. This will increase economic growth. 2.5 Interest rates As seen in session 2 (Business cycles) and session 2 (Public sector) interest as the main instrument in the monetary policy play a key role in the economy and would therefore be vitally important in measuring economic growth. The two important rates are: a. Repo rate b. Prime rate a. Repo rate The rate at which the SARB lends money to commercial banks. b. Prime Rate The rate at which commercial banks lends money to households and business. If interest rates move upward, the debt of households and business require bigger repayment instalments. This may indicate that the business cycle could be heading for a downward cycle, businesses might have to cut down production, unemployment may increase and economic growth will decline. © Gauteng Department of Education 8 2.6 Money supply The money supply indicate the money in circulation in the economy and how fast it moves from one person to another as this indicate high or low inflation. Money supply is divided in three categories. M1: This includes coins and notes. M2: Includes M1 and other short-term and medium-term deposits of the domestic private sector with monetary institutions, M3: Includes M2 plus all long-term deposits of the domestic private sector with monetary institutions. Too much money in circulation could lead to more spending and higher inflation. Too little money in circulation leads to under-spending, which leads to reduction in production, leads to unemployment and decline in economic growth. 3. Social Indicators Sometimes called human development indicators or development indicators because they promote improvement in the standard of living. 3.1 Demographics This is the description of the physical population and its composition. To get this a census is done regularly to obtain this information. Human development index (HDI). This is a measure of people’s ability to live long and healthy life, to communicate, to participate in the community and to have sufficient income to experience a decent lifestyle. HDI for 2012 Rank Country 1 Norway 2 Australia 3 United States 4 Netherlands 5 Germany 6 New Zealand 7 Ireland 8 Sweden 9 Switzerland 10 Japan 121 South Africa HDI 0.955 0.938 0.937 0.921 0.92 0.919 0.916 0.916 0.913 0.912 0.629 Life expectancy 81.3 82 78.7 80.8 80.6 80.8 80.7 81.6 82.5 83.6 53.4 Source: https://data.undp.org/dataset/Table1-Human-Development-Index-and -its-components/wxub-qc5k © Gauteng Department of Education 9 Human poverty index (HPI). It measures: life expectancy is measured by the percentage of newborns not expected to survive to age 40 lack of education is measured by the percentage of adults who are illiterate 3.2 Health and nutrition a. Health indicators life expectancy at birth infant mortality rate b. Nutrition indicators daily calorie intake per person the number of children who go hungry These measures are important to government as they are supplying healthcare and sometimes have to include legislation such as adding vitamin A to basic foodstuffs such as bread. 3.3 Education The standard of living of people is directly connected to their education. Educated people are employable and can earn an income and provide for their own wants and needs. Two important measures are: Secondary enrolment percentage – how many children that start Grade 1 get to Grade 8 and finish Grade 12 Adult literacy – People over the age of 15 that can read and write. Referring to Session 3 (Public sector) in the budget that the Minister of Finance delivered last year and this year the largest portion of government spending was given to education. 3.4 Services Because of our constitution certain basic services must be supplied by the government. These services have a direct effect on people’s living standards. These basic services differ from rural to urban areas. a. b. c. d. Electricity Refuse disposal Water supply Sanitation © Gauteng Department of Education 10 3.5 Housing and urbanisation Urbanisation: the process by which an increasing proportion of a country’s population is concentrated in its urban areas as a result of natural increase and migration from rural areas. This measure is important as more people come to live in urban areas the greater the demand for housing, services, education, health care etc. Housing: the percentage of the population living in a permanent dwelling, or house. The government issue housing subsidies to help poor people to own a house. South African citizens or permanent residents earning R3 500 or less a month could apply for this subsidy. 3.6 Summary Measure of development Method of measurement Possible interpretation Infant mortality The number of children who die between birth and the age of 5 An indication of the living standards and the state of medical services in a country Life expectancy at birth How long a person is expected to live when he/she is born An indication of the living standards and the state of medical services in a country Population growth rate Given as a percentage An indication of the living standards People per doctor The number of people for each medical doctor An indication of the living standards and the state of medical services in a country Percentage of children in school The percentage of children who attend school An indication of the living standards and the state of education in a country Literacy level The number of people who are able to read and write An indication of the living standards and the state of education Percentage of people with safe water Percentage of the total population who has access to safe, clean drinking water An indication of the living standards © Gauteng Department of Education 11 4. International comparisons Figures collected by the World Bank, International Monetary Fund (IMF) and United Nations provide the best data for comparison purpose. Other measures used: Purchasing power parity (PPP) (This was done in session 4) the number of units of one country’s currency that gives the holder the same purchasing power as one unit of another country’s currency. The Big Mac Index – Burgernomics explain the PPP theory. A Mc Donald’s Big Mac burger, sold in about 120 countries. The index is based on the price of the Big Mac around the world as compared to its price in the United States. SECTION C: HOMEWORK QUESTION 1: 10 minutes (Source: Solution for all Economics) 1.1 Name TWO uses of economic indicators. 2 x 1 (2) 1.2 Name and describe the different methods and tools that economists can use to make forecasts of the economic future. (8) QUESTION 2: 10 minutes (Source: Oxford Successful Economics) Study the table below and answer the questions that follow: Population (15-64) Labour force Employed Unemployed Not economically active Discouraged work seekers Other Rates(%) Unemployment rate Labour absorption rate Labour force participation rate Jan-March 2010 (thousands) 31 818 17 471 13 076 4 375 14 346 1 870 Jan-March 2011 (thousand) 32 314 17 482 13 118 4 364 14 832 2 223 12 476 12 609 25.2 41.1 54.9 25.0 40.6 54.1 Year-on- year change (%) 1.6 0.1 0.3 -0.7 3.4 18.9 1.1 Source: www.statssa.goc.za 2.1 2.2 Identify the group that has shown the largest increase. Distinguish between discouraged work seekers and those who are not economically active. © Gauteng Department of Education (2) (4) 12 2.3 Differentiate between the terms of trade and the trade balance. QUESTION 3: 3.1 3.2 5 minutes (4) (Source: Via Afrika Economics) List TWO indicators that reflect the level of education in a country. Explain the inflation rate as an economic indicator. 2 x 1(2) (8) SECTION D: SOLUTIONS AND HINTS TO SECTION A QUESTION 1: 1.1 C 1.2 A 1.3 C 1.4 C 1.5 A 5 minutes Section A (Taken from various sources) 3%-6% Broad-based Black Economic Empowerment GEAR Skills Support Programme labour productivity (10) QUESTION 2: 2.1 5 minutes Section B (Taken from Eastern Cape prelim September 2012) The number of infants who die before reaching one year of age per thousand live births. 2.2 Sanitation Electricity Refuse removal Water supply Infant mortality Under-five mortality Health expenditure Access to safe drinking water Access to sanitation facilities 2.3 QUESTION 3: 10 minutes Section B (Taken from DBE/November 2012) The number of employed persons expressed as a percentage of the EAP gives the employment rate. This can be converted to an index Definition of EAP: people between 15 and 60/65 SA employment rate was ± 75% in 2005 – low compared to rates in developed and some developing countries (unemployment rate currently 26%) Figures obtained are: as part of the population census, usually every ten years From registrations with Department of Labour By surveys, such as the Labour Force Survey of StatsSA © Gauteng Department of Education 13 Growth in the economy is not accompanied by similar growth in employment numbers Full employment refers to the aim of providing everyone who is willing to work at current wage rates with a job Employment indicators are used for three purposes: - To calculate trends in employment in different sectors or industries; to disclose structural changes in economy - To calculate productivity - To show success of economy in utilising its full potential Relatively slow real economic growth Drop in the ratio of capital formation to GDP An increasing demand for highly skilled labour while there is an oversupply of low skilled labour Net emigration of highly skilled labour Average wage increases that are higher than the inflation rate The strong presence and influence of trade unions in the economy Labour unrest, strikes and work stoppages which cause a loss in number of days work Restructuring of the economy and introduction of new international competitiveness of domestic producers, which has led to layoffs of low skilled workers (Any 4x2) (8) QUESTION 4: 20 minutes Section C (Taken from Eastern Cape prelim Sept 2011) INTRODUCTION Social indicators are concerned with people, such as their education and health. Various measures are used to evaluate the performance of a country in terms of the social well-being of its citizens. (2) BODY A. Health - A number of indicators are used to monitor the health of the population - Infant mortality – the number of infants who die before reaching one year per thousand live births in a year. - Under five mortality – the number of newborns that die before reaching the age of five years. - Health expenditure – the amount of public and private health expenditure on health care as a percentage of GDP. - Safe drinking water – the percentage of population who have access to safe drinking water. - Sanitation facilities – the percentage of population with adequate sanitation facilities (max 3 x 2) (6) B. Nutrition - Nutrition is an important indicator for the well-being of people © Gauteng Department of Education 14 - Child malnutrition – the proportion of children who are underweight is the most important indicator of malnutrition - Underweight increases the risk of death and inhibits development in children. - Overweight children – there exists a relationship between obesity in childhood and the prevalence of other chronic diseases - Being overweight can affect their ability to work - These indicators are also used to decide on feeding schemes. (max. 3 x 2) (6) C.Education - Standard of living is directly related to the level of education - Public expenditure percentage – shows the percentage of public expenditure for education. - Secondary enrolment percentage − shows the percentage of the designated age group attending secondary education. - Youth literacy rate percentage − shows the percentage of the designated age group that are literate. (max. 3 x 2) (6) D.Housing and services - Housing and services are important elements of people’s lifestyles. - Many South Africans are not able to buy residential property. - Government facilitates home ownership through a subsidy system and loans from the private sector. - The number of houses handed over to disadvantaged South Africans is an indicator of service delivery. - A number of services are necessary to improve the life of the people. - E.g. electricity, refuse removal, water supply, sanitation etc. (max. 3 x 2) (6) E .Urbanisation - The increase in the population numbers of cities and towns - Can be because of the natural growth of urban population - Migration – rural to urban or international - The establishment of new towns - It is an important social indicator because it points out to governments and developers the need for a variety of services (max. 3 x 2) (6) F. Demographics - South Africa has a relatively high population growth rate - A high population growth coupled with a low economic growth harms the efforts to improve the standard of living - There is a decline in the growth of population in the recent past - Life expectancy expresses the number of years a newborn infant would live under the prevailing conditions - There is a decrease in the life expectancy in South Africa - Government needs to know the size of the labour force and tax base. - Assurance companies also need to know because it can affect their profitability. (max. 3 x 2) (6) G. Income distribution - Gini Coefficient is calculated from the information provided by a Lorenz curve. - A Lorenz curve shows the distribution of income among the population. © Gauteng Department of Education 15 - The Gini coefficient shows the proportion of the population who lives on less than a proportional income. - The value of the Gini coefficient can be between 0 and 1 and higher the value, the more unequal the distribution of income is. - The Gini coefficient for South Africa indicates that it is essential that the government employs policies to redistribute income. - Its main policy tools are progressive personal income tax, BEE etc. - The head count index is the percentage of people living below the poverty line income - This indicator is important because government must know the extent of poverty - It can also be used to adjust the budget to provide sufficient social services (max. 3 x 2) (6) CONCLUSION These social indicators inform governments and businesses of the need to change in the provision of goods and services. (2) ___________________________________________________________________ © Gauteng Department of Education 16 SESSION 12: CONTEMPORY ECONOMIC ISSUES: INFLATION Learner Note: One of the macroeconomic aims of government is to stabilise prices. Inflation is the key instrument to control prices and also as seen in session 3 & 11 an instrument to measure prices. SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: 5 minutes Section A (Taken from various sources) 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 A high inflation rate together with a high unemployment rate is called … A. deflation. B. hyperinflation. C. stagflation. 1.2 Deflation is defined as a decline in the … A. price of certain products. B. general price level. C. gross domestic product. 1.3 It represents the cost of the ‘shopping basket’ of goods and services of an average South African household. A. CPI B. CPIX C. PPI 1.4 The aggregate demand for goods and services that exceeds the aggregate supply thereof is known as … A. cost-push inflation. B. demand-pull inflation. C. deflation. 1.5 The current inflation target set by the South African government is … A. 1–6%. B. 6–12%. C. 3–6%. (5 x 2) (10) © Gauteng Department of Education 17 QUESTION 2: 10 minutes Section B (Taken from DBE/November 2012) Study the extract below and answer the questions that follow. INFLATION PRESSURES Low-income households experience far greater pressure from inflation. The workers' consumer price index constructed by Statistics South Africa finds that low-income workers spend more than 45% of their income on food and beverages – more than double the weighting these items enjoy in the official consumer price index basket. They also spend 8% of their income on electricity and transport – three to four times more than the average consumer. The workers' consumer price index averaged 10,1% in 2009 compared to wage settlements of 8,6%. According to Statistics South Africa the drivers of higher inflation include food, fuel and administered prices. [Adapted from Financial Mail, September 2011] 2.1 Why are low-income households negatively affected by the weighting of items in the consumer price index basket? 1 x 3 (3) 2.2 Explain the concept administered prices. 2 x 2 (4) 2.3 Why, do you think, should wages be settled at the same or a higher figure than the average consumer price index? 1 x 3 (3) QUESTION 3: 5 minutes Section B (Taken from DBE/March 2011) Discuss headline and CPI inflation as types of consumer inflation. QUESTION 4: 20 minutes Section C 2 x 4 (8) (Taken from DBE/November 2011) Discuss the causes and consequences of demand-pull inflation. [40] SECTION B: ADDITIONAL CONTENT NOTES Definition Inflation may be defined as a significant and continual rise in the general price level of goods and services over a given time, with the result that the purchasing power of money will decrease. The definition highlights the following aspects It describes a process. A single price increase is not inflation – it must be a continual price increase. The price increase must be substantial – a price increase of 1% or 2% is regarded as normal and will not be classified as inflation. The result of inflation is the decrease in the purchasing power of money. © Gauteng Department of Education 18 The formula to calculate inflation: X Types of inflation Consumer inflation CPI/Headline – It represents the cost of the shopping basket (1500 items) of goods and services of a typical or average SA household. CPIX – the overall Consumer Price Index excluding interest rates on mortgage bonds (home loans) CORE - the overall Consumer Price Index excluding volatile prices and items with prices that are affected by government intervention and policy. ADMINISTERED – the prices of goods and services that are set by government or controlled by government appointed authorities. ALL/IMPLICIT GDP INFLATOR – the price of all final goods and services. Hyperinflation – high rate of inflation (over 50%) Stagflation – when there is ongoing high inflation combined with high unemployment, low growth in the GDP and stagnant demand in the economy. Deflation – when prices of a wide range of goods and services decrease continuously over an extended period. Producer inflation PPI – measures prices at the level of the first significant commercial transaction. Characteristics of inflation Causes of inflation Demand –pull inflation Total spending on domestic goods and services in the economy consists of the spending by households, firms, the government and the foreign sector and as done in Session 1 (National account) Total spending = C + I + G + (X – M) Causes of demand inflation Increase in consumption (C) – consumers’ expenditure will increase mainly for three reasons a. If consumers save less & spend more b. Decrease in personal income tax c. A greater availability of consumer credit, because of decrease in interest rate. Investment (I) – when business invest this increase demand for labour, cement, sand and bricks. Supply cannot keep up with the increase in demand and this will increase prices. Government spending (G)– three main reasons a. New capital projects © Gauteng Department of Education 19 b. Consumption expenditure on education, health and protection. c. Social expenditure on public work programme to create jobs and increase in social allowances. Export earnings (X) a. When economy of trading country improve b. When global economy expands AD 2 Average price level P1 P AD AD 1 AS Q1 Q2 Q3 Real output Cost –push inflation. Causes of cost-push inflation Higher wages – without more productivity Exchange rates – if rand depreciates against other currencies, all imported goods will become more expenses. Profit margins that are too high – higher profit margins will be recovered from consumer and will give rise the higher prices Increasing import prices – if key imports become more expensive inflation will go up Low productivity – leads to higher costs Natural disasters – drought, flood and natural disasters will cause an increase in prices Indirect tax – such as VAT and customs and excise tax will cause prices to rise Shoplifting – loss to business leads to higher prices. Consequences of inflation © Gauteng Department of Education 20 A decreasing in the purchasing power of money Increase in poverty levels People dependant on a fixed income will be affected Negative psychological effects Negative effect on savings Increased unemployment Balance of payments problems Inflation problem in South Africa The graph below shows South Africa's inflation rate since 1955. During the 1960s and early 1970s South Africa’s inflation rate was below 5%. From 1980 the average inflation rate was over 10% and reached an all time high of 20.8% in January 1986. A record low of 0.10 was reached in January 2004. The average inflation rate since 1994 has been about 5% per annum. It is important for a country to have inflation parity (the same inflation rate as other countries) otherwise adverse terms of trade come about. South Africa since the 1970s has tended to have a higher inflation rate than its main trading partners. The table below shows the inflation rates of South Africa’s main trading partners in 2013. Country Inflation rate South Africa 6.3 United Kingdom 2.80 China 2.70 USA 2.00 Japan .20 Measures to combat inflation Fiscal measures Fiscal measures are measures taken by the Minister of Finance regarding taxation and expenditure. Examples of measures that can be taken include: An increase in direct taxation (personal income tax) due to excess demand for goods. © Gauteng Department of Education 21 An increase in indirect taxation (VAT) causes spending to decrease because goods become more expensive. A loan levy. The state cuts back on expenditure by cancelling government projects like roads, hospitals and schools. The country’s finance budget deficit is non-inflationary (the government uses loans from the non-banking sector to limit inflation). The state imposes surcharges on imported goods. This increases the price of these imported goods, resulting in many people being unable to afford to buy these goods. Monetary measures The South African Reserve Bank (SARB) and the government apply certain monetary measures to curb inflation: The SARB adjusts the quantity of money to the needs of the economy, (e.g. through open-market policy, thus maintaining a fine balance) between the supply of goods and services and money supply. The SARB curbs inflation caused by excess demand by reducing the money supply. The bank rate of the central bank (SARB) affects the interest rates in the economy (repo rate). The bank rate can be raised to encourage savings. Excessive credit can be reduced by restricting the granting of credit by banks. The SARB can apply moral pressure (moral suasion) on financial institutions to be more careful when granting credit. Additional measures that can be taken to combat inflation include: Increase productivity: This is a long-term measure generated through improved education and training which allows more people to be employed and ensures they are more productive. Price control: By fixing the price of certain essential goods, the government assures they remain affordable. Wage policy: The government takes a decision to break the inflationary spiral of increased wages and prices by keeping the increase in wages below or at the level of inflation. Stricter conditions for consumer credit: The government makes it harder for consumers to get credit in order to restrict their spending. Encourage personal savings: The government implements measures to encourage savings, e.g. by cutting taxes on savings. The imbalance between demand and supply is corrected by increased savings, as people save more and spend less. Import controls are relaxed. Floating exchange rate: Prices are automatically adjusted to international conditions. Indexation: The effects of inflation should be lessened – learn to live with inflation. (Source: Mind the gap) © Gauteng Department of Education 22 The Reserve Bank has set the inflation target for South Africa between 3% and 6%. The Monetary Policy Committee takes this into consideration when making decisions about interest rate changes. The graph below represents the official inflation rate, from January 2009 to June 2013, derived from StatsSA’s headline CPI figures. The shaded band refers to the Reserve Bank’s inflation target of between 3% and 6%. SECTION C: HOMEWORK QUESTION 1: 1.1 1.2 2.2 (Source: Oxford Successful Economics) Distinguish between real wages and money wages. Distinguish between nominal GDP and real GDP. QUESTION 2: 2.1 5 minutes 5 minutes (4) (4) (Source: Via Afrika Economics) South Africa experienced extremely high rates of inflation through the 1980s. Identify and explain the reasons for this. (6) What is consumer inflation? (3) QUESTION 3: 10 minutes (Source: Clever Economics) Explain TWO causes of demand-pull inflation and TWO causes of cost-push inflation. (8) SECTION D: SOLUTIONS AND HINTS TO SECTION A © Gauteng Department of Education 23 QUESTION 1: 5 minutes 1.1 C stagflation 1.2 B general price level. 1.3 ACPI 1.4 B demand-pull inflation. 1.5 C 3% – 6% (Taken from various sources) 5 x 2 (10) QUESTION 2: 10 minutes (Taken from DBE/November 2012) 2.1 They experience a greater pressure from inflation than other income groups as a higher percentage of their income is spent on food and beverages More than double the weighting these items enjoy in the official CPI basket 45% of the income spent on food and beverages The goods they consume the most, are the ones hard hit by inflation The workers’ consumer price index averaged 10,1% in 2009 compared to wage settlements of 8.6% (Any 1x3) (3) 2.2 Prices of goods and services that are set by government or controlled by government-appointed authorities (national, provincial and local) E.g. electricity, fuel, paraffin, medicines, public hospitals, telephone rates, telephone line rental, installation, postage, TV licences, train fares, licences, water registration, school boarding fees (2x2) (4) 2.3 For workers to enjoy a better or the same standard of living workers should be able to afford basic goods they should have enough money to satisfy their basic wants cushions the effect of inflation the real wage increases to keep track with the cost of living increases (Any other relevant answer) (1x3) (3) QUESTION 3: 5 minutes (Taken from DBE/March 2011) • Headline inflation - Measured by the Consumer Price Index (CPI). - Represents the cost of the 'shopping basket' of goods and services of a typical South African household. - The unadjusted CPI inflation rate is also known as headline inflation.(2 x 2) • CPI inflation - Interest rates are the main monetary instrument used by the SARB to fight inflation. - Main indicator of inflation in its pursuit of the inflation target set by the Reserve Bank Accept any other relevant facts. (2 x 2) QUESTION 4: INTRODUCTION 20 minutes (Taken from DBE/November 2011) © Gauteng Department of Education 24 Demand-pull inflation occurs when aggregate demand for goods and services exceeds the aggregate supply of goods and services Demand-pull inflation can be described as a case of “too much money chasing too few goods” (Max 2) Any other relevant introduction. BODY • Increase in consumption (C) income of households increase at faster rate than aggregate supply Due to: Less savings start spending current and accumulated savings Reduction in taxes e.g. personal income tax • Access to credit as interest rate decrease more money is demanded Increase in economic active population has pushed up the demand for many consumer items making more money readily available, e.g. credit cards, overdraft facilities • Investment spending lower interest rates result in improvement in the profit expectations of a business business invests more and may lead to an increase in demand for goods and services part of investment e.g. cement, bricks • Government spending increase without corresponding rise in aggregate supply leads to increase in prices government borrowing money from banks leads to more money in circulation government spends money on infrastructure, consumption spending and social spending Consumers have more money to spend but no goods on which to spend their money • Export earnings foreign growth creates demand for locally produced goods sales of exports increase the money supply in the country which increases demand If exports increase, with no increase in domestic production, fewer goods are available in the country • Commodities demand expands and contracts like business cycles do • An increase in the money supply without a corresponding increase in production in proportion to the money supply causes an excess demand. (Max 26 Marks) Consequences: - Decrease in the buying power of money consumers buy less with the same amount of money - Increase in poverty levels money is worth less than before, unable to satisfy basic needs as in the past - Inflation effects the distribution of income and wealth: People whose monetary income grows more slowly than the increase in the general level of prices such as interest and rental, are affected negatively Disadvantaged people dependent on fixed income pensioners hit hard by inflation © Gauteng Department of Education 25 - Psychological influence consumers would like to spend now before of the fear that higher prices in future will decrease the buying power of their money - Negative influence on savings people who lend money will be affected by high inflation rates if interest rate received is lower the inflation rate, then the real value of money will decrease - Increased unemployment higher prices will result in decrease in demand which decrease production levels which will increase unemployment - Balance of payments problems increased inflation rate will lead result in South Africa finding it difficult to sell products on international markets exports will decrease and shortages will occur on balance of payments - Increase in tax income for government more personal income tax payable to state due to higher salaries caused by inflation • Inflation impacts negatively on economic growth Inflation deprives the monetary unit of its function as a reliable measure of value The result is that confidence, stability and certainty are undermined over time - Benefits debtors to the disadvantage of creditors Debtors are favoured at the cost of creditors The original debt was incurred when money had a higher real value, but is repaid in money with a lower real value - Stimulates investments People who invest in negotiable instruments and securities, shares, etc., often benefit from inflation This is because the value of their paper investment may increase more rapidly than the rate of inflation - Bring about social and political costs that can be devastating / Industrial and social unrest Continuously rising prices can make people unhappy and distrustful of one another - Wage bargaining is often accompanied by strikes and mass actions These actions can spill over into violence - Feeds upon itself and brings about more inflation Inflation spiral, since people expect inflation to continue, they do things that fuel further inflation =hyperinflation (Max 10) CONCLUSION From the above explanation it is clear which factors are influencing demand pull inflation, and besides the fiscal policy, there are other measures to combat inflation. (Max 2) © Gauteng Department of Education 26 SESSION 13: CONTEMPORARY ECONOMIC ISSUES: TOURISM AND ECONOMIC REDRESS. Learner Note: South Africa is a country with a lot to offer tourist and could potentially become the biggest supplier of jobs and contributor to the GDP. We saw the benefit of tourist in 2010 with the soccer world cup. SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: 5 minutes Section A (Taken from various sources) 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 Religious events are included under … tourism. A. ecoB. medical C. cultural 1.2 Tourism is … intensive. A. labour B. capital C. risk 1.3 When tourists are given the opportunity to experience South Africa's natural beauty it is known as … tourism. A. cultural B. ecoC. international 1.4 Foreign tourists coming to South Africa are also known as … tourists. A. outbound B. inbound C. domestic (5 x 2) (10) © Gauteng Department of Education 27 QUESTION 2: 10 minutes Section B (Taken from DBE/November 2012) Study the graph below and answer the questions that follow. NUMBER OF FOREIGN AND SOUTH AFRICAN TOURISTS BY YEAR OF TRAVEL, 1991–2010 N u m b e r R22 mil o f t o u r i s t s Year of travel 2.1 2.2 2.3 2.4 Define tourism. (2) Use the data given in the graph above to calculate the percentage of foreign tourists in 2010. Show ALL calculations. (2 x 2)(4) Which tourists form the biggest part of the tourist industry in South Africa? (2) What led to the steady increase in the number of foreign tourists visiting South Africa? (2) QUESTION 3: 5 minutes Section B (Taken from Eastern Cape Prelim Sept 2011) Briefly explain how Indigenous Knowledge Systems (IKS) will encourage tourism in South Africa. (4 x 2)(8) QUESTION 4: 20 minutes Section C (Taken from DBE/November 2009) Write a business letter to the Minister of Tourism, discussing the benefits of tourism, and how South Africa will benefit from relevant tourism growth policies regarding taxation and infrastructure development. Address the letter to: The Minister Department of Tourism PO Box 1001 PRETORIA 0001 © Gauteng Department of Education 28 You are a BEE consultant, S Sithole. Use your own address as a business address. [40] SECTION B: ADDITIONAL CONTENT NOTES 1. Introduction Tourism refers to all the activities undertaken by individuals who leave their normal place of residence for no longer than a year and who use amenities and take part in activities in another place. 2. Reasons for growth in tourism Domestic Domestic tourism is when South Africans visit other parts of South Africa. Reasons for growth of domestic tourism South Africa provides a wide variety of tourism attractions. Many South Africans cannot afford it to travel abroad. Improved infrastructure Economic growth and higher levels of income. Socio-economic factors also play an important role, such as domestic immigration. International Since the democratic elections in 1994 foreign tourism to South Africa has grown at a very high rate for the following reasons: The new democratic South Africa impressed other countries South Africa is a Rainbow nation. One can experience the whole world in one country. The Rand depreciated against important world currencies, thus it is cheaper for foreigners to travel to South Africa. 3. Purposes a. Leaisure and recreation: enjoying a holiday, doing sports or visiting friends and family. i. Cultural tourism: visiting museums, art galaries,churches, etc. ii. Ecotourism: natural areas, wilderness areas, the sea, etc. b. Business and professional: attending meetings and conferences, visiting sites and factories, etc. c. Other: Studying, medical treatment, etc. 4. Effects of tourism a. GDP i. The direct contribution:reflects the spending on travel and tourism by residents and non-residients on accommodation, food, retail, transport, etc. ii. The indirect contribution: spending of those who are directly or indirectly employed by the travel and tourism industry. © Gauteng Department of Education 29 b. Employment: Tourism is the world’s largest generator of jobs. i. Tourism is labour intensive: A lot of actions connected to tourism can only be done by labour and not machines, airport shuttle, hotel services, restaurant services, tour operators, etc. ii. Tourism employs many skills:All levels of skills are requiredunskilled – hotelroom cleaners, semi-skilled – bus drivers, skilled – tour guides iii. Tourism can provide immediate employment: Street artists, airport shuttles, bed and breakfast, etc. iv. Tourism provide entrepreneurial opportunities: informal craft stalls, bed and breakfast houses, tour guides, etc. c. Poverty: Many of the tourist attractions are located in rural areas, this allows rural people to share in the money generated by tourism, create SMMEs, empowering people. d. Externalities: Referback to session 9 Market faillures. Externalities are costs or benefits spilling over to a third person or party. i. Positive externalities: The creation of infrastructure for tourism, example upgrade roads and airports for the 2010 soccer world cup, the benefit is to all in South Africa even after 2010 ii. Negative externalities: Tourist polute, too many toursit in a specific area could harm the eco-system. e. Environment: a lot of tourist attractions are linked to the environment, infrastructure must be build at these sites, waste products must be removed etc. All this may have a permanent effect on the environment. f. Investment: As mentioned before infrastructure need to be supplied in especially transport, communication, energy supply and basic services infrastructure like water and sanitation. 5. Negative effects of tourism a. Human rights violations: land crabs, forced removals, etc. b. Damage to historical and cultural sites: too many tourist at once at a site could damage it c. Environmental damage: Waste and other damage 6. Benefits of tourism a. Households: i. Income: As already mentioned tourism is labour intensive and the generates salaries and wages to households. This reduces poverty and increase standard of living and economic development. ii. Infrastructure: The roads and telephones and water supply created for tourists are also used by the local households. iii. Skills: Special tourism programs and degrees and training programs by SETAs empower houesholds and turn unskilled labour into semi- and skilled labour. © Gauteng Department of Education 30 b. Businesses:As already mentioned tourism encourage entrepreneurial abilities. Bunisses directly created for tourism example hotels, tour guides etc. and businesses indirectly benifit example banking industry, restaurants etc. c. Government: benefit from tourist directly and indirectly. i. Directly : To cover the costs of the negative externalities the government levy a tax on all tourist travelling into South Africa in the form of a tax on all airline tickets. ii. Indirectly: On all products bought by the tourist VAT is included which can be claimed back before departure out of South Africa but a small percentage of tourist claim back their VAT. d. Infrastructure development: new infrastructure is created because of tourism and existing infrastructure is maintained and inproved. 7. South Africa’s profile South Africa has three key attractions i. Our coasts ii. Animal life iii. Variety of landscapes World Heritage Sites b. Mapungubwe c. Vredefort Dome d. Sterkfontein caves e. Robben Island f. St Lucia Wetland g. Cape Fynbos Region h. uKhahlamba Drakensberg Park 8. Policy suggestions The Department of Tourism leads and directs tourism-policy formulation and implementation at national level in South Africa. A private-public partnership (PPP) with SA Tourism (SATOUR), NGOs, The Tourism Business Council of South Africa (TBCSA). a. Marketing : focus on international and national context. b. Spatial distribution: To make sure that tourist do not go to the main tourist attractions but spread it over the whole country and all provinces. c. Taxing: WTTC ensures that tax imposed on tourists are fair, efficient and simple to implement and collect. d. Infrastructure development: More infrastructures required, old infrastructure needed to be maintained and upgraded. In 2010 the Department of Tourism, in partnership with South African Tourism (SAT) and the TBCSA launched the draft National Tourism Strategy (NTSS). The NTSS © Gauteng Department of Education 31 describes the strategies and policies necessary to create the conditions for future growth in the tourism sector. The main objectives are: To increase the tourism sector’s contribution to GDP. To achieve transformation in the sector. To provide excellent people development and decent jobs within the sector. To develop and entrench a culture of travel among South Africans. Indigenous knowledge system (IKS) IKS refer to local knowledge or the traditional way of doing things unique to a given culture or society. It covers culture, religion and agricultural practices. South Africa’s IKS is protected under the Department of Science and Technology. It protects rock art, beading, pottery, homestead decoration, traditional weapons, traditional clothing, traditional food, traditional hunting and oral traditions. SECTION C: HOMEWORK QUESTION 1: 1.1 1.2 15 minutes (Source: Oxford Successful Africa) Explain reasons for the growth of tourists. Evaluate the role of tourism in reducing poverty. QUESTION 2: 5 minutes (Source: Via Afika Economics) Discuss any two benefits of tourism for households. QUESTION 3: 5 minutes 4 x 4 (8) 4 x 2 (8) 2 x 4 (8) (Source: Solution for all Economics) Describe the different types of expenditure resulting from tourism. (8) SECTION D: SOLUTIONS AND HINTS TO SECTION A QUESTION 1: 5 minutes 1.1 C cultural 1.2 A labour 1.3 B eco 1.4 B inbound (Taken from various sources) QUESTION 2: 10 minutes (Taken from DBE/November 2012) 2.1 Tourism can be defined as the activities of people travelling to and staying in places outside their usual environment for no more than one consecutive year for leisure, business and other purposes (such as studying) not related to an activity remunerated from within the place visited. (2) 2.2 22 mil /32(32.5/33) mil x 100 © Gauteng Department of Education 32 = 68,75% (67,70%/66,7%) 2 x 2 (4) 2.3 Foreign tourists/international/inbound (2) 2.4 Peaceful transition to a democratic state A world in one country Depreciation of the rand/Favourable exchange rates Ease of obtaining foreign currencies and make payments Large number of tourist attractions (e.g. fauna and flora) Special events (e.g. Soccer World Cup / sport, cultural) Improved marketing strategies by Department of Tourism Increased income/affordability Improved transport and telecommunication Reduction in working hours / more leisure time Hospitality of the SA people (friendly attitude) (Any other suitable answer) (Any 1x2) (2) QUESTION 3: 5 minutes (Taken from Eastern Cape Prelim Sept 2011) Tourists seek authenticity and uniqueness at destinations. They want to understand the indigenous culture, history and environment. South African Heritage sites have several aspects in which tourists are interested. E.g. Mapungubwe and Early stone age settlement in Limpopo South African world heritage sites represent the extreme of our indigenous environmental uniqueness. The customs, rituals and ceremonies of people. (Any 4 x 2)(8) QUESTION 4: 20 minutes (Taken from DBE/November 2009) Introduction Your Address Date The Minister Department of Tourism PO Box 1001 PRETORIA 0001 Dear Sir. Re: Tourism in South Africa (Max 2 Marks) Body South Africa benefits directly from tourism because of the growth it causes in GDP, government, infrastructure development and exposure to foreigners./ A major spin-off benefit is foreign exchange earnings. The following sectors benefit the most from tourism: 1.1 Households Benefit through three main impacts of prosperity: © Gauteng Department of Education 33 • They receive income because of salaries and wages through employment and their own endeavours in the tourism industry. • Most of the infrastructure that is created for tourists are also used by the local people (E.g.) roads, hotels Tourism requires a number of skills, which require education and training. 1.2 Government The main avenue for governments to benefit from tourism is through the levying of taxes. These taxes have a dual purpose To recover external costs This cost is recovered from the tourist through adding the taxes to the supply price / normal expenditure taxes (e.g. VAT, excise duties, customs duties). This amount serves to compensate the host community for providing the infrastructure, public amenities (showers, toilets) to the tourists. To raise revenue. Tourists are seen as part of the overall tax base (E.g.) through airport departures, air ticket taxes and taxes on hotel rooms 1.3 Businesses Economic and basic services infrastructure is usually provided by the public sector. A superstructure consists of businesses that provide accommodation, transport, and retailing and recreation services. Tourism also stimulates certain socio-economic objectives such as entrepreneurship development, Black Economic Empowerment and SMME development. They are normally private sector activities and make up the profit-generating element of a tourist destination. A combination of public and private sector finance is used to develop destinations. The public sector also provides a range of financial incentives for private sector tourism investment (grants, subsidies, loans, taxes) There are also many informal and less traditional opportunities for tourism benefits and these serve as stepping stones for previously neglected groups in the tourism business. (E.g.) car rentals, craft curios sales. 1.4 Infrastructure Adequate and well-maintained physical and basic services infrastructure are essential for tourist destination areas. Economic infrastructure has been prioritised by Department of Tourism (E.g.) accesses to beaches, lakes and rivers) Social infrastructure has also been improved (E.g.) ambulance services, medicines, and information services. (Max 26) © Gauteng Department of Education 34 2. Tourism growth policies 2.1 Taxation There has been an escalation in the number of countries that are now levying tourist taxes. These taxes are merely used as a source of revenue. THE WTTC recommends that these taxes be raised in accordance with the following guidelines. Equitythe taxes should be fair when compared to the other sectors of the economy (E.g.) a plane ticket. Efficiency taxes should have a minimal effect on the demand for travel and tourism (E.g.) an access fee to nature and game reserves Simplicitytaxes should be simple to pay and administer. They are levied at a flat rate and not a percentage. 2.2 Infrastructure development Roads, basic services are of critical importance for the efficient functioning of the economy. Infrastructure must be properly maintained for the sake of local citizens, domestic and foreign tourists. The following basic considerations should be taken into account. Upgrading: Where expansion is not possible, upgrading should be done. (E.g.) dirt roads should be converted to tarred roads. New technology:should be implemented in transport and communications This is vital for effective marketing, promotion and distribution of travel and tourism products, services and information domestically and internationally. Infrastructure: The accessibility and infrastructure of rural areas must be improved. (E.g.) secondary roads be maintained and domestic tourism will increase dramatically. Max 10 Conclusion Yours sincerely/Yours faithfully. ______________________________ (signature) (Max 2) ___________________________________________________________________ © Gauteng Department of Education 35 SESSION 14: CONTEMPORARY ECONOMIC ISSUES: ENVIRONMENTAL SUSTAINABILITY Learner Note: We are living on planet earth and cannot survive on any other planet. If we do not look after this planet and preserve it for future generations earth will not be able to produce water, food and air and it will become impossible for humans to survive. The economic processes are placing a lot of pressure on the sustainability of earth and its resources. The main aim of any business is to make a profit, but at what cost to mother nature. SECTION A: TYPICAL EXAM QUESTIONS QUESTION 1: 5 minutes Section A (Taken from various sources) 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 Gas emissions and climate change are connected to … A. property rights taxes. B. global warming. C. positive externalities. 1.2 The state can play an important role in maintaining environmental sustainability through its … A. fiscal policy. B. urbanisation policy. C. monetary policy. 1.3 The state can play an important role in maintaining environmental sustainability through … A. quotas. B. taxation. C. externalities. 1.4 A firm will spend less on pollution reduction equipment because of its small marginal … A. private cost. B. social cost. C. private benefit. © Gauteng Department of Education 36 1.5 Local capacity building among … people is a crucial aspect of sustaining the environment. A. endogenous B. indigenous C. exogenous (5 x 2) (10) QUESTION 2: 10 minutes Section B (Taken from DBE/November 2011) Study the extract below and answer the questions that follow. CLEAN COAL FOR A SMALL CARBON FOOTPRINT South Africa is committed to reducing greenhouse gas emissions from its coal-dependent economy by 2025. The minister of economic development suggested the utilisation of underground coal gasification to clean up coaldriven power generation and reduce the country's carbon footprint. In this way we are still using the advantage of coal reserves while developing alternative infrastructure. According to Ibrahim Patel, South Africa is faced with enormous poverty and unemployment as development challenges, while climate change commitments and the potential of a green economy cannot be ignored. The Industrial Development Council has set aside R25 billion to support investments in the green economy, which is promoted through green taxes. The government is currently compiling a database of job-spinning projects that are climate friendly in energy, manufacturing, waste-management, ecotourism, agriculture and mining. [Adapted from Sunday Independent, February 2011] 2.1 Give ONE example of a renewable energy source. 2.2 What is meant by reducing a carbon-footprint? 2.3 Explain the concept green taxes. (3) (3) (4) QUESTION 3: 10 minutes Section B (Taken from DBE/November 2009) Discuss any TWO recent international agreements on environmental sustainability. [16] QUESTION 4: 20 minutes Section C (Taken from DBE/November 2012) Discuss the measures used to ensure environmental sustainability under the following headings: • Market-related policies • Public-sector intervention • Public-sector control In your opinion, to what extent were the relevant international protocols and agreements successful? [40] © Gauteng Department of Education 37 SECTION B: ADDITIONAL CONTENT NOTES Sustainability is meeting “the needs of the present without compromising the ability of future generations to meet their own needs” Sustainability means integrating three dimensions: social justice, economic security, and ecological integrity. Pollution Pollution occurs when the flow of residual emissions resulting from human activity exceeds the natural environment’s capacity to absorb them. Air pollution - any contamination of the atmosphere that disturbs the natural composition and chemistry of the air. This can be in the form of particle matter such as dust or excessive gases like carbon dioxide or other vapours that cannot be effectively removed through natural cycles, such as the carbon cycle or the nitrogen cycle. Water pollution - involves any contaminated water, whether from chemical, particle, or bacterial matter that degrades the water's quality and purity. Water pollution can occur in oceans, rivers, lakes, and underground reservoirs. Soil pollution - occurs when domestic and industrial waste is dumped on the land and natural organisms are killed. Noise pollution - happens when the sound coming from planes, industry or other sources reaches harmful levels. Research has shown that there are direct links between noise and health, including stress-related illnesses, high blood pressure, speech interference and hearing loss. Causes of pollution Pollution is a by-product of human economic activity and it is caused by • domestic, industrial and agricultural waste discharged into the environment faster than it can be absorbed; • gas emissions from burning fossil fuels; • use of pesticides by farmers; • radioactive materials leaking into the environment. © Gauteng Department of Education 38 Conservation: This is a practice of protecting the environment on individual, organisational or governmental level for the benefit of the natural environment and (or) humans. The aim of conservation is the sustainable use and management of natural resources (both renewable and non-renewable resources). The conservation of stocks (resources): • Conservation is needed when stocks are utilised (used) more than they can reproduce to replace what has been used. • This leads to a search for substitutes. • Conservation policies help to conserve renewable stocks (e.g. trees) and nonrenewable stocks (e.g. fossil fuels). Maintaining renewable stocks: • A market economy has an interest in conservation as it helps maintain renewable stocks, e.g. timber and fishing. Without conservation, timber factories and fisheries could be forced to close down. • Direct controls: The government maintains the stock levels of environmental resources through the issuing of permits and quotas. For example, the government sets quotas for fishing to stop catches being so large that they exceed (are bigger than) the growth of the fish population. It also sets quotas for cutting down trees to ensure deforestation does not exceed the rate of renewal. (Source Mind the Gap) Preservation: This is the overall strategy adopted by an organisation to protect the environment and involves research and conservation measures. • Private property: A game reserve may be sold to a businessman to be used for farming. But the government can intervene and stop the sale because they recognise the importance to the environment of preserving game reserves. • Preservation requires compromise (give and take): Farmers may develop their river mouth as a holiday resort. If this is not controlled, and too many other farmers do the same, the entire ecosystem will be damaged, and animal and plant life will be negatively affected. • Government policy: Government intervenes to preserve environmental assets by: –– Buying, confiscating, expropriating (taking ownership) or nationalising resources, e.g. indigenous forests. –– Subsidising key resources, e.g. privately owned ecosystems. (source: Mind the Gap) Externalities: • The extra costs and benefits of externalities are not factored in when assessing the state of the environment. • It is hard to work out where negative externalities, such as air pollution, arise from. • It is also hard to work out where positive externalities, such as a decrease in pollution, come from. For example, it can be difficult to identify which factory has stopped polluting. Measures to ensure sustainability The market The market is driven by self-interest. The market considers the environment as an asset to be used for its own benefit. Sustainability is achieved in the free market only © Gauteng Department of Education 39 to the extent that resource prices rise as they become scarce (less available), and through the development of environment friendly technology. There is a social interest in using the environment, not only to the direct producer/ consumer, but also to people in general, now and in the future. This means we all have an interest in preserving the environment. Reasons why the market fails to ensure sustainability: • The market sees the environment as a common resource. • Externalities such as air pollution caused by factories cannot be stopped without restrictive policies. • Lack of knowledge: Businesses cause damage without realising it, e.g. companies making aerosol cans (such as spray-on deodorants) did not know the damaging effect they had on the ozone layer. • Carelessness: People continue with harmful practices and leave future generations to worry about the consequences. Optimum market decisions • Market mechanisms have failed when market forces fail to produce the desired result of environmental sustainability. • All costs and benefits are not captured in the market price. The future cost of the resource disappearing is not often considered. (Source: Mind the Gap) Public sector intervention Method to attain Explanation and example sustainability Charging for the use Producers are made to pay a fee for the waste they need to of the environment dump. Residents pay fees for garbage and sewage disposal. Taxing the polluters Taxes can be charged on goods such as tyres, petrol and white paper, which are associated with pollution. Surcharge on petrol to cover damage caused by global warming. Setting standards A standard is set for the highest level of pollution allowed, such as a certain number of parts per million. Subsidising anti- Development programs are implemented in schools and pollution devices information posters are placed in public places. Use made of green technology such as electric motor cars and solar energy. Using marketable Businesses buy licenses to allow a certain amount of permits pollution from a production process. Firms that reduce their pollution emissions are allowed to sell part of their pollution license to another producer. Levels of pollution under these licenses can gradually be reduced. Command and Control (CAC) systems: • The government enforces policy by setting maximum levels of emission of pollution. © Gauteng Department of Education 40 • Most developed countries have regulations that control air and water pollution. There are 3 approaches in CAC systems: • Quantity standards: These focus on the amount of pollution emitted. • Quality standards: These focus on the environmental impact of the pollution emitted. • Social impact standards: These focus on the effect on people of the pollution emitted. Voluntary agreements: • The government concludes agreements with businesses on a voluntary basis to cut pollution. Education: • Education is used to try to change people’s attitudes towards the environment. • Innovative approaches have been tried in the developing world to educate people, e.g. setting up community wildlife reserves. Major international agreements. The Montreal protocol and the Kyoto protocol South Africa, as a signatory to the Montreal Protocol has a national obligation to safeguard the ozone layer from depletion. South Africa has phased out chlorofluorocarbons (CFCs), halons, methyl chloroform and carbon tetrachloride making it the only developing country in the world that has achieved so much in line with the phase-out schedule for developed countries. In 1997 in Japan, 160 nations drafted a much stronger agreement known as the Kyoto Protocol. This treaty, which has not yet been implemented, calls for the 38 industrialised countries that now release the most greenhouse gases to cut their emissions to levels 5% below those of 1990. This reduction is to be achieved no later than 2012. The Rio de Janeiro summit In June 1992 governments from over the world got together to work out a plan to protect the environment. Focussed on: Reconsidering patterns of production that result in toxic waste and pollution. Find alternative sources of energy to replace the use of fossil fuels. Emphasise the use of public transport to reduce vehicle emissions, traffic congestions and health problems. Create greater awareness of the growing scarcity of water. The Earth Summit held in Johannesburg 2002 A conference was held in Johannesburg on sustainable development. Detailed development targets were set and the progress made was reviewed. © Gauteng Department of Education 41 A program of work was drawn up in respect to the following: 1. Water, Sanitation and Human Settlements 2. Energy for Sustainable and Industrial Development and Air Pollution, Climate Change. 3. Agriculture, Rural Development, Land, Drought, Desertification. 4. Africa Transport, Chemicals, Waste Management, Mining and a 10-year framework of programmes on Sustainable Consumption and Production Patterns. 5. Forests, Biodiversity, Biotechnology, Tourism and Mountains. The Rio+20 summit The Rio+20 United Nations Conference on Sustainable Development was held in June 2012, again in Rio. Focussed on: Making the transition to greener economies while focussing on eradicating poverty Protecting the ocean from overfishing. Making cities more liveable and more efficient. Broadening the use of renewable energy resources. SECTION C: HOMEWORK QUESTION 1: 15 minutes (Source: Oxford Successful Economics) 1.1 Provide TWO reasons for environment degradation. (8) 1.2 Distinguish between conservation and preservation of the environment. (8) QUESTION 2: 10 minutes (Source: Via Afrika Economics) 2.1 Identify TWO sources of land pollution. 2.2 Since the 1970s international events have been organised to address sustainable development. Name decisions taken at the Johannesburg Summit on sustainable development. (2) (8) QUESTION 3: 10 minutes (Source: Solution for all Economics) 3.1 Explain the mechanisms through which putting a price on carbon results in decreased carbon emissions. (8) 3.2 Name TWO measures that may be used to ensure that carbon emissions are priced in an economy. (2) © Gauteng Department of Education 42 SECTION D: SOLUTIONS AND HINTS TO SECTION A QUESTION 1: 5 minutes 1.1 Bglobal warming. 1.2 Afiscal policy. 1.3 Aquotas 1.4 C private benefit 1.5 B indigenous (Taken from various sources) 5 x 2 (10) QUESTION 2: 10 minutes (Taken from DBE/November 2011) 2.1 • bio-mass / bio-diesel / bio-gas / bio-fuel • hydro • wind turbines • waves / tidal energy • solar power • fire wood • Any other renewable resource (Any 1 x 3)(3) 2.2 Reduce emission of CO2 / reducing carbon dioxide (levels of carbon) (3) 2.3 • Green taxes are taxes on output or consumption which are charged for the adverse effects on the environment / taxes levied on consumers and producers for waste and pollution • Also known as environmental taxes • E.g. levied on tyres, gas emission tax, plastic bags • Any other relevant explanation – maximum 2 marks for examples (2 x 2)(4) QUESTION 3: 10 minutes (Taken from DBE/November 2009) INTERNATIONAL AGREEMENTS 1992: UNCED 1992: Montreal Protocol on Substances that Deplete the Ozone Layer 1992: Convention on Biological Diversity 1992: Framework Convention on Climate Change 1992: Convention to Combat Desertification 1996: Habitat II Conference in Istanbul 1997: Kyoto Protocol on Climate Change in Bonn in Germany Earth Summit / Rio de Janeiro Also called the UNCED (United Nations Conference on Environment and Development), held in June 1992. Purpose of the Earth Summit was to set a series of objectives and establish and sign a number of conventions and treaties to address the deterioration of the global environment © Gauteng Department of Education 43 Agenda 21 as action plan originated from the Earth Summit Agenda 21 outlined detail key issues to ensure sustainable development – including issues like resource management, population growth, health and poverty Aimed at the sustainable development and the protection of the environment. Main value of the summit is that it made countries across the globe aware of the dangers unsustainable development pose to individual countries and the whole world. The threat of environmental problems was widely acknowledged and this led to the reduction of global warming.(Max. any 4 x 2) Johannesburg World Summit on Sustainable Development Largest conference in the country since Rio de Janeiro – 10 years previously. Focused on WEHAB – water, electricity, health, agriculture and biodiversity. African environmental issues were also highlighted, namely to improve access to clean water and to help fight the HIV/Aids pandemic. The Summit was very successful with countries committing themselves to a range of actions, namely improving water and sanitation and addressing the causes of ill health. Poverty eradication Changing unsustainable patterns of consumption Globalization Health The environment (Max. any 4 x 2) Kyoto Protocol Agreement to deal with the problem of global warming. It is a guide or action plan that sets targets for developed countries to reduce greenhouse gas emissions by 7% before 2010. Signed by 141 nations, including all European and other developed countries USA and Australia To achieve this, countries put controls on the emissions of greenhouse gases by their largest polluters, which are large companies. (Max. any 4 x 2) (Accept current/latest agreements) QUESTION 4: 20 minutes (Taken from DBE/November 2012) INTRODUCTION Sustained development means meeting the needs of the present generation without compromising the needs of future generations OR When pollution levels and environmental degradation are too high and the free market system has failed to bring about an optimal utilisation of the environment, government intervenes or takes control. (Accept any other relevant introduction) Max 2 © Gauteng Department of Education 44 BODY 1. PUBLIC SECTOR INVOLVEMENT Aims to achieve social efficiency with regard to environmental sustainability: • Granting property rights - The conservationist effect: ensure people care for things belonging to them use it profitably as long as possible - To prevent fauna + flora species to become extinct allow people property rights little cost to tax payers - Can be expanded to common goods e.g. clean air where polluters pay victims to reduce pollution - E.g. Kyoto Protocol, where developed countries pay developing countries for their right to pollute Charging for use of environment - Pricing the environment – government levies fee on consumers and producers for waste produced and dumped in environment - E.g. in SA local authorities levy charges on rubbish collection and sewage disposal. - In other countries emission charges are levied on industries and vehicle owners for discharging gas waste - The best results are when charges are proportional to waste produced Environmental taxes - A tax could be imposed on the output or consumption of goods, wherever external environmental costs are generated - These are known as green taxes (e.g. tyres) - The rate of tax should be equal to the marginal external cost Environmental subsidies - These subsidies reduce activities that cause environmental damage - These costs are recovered from taxes - Subsidies could be used for the development of new technology or equipment - Encourage production of environmentally friendly subsidies - Encourage recycling of waste such as bottles and/or cardboards Marketable permits - When government wants to reduce pollution, each business is given a license to pollute to a certain degree - Business can sell their licenses to other business who needs to expand production. It is done on a permit market - In SA done by Dept. of Mineral Resources to reduce permitted amount of pollution over time © Gauteng Department of Education 45 PUBLIC SECTOR CONTROL • When government intervention has no result – government takes direct control Command and control (CAC) Set maximum permitted levels of emission or resource use inspectors monitor activities and impose fines Developed countries have environmental regulations e.g. air and water pollution, noise, waste management, recycling 3 approaches to devising CAC systems: - Quantity standards focus on amounts of pollution caused - Quality standards focus on environmental impact - Social impact standards focus on the effect on the people Voluntary agreements Between government and businesses on voluntary basis to cut pollution – formal contract and legally binding or informal commitments Businesses prefer these agreements – can negotiate – build into planning Education Manage the environment through education people’s attitude change towards environmental consequences of their actions Innovative approaches in developing world to educate people to manage environment is: community wildlife reserves transformed into areas managed for conservation, households more conscious of waste-recycling, co-operatives established to produce organic foods, groups like Green Party + Friends of the Earth encourage environmental Department of Agriculture – Conservation of Agricultural Resource Act – prevent soil erosion South Africa signed Convention to Combat Desertification South Africa coordinates Valdivia group of Desertification Aim: to foster scientific and technological cooperation Waste management • Government published the White Paper on Integrated Pollution and Waste Management Pollution prevention eliminates costly waste and promotes sustainable development Aims to reduce risks to human health and the environment by trying to eliminate the causes of pollution, instead of treating the symptoms Radioactive Waste Management Policy and Strategy – aims to establish a comprehensive radioactive waste governance framework September 2002 – agreement signed on regulations governing plastic shopping bags February 2004 – tyre industry agreed to certain targets with respect to the collection and recycling of waste tyres DEAT implemented the National Waste Management Strategy Projects © Gauteng Department of Education 46 Main components: waste information, health care waste recycling and capacity building Examples: fuel and vehicle taxes, effluent charges, congestion charges, emission permits and recycling Optimum market decisions • Market mechanism has failed when market forces failed to produce desired result of environmental sustainability All costs and benefits are not captured in the market price – quantities produced and consumed inappropriate Private sector involvement • Numerous bodies are involved in conservation activities to ensure sustainability – concentrating on conservation, wildlife and the general environment Examples: Bird Life South Africa, Wildlife and Environment Society, Worldwide Wildlife Fund South Africa, Green Trust Recycling • Examples: recycled waste paper, Collect-a-Can Market related solutions refers to a set of measures designed to incorporate the price mechanism to better the effect Can be based on incentives which tax or charge polluters according to the amount or damage they do Max 26 International agreements Identification and explanation of agreements/protocols (Max 6) Motivation for success or failure (Max 4) CONCLUSION Pressure groups such as the Green party and Friends of the Earth have forced industries to encourage managers to integrate environmental responsibility into all their business decision-making. (Accept any other relevant conclusion) Max 2 _________________________________________________________________ © Gauteng Department of Education 47 SESSION 15: REVISION PAPER 1 (TERM 1) SECTION A: TYPICAL EXAM QUESTION – Paper 1 Gauteng June Exam 2014 SECTION A (COMPULSORY) QUESTION 1: MULTIPLE-CHOICE QUESTION 1.1 1.1.1 Various options are given as possible answers to each question. Choose the answer and write only the letter (A - C) next to the question number (1.1.1 – 1.1.8) in the ANSWER BOOK. The value of leakages is calculated by the following model equation. A B C G+X+I T+M+S C+I+G (2) 1.1.2 The MPS and MPC will always add up to ……… A B C 5 between 3 to 6 1 (2) 1.1.3 Business cycles that last between 7 and 11 years and are caused by the changes in net investments by businesses and government are called …… A B C 1.1.4 Kitchin cycles Juglar cycles Kuznets cycles ((2) The length of a business cycle is measured from……. A B C peak to trough expansion to contraction peak to peak (2) 1.1.5 The budget was presented by ………………. in Parliament on the 26th of February 2014. A B C Trevor Manual Pravin Gordhan Gill Marcus (2) 1.1.6 A country will have a/an ……………. advantage if it can produce a good or service, or most goods and services at lowest costs. A B C Comparative Real Absolute © Gauteng Department of Education 48 (2) The Wallmart take-over of the local retail chain Massmart was a ……………. of US$2.2 billion in South Africa. 1.1.7 A B C Foreign Direct Investment capital transfer current transfer (2) The ……… is the only international global organization that deals with the rules of trade between countries 1.1.8 A B C African Union International Monetary Fund (IMF) World Trade Organization (WTO) (2) 8 x 2 [16] 1.2 Choose a description from COLUMN B that matches the item in COLUMN A. Write only the letter (A-J) next to the question number ( 1.2.1 – 1.2.8 ) in the ANSWER BOOK. 1.2.1 COLUMN A Capital goods market A COLUMN B A fixed limit, usually by quantity, of the amount of a good that may be imported. 1.2.2 Taxes on product B Public goods 1.2.3 Unemployment and inflation C Must be added to Gross value at basic prices to get Gross Domestic Product at market prices. 1.2.4 Non-excludability D 1.2.5 Treasury When a country imports a greater value of goods and services than it exports. 1.2.6 Trade deficit E Trading of machinery and vehicles 1.2.7 Managed floating exchange rate F Demand –side policy. G 1.2.8 Trade liberalization Involves removing barriers to international trade. H Collective goods I Rate that government allows to fluctuate as a result of supply and demand factors. J A department of government that is in charge of the collection, management and © Gauteng Department of Education 49 expenditure of public revenue ( 8 x 1) = (8) 1.3 Give the economic term/concept for each of the following descriptions. Write only the term/concept next to the question number ( 1.3.1 – 1.3.6 ) in the ANSWER BOOK. 1.3.1 Added spending in the circular flow that is not paid for out of current resource income. 1.3.2 Proportion of an increase in income that households spend on consumption. 1.3.3 A decline in the level of economic output (a downturn in the business cycle) that lasts for six months or longer. 1.3.4 The deliberate action of the authorities to influence the economy by means of government expenditure and tax. 1.3.5 An increase in the value of the domestic currency, relative to the currencies of other countries. 1.3.6 A tax levied on the value of the product. ( 6 x 1 ) = (6) TOTAL SECTION A: [30] SECTION B (Answer any TWO of the following questions) QUESTION 2: (CIRCULAR FLOW AND BUSINESS CYCLES) 2.1 Answer the following questions: 2.1.1 Name two supply-side policies used by government to stimulate economic activities. 2 x 1 = (2) 2.1.2 Give the concept used to describe the removal of laws, regulations and other forms of government controls to encourage free markets. (2) 2.2 Study the following insert and answer the questions that follow. © Gauteng Department of Education 50 2.2.1 Name the TWO factors that will influence the petrol price, according to the above article. 2 x 2 = (4) 2.2.2 What is the biggest risk in terms of oil prices? (2) 2.2.3 Describe the effect of an increase in “ fuel levies” on food prices. (2) 2.2.4 A barrel of oil currently costs $ 108. If the rand/dollar exchange rate is R 13.60, calculate the price per barrel of oil in rand. (Show calculations) (2) (10) 2.3 Study the table below and answer the questions that follow: R m (2009 Compensation of employees 1 077 833 Net operating surplus 731 204 Consumption of fixed capital 332 584 Gross value added at (A)____ 2 141 621 Other taxes on production 42 101 Other subsidies on production 9 210 Gross value added at basic prices 2 174 512 Taxes on products 238 557 Subsidies on products 14 914 Gross domestic product at (C) ____ 2 398 155 Factor payments from the rest of the world (D) Factor payments to the rest of the world (E) Gross National Income at market prices 2.3.1 Provide the missing words for A and C. (4) 2.3.2 Use the figures in the above table to calculate the GNI at market prices if the factor payments from the rest of the world were R 34 075 million and the factor payments to the rest of the world were R 87 593 million. (4) © Gauteng Department of Education 51 2.3.3 Give an example of subsidies on production. (2) 2.4 2.5 Discuss the Keynesian view about the causes of business cycles. 4 x 2 = (8) Distinguish between extrapolation and moving averages in the business cycle. 2 x 4 = (8) [40] QUESTION 3: (PUBLIC SECTOR; ECONOMIC GROWTH AND FOREIGN EXCHANGE) 3.1 Answer the following questions: 3.1.1 Name TWO objectives of the public sector. 2 x 1 = (2) 3.1.2 State the type of protectionism which limit the quantity of goods that may be imported. (2) 3.2 Study the table below and answer the questions that follow: Current account Merchandise exports, free on board Net gold exports Service receipts Income receipts Less: Merchandise imports, free on board Less: Payments for services Less: Income payments Current transfers (net receipts+) Balance on current account R billions 665 400 55489 104 300 35 600 598 100 130 800 85 200 -18 000 (A) 3.2.1 Calculate the trade balance. (show all calculations) (4) 3.2.2 Indicate in which section of the current account the following transactions will occur: 3.2.2.1 3.2.2.2 3.2.2.3 The selling of gold to the French government. The receipt of a $1 million donation for a housing project. Freight insurance received for the shipment of sugar to Malawi.3 x 2 = (6) © Gauteng Department of Education 52 3.3 Analyze the graph below and answer the questions that follow: 3.3.1 At what price level is the exchange rate in equilibrium? (1) 3.3.2 At what price level will there be an over-supply of dollars? (1) 3.3.3 Give the concept/term used when the exchange rate changes from R6 a dollar to R5 a dollar due to reserve bank intervention. (2) 3.3.4 Explain TWO factors that will increase the demand for dollars. 3.3.5 Define an exchange rate. 2 x 2 = (4) (2) (10) 3.4 Explain TWO effects of public sector failure. 2 x 4 = (8) 3.5 Discuss quotas and subsidies as import substitution methods. 2 x 4 = (8) [40] © Gauteng Department of Education 53 QUESTION 4: (COMBINED – ALL SECTIONS) 4.1 Answer the following questions: 4.1.1 Name TWO demand reasons for international trade. 2 x 1 = (2) 4.1.2 State the kind of subsidy used when SAA (South African Airways)losses are written off. (2) 4.2 Analyze the following cartoon and answer the questions that follow. 4.2.1 Explain why the person in the cartoon has fainted? (2) 4.2.2 Define a fiscal policy. (2) 4.2.3 Is personal income tax progressive or regressive? Motivate your answer. (4) 4.2.4 Name ONE source of state revenue. © Gauteng Department of Education (2) [10] 54 4.3 Analyze the following diagram and answer the questions that follow: C = 1500 Factor market a= b = 100 G H F f = 250 g = 150 I = 300 d = Goods market e = 350 Financial market h = 250 2250 Foreign sector 4.3.1 Calculate the missing values for flows d and a in the diagram. (4) 4.3.2 Identify and calculate the economic leakages from the above diagram. (6) 4.4 Explain how the existence of parastatals causes a problem in public sector provisioning. (8) 4.5 Using a graph, discuss the Laffer curve in detail. (8) [40] SUB-TOTAL : SECTION B [80] SECTION C Answer any ONE of the following questions from section C. Rubric for essays: Essays must include an introduction, structured body and logical conclusion. Mark allocations: Introduction (2 Marks) Body ( Main topic = 26 Marks) ( Sub – section = 10) Conclusion (2 Marks) © Gauteng Department of Education 55 QUESTION 5: (BUSINESS CYCLES) Discuss the monetary and fiscal policies used to smooth out the business cycles. (26) Also explain the leading indicators that help to forecast the tendency of a business cycle. (10) [40] QUESTION 6: (TRADE PROTECTION AND FREE TRADE) Discuss the arguments in favour of protectionism and the arguments in favour of free trade. (26) * Explain if South Africa has been successful in promoting free trade. (In your answer, refer to various trade protocols South Africa has entered in support of free trade.) (10) [40] SUB-TOTAL: SECTION C [40] FINAL TOTAL: [150] SECTION B: HOMEWORK SECTION A (COMPULSORY) QUESTION 1 30 MARKS 1.1 Various options are given as possible answers to each question. Choose the answer and write only the letter (A - C) next to the question number (1.1.1 – 1.1.8) in the ANSWER BOOK. 1.1.1 Calculate the amount by which national income is going to increase if a new investment of R500 000 is injected into the economy while MPC is 0.75. A B C 1.1.2 The ……. Indicates the general direction in which the economy is moving. A B C 1.1.3 R2 000 000 R666 666.67 R375 000 amplitude trend line moving averages ……. are supplied by government, because markets will undervalue and undersupply these goods, A B Scarce goods Merit goods © Gauteng Department of Education 56 C 1.1.4 Final goods The ratio between export prices and import prices expressed as an index is known as … A B C 1.1.5 terms of trade balance of payment surplus trade A consequence of public sector failure is: A B C 1.1.6 effectiveness inefficiency adequacy If the exchange rate changed from $1=R6 to $1=R8, we can say that: A B C 1.1.7 A surplus on the balance of payments indicates that …… A B C 1.1.8 the $ depreciated against the R. the R depreciated against the $. the R appreciated against the $. the inflow of foreign currency exceeds the outflow of foreign currency. the inflow of foreign currency is less than the outflow of foreign currency. there is a deficit on both the current and financial account . An excess demand for dollars will cause….. A B C a depreciation of the rand/dollar exchange rate. an appreciation of the rand/dollar exchange rate no change in the rand/dollar exchange rate. 8 x 2 (16) 1.2Choose a description from COLUMN B that matches the item in COLUMN A. Write only the letter (A-I) next to the question number ( 1.2.1 – 1.2.8 ) in the ANSWER BOOK. 1.2.1 COLUMN A Firms 1.2.2 GDI 1.2.3 Kuznets business cycles 1.2.4 Free-riders 1.2.5 Non-excludability A COLUMN B People who are able to make use of a good or service without paying for it B Removing barriers to international trade C No one can be prevented from using a good or service once it is provided D Agreements that set out how trade between two or more countries will be conducted © Gauteng Department of Education 57 1.2.6 Trade balance 1.2.7 Trade liberalization 1.2.8 Trade protocols E The units that employ factors of production to produce goods and services that are sold on the goods market F Business cycles of 15 – 25 years, also known as infrastructural investment cycles G Difference between merchandise export (including net gold export) and merchandise imports H The income received by the factors of production for producing the gross domestic product I Business cycles of 40-60 years that are characterized by periods of high sectoral growth, followed by periods of slow growth (8 x 1 ) (8) 1.3 Give the correct term/concept for the following. Write only the word next to the question number ( 1.3.1 – 1.3.6 ) in the ANSWER BOOK. 1.3.1 The proportion of an increase in income that households save 1.3.2 The market where both short-term and long-term financial assets are traded 1.3.3 A decline in the level of economic output (a downturn in the business cycle) that lasts for six months or longer. 1.3.4 When government expenditure is greater than government income 1.3.5 A tariff that is based on a percentage of the value of a good 1.3.6 Agreements that set out how trade between two or more countries will be conducted 6 X 1 (6) TOTAL SECTION A: 30 SECTION B Answer any TWO of the THREE questions from this section in the ANSWER BOOK. QUESTION 2:MACRO-ECONOMICS Topics 1-3 40 MARKS 2.1.1 Name any TWO problems associated with the use of fiscal and monetary policy to fine-tune the economy 2 x 1 (2) 2.1.2 ….. studies the sum total of economic activity including the study of 1 x 2 (2) © Gauteng Department of Education 58 aggregated indicators such as the national income figures. 2.2 Study the diagram below and answer the questions that follow. R80 000 A R20 000 Households R10 000 Government Business C R60 000 B R10 000 Foreign sector 2.2.1 Define the multiplier. (2) 2.2.2 Complete the flow by filling in the value or name of A-C. (6) 2.2.3 Calculate the leakages in the diagram above. Show all calculations. (2) 2.3 Study the graph below and answer the questions that follow. R100 000 R80 000 Tax revenue Tax % 0% 10% 50% 90% 100% 2.3.1 Identify the curve used in the graph above and give a definition of that curve. (2) 2.3.2 Identify the best tax % and Tax revenue combination a government © Gauteng Department of Education 59 2.4 2.5 should use. (4) 2.3.3 Explain Point A and Point B. (4) Differentiate between the Keynesian and monetarist view of the business cycle. 2x4 (8) Explain why an increase in exports has a multiplier effect on the domestic level of production and income. 4 x 2 (8) [40] QUESTION 3: MACRO-ECONOMICS/ECONOMIC PURSUITS Topics 4 & 5 40 MARKS 3.1.1 3.1.2 3.2 Name any TWO reasons for a demand for foreign currency, e.g. $ (dollars) 2 x 1 (2) ...... refers to the situation in which the central bank stands ready to buy and sell currencies in the foreign exchange market in order to stabilise the exchange rate. 1 x 2 (2) Study the cartoon below and answer the questions that follow. 3.2.1 3.2.2 3.2.3 3.2.4 Give a definition of protectionism. What do you think is meant by “mine is taller”? Name TWO instruments used as trade barriers. Explain what is meant by “Preventing dumping” as an argument for protectionism. © Gauteng Department of Education (2) (2) (2) (4) 60 3.3 Study the extract below and answer the questions that follow: Government starts to implement WTO facilitation rules The Government has started the process of implementing a series of international trade facilitation agreements, so far signed by the country. At the 9th Ministerial Conference held in Bali, Indonesia, from December 3 – 7, 2013, ministers adopted the Bali Package, a series of decisions aimed at streamlining trade, allowing developing countries more options for providing food security, boosting least-developed countries’ trade and helping development more generally. By: Lydiah Nyawira Standard digital 3.4 3.5 3.3.1 What does the abbreviation WTO stand for? (2) 3.3.2 What is the main function of the WTO? (2) 3.3.3 Why do you think developing countries cannot compete with developed countries when it comes to international trade? (4) 3.3.4 Which organisation did the WTO replace and when did it replace it? (2) Briefly explain ‘specialisation’ and ‘mass production’ as effects of international trade. 2 x 4 (8) Explain the Southern African Customs Union (SACU) in detail. 4 x 2 (8) [40] QUESTION 4: MACRO-ECONOMICS/ECONOMIC PURSUIT Topics 1-5 40 MARKS 4.1.1 List TWO of Adam Smith’s criteria of a good tax. 2 x 1 (2) 4.1.2 When the government of a country encourages the use of local goods and services rather than imported ones it is called ...... 1 x 2 (2) 4.2 Study the cartoon and answer the questions that follow. © Gauteng Department of Education 61 4.2.1 4.2.2 4.2.3 4.2.4 4.3 Define public sector failure. Who is the lady sitting behind the desk? Discuss how corruption leads to public sector failure. Name ONE effect of public sector failure. (2) (2) (4) (2) Use the following table to answer the questions. Sugar Wine Country X 8 000 4 000 Country Y 4 000 8 000 4.3.1 Define comparative advantage. (2) 4.3.2 Country X has an absolute advantage over Country Y in the production of ...... (2) 4.3.3 Calculate the comparative advantage of CountryY. Which product should the produce? Show all calculations. (6) 4.4 4.5 Explain TWO macroeconomic objectives of government. Explain TWO disadvantages of export promotion. 4 x 2 (8) 2 x 4 (8) [40] TOTAL SECTION B: 80 SECTION C Answer any ONE of the two questions from this section in the ANSWER BOOK. MARK ALLOCATION FOR ESSAY RESPONSES STRUCTURE OF ESSAY MARK ALLOCATION Introduction Max 2 Body: © Gauteng Department of Education 62 Main part: Additional part: For example discuss/distinguish/ differentiate/explain/analyse/ evaluate/assess For example draw a graph/deduce/ Outline/briefly explain/expand on/your own opinion/support Conclusion Max 26 Max 10 Max 2 TOTAL 40 QUESTION 5: Topic 2 40 MARKS Business cycles are an important instrument in the economy. Fully explain the following business cycle indicators used in forecasting –Leading, Lagging, Co-incident, Length and Amplitude. (26) In addition draw a fully labelled “business cycle”. (10) QUESTION 6: Topic 4 40 MARKS International trade is very important for any country. Discuss the current account and capital transfer accounts in the balance of payment. (26) Suggest ways in which government could correct the balance of payment surplus and deficits (disequilibria). (10) TOTAL SECTION C: 40 GRAND TOTAL: 150 SECTION C: SOLUTIONS TO SECTION A ECONOMICS – GRADE TWELVE MEMORANDUM – JUNE EXAMINATION – PAPER 1 CAPS – 2014 SECTION A (COMPULSORY) QUESTION 1: 1.1 MULTIPLE-CHOICE QUESTION 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 1.1.7 1.1.8 B T + M + S C 1 B Juglar cycles C peak to peak B Pravin Gordhan C absolute A Foreign Direct Investment C World Trade Organisation (8 x 2 )(16) © Gauteng Department of Education 63 1.2 MATCHING ITEMS 1.2.1 E Trading of machinery and vehicles 1.2.2 C Must be added to Gross value at basic prices to get Gross Domestic Product at market prices 1.2.3 F Demand –side policy. 1.2.4 B Public goods 1.2.5 J A department of government that is in charge of the collection, management and expenditure of public revenue 1.2.6 D When a country imports a greater value of goods and services than it exports. 1.2.7 I Rate that government allows to fluctuate as a result of supply and demand factors 1.2.8 G Involves removing barriers to international trade. (8 x 1) (8) 1.3 ONE-WORD ITEMS 1.3.1 Injections 1.3.2 Marginal Propensity to Consume (mpc) 1.3.3 Recession 1.3.4 Fiscal Policy 1.3.5 Appreciation 1.3.6 Trade liberalization ( 6 x 1 ) (6) TOTAL SECTION A: SECTION B QUESTION 2: (CIRCULAR FLOW AND BUSINESS CYCLES) 2.1 Answer the questions: 2.1.1 Name TWO supply-side policies used by government to stimulate economic activities. Reduction in costs Improving the efficiency of inputs Improving the efficiency of markets 2 x 1 = (2) 2.1.2 Give the concept used to describe the removal of laws, regulations and other forms of government controls to encourage free markets. Deregulation (2) 2.2 Study the given insert and answer the questions: 2.2.1 Rand value Global oil prices 2.2.2 2.2.3 2.2.4 2 x 2 = (4) Politics in the Middle East. Food prices could increase. R 108 X R 13,60 = R 1468,80 © Gauteng Department of Education (2) (2) (2) 30 64 2.3 Study the given table and answer the questions that follow: 2.3.1 A = Factor cost (2) C = Market prices (2) 2.3.2. R 2 398 155 m + R 34 075 m – R 87 593 m = R 2 344 637 m.(4) 2.3.3. Employment subsidies Subsidies paid to prevent pollution 1 x 2 = (2) 2.4. Discuss the Keynesian view on the causes of business cycles. According to the endogenous explanation, business cycles develop due to forces inside the market system. The Keynesian view is that the market economy is inherently unstable. The market economy is characterized by periodic waves of high and low economic activity. Business cycles are an integral part of the market system, and are caused by endogenous factors that arise from the system itself. The market is not able to solve problems and it is the duty of government to intervene and bring stability to the economy. The price mechanism fails to coordinate supply and demand in the markets for goods and services, and factors of production. 4 x 2 = (8) Examples of endogenous factors: (causes) Change in investment: - An increase in investment causes an increase in real GDP. - This puts the economy in an expansion phase, and vice versa. Change in aggregate demand: A large decrease in any of the components of aggregate demand forces firms to reduce output. This causes a contraction of economic activities, with job losses. Change in aggregate supply: A large increase in supply places the economy into an expansion phase. The discovery of new mineral deposits stimulates all other sectors of the economy. This increases aggregate demand and causes an increase in economic activity. Technological change and innovation: The introduction of new technology and innovation increases economic activity and places the economy into an expansion phase. © Gauteng Department of Education 65 Monetary policy: An increase in interest rates discourages economic activity. If interest rates are high, entrepreneurs borrow and invest less. This decreases productivity and reduces economic activity. A continuous increase in interest rates will put the economy into a recession. (Examples: Max 4) 2.5. Distinguish between the following concepts: Extrapolation: The technique of extrapolation is to identify a trend and then assume that this trend will continue. (this then predicts future patterns) If the business cycle has passed through a trough and has entered the boom phase, forecasters might predict economic growth, e.g. to predict future share prices. (4) Moving average: The statistical tool of moving averages is used to analyse the changes that occur in a series of data over a certain time period. By calculating a moving average a forecaster can smooth out the minor fluctuations in a series of events. (e. g. the average sales figures are calculated over three or more months to forecast events) (4) [40] QUESTION 3: (PUBLIC SECTOR; ECONOMIC GROWTH AND FOREIGN EXCHANGE) 3.1 Answer the following questions. 3.1.1 Name TWO main objectives of the public sector. Economic growth Full employment Exchange rate stability Price stability Economic equity 2 x 1 = (2) 3.1.2 State the type of protectionism that limits the quantity of goods which may be imported. Import quotas. 3.2 3.2.1 1 x 2 = (2) Study the given table and answer the questions that follow. R 655 400 m + R 55 489 m – R 598 100 m = R 112 789 m (4) © Gauteng Department of Education 66 3.2.2 Indicate the sections in the current account. 3.2.2.1 3.2.2.2 3.2.2.3 Gold exports Current transfers Service receipts 3.3 Analyse the given graph and answer the questions. 3.3.1 3.3.2 3.3.3 R6 R7 Revaluation 3 x 2=(6) (2) (2) (2) 3.3.4 Name TWO factors that will increase the demand for dollars. An increase in the price of minerals, e.g. the price of gold. An increase in exports to America due to an economic recovery in America. An increase in the number of Americans visiting South Africa. Higher investments by Americans in the South African economy. Buying shares in South African firms. The placing of a deposit with a South African bank. The paying of interest or dividends to South Africans. Repaying money borrowed from South Africans (loans repaid). 2 x 2 = (4) 3.3.5 An exchange rate is the value of one countries currency, in exchange for that of another country. (2) 3.4 Explain TWO effects of public sector failure. Social effects/instability: - Service delivery delayed or not delivered. - Poverty cannot create sufficient jobs/economic growth. - Unfair distribution of income and wealth. - The public turn to illegal practices, such as illegal electricity connections. - The high crime rates/road accidents are indicative of mismanagement. Economic effects: - Economic growth does not occur if the public sector fails. - Waste of resources occurs because the public sector is not profit motivated. - Public sector failure undermines economic confidence and foreign investment. © Gauteng Department of Education 67 - 3.5 The lack of skills reduces the standard of education and healthcare is poor. Price instability: - Public sector failure may lead to unstable prices for goods. Unemployment: - The public sector must provide systems, services and policies that provide opportunities to create employment. Political effects: - Large bureaucracy, which is typical of a failing government. (high salaries by state workers) - Inefficiency, such as a lack of monitoring and evaluation causes poor workmanship. Environmental effects: - Degradation can cause a loss of habitat, damage to ecosystems, the loss of fauna and flora, etc. 2 x 4 =(8) Discuss quotas and subsidies as import substitution methods. Quotas: - A quota is a limit on the supply of a good or service/they are protective measures. - Quotas are fixed, pre-determined quantities of a good that may be imported. - If goods are allowed to enter the country in unlimited quantities, the market can be flooded with cheap, imported products. - Quotas can be imported on exports, but more commonly on imports. - The effect of a quota is to reduce the supply of imports and increase prices. - Quotas protect domestic producers from foreign competition. 2 x 2 = (4) Subsidies: - Subsidies to domestic enterprises that export goods may be used as an indirect way of processing them. - Subsidies are paid on transport costs or employment of workers, such as training costs. - The subsidies may enable relatively high costs of domestic enterprises to reduce those. - Governments often subsidize domestic producers to create a trade surplus. © Gauteng Department of Education 68 QUESTION 4: (COMBINED – ALL SECTIONS) 4.1 Answer the following questions: 4.1.1 Name TWO demand reasons for international trade: Level of economic development and income of a country, such as consumption patterns. Consumer wants and preferences are different from one country to the next. International migration – different cultures, religions and lifestyles create a need for imports. Differing levels of technical development, such as technology in various countries. A country may not have the factors of production needed to produce certain goods/services. A country may not be able to produce the required goods and services – cost of production. 2 x 2 =(4) 4.1.2 4.2 Indirect subsidy. (2) Analyze the given cartoon and answer the questions that follow. Consumer has to pay more taxes/consumer ‘s income decreases. (2) A fiscal policy involves the state’s planned expenditure and taxes for a specific year. (2) 4.2.3 Progressive tax. Motivation: The higher income groups are taxed more. 2 x 2 = (4) 4.2.4 Name ONE source of state income (revenue) Taxes (direct taxes/indirect taxes) Loans Donations Administrative income Government property 1 x 2 = (2) 4.3 Analyse the given diagram and answer the questions that follow. 4.2.1 4.2.2 4.3.1 (a) R 1 500 + R 100 = R 1 600 Or (a) (d) R 1 150 + R 250 + R 150 +(R 300 – R 250) = R 1 600 R 1 500 -- R 350 = R 1 150 (2) (2) 4.3.2 Leakages (L) = R 350(savings) + R 100(taxes) + R 250(imports) = R 700 (6) 4.4 Explain how the existence of parastatals causes a problem in public © Gauteng Department of Education 69 sector provisioning. Parastatals receive exclusive rights from the government, which often leads to monopolies. Parastatals can also be created through the process of nationalization. The public sector is normally not profit-driven; parastatals are special forms of public sectorenterprises that are, however, profit-driven, such as Telkom, Transnet, PetroSA, Denel, SABC, Eskom, Rand Water Board, ACSA, South Africa Post Office(SAPO) and SABS(S.A. Bureau of Standards) The parastatals are faced with inefficiency and a lack of skilled workers to produce profits. Parastatals are protected by government and new competitors find market entry difficult. The state has to “subsidise” or fund these enterprises are the cost of taxpayer’s money. 4 x 2 (8) 4.4 Use a graph and discuss the Laffer curve in detail. t (4) This curve indicates that high and progressive tax rates of income discourage people from entering or staying in the labour force. As the tax rate is raised above zero, tax revenues increase. The increasing curve finally peaks at tax rate (t). Thereafter tax rates become too high, which could lead to evasion or tax avoidance. A decrease in the high tax rate (t1) to a lower tax rate (t)often creates more state revenue. (4) © Gauteng Department of Education 70 [40] SUB-TOTAL: SECTION B [80] SECTION C QUESTION 5: (BUSINESS CYCLES) INTRODUCTION: A business cycle is a time series that shows what happens to the value of the domestic output (GDP) of the economy over time, which can be repeated every three to five years, or longer. (Any relevant introduction)(2) A. Monetary Policies: (instruments to be used by the SARB) Interest rates: In South Africa, banks turn to the SARB if they experience a general shortage of funds in the money market. The decrease in the interest rates makes it cheaper for firms to borrow money, and vice versa. Cash reserve requirements: (currently at 2,5 %) The SARB can increase the cash reserve requirements of commercial banks. This means that commercial banks can lend less, and so the money supply decreases. Open-market transactions: The SARB uses its stock of security instruments, such as government bonds and treasury bills to control money supply. If there is too much money in circulation, the SARB sells these securities to banks and other financial institutions. The SARB debits the bank’s account with the value of the sale and the bank’s balance with the SARB is reduced. (effect – this reduces the ability of the bank to offer credit)(used in prosperity) If the SARB wants to increase the amount of money in circulation, it buys security instruments back from banks. The SARB credits the banks’ account with the amount of the purchase. (used during recessions) Moral persuasion: The governor of the SARB can try to persuade commercial banks to lend less in booms, and more in recessions. The SARB also uses moral persuasion to warn consumers not to spend too much and rather to save money during times of inflation. Exchange rate policy: Central banks use either a free-floating rate policy or a managed floating rate policy. © Gauteng Department of Education 71 Free-floating is when supply and demand determines the exchange rate of the currency. Managed floating is where the central bank interferes in the foreign exchange markets by buying and selling the currency in order to stabilize the exchange rate. Inflation targeting: The SARB adopts a policy of inflation targeting, which means to keep the inflation rate between 3% to 6% per year. The main target of the SARB is to maintain the internal and external value of the rand. B. Fiscal Policies: Expansionary fiscal policy: It is an attempt to contain the economic slump and stimulate economic activity, by increasing government spending and and/or reducing the level of taxes. During a recession, a reduction in taxation may be needed to increase disposable income and stimulate demand for goods and services. Restrictive fiscal policy: It is an attempt to decrease the level of economic activity by reducing government spending and/or increasing the level of taxes. During prosperity periods the government must reduce public expenditure to prevent the economy from overheating. An increase in government spending will only make inflation worse. (26) Leading indicators: Leading indicators change before the economy changes. They give a warning of what we can expect in the future, so economists use them to forecast turning points in the economy. Leading indicators lead the economy, so they indicate changes before the changes happen. Leading indicators reach a peak a few months before the business cycles reaches a peak, and they reach a trough a few months before the business cycles reaches a trough. Leading indicators are important, because they give advance warning of changes in aggregate economic activity. Examples of leading indicators are the net gold and foreign reserves, volume of mining production, total number of new cars sold, share prices, number of new businesses registered and real exports. (10) CONCLUSION: (Accept any relevant/logical conclusion) (2) [40] © Gauteng Department of Education 72 QUESTION 6: (TRADE PROTECTION AND FREE TRADE) INTRODUCTION: Free trade occurs when there is trade without any protectionist activities or trade barriers between countries. Businesses are free to import and export goods, as well as to invest in foreign countries, without the imposition of restrictive tariffs. Protectionism involves a deliberate policy by the government to create trade barriers, such as tariffs and quotas in order to protect domestic industries. (Accept: Any logical introduction)(2) BODY: Arguments for trade protectionism: Raising revenue for the government: The introduction of tariffs produces revenues for governments. In developing countries the tax base is often limited, because of low incomes of individuals and businesses. Protecting the whole industrial base: (i) Maintaining domestic employment. Countries with high levels of unemployment are forces by politicians to stimulate employment creation. Developing countries often tend to resort to protectionism in order to stimulate industrialization, at the expense of that country. (ii) Protecting workers. An argument is that imports from countries with fairly low wages represent unfair competition to the highly paid workers of the local industries. Protection is thus necessary to prevent local wage levels from falling or even to prevent local businesses from closing down. (iii) Diversifying the industrial base. All countries need to develop diversified industries to prevent overspecialisation. A country relying too heavily on the export of one or a few products is very vulnerable. Such a country is exposed to world fluctuations in prices and supply and demandside problems could lead to the imposing of import restrictions. (iv) Developing strategic industries. Industries such as iron and steel, agriculture, chemicals and energy are regarded as strategic industries. Developing countries feel that they need to develop these industries in order to become self-sufficient. Protecting particular industries: (i) Dumping. Foreign countries may engage in dumping, because government subsidies permit them to sell at very low prices, or they want to achieve larger profits. © Gauteng Department of Education 73 The long term objective may be to drive out domestic producers and gain a strong market position. The consumers will lose out as a result of the reduction in choice and the higher prices that the exporters will be able to charge. (ii) Infant industries. Infant industries are usually newly established industries. The enterprises in such industries could find it difficult to survive, due to their average costs being higher than that of established foreign competitors. If these new industries are protected in the starting years, they may be able to grow and take advantage of economies of scale, lower their average costs and become competitive. (iii) Declining industries. Structural changes in the supply and demand of a good may severely damage an industry. Declining industries are likely to be industries that no longer have a comparative advantage. If they go out of business quickly there may be a sudden and large increase in unemployment. Protection may enable an industry to decline gradually, and to slowly move to other industries. Arguments for free trade: Improves global efficiency: - Under free trade, resources are allocated more efficiently as markets expand. - In a free trade system, some goods can be shipped from areas in which they can be produced cheaply to areas in which they are more valuable and where needed. Specialization: - Free trade allows countries to specialize in industries in which they have a comparative advantage. - The profit motive encourages less wastage and better production methods. - Mass production methods are applied at low cost per unit. Economies of scale: - Costs can be reduced if businesses take advantage of the economies of scale, such as low unit costs that a global market provides. - The global market means that businesses can produce and sell in larger quantities, and total output is increased. Innovation: - Free trade increases competition and this encourages innovation in producing goods. Choice: © Gauteng Department of Education 74 - Consumers can buy from any business and are not restricted to locally produced goods. Lower prices: - Efficient allocation of resources and specialization of production lowers prices. - This increases the quality of life for consumers, who are now able to afford the goods. Spreads democratic values: - Companies that trade internationally are compelled to operate on agreedupon norms and laws, such as determined by the WTO. - Global trade may also reduce corruption, because countries with corrupt governments may be less able to compete for international business. Improved international relations: - The removal of certain trade barriers can improve the trade relations between nations. Trade protocols South Africa entered into: The Southern African Customs Union (SACU) - The SACU consists of South Africa, Botswana, Lesotho, Namibia and Swaziland. - These countries jointly negotiate free trade areas with other countries. - Goods are traded free of duties and quotas between member states. The Southern African Development Community (SADC) - The main objectives are that member states work together to reconstruct and develop the entire social and economic framework of the region. - A free trade area would encourage economies of scale with competitive SADC-wide industries that would increase intra-regional trade and boost foreign investments. The African Union (AU) - The AU exists to promote cooperation between the countries of Africa. - Its economic development programme, called the New Partnership For Africa’s Development (NEPAD), encourages regional cooperation and integration. The free trade agreement with the European Union (EU) - The EU-South Africa trade agreement encourages free trade, development co-operation, finance and technical assistance. - The agreement(2010) provides for the removal of 90% of all trade barriers. © Gauteng Department of Education 75 Mercusor: - Involves a regional trade area consisting of Brazil, Argentina, Paraguay and Uruguay. - The main purpose is to strengthen the existing relations between the parties, the expansion of trade and institute the conditions for the creation of a free trade area. Trade agreement with the United States: (AGOA) - South Africa benefits from duty-free exports to the USA under the United States’ Generalised System Of Preferences (GSP) and its African Growth and Opportunity Act (AGOA) The BRICS Agreement (Brazil, Russia, India, China, South Africa) - Member countries are exacted to gain substantial trade and investment benefits. - Membership to the BRICS does not, however, give any preferential trade or tariff treatment. The European Free Trade Area (EFTA)(Norway, Switzerland, Iceland, Liechtenstein) Other Bilateral Trade Agreements: The People’s Republic of China-South Africa bilateral trade agreement. India-South Africa bilateral trade agreement. Malawi-South Africa trade agreement. Mozambique preferential access agreement. Zimbabwe-South Africa bilateral trade agreement. (10) Conclusion: (Accept: Any logical conclusion)(2) [40] SUB-TOTAL: SECTION C [40] FINAL TOTAL: [150] ___________________________________________________________________ © Gauteng Department of Education 76 SESSION 16: REVISION PAPER 2 SECTION A: TYPICAL EXAM QUESTIONS SECTION A (Compulsory) QUESTION 1 1.1 Various possible options are provided as answers to the following questions. Choose the most correct answer and only write the letter (A, B or C) next to the corresponding question number (1.1.1 – 1.1.8) in the ANSWER BOOK. 1.1.1 Market price in a perfect competitive market is determined by the interaction between … A consumers and buyers. B demand and supply. C producers and sellers. (2) 1.1.2 This is usually in the form of a financial assistance by the government in order to support production or a person. A Levy B Tax C Subsidy (2) 1.1.3 A monopolist will get … in the long term. A economic profit B economic loss C normal profit (2) A positive consequence of inflation is that it … A improves the value of money. B benefits debtors. C benefits creditors. (2) Tourists visiting natural areas that are undisturbed are called … A cultural tourists. B ecotourists. C business tourists. (2) Banned the commercial international trade in endangered species. A CITES B UNFCCC C MEA (2) 1.1.4 1.1.5 1.1.6 1.1.7 This is an example of an oligopoly market in South Africa. A Eskom B Johannesburg Securities Exchange C Cellphone industry © Gauteng Department of Education (2) 77 1.1.8 It seeks a creative continuity of the environment and ensures that change is sympathetic to the quality of present and future generations. A Preservation B Conservation C Externality (2) 8 X 2 (16) 1.2 Choose a description from COLUMN B that matches a concept in COLUMN A. Only write the correct letter (A to J) next to the corresponding question number (1.2.1 – 1.2.8) in the ANSWER BOOK. 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.2.8 Column A MR = MC Pollution Renewable resource Kyoto Protocol Competition Policy Demerit goods Demand-pull Inflation Inbound tourist A B C D E F G H I J Column B Resource that can be replenished or replaced A plan for developed countries to reduce greenhouse gas emissions An example of a negative externality Profit maximization Resources that cannot be replaced These are over consumed in a free market economy To prevent the abuse of economic power e.g. monopoly Foreign tourists arriving in South Africa Domestic tourists leaving RSA Aggregate demand exceeds aggregate supply 8 X 1 (8) 1.3 Give the economic term/concept for each of the following descriptions. Write only the term/concept next to the question number (1.2.1 – 1.2.6) in the ANSWER BOOK. 1.3.1 The additional cost incurred when production increases by one more unit 1.3.2 The mechanism that brings together buyers and sellers of goods and services 1.3.3This type of tourism involves visiting undisturbed natural areas 1.3.4 The authority controlling inflation in South Africa is the ... 1.3.5 An industry dominated by a small number of large firms is known as ... 1.3.6 A sustained increase in the general price level 5 X 1 (6) TOTAL SECTION A: 30 © Gauteng Department of Education 78 SECTION B (Answer any TWO questions from this section.) QUESTION 2 : MICROECONOMIC 40 MARKS − 20 MIN 2.1 Answer the following questions. 2.1.1 2.1.2 Sellers in an oligopoly market are .... on each other’s actions. List any TWO characteristics of a monopoly. 1x2 2x1 (2) (2) 2.2. DATA RESPONSE Study the cartoon below and answer the questions that follow. 2.2.2 2.2.3 [Adapted from www.comptrib.co.za] According to the above cartoon, what is the role of the Competition (2) Commission? Mention any TWO aims of a competition policy. (4) List any TWO institutions established by the Competitions Act. (4) 2.3 DATA RESPONSE 2.2.1 Study the extract below and answer the questions that follow. Chris Rock once said, “We don‟t need gun control, we need bullet control. I think a bullet should cost R5 000, because if a bullet cost R5 000 there would be no more innocent bystanders.” Chris Rock may not have had market failure in mind when he made this statement, but he unknowingly established a perfect example of a case in which the overconsumption of a particular good result in spillover costs on third parties not involved in the original transaction (the “innocent bystanders”). In economics, this is known as a negative externality of consumption, and is considered a market failure because without some kind of government intervention, too much of the harmful goods will be © Gauteng Department of Education 79 produced and consumed: in this case, too many bullets are consumed causing harm to society. [Adapted from welkerswikinomics.com] 2.3.1 2.3.2 2.3.3 2.4 2.5 Define the concept, „market failure‟. State any THREE causes of market failure. Give another term for „spillover effects‟. Briefly explain the “shut-down point‟ in a perfectly competitive market. Discuss “product differentiation‟ as a characteristic of monopolistic competition. QUESTION 3: CONTEMPORARY ECONOMIC ISSUES 3.1 Answer the following questions appropriately. (2) (6) (2) (8) (8) [40] 40 MARKS – 20 MIN 3.1.1 3.1.2 List any TWO reasons for the growth of worldwide tourism. The unadjusted CPI inflation is also known as ... inflation. 3.2 DATA RESPONSE 2 x 1 (2) 1 x 2 (2) Read the following extract and answer the following questions. While the official inflation target applies to consumer prices, it is important that most recently both consumer price and producer price inflation have fallen within the inflation target range of between 3 and 6%. Domestic consumer price inflation continued to decrease during 2010 within an environment of relatively subdued local demand and an appreciation in the external value of the rand throughout the year. Consumer price inflation accordingly slowed from an annual average of 7,1% in 2009 to 4,3% in 2010. Conversely, headline producer price inflation (which relates to domestic output prices) accelerated from 0% in 2009 to an annual average rate of 6% in 2010. [Adapted from SARB Quarterly Bulletin, March 2011] 3.2.3 Differentiate between “Consumer Price Index” and “Producer Price Index”. According to the extract, what are the TWO reasons for the decrease in the consumer price inflation? State the producer price inflation in 2010. 3.3 DATA RESPONSE 3.2.1 3.2.2 Read the following extract and answer the following questions. Recycling Recycling has a variety of economic impacts. For the companies that buy used goods, recycle them and resell new products, recycling is the source of all their income. For cities in densely populated areas that have to pay by the ton for their landfill usage, recycling can save millions of rand from municipal budgets. The recycling industry can have an even broader impact. Economic analysis shows that © Gauteng Department of Education (4) (4) (2) 80 recycling can generate three times as much revenue per ton as landfills and almost six times as many jobs. [Adapted from howstuffworks.com] 3.3.1 3.3.2 3.3.3 3.4 3.5 Define the term “environmental sustainability” According to the extract, mention THREE advantages of recycling. (3 x 2) Mention any ONE (other than in QUESTION 5.5) policy of public sector intervention with regard to environmental sustainability. (2) Briefly describe “inflation” as an economic concept. Discuss “granting property rights” as a policy of public sector intervention with regards to environmental sustainability. (8) (8) (6) (2) [40] QUESTION 4: MICROECONOMICS & CONTEMPORARY ECONOMIC ISSUES 40 MARKS – 20 MIN 4.1 Answer the following questions appropriately. 4.1.1 4.1.2 4.2 List the THREE government approaches to reduce the impact of negative externalities. 2 X 1 (2) Collusion between sellers occur in a....... . 1x2 (2) DATA RESPONSE Study the following extract and answer the questions that follow. The Competition Tribunal has imposed a R195-million penalty on JSE-listed Pioneer Foods for its role in a bread cartel The cartel involved the Tiger (Albany), Premier (Blue Ribbon), Food Corp (Sunbake) and Pioneer (Sasko and Duens) bakeries. [Adapted from, Mail&Guardian, 3 February 2011] 4.2.1 Define the term “cartel”. (2) 4.2.2 What type of a market structure does the above cartel belong to? (2) 4.2.3 Mention TWO advantages of collusion. (2 x 2) (4) 4.2.4 Give an example of an international cartel. (2) © Gauteng Department of Education 81 4.3 DATA RESPONSE Study the graph given below and answer the following questions. [Adapted from SARB’s Quarterly Bulletin, September 2012] 4.3.1 Define the term core inflation. 4.3.2 Name the kind of consumer goods that have an upward inflation trend in 2012. 4.3.3 Briefly explain administered prices inflation. 4.3.4 Define the term non-durable goods. (2) (2) (4) (2) 4.4 Discuss the rationale of cost-benefit analysis. 4.5 Briefly explain the benefit of tourism on the rural population. (8) (8) [40] QUESTION 5: MICROECONOMICS Examine the monopoly as a market structure. Briefly compare it to the perfect market. (26) (10) [40] © Gauteng Department of Education 82 QUESTION 6: CONTEMPORARY ECONOMIC ISSUES [40] Analyse the cause of cost-push inflation. Indicate any FIVE consequences of inflation. (26) (10) TOTAL SECTION C: 40 SECTION B: HOMEWORK SECTION A (COMPULSORY) QUESTION 1 30 MARKS 1.1Various options are given as possible answers to each question. Choose the answer and write only the letter (A – C) next to the question number (1.1.1 – 1.1.8) in the ANSWER BOOK. 1.1.1 The allocative inefficiency of a monopolistic completion creates ….. capacity A excess B shortfall C minimum 1.1.2 An example of a demerit good is ….. A education B tobacco products C fire protection 1.1.3 The oligopolist makes ….. profit in the long-run A economic B normal C no 1.1.4 In a perfect competitive market, the price of the product will always be equal to ….. A marginal cost B marginal revenue C average cost 1.1.5 The market structure where interdependence among rivals plays an important role is …… A monopoly B monopolistic competition C oligopoly 1.1.6 The concept that describes a state in which all opposing market forces are balanced, is known as ….. A competition B collusion © Gauteng Department of Education 83 C equilibrium 1.1.7 This assumption is used by economists to describe a state where all other factors remain unchanged A constant B equilibrium C ceteris paribus 1.1.8 The most likely barrier to entry for firms wanting to compete with a company like Mercedes or Microsoft is ….. A legal restrictions B licensing problems C technical superiority 8 x 2 (16) 1.2 Choose a description from COLUMN B that matches the item in COLUMN A. Write only the letter (A-I) next to the question number ( 1.2.1 – 1.2.8 ) in the ANSWER BOOK. 1.2.1 COLUMN A Economies of scale 1.2.2 COLUMN B A MC=MR B A market structure dominated by two firms C Period of time where one of the factor inputs are fixed D Non-excludable and non-rivalrous E Public protector F Minister of Finance G Decrease in the average cost of production per unit as output increases H The coming together of two or more firms I An exclusive right given to the inventor of something Patent 1.2.3 Profit maximization point 1.2.4 Short run 1.2.5 Mergers 1.2.6 Duopoly 1.2.7 Public goods 1.2.8 Nlanhla Nene 8 x 1 (8) © Gauteng Department of Education 84 1.3 Give the correct term/concept for the following. Write only the word next to the question number ( 1.3.1 – 1.3.6 ) in the ANSWER BOOK. 1.3.1 Measures taken by governments with the primary aim of improving the efficiency of markets by ensuring competition between producers 1.3.2 The point at which a firm minimises economic loss by producing no output in the short run, if the price is less than the average variable cost 1.3.3 When a seller charges different prices for the same product for different groups 1.3.4 When existing resources are used in the most efficient manner, which is when the maximum possible output is obtained for a given set of resources 1.3.5 Any benefits of a production decision that accrue directly to the decision-maker 1.3.6 The total cost of the production decision to the whole of society 6 X 1 (6) TOTAL SECTION A: 30 SECTION B Answer any TWO of the THREE questions from this section in the ANSWER BOOK. QUESTION 2: MICRO-ECONOMICS Topic 6 2.1.1 What is the main function of a market? 2.1.2 Name TWO characteristics of a perfect competitions price. 3.3. 40 MARKS 1 x 2 (2) 2x 1 (2) Study the graph given below and answer the questions that follow. 35 25 25 50 © Gauteng Department of Education 85 3.3. 2.2.1 Identify the market structure under which you will find the market situation shown in the graph. Motivate your answer. 2.2.2 Identify the market price from the graph. 2.2.3 Calculate the profit/loss. Show all calculations. Study the table below and answer the questions that follow. Output produced in kg (000) 0 1 2 3 4 5 TFC TVC TC MC TR Profit/ loss B 0 2 000 C 6 000 8 000 10 000 D 1 500 3 000 4 500 6 000 7 500 15 000 16 500 18 000 19 500 21 000 22 500 A 2.3.1 Calculate the missing amounts for A to D. 2.3.2 Give the formula used to calculate the MC. 2.3.3 Draw a graph and show TFC, TVC and TC on the graph. 2.4 2.5 3.1.2 (4) (2) (4) Draw diagrams to contrast the difference between the profit made by a perfect competitor in the short run and the long run. 4 X 2 (8) Discuss competition policies in South Africa. QUESTION 3: 3.1.1 (4) (2) (4) MICRO-ECONOMICS Topic 7 & 8 4 x 2 (8) [40] 40 MARKS Why are allocative and technical efficiency important for the economy? List TWO types of monopolies. © Gauteng Department of Education 2 x 1 (2) 2 x 1 (2) 86 3.2 Use the graph below and answer the questions that follow: Price MC AC a 15 b c 10 d 5 MR 0 Quantity AR 100 3.2.1 Define the term imperfect market. 3.2.2 Which point on the graph indicates profit maximisation? 3.2.3 Calculate the economic profit. 3.3 (2) (2) (6) Read the article below and answer the questions that follow. Prepare to pay more for your sins this year Smokers will have to pay 58 cents more for a packet of 20 cigarettes. Finance Minister Pravin Gordhan announced this in his 2012/13 Budget on Wednesday. Drowning one’s sorrow in alcohol will also cost more, with a 750ml bottle of spirits set to increase by a hefty R6, a 340ml can of beer by 9 cents, and a litre of wine by 18 cents, he said. Higher so-called sin sin taxes will also affect the very rich or those who splurge on boats and planes. From October, the ad valorum excise tax on small airplanes and helicopters weighing less than 5 000 kilogram will be 7%, while a 10% tax will apply to long motorboats and sailboats. Gordhan also offered gamblers a tip, with a proposed national tax on gross gambling revenue from April next year. This will take the form of a 1% levy on a uniform provincial gambling tax base. A smaller levy may apply to the National Lottery. Source:www.sowetanlive.co.za 3.3.1 Define Ad Valorum excise tax. © Gauteng Department of Education (2) 87 3.3.2 On what type of product is “sin tax” levied? 3.3.3 Name THREE possible outcomes of the increase in tax. (2) (6) 3.4 Discuss any two methods that the government can use to limit negative externalities. 4 x 2 (8) 3.5 Explain the process of conducting a cost-benefit analysis. QUESTION 4: MICRO-ECONOMICS Topic 6 – 8 4 x 2 (8) 40 MARKS 4.1.1 A firm makes a(n) …… profit when it covers the explicit costs of production and the implicit costs. 1 x 2 (2) 4.1.2 Name TWO non-price methods an oligopoly can use to increase their market share. 2 x 1 (2) 4.2 Study the cartoon and answer the questions that follow. Eskom Consumer 4.2.1 Which market structure is presented in the cartoon? (2) 4.2.2 Explain why it is possible for this market structure to make economic profits in the long run. (4) 4.2.3 Why in your opinion is the consumer in the cartoon saying “Eish”? (2) 4.2.4 Complete the following: The market structure in the cartoon will ….. produce and …... charge the consumer. (2) © Gauteng Department of Education 88 4.3. Study the article below and answer the questions that follow. Are airlines oligopolies? Think about airlines as oligopolies. All airlines, much as they pretend to the contrary, provide the basic identical service – a flight that lasts about the same duration, between the same cities, on the same plane, in the same sort of seat, for the same price. We see interdependence all the time. An airline will try to raise prices, and if the other airlines don’t follow, it will bring its price back again. An airline will introduce a new service (or fee) and the other airlines generally copy. Airlines are aggressively seeking to merge or collude, either officially with the Department of Trade and Industry’s permission or unofficially through backdoor arrangements (such as alliances) . Airlines choose not to compete on price, but to promote thing such as their lounges, frequent flier miles etc. By all these measures, airlines are exhibiting oligopolistic 88ehaviour. Source:www.thetravelinsider.info 4.3.1 Name any TWO characteristics of oligopolies. (2) 4.3.2 Discuss TWO examples of how airlines are interdependent on one another. (2) 4.3.3 Explain the kinked demand curve with referring to the above article. (Use a graph to explain your answer) (6) 4.4. 4.5 Explain the DTI in detail – outline their function as well as what the abbreviation stands for and who the new Minister in charge is. 4 x 2 (8) Discuss the most important differences between monopoly and perfect competition. 2 x 4 (8) TOTAL SECTION B: 80 © Gauteng Department of Education 89 SECTION C Answer any ONE of the two questions from this section in the ANSWER BOOK. Introduction Body: Main part: MARK ALLOCATION FOR ESSAY RESPONSES STRUCTURE OF ESSAY MARK ALLOCATION Max 2 Additional part: For example discuss/distinguish/ differentiate/explain/analyse/ evaluate/assess For example draw a graph/deduce/ Outline/briefly explain/expand on/your own opinion/support Conclusion Max 26 Max 10 Max 2 TOTAL 40 QUESTION 5: Topic 7 40 MARKS Mc Donalds is an example of a business running under a monopolistic competition. Discuss the characteristics of a monopolistic competition. (26)) With the aid of a graph explain the monopolistic competition’s long run profit. (10) QUESTION 6: Topic 8 40 MARKS When markets fail the economy cannot grow. Discuss FIVE reasons for market failures. (26) Briefly describe the South African government’s attempts to improve income distribution. (10) SECTION C: SOLUTIONS TO SECTION A SECTION A (COMPULSORY) QUESTION 1 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 B C A B B A 30 MARKS demand and supply subsidy economic profit benefits debtors ecotourism CITES © Gauteng Department of Education 90 1.1.7 C Cell phone industry 1.1.8 B conservation 8 x 2 (16) 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.2.8 D C A B G F J H Profit maximisation An example of a negative externality Resource that can be replenished or replaced A plan for developed countries to reduce greenhouse gas emissions Prevent the abuse of economic power e.g. monopoly These are over consumed in a free market economy Aggregate demand exceeds aggregate supply Foreign tourists arriving in South Africa 8 x 1 (8) 1.3.1 Marginal cost 1.3.2 Market 1.3.3 Ecotourism 1.3.4 South African Reserve Bank (SARB) 1.3.5 Oligopolies 1.3.6 Inflation 6 x 1 (6) TOTAL SECTION a: 30 SECTION B QUESTIONS 2: MICROECONOMICS 2.1.1 interdependent 1 x 2 (2) 2.1.2 Faces with demand curve Decide on their production level Are exposed to market forces No close substitute Only one seller Price makers Exploit consumers Protected by barriers of entry Enjoy favourable circumstances 2 x 1 (2) 2.2.1 2.2.2 2.2.3 2.3.1 To save SA consumers from price fixing (pricing predators). To prevent the abuse of monopoly power To regulate the market power through mergers and takeovers To prevent price fixing and collusions (2) 2 x 2 (4) Competition Commission Competition Tribunal Competition Appeals Court 2 x 2 (4) Failure of markets to produce the quantities of goods and services that consumers want at a price that reflect marginal utilities and relative scarcities. (2) © Gauteng Department of Education 91 2.3.2 Externalities Public goods Merit and demerit goods Imperfect competition Lack of information Advertising Immobility of factors of production Imperfect distribution of income and wealth 2.3.3 Externalities 3 x 2 (6) (2) 2.4 Profit maximisation is where MC=MR The firm should consider shutting down when TR<TC of production If TR< TVC it should consider closing down If the price is below MR/MC the business will not cover its AVC If the business is not able to cover its AVC it is better to close down The point where price is less than AVC is known as closing down point. 4 x 2 (8) Product are not identical Differentiated products are similar in many ways Similarity means they can satisfy the same needs Differences are imaginary May have different brand names but contains the same ingredients Services of sellers make the products different Difference in packaging 4 x 2 (8) 2.5 QUESTION 3: CONTEMPORARY ECONOMIC ISSUES 3.1.1 Increase in disposable income Reduction in working hours Awareness of recreating and leisure Improved infrastructure Increased advertising and promotion Awareness of the benefits of tourism Easy of obtain foreign exchange 3.1.2 headline 2 x 1 (2) 1 x 2 (2) 3.2.1 CPI: Measures the cost of a representative basket of goods to the consumer. PPI: © Gauteng Department of Education 92 Measures the cost of production of the representative basket of goods when they leave the factory. (4) 3.2.2 Subdued local demand Appreciation 2 x 2 (4) 3.2.3 6% (2) 3.3.1 The ability of the environment to survive economic activity. (2) 3.3.2 3.3.3 3.4 3.5 A source of income Save millions from municipal budget Three times more revenue than landfills Creates six times more jobs 3 x 2 (6) Changing for the use of the environment Environmental taxes Environmental subsidies Marketable permits 1 x 2 (2) It is a process – not a single non-recurrent activity Sustained conditions – prices continue to rise The rise in the price must be considered There is a general rise in prices Increase in the price of isolated goods does not indicate inflation There is a decline in the purchasing power of money 4 x 2 (8) To prevent flora and fauna from becoming extinct Ensures the owner take proper care of the things that belongs to him Owners will try to use them profitable as long as possible Property rights will help in the preservation at little cost to the tax payer Property right are not possible in all circumstances 4 x 2 (8) [40] QUESTION 4: MICROECONOMICS & CONTEMPORARY ECONOMIC ISSUES 4.1.1 4.1.2 4.2.1 4.2.2 4.2.3 Persuasion The price mechanism Direct control 2 x 1 (2) Oligopoly 1 x 2 (2) When collusion between oligopolists occur openly and formally. (2) Oligopoly (2) © Gauteng Department of Education 93 4.2.4 4.3.1 Higher profits Less uncertainty Difficult for new businesses to enter 2 x 2 (4) OPEC (2) It excludes items from the CPI basket that have highly volatile prices and items with prices that are affected by government intervention. (2) 4.3.2 Semi-durable goods (2) 4.3.3 It is caused by a increase in the price of the administered goods and services. These are prices of goods and services that are set or controlled by government (4) 4.3.4 Goods that can be used only once/goods that are consumed during use, e.g. food stuffs (2) 4.4 CBA is a valuable tool that helps to make informed decisions. It helps in the efficient allocation of resources It is a technique used to measure and compare the cost and benefits of an economic activity It is to find the rate of return on the project It is also used to find the future costs and benefits as well as its present value This technique brings greater objectivity in decision making. 4 x 2 (8) 4.5 The environment is a common resource o Most services do not have a price. o There is no economic incentive to economise on their use. Externalities o The cost of pollution on the environment is borne by others. o Because no one owns the environment. Lack of knowledge o People cause damage to the environment without realising it. o In many instances, people do not have the knowledge to do things in an environmentally friendly way. Carelessness o People are generally prepared to continue with various harmful practices. o They leave it to future generations to worry about the consequences. Any 2 x(2 + 2) (8) SECTION C QUESTION S 5: MICROECONOMICS INTRODUCTION The major organisational features of a market, (e.g. number of sellers/buyers the degree of product differentiation/the availability of information) are called the structure of the market. © Gauteng Department of Education 94 OR Is a market structure in which there is only ONE seller of a good or service that has no close substitutes, entry into that market is completely blocked. (Max 2) BODY MONOPOLY AS MARKET STRUCTURE Number of firms Whereas a perfectly competitive industry consists of a large number of small firms, the monopoly consists out of one single firm. The monopoly is also the industry. Example: Eskom or De Beers – diamond-selling (Accept any other relevant example) In the perfect market there is a large number of firms Nature of product The product is unique with no close substitute. Example: Diamonds are unique. In the perfect market products sold are homogeneous. Market entry Refers to how easy or difficult it is for businesses to enter or to leave the market Is entirely/completely blocked. A number of barriers to entry that may give rise to monopoly can be: - Economies of scale - Limited size of the market - Exclusive ownership of raw materials - Patents - Licensing - Sole rights - Import restrictions In the perfect market, there is complete freedom of entry and exit Market Information This refers to market participant’s information on market conditions. All information on market conditions should be available to both buyers and sellers. This means that there are no uncertainties. This assumption also applies in the case of the monopoly. In the perfect market both sellers and buyers have full knowledge of all prevailing market conditions Control over price A perfectly competitive business has no control over the price of its product and is therefore a price-taker. In the case of a monopoly there are considerable price control, but limited by market demand and the goal of profit maximisation. In the perfect market no individual buyer or seller is able to influence the market price © Gauteng Department of Education 95 Demand curve for the firm’s product It equals the market demand curve Downward-sloping from left to right In the perfect market, the market demand curve slopes downwards from left to right, but the individual business cannot influence the market price and its demand curve is the actual market price taken – horizontal to the quantity axis Long-run economic profit Can be positive Because new entries are blocked and short-run economic profit therefore cannot be reduced by new competing firms entering the industry The monopoly can thus continue to earn economic profit as long as the demand for its product remains intact In the perfect market economic profit does not exist on the long run Any (26) – discussion on monopoly Any 5 x 2 (10) – for comparison to perfect market A maximum of 10 marks can be allocated for graphs – 26 marks for discussion © Gauteng Department of Education 96 © Gauteng Department of Education 97 Economic profit CONCLUSION From the above it is clear that healthy competition contributes to a well-functioning market structure. (Max 2) (Accept any other relevant conclusion.) © Gauteng Department of Education 98 QUESTION 6: CONTEMPORARY ECONOMIC ISSUES INTRODUCTION BODY CAUSES OF COST PUSH INFLATION Higher demand for wages/Wages o Workers often demand higher wages than their productivity. o Employers are usually forced by trade unions to pay higher wages. o Employers recover the higher cost on labour by increasing the prices of goods and services. o It is the most important single cost-item. Vicious circle of wages o Higher prices of goods lead to a vicious circle of higher prices and demand for higher wages. o Workers demand higher wages because of higher cost of living. Drop in productivity/Productivity o There is a drop in productivity while employment and wages remain high. o Gradually production will decrease and prices will increase. o Cost per unit output will rise if productivity decreases and remuneration remains unchanged. Sudden strikes and stayaways o This will reduce production output and causes a drop in supply. o Decrease in supply will push prices up. Direct taxation o Producers will try to adjust their incomes when government increases direct taxation. o Producers will increase their prices to compensate for the higher taxes. o Producers will increase prices according to the increased costs. o Because of higher production costs, producers will adjust their prices. Increase in the price of administered goods o When these prices go up, trade unions demand higher wages. o Producers will add the increase in prices of administered goods on their products as well. o E.g. increase in the price of petrol, postage, electricity, water, etc. Indirect taxation o Increase in indirect taxation also increases cost of production. o E.g. Increase in VAT, customs and excise duties Higher profit margins/Profit margins o Some price increases are intended to increase the profit margins of businesses. © Gauteng Department of Education 99 Shrinkage o Shoplifting and loses caused by employees will also increase cost of production. o These amounts are also added to the price of products. o As more money is spent on security, prices of consumer goods will increase. High prices of agricultural goods o This is because of the high cost of inputs such as diesel and fertilisers. o Higher input cost leads to higher food prices. Interest rates o High rate of interest is a cost item for many businesses. o Interest is also included in the price goods. Key-inputs o Production costs increase with an increase in the prices of the key-inputs, e.g. oil. Exchange Rate depreciation o If the rand depreciates, all import goods become more expensive. Natural disasters o Droughts, floods, etc. causes the production costs and prices to increase. (Any 13 x 2) (26) CONSEQUENCES OF INFLATION An increase in the price leads to a decrease in the purchasing power of money. It causes a redistribution of income and wealth. It reduces the real value of savings. It affects export earnings and affects balance of payments negatively. Decreasing exports and increasing imports result in the depreciation of the currency. It also leads to a redistribution of income from taxpayers to the government because of an increase in the average tax rate. It also leads to wage bargaining which often leads to industrial and social unrest. (Any 5 x 2) (10) CONCLUSION There are many causes of inflation and they all have a close relationship with the functioning of the market system. When the market system does not function properly, inflation is the price we pay. (Any appropriate conclusion can be credited.) (Any 1 x 2) (2) ___________________________________________________________________ © Gauteng Department of Education 100 SESSION 17: REVISION SECTION A: TYPICAL EXAM QUESTIONS – Exemplar 2014 Paper 1 SECTION A (COMPULSORY) QUESTION 1 30 MARKS – 15 MINUTES 1.1 Various options are provided as possible answers to the following questions. Choose the answer and write only the letter (A–C) next to the question number (1.1.1–1.1.8) in the ANSWER BOOK. 1.1.1 The money market is a market for … term savings and loans. A. shortB. short- and longC. long1.1.2 Consumption of fixed capital is used to calculate the gross value added at … A. basic prices. B. market prices. C. factor cost. 1.1.3 During an economic recession … A. unemployment will increase. B. production increases. C. spending increases. 1.1.4 The new economic paradigm is embedded in … side policies. A. demandB. supplyC. demand-and-supply- 1.1.5 According to the UN classification, South Africa's HDI ranking is categorised as a … level. A. low B. middle C. high 1.1.6 Economic growth is measured in terms of … A. real GDP. B. real GDP per capita. C. nominal GDP. 1.1.7 The ratio of export prices and import prices is known as the … A. terms of trade. B. exchange rate. C. balance of payments. © Gauteng Department of Education 101 1.1.8 An example of an economic indicator is … A. labour productivity. B. life expectancy. C. housing. 8 X 2 (16) 1.2 Choose a description from COLUMN B that matches an item in COLUMN A. Write only the letter (A–J) next to the question number (1.2.1–1.2.8) in the ANSWER BOOK. Column A 1.2.1 Capital Transfer Account 1.2.2 Depreciation 1.2.3 Free floating 1.2.4 Tariffs 1.2.5 Regional development 1.2.6 Prime rate 1.2.7 Globalisation 1.2.8 Deregulation A B C D E F G H I 1.3 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 Column B the weakening of a currency as result of market forces policies aimed at increasing the economic livelihood of a specific area the interest rate which banks charge on loans to preferential clients world-wide interfacing with trade as the major element the removal of unnecessary laws that inhibit the free operation of markets subaccount in the balance of payments a protection measure against unfair foreign competition exchange rate system the interest rate at which the Reserve Bank charges commercial banks subaccount in the current account 8 x 1 (8) Give ONE term for each of the following descriptions. Write only the term next to the question number (1.3.1–1.3.6) in the ANSWER BOOK. A small initial change in spending produces a proportionately larger increase in national income The sale of state-owned enterprises to the private sector Goods used as inputs to produce other goods and services An increase in the capacity of the population to produce more goods and services It consists of people between the ages of 15 and 60/65 who are willing to work for an income Return of land to their original owners after confiscation by the government 5 x 1 (6) TOTAL SECTION A: 30 © Gauteng Department of Education 102 SECTION B Answer TWO of the three questions in this section in the ANSWER BOOK. QUESTION 2: MACROECONOMICS 40 MARKS – 20 MINUTES 2.1 Answer the following questions. 2.1.1 Give TWO examples of injections into the economy. 2 x 1 (2) 2.1.2 What effect will an increase in the value of the rand against the US dollar have on imports from the USA? 1 x 2 (2) 2.2. Study the table below and answer the questions that follow. EXTRACT FROM NATIONAL ACCOUNTS OF SOUTH AFRICA AT CURRENT PRICES R million 2012 Gross domestic product (GDP) at market prices 3 155 195 Primary income from the rest of the world 48 501 Primary income to the rest of the world A Gross national product (GNP) at market prices 3 085 188 [Source: SARB Quarterly Bulletin, March 2013] 2.2.1 Define the concept gross domestic product. (2) 2.2.2 Calculate the value of A in the table. (2) 2.2.3 Give an example of a primary income from the rest of the world. (2) 2.2.4 Explain the difference between current prices and constant prices. (4) © Gauteng Department of Education 103 2.3 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 E0=20+0,5Y 60 40 30 20 40 60 Income (Y) 2.3.1 Identify ONE participant in the economy above. 2.3.2 What does the line E=Y represent? 2.3.3 Calculate the multiplier using the following formula: (2) (2) k= The marginal propensity to consume (mpc) = 0,8. (Show ALL calculations.) (4) 2.3.4 What is the relationship between the marginal propensity to consume (mps) and the multiplier? (2) 2.4 Explain the new economic paradigm. 2.5 Argue ONE case in favour of free trade and ONE case against protectionism. 2 x 4 (8) [40] QUESTION 3: ECONOMIC PURSUITS 3.1 4 x 2 (8) 40 MARKS: 20 MINUTES Answer the following questions. 3.1.1 State TWO fiscal policy measures that can be implemented to redistribute wealth in South Africa. 2 x 1 (2) 3.1.2 What effect will import restrictions have on the local textile industry in South Africa? 1 x 2 (2) © Gauteng Department of Education 104 3.2 Study the extract below and answer the questions that follow. INDUSTRIAL POLICY ACTION PLAN The Industrial Policy Action Plan (IPAP) is located in the vision of the National Development Plan and forms one of the fundamental cornerstones of the New Growth Path Framework. IPAP is predicated to bring about significant structural change to the South African economy. The existing growth path is led by the consumption-driven sectors, which are growing twice as fast as the manufacturing sectors. The economy is import intensive, especially with respect to value-added products. Stronger domestic growth in the manufacturing sector is imperative. High structural unemployment is a constant, oscillating between 22,5% and 25% if the strict definition is used. [Adapted from www.bdlive.co.za] 3.2.1 Identify the main objective of the IPAP. (2) 3.2.2 How will the above objective be achieved? (4) 3.2.3 Explain how unemployment will be addressed by the New Growth Path Framework. (4) 3.3. Study the map below and answer the questions that follow. [Source: www.cartoons.com] 3.3.1 What is indicated by the solid line in the map above? (2) 3.3.2 Name TWO countries that make up the G8 grouping of countries in the North. (2) 3.3.3 Briefly comment on the trade relations between the countries in the North and South. (6) © Gauteng Department of Education 105 3.4 Briefly explain the integrated manufacturing strategy in South Africa. 4 x 2 (8) 3.5 How can the repo rate be used to stimulate aggregate demand? QUESTION 4: 4.1 4.2 4 x 2 (8) [40] MACROECONOMICS AND ECONOMIC PURSUITS 40 MARKS – 20 MINUTES Answer the following questions. 4.1.1 Name TWO problems of public sector provisioning. 2 x 1 (2) 4.1.2 What effect will low labour productivity have on inflation? 1 x 2 (2) Study the graph below and answer the questions that follow. SUPPLY AND DEMAND OF US$ Price of dollars (R/$) R12 f R10 0 e 100 130 4.2.1 At what point on the graph does the equilibrium for foreign exchange originally occur? (2) 4.2.2 What happens to the value of the rand when DD shifts to D1D1? (4) 4.2.3 How can the Central Bank of South Africa intervene in the market to influence the exchange rate? (4) © Gauteng Department of Education 106 4.3 Study the extract below and answer the questions that follow. REGIONAL STRENGTHS The announcement that 10 potential special economic zones have been identified in conjunction with the provinces could be a game-changer for South African manufacturers. Such zones are intended to bring mainstream economic activity to poor and isolated parts of South Africa by leveraging the commercial potential of the particular regions. This will include industry clustering, or targeted development. Upington, in the Northern Cape, is a natural home for solar energy research and development. Saldanha Bay will service the growing oil and gas industry on Africa's west coast, while expanding iron ore exports. The Department of Trade and Industry is devising a draft of regulations that will see the country's industrial development zones (IDZs) in Richards Bay, East London and Coega, near Port Elizabeth, taken into a new special economic zones framework. This envisages zones including free ports, free trade zones, and sector development zones. A special corporate tax rate of 15% is proposed, well below the 28% currently applied. There was, however, a concern that the incentive would cause dislocation and would have 'distorting effects' on the economy. [Source: www.bdlive.co.za] 4.3.1 4.3.2 4.3.3 4.3.4 4.3 4.4 Define the concept IDZ. (2) Identify TWO new proposed economic regions. (2) What is the main difference between an IDZ and an SEZ? (2) What, in your opinion, would be the ‘distorting effects’ on the economy? (4) Explain leading and lagging business cycle indicators. 2 x 4 (8) Explain the TWO social indicators used for children under the age of five. 2 x 4 (8) [40] TOTAL SECTION B: 80 SECTION C Answer only ONE of the two questions in this section in the ANSWER BOOK. STRUCTURE OF ESSAY Introduction Body: Main part: Additional part: MARK ALLOCATION Max 2 For example discuss/distinguish/ differentiate/explain/analyse/ evaluate/assess For example draw a graph/deduce/ Outline/briefly explain/expand on/your own opinion/support © Gauteng Department of Education Max 26 Max 10 107 Conclusion Max 2 TOTAL 40 QUESTION 5: MACROECONOMICS 40 MARKS – 35 MINUTES International trade is the backbone of our modern commercial world as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders. Discuss export promotion as part of South Africa’s international trade policy. (26) In your opinion, how successful is South Africa with the implementation of the above policy? Motivate your answer. (10) [40] QUESTION 6: ECONOMIC PURSUITS 40 MARKS – 35 MINUTES Supply-side policies focus on the ability of markets to supply enough goods and services to meet aggregate demand. Discuss this statement by focusing on effectiveness and efficiency of markets in the South African context. (26) In your opinion, how successful is the South African government in providing for the basic needs of the poor? (10) [40] TOTAL SECTION C: 40 GRAND TOTAL: 150 SECTION B: ADDITIONAL CONTENT NOTES – TIPS TO ANSWER A QUESTION PAPER. Section A You need to allocate 15 minutes to do this section. DO NOT use the grid in the inside of the cover page of your book to answer question 1.1 – rather use the normal writing pages. Do not make columns to answer section A – write each answer underneath each other. Clearly delete wrong answers and re-write correct answers. Your exam answer book have TWO margins one on each side of the page DO NOT write in the margins, the markers use this space for your marks. 1.1 Multiple choice questions Multiple choice questions are used to test mainly your knowledge of certain key concepts and how well you understand the different concepts. Multiple choice questions usually cover all the Topics and candidates who have been selective when doing their studies often struggle with this type of question. There are two ways to get the correct answer in multiple choice questions: • Knowing the correct answer. • Eliminating the wrong answers. © Gauteng Department of Education 108 In Economics it is very important that you know the meaning of important concepts and terms. KNOW YOUR WORDBANKS and DEFINITIONS – read the questions CAREFULLY. Make sure you know what they are asking and DO NOT assume you know what they are asking. Learners do poorly in this section because they rush through it instead of taking their time and read each question carefully. 1.2 Match Column A with Column B In this case column A has 8 terms and Column B has 9 explanations. The following process can be used to deduce the right answers. Read column B first then look for the possible matching item. Step 1: Match the items that you know correctly. Step 2: Eliminate those that don’t match. Step3: Mismatches will result in false links – eliminate these links. Step 4: Match the items. 1.3 Correct term/concept You MUST know your definitions, again look at key words in the description and underline them. Section B Clearly write which question you are doing and keep each questions answers together. If you need to split the answer and continue further on in the book CLEARLY indicate so in your answer book that the marker is aware that you answer continue somewhere else in your answer book, but try to avoid this. Do not exceed the required number of questions, only the 1st two questions will be marked and the 3rd question will not be marked, if you change your mind and redo a question make sure you DELETE the question you no longer want do use. 1st question in all Section B questions are split in two. 1st part will ask a one word answer for 2 marks. 2nd part will ask you to list/ name/ give TWO of something for one mark each. Total 4 marks. This is one or two word answers you need not go into detail. Answer in bullet format. Data response questions Data response questions can include the following: 1. A table or graph. 2. A paragraph to read. 3. A combination of the two. 4. A cartoon. This is often drawn from a newspaper, magazine or other relevant publications. Passages: Very often the answers to the question are to be found in the passage itself. This means that you must carefully read the passage before answering the questions. Underline or highlight key words or concepts as you are reading the passage. This is easy marks but you must concentrate. You have practices this a lot © Gauteng Department of Education 109 in English with comprehension work and all the rules you were taught in English apply here. Cartoons: Cartoons can be used to introduce short questions or even long questions. In the case of cartoons some of the answers can be found in the text of the cartoon but usually it involves prior knowledge of the topic. This means you must know the economic theory behind the cartoon and be able to interpret it. NOT EVERYONE SEES THE HUMOUR IN THE CARTOON. General knowledge is vitally important with interpreting a cartoon. You must read newspapers and watch the news. Remember all the cartoons are relevant to economic concepts done during the year, you must find the link. STEP1. Analyse the cartoon carefully – identify all the economic concepts associated with the cartoon/ place the cartoon into context of present events. Look at every detail in the cartoon carefully. STEP2. Read the questions carefully. STEP 3: Try to derive as much relevant information as you can from the cartoon that applies to the questions. STEP 4: Use all your prior knowledge and understanding when answering the question linking this to events depicted in the cartoon. General statistical interpretations: If you are asked to interpret general statistical data for example comparing one set of data with another, you should take into consideration the following: General trend – does the data show an increase or a decrease? 1. The highest increase – by how much? 2. The lowest increase – by how much? Answering paragraph questions: These questions can either be based upon source material included in the examination paper or the question can be independent of source material. These questions can be answered in a similar way to essay questions. The following steps can be used to answer these questions. STEP 1: Read the question carefully to determine what is wanted. Underline the instruction word and words that deal with the topic. STEP 2: Look for clues in the question as to how much detail is wanted. This is usually linked to the mark allocation given in the question. If the question is out of 8, this means that 4 facts are required. The question MUST still be answered in BULLET format. The best way to learn how to answer short questions, stimulus response and paragraph questions is to practice. Use your past papers and do them over and over. © Gauteng Department of Education 110 Section C Only ONE question must be answered the 2nd question will not be marked, again if you change your mind and redo a question make sure you DELETE the question you no longer are using. This usually tests the higher order thinking skills. Increasing degree of difficulty KNOWLEDGE • Identifying the key business studies terms and concepts used in the stimulus material. • Defining and explaining terms. APPLICATION AND ANALYSIS • Apply economic theory to the stimulus material. (Remember this is done in an impressionisti c way using generalisation s) • Analyse the information using business theory & economic theory. CONCLUSIONS AND EVALUATION • Draw conclusions from your analysis. • Evaluation how accurate is your analysis? Are your conclusions valid? Don’t jump to conclusion without valid evidence. © Gauteng Department of Education 111 The breakdown of the mark allocation for the essays is as follows: • You should include an introduction, body and conclusion. • For the introduction 2 marks and conclusion 2 marks will be allocated. • The body consists of two parts - the main part will be 26 marks and the additional part 10 marks Introduction: What you are dealing with when answering the question. Definition of what was asked. The body: The factual content of the essay. It is best to subdivide the content using: Headings - each new paragraph. Subheadings - important sub-parts of the paragraph. Details – the facts. ALL MUST BE IN BULLETS Conclusion: Summarising your ideas. The conclusion gives you the opportunity to draw your points together and to weigh up the arguments put forward. It is important that you read the instruction words within the questions carefully so that you can form a clear idea of what is wanted. Below is a list of instruction words that apply to essays. • Describe - in this case you should give a written picture or a diagram of the topic you are dealing with. In your description you should give specific details regarding your topic. You can also list these in a particular sequence; depending on the question you have been asked. • Discuss - means to examine various ideas pertaining to the topic and argue which you think is best. The ideas you should examine are those of writers who have written on the topic and those of your own. • Explain - to show how a thing works or to give reasons why something happens. • Compare - this means to examine the differences and similarities regarding two things in terms of certain criteria. A comparison is not simply a descriptive list regarding both items you are examining. Best to use a table format. • Examine - look at detail, inspect and analyse; how does it work? • Analyse - to break down into smaller understandable parts and to ask questions regarding the nature of the thing or idea. • Criticise - in this case you must point out what is wrong with a proposition (model, theory). You must also say why others believe the proposition (model, theory) is incorrect. You may suggest alternatives. • Evaluate - to judge, to decide what is best. It is essential you give reasons for your answer. Points to consider when using diagrams to illustrate your answers: • You must reproduce standard diagrams found in any economics textbook. • Be sure that you are accurate in your reproduction. • Your diagrams should be large enough to read easily. • Your diagrams will look better if they are drawn with a ruler where appropriate. • Always label the axes, lines and curves. © Gauteng Department of Education 112 • Refer to the diagram in your written answer and explain it carefully. In summary Ways to improve your performance when answering data response questions: 1. Read through the material carefully. a) Highlight the important economic concepts. b) Highlight the instruction words – these words indicate what the examiner wants. 2. Think carefully about each questions relating what is wanted to the number of marks. 3. If there are any numerical calculations show all your working. You will get marks for formulas and steps used in the calculation process even if your answer is wrong. 4. Explain the concepts carefully and apply them to the data response items. Illustrate your answer with examples from the data provided. 5. Plan very carefully for the longer answers - use the knowledge → application → conclusion & evaluation approach as outlined in the essay section. 6. Make sure that you don’t run out of time. It is better to answer all the questions than to write perfect answers. 7. Plan the longer answers the way you would answer essay questions. SECTION C: HOMEWORK EXEMPLAR 2014 PAPER 2 INSTRUCTIONS AND INFORMATION 1. Answer FOUR questions as follows in the ANSWER BOOK: SECTION A: COMPULSORY SECTION B: Answer TWO of the three questions. SECTION C: Answer ONE of the two questions. 2. Answer only the required number of questions. Answers in excess of the required number will NOT be marked. 3. Number the answers correctly according to the numbering system used in this question paper. 4. Write the question number above each answer. 5. Read the questions carefully. SECTION A (COMPULSORY) QUESTION 1 1.1 30 MARKS – 15 MINUTES Various options are provided as possible answers to the following questions. Choose the answer and write only the letter (A–C) next to the question number (1.1.1–1.1.8) in the ANSWER BOOK. © Gauteng Department of Education 113 1.1.1 As a rule, a firm should consider shutting down its business at the point where its .... A. MC=AVC B. MR=AC C. MC=MR 1.1.2 A market which has major government influence and control can be described as being ... A. Unregulated B. Deregulated C. regulated 1.1.3 The value of inputs owned by the entrepreneur and used in the production process is known as ... costs. A. variable B. explicit C. implicit 1.1.4 A patent which gives one the exclusive right to manufacture a product is characteristic of a/an ... monopoly. A. artificial B. natural C. local 1.1.5 The aggregate demand for goods and services that exceeds the aggregate supply thereof is known as ..... A. cost-push inflation B. demand-pull inflation C. deflation 1.1.6 Tourism is ... intensive. A. labour B. capital C. risk 1.1.7 When tourists are given the opportunity to experience South Africa’s natural beauty it is known as .... tourism. A. cultural B. ecoC. International © Gauteng Department of Education 114 1.1.8 The government can play a very important role in environmental sustainability through its ... policy. A. monetary B. fiscal C. urbanisation 8 X 2 (16) 1.2 Choose a description from COLUMN B that matches an item in COLUMN A. Write only the letter (A–J) next to the question number (1.2.1–1.2.8) in the ANSWER BOOK. Column A Column B 1.2.1 Core inflation A Price increases combined with high 1.2.2 Stagflation unemployment 1.2.3 Climate change B Items that have highly volatile prices are 1.2.4 Pollution excluded from the CPI basket 1.2.5 Duopoly C When it is impossible to increase the 1.2.6 Pareto efficiency welfare of one without decreasing the 1.2.7 Merit goods welfare of another 1.2.8 Normal profit D Often under-produced by the market, for example education E Two industries that dominate a particular market F Excessive price increases G Average revenue=average costs H Occurs due to global warming I The flow of residual emissions exceeds the natural environment’s capacity to absorb them J Cigarettes and alcohol 8 x 1 (8) 1.3 Give ONE term for each of the following descriptions. Write only the term next to the question number (1.3.1–1.3.6) in the ANSWER BOOK. 1.3.1 1.3.2 A market structure dominated by a small number of large firms Prices that are set below equilibrium price in the market and which allow the poor greater access to goods and services. The additional cost incurred when production is increased by one more unit Seeks creative continuity of the environment, while ensuring that environmental change considers the quality of life of both present and future generations The cost of a basket of consumer goods and services of an average South African household A general increase in prices caused by increases in factor input costs 6 x 1 (6) TOTAL SECTION A: 30 1.3.3 1.3.4 1.3.5 1.3.6 © Gauteng Department of Education 115 SECTION B Answer TWO of the three questions in this section in the ANSWER BOOK. 40 MARKS – 20 MINUTES QUESTION 2: MICROECONOMICS 2.1 Answer the following questions. 2.1.1 Name TWO redress methods used by the government to improve income distribution. 2 x 1 (2) 2.1.2 Explain how price leadership can result in consumers paying higher prices in an oligopoly market. 1 x 2 (2) 2.2 Study the graph below and answer the Questions that follow. LONG-RUN EQUILIBRIUM IN AMONOPOLY MARKET Price Cost Revenue LMC LAC a 25 19 s b 14 E DD/AR 100 120 130 Quantity 2.2.1 Define the concept long run as used in economics. 2.2.2 Identify the optimum production level. 2.2.3 Explain why the marginal revenue(MR) curve will always lie below the demand curve (DD) in this type of market. 2.2.4 Calculate the profit or loss of this monopolist. Show ALL calculations. 2.3 (2) (2) (2) (4) Study the article below and answer the questions that follow. COMMISSION CRACKS GLASS CARTEL Six firms active in the manufacturing and distribution of glass products for the building and construction industry have been found to be involved in a cartel by a Competition Commission investigation. In its latest ruling on anti-competitive practices in the building and construction industry, the commission alleged that National Glass, Northern Hardware & Glass, Furman and Glass, McCoy's Glass, AF-FSL Glass and Glass South Africa © Gauteng Department of Education 116 were involved in price fixing, market allocation and the fixing of trading conditions through various arrangements and agreements. The investigation into cartel activity in the glass industry was initiated in February 2010 based on information received in June 2009. AF-FSL Glass was granted conditional leniency from prosecution. [Adapted from Business Report, 9 April 2013] 2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.4 2.5 Define the term cartel. (2) Which market structure is depicted in the above article? (1) What prompted the Competition Commission to investigate anticompetitive behaviour in the glass industry? (2) Explain how the glass cartel’s behaviour can affect the economy negatively. (4) Name the institution that the glass companies can approach if they are not happy with the fine imposed on them. (1) Explain the reasons why cost-benefit analysis is used in practice. How can non-price strategies assist firms to increase their market share? (8) (8) [40] QUESTION 3: CONTEMPORY ECONOMIC ISSUES 40 MARKS – 20 MINUTES 3.1 3.1.1 3.1.2 3.2 Answer the following questions. Give TWO examples of places or events that form part of cultural tourism. 2 x 1 (2) How will a sound political climate lead to an increase in tourist figures? 1 x 2 (2) Study the cartoon below and answer the questions that follow. © Gauteng Department of Education 117 3.2.1 3.2.2 3.2.3 3.2.4 What is the meaning of the greenhouse effect? (2) Why is it necessary to prevent global warming at all times? (2) Name ONE international convention/protocol against global warming (2) Explain how the market fails to protect the environment. (4) 3.3 Study the table below and answer the questions that follow. EXPECTED GDP: R 51,1 billion Tourist group Volume of local tourism Value of local market (%) market (number of trips) Visits to family and friends 32 37,2 Holiday makers 8,1 44,5 Religion 5,3 4 Business 3,8 12,8 Medical reasons 0,8 14 [fictitious figures] 3.3.1 Which tourist group contributed most % to the local economy? (2) 3.3.2 Determine the percentage contribution to the gross domestic product by people visiting friends and family. (2) 3.3.3 Why do you think that tourist figures increased locally after 1994? 2 x 2 (4) 3.3.4 How can tourism eradicate poverty in South Africa? 2 x 1(2) 3.4 3.5 Discuss taxation as fiscal measure to combat inflation. 4 x 2 (8) Discuss why the loss of indigenous knowledge requires international measures. 4 x 2(8) [40] © Gauteng Department of Education 118 QUESTION 4: MICROECONOMIC & CONTEMPORARY ECONOMIC ISSUES 40 MARKS- 20 MINUTES 4.1. 4.1.1 4.1.2 Answer the following questions. Name TWO characteristics of monopolistic competition. 2 x 1 (2) What is the value of the production price index(PPI) as an inflation indicator? 1 x 2(2) 4.2. Study the extract below and answer the questions that follow. TIME RIPE FOR SMART TRANSPORT Motorists will have to reconsider their transport options in the light of current petrol price hikes. According to Findalift.co.za many motorists drive to work causing millions of empty seats daily. Registering with Findalift will bring you into contact with people traveling the same route on a daily basis. Sharing the total cost of travelling 25 km daily will save you more than R6 500 every year – four people per vehicle will bring this saving up to R10 000. The Universities of Cape Town and Stellenbosch have already registered their students and employees to lower their travel costs. [Adapted from Beeld, March 2013] 4.2.1 4.2.2 4.2.3 Define the concept inflation. (2) Explain the influence Findalift might have on consumer consumption expenditure. (4) What impact will reduced petrol costs have on savings and investment in general? (4) © Gauteng Department of Education 119 4.3. Study the graph below and answer the questions that follow. NEGATIVE EXTERNALITIES – A CAUSE OF MARKET FAILURE Price and cost (R) SMC1 SMC b P1 a P D Q1 4.3.1 4.3.2 4.3.3 4.3.4 4.4. 4.5. Q Define the concept market failure. Give ONE example of a negative externality. Which curve indicates the social cost to society? Explain how negative externalities can lead to market failure by using the data in the above graph. (2) (1) (1) (6) Explain inefficiency in the economy as a consequence of market failure. 4 x 2 (8) What are the effects of taxes and subsidies on the South African economy? 4 x 2(8) [40] TOTAL SECTION B: 80 SECTION C Answer only ONE of the two questions in this section in the ANSWER BOOK. STRUCTURE OF ESSAY MARK ALLOCATION Introduction Max 2 Body: Main part: For example discuss/distinguish/ Max 26 differentiate/explain/analyse/ evaluate/assess © Gauteng Department of Education 120 Additional part: For example draw a graph/deduce/ Outline/briefly explain/expand on/your own opinion/support Conclusion Max 10 Max 2 TOTAL 40 QUESTION 5: MICROECONOMICS 40 MARKS – 35 MINUTES Markets are broadly categorised into perfect and imperfect markets. However, in reality very few examples of perfect markets exist. Examine the conditions of a perfect market in detail. (26) Draw a clearly labelled graph to show economic profit for an individual producer in the market. (10) [40] QUESTION 6: CONTEMPORARY ECONOMIC ISSUES 40 MARKS – 35 MINUTES Tourism is one of the fastest growing industries worldwide. Critically discuss the effects of tourism. (26) Evaluate how tourism benefits the households in your community by using appropriate examples. (10) [40] TOTAL SECTION C : 40 GRAND TOTAL : 150 SECTION D: SOLUTIONS AND HINTS TO SECTION A SECTION A (COMPULSORY) QUESTION 1 1.1 MULTIPLE-CHOICE QUESTIONS 1.1.1 A short 1.1.2 C factor cost 1.1.3 A unemployment will increase 1.1.4 C demand and supply 1.1.5 B middle 1.1.6 A real GDP 1.1.7 C terms of trade 1.1.8 A labour productivity 8 X 2 (16) 1.2 1.2.1 1.2.2 MATCHING ITEMS F subaccount in the balance of payment A the weakening of a currency as result of market forces © Gauteng Department of Education 121 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.2.8 H exchange rate system G a protectionism measure against unfair international competition B policies aimed at increasing the economic livelihood of a specific area C the interest rate which banks charge on loans to preferential clients D World-wide interfacing with trade as the major element E the removal of unnecessary laws that inhibit the free operation of markets 8 X 1(8) 1.3 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 IDENTIFY THE CONCEPT Multiplier effect Privatisation Capital goods Economic development Economically Active Population Land restitution 3. X 2 (6) SECTION B Answer TWO of the three questions from this section in the ANSWER BOOK. QUESTION 2: MACROECONOMICS 2.1 2.1.1 Government spending Investments (2) Exports (2 x 1) (2) (2) 2.1.2 Imports will increase(1 x 2) 2.2 2.2.1 2.2.2 2.2.3 2.2.4 2.3 2.3.1 2.3.2 2.3.3 final value of goods and services produced within the borders of a country in one year R87 593 million RSA citizen working and earning money in the UK. Current prices – Nominal) Does not take into account changes in the general price level Constant prices- (Real) Where the change in the general price levels were taken into account Households/Consumers Business sector/Firms/Producers (2) (2) (2) (4) (2) It shows all the possible levels of expenditure and output at which the economy is in equilibrium (2) They received information when (2) (2) K= AF-FSL Glass had applied for leniency for their part in collusive behaviour. = (4) 2.3.4 =5 The bigger the mpc, the bigger the multiplier (and vice vera) © Gauteng Department of Education (2) 122 2.4 (8) • Theories by the Monetarists (Friedman) and Keynesians(Keynes) extreme and only true under specific circumstances. • Under real circumstances, government pursues economic growth irrespective of inherently stable or unstable market • Therefore governments aren’t extreme, but transparent and follow pragmatic policies • The root of the new economic paradigm is embedded in the prevention of unstable conditions that will lead to contraction • According to the new economic paradigm it is possible for output to rise over extended periods of time without being hampered by supply constraints and inflationary pressures • Embedded in demand-side and supply-side policies (Any 4 x 2) Arguments in favour of free trade: • The free trade argument is persuasive.If each nation does what it does best, everyone will enjoy lower prices and higher levels of output • Free trade leads to greater world production of traded goods, leading to an increase in economic welfare • Free trade allows countries to specialise in economic activities in which they have a comparative advantage (economies of scale) When there is free trade, more efficient distribution of resources is possible because each country specialises in its most effective production. Free trade offers consumers greater choice. It allows consumers the choice of what to buy globally and not just from what is available locally (Any 1 argument 2 x 2) QUESTION 3: CONTEMPORARY ECONOMIC ISSUES 3.1 3.1.1 • Progressive personal income tax • Wealth taxes Cash benefit - grants Benefits in kind – food parcels/user fee charge/school meals Land reform programmes – land restitution and land redistribution © Gauteng Department of Education (8) 123 3.1.2 3.2.1 3.2.2 Property subsidies Youth wage subsidies Any other relevant fact (2) • Increase sales of locally produced clothing Expansion of local industries Increased employment Any other relevant fact (2) IPAP is predicated on the need to bring about significant structural change to the South African economy (2) Stronger domestic growth in the manufacturing sector High employment levels (4) • Creation of employment • NGP envisage the creation of 5 million new jobs by 2020 (4) 3.2.3 3.3.1 3.3.2 3.3.3 3.4 Noth/South divide or developed/developing countries USA, Canada, UK, France, Germany, Japan, Italy, Russia 2x1 Developing Countries: mainly export raw to developed countries and import manufactured products from developed countries. Developed countries: continue to subsidise production of their agricultural goods, making it difficult for developing countries to compete while insisting that developing countries eliminate their tariffs on manufactured goods. Most developing countries have very little foreign trade • The main focus was on developing the global competitiveness of the SA manufacturing enterprises (implemented by the DTI) • It is a strategy that applies to all processes that transforms natural products into manufactured products QUESTION 4 4.1.1 Accountability/efficiency/assessing needs/pricing policy/parastatals/privatisation 4.1.2 (Any 1 x2) Low productivity – low production – negative effect on the aggregate supply of goods and services – same/or growing aggregate demand= rapid increase in general price level (demand inflations (Any 1 x 2) © Gauteng Department of Education (2) (2) (2) (2) (6) 124 4.2.1 4.2.2 4.2.3 4.3.1 4.3.2 4.3.3 4.3.4 4.4 Point e (2) The value of the rand depreciates As a result of the increase in the demand for dollars, the value of the rand decreases from R10 for one dollar to R12 for one dollar (4) In the case of devaluation of the rand, the Central Bank will sell foreign exchange. In the case of revaluation of the rand, the Central Bank will buy foreign exchange. (4) An IDZ is a purpose-built industrial estate which is closed off and situated in a specific area. (2) Upington, in the Northern Cape, is a natural home for solar energy research and development. Saldanha Bay will service the growing oil and gas industry on Africa’s west coast, while expanding iron ore exports (2) SEZ’s currently get a special incentive, which is not applicable to the IDZ. A blanket corporate tax rate of 15%, well below the 28% currently applied. IDZ is located in a smaller area linked directly to a port, whereby an SEZ covers a wider area. The plan is to incorporate the IDZ into an SEZ (2) Distorting effects – the current IDZ does not benefit from the special tax incentive scheme The concern is that companies within the IDZ will close their operations and move over to the SEZ’s to enjoy this incentive. This could mean dislocations and movements to other areas. Valuable investments will be lost in the area withdrawn. This will cause distortions in the production and output for that region (4) Leading: Give consumers, businesses and the state a glimpse of the direction in which the economy might be heading When these indicators rise, the level of economic activities will also rise a few months later.. Examples job advertising space; inventory; and sales Lagging: Lagging indicators won’t change direction until after the business cycle has changed its direction. Examples hours worked in construction and total of commercial vehicles sold. © Gauteng Department of Education (8) 125 4.5 Infant mortality rates – the number of children younger than one year old who die in a year per 1 000 births during that year. In 2010 in SA it was 34 per thousand Under five mortality rates – the number of children under five years old who die per 1 000 (Any 2 x 2) (8) [40] TOTAL SECTION B: 80 SECTION C QUESTION 5: MACROECONOMICS 40 MARKS – 25 MINUTES Introduction Incentives or mechanisms to encourage domestic manufacturers to increase the exports of goods and services to foreign countries (Max. 2) (Any other relevant definition of export promotion) Body MAIN PART Reasons for export promotion The country achieves significant export-led economic growth. Export promotion enlarges the production capacity of the country. Export markets are much bigger than local markets. More workers will be employed. Prices will be reduced. Methods of export promotion Incentives: The government supplies information on export markets, research on new markets, concessions on transport charges, export credit, etc. in order to stimulate exports. Subsidies: These include direct and indirect subsidies: – Direct subsidies: Cash payments to exporters. – Indirect subsidies: Refunds on import tariffs and general tax rebates. Trade neutrality: Subsidies equal in size to import duties are paid. -Neutrality can be achieved through trade liberalisation. Advantages of export promotion There are no limitations to size of scale since the market is very large. Production is based on cost and efficiency. There is increased domestic production. Exchange rates would be realistic. Disadvantages of export promotion The real cost of production is reduced by subsidies and incentives. The lack of competition because of incentives and subsidies forces competitors out of the market. © Gauteng Department of Education 126 Export promotion results in increased tariffs and quotas by powerful overseas competitors. Export promotion results in the protection of labour-intensive industries by developed countries.(Max 26) NOTE: A maximum of 8 x 1 marks will be allocated for headings. ADDITIONAL PART The candidate can offer a positive or a negative argument. Positive/Negative (1 x 2) Arguments (2 x 2) Substantial evidence (2 x 2) (Accept any other relevant answer) (Max. 10) Conclusion Any relevant conclusion. (Max. 2) [40] QUESTION 6: CONTEMPORARY ECONOMIC ISSUES 40 MARKS – 25 MINUTES Introduction The stimulation of supply means to increase the output, in terms of goods and services. (Any other relevant definition) (Max. 2) Body MAIN PART: There are various factors that promote the efficiency and effectiveness of resources: • Education and training - The Sectorial Education and Training Authorities (SETA's) have been created to promote and facilitate work-related training for the different sectors of the economy. - The increase in the number of skilled workers will improve the productivity levels of workers. This will lead to an increase in output. Fiscal policy - High tax rates discourage individuals, leading them to work less and businesses to invest less. - In South Africa the tax rates for individuals and businesses have been systematically reduced. Tax incentives give industries an area to operate at lower costs. These additional funds can be used to increase production. - Individuals get tax rebates. - This will increase the disposable income levels of individuals. This will stimulate the demand for consumer goods and services. © Gauteng Department of Education 127 Competition - The promotion of competition services as an incentive for new businesses to enter the market. - The Competition Act is aimed at limiting the number of monopolies formed and reducing or eliminating the powers of monopolies. - In addition, the many barriers of international trade have been lifted over the years. Deregulations - The deregulation of regulated industries provide for greater competition in the market. - Many unnecessary laws and other barriers to competition in SA have been removed, although there are still some regulations, especially the informal sector that has to be revised. Labour legislation - In South Africa, the Labour Relations Act, the Employment Equity Act and the Basic Conditions of Employment Act provide a fair and equitable working environment. - Such a workplace atmosphere will motivate workers to not only improve the quality of their work but also strive towards self-development. Small, medium and micro enterprises - In South Africa, the government encourages the establishment of SMMEs through various financing and support structures. - Institutions such as Khula, the National Empowerment Fund, the Industrial Development Corporations and Business Partners are in partnership with national government. - There are also free advisory centres available to provide information on topics such as managing and running SMMEs Broad-Based Black Economic Empowerment Act (BBBEE) - BBBEE is the economic empowerment of all black people, especially women, workers, youth, the disabled and people living in rural areas. - It is aimed at addressing historical imbalances of the past, through increasing the number of black people that can own, control and control the country's economy and decreasing income inequalities. Research and Development - An R&D strategy has been implemented by the government to improve national competitiveness. - The R&D Strategy has three pillars: innovation; science, engineering and technology (SET), human resources and transformation; creating an effective government system. - Examples are the CSIR and Mintek Privatisation - Many publicly owned businesses have been privatised or partly privatised. - Privatisation is essential in promoting competition in the market place. © Gauteng Department of Education 128 - It is also proven that private companies are more effective and efficient than stateowned businesses. - Examples are Telkom, Iscor, Infrastructure - A well-developed infrastructure is the backbone of a growing economy. South Africa has one of the better-developed infrastructure is Southern Africa. - Transport: The South African transport network consists of highways, railways and ports. - Energy: Currently Eskom generates 95% of electricity in South Africa. It is one of the world's ten largest electricity suppliers in the world. It also exports to other countries. - Telecommunications: this is one of the fastest growing sectors in the SA economy. It offers fixed-line, wireless and satellite communication and has the most developed network on the African continent. Cost of doing business - It refers to cost of doing business, such as transport, communication and energy costs. - Other costs involve water, sanitation, vehicle and registration and labour markets. (Max 26) NOTE: A maximum of 8 x 1 marks will be allocated for headings. ADDITIONAL PART: In your opinion, is the South African government successful in meeting the basic needs of the poor? Motivate your response. Yes/No Almost 26% is regarded as absolutely poor in terms of international benchmark poverty line ($1,25 per day) (1) Social security grants: old age pensions, child support grants, disability grants (2) Benefits in kind: free quota water (6 000 litres per household) and electricity (20 kWh) per household, school-feeding schemes (3) Housing: RDP houses (4) Sanitation: Access to clean water, energy, sewerage system (5) Primary healthcare: poor receive free hospitalisation and medicine. From certain income levels fees are staggered. Immunisation for all children is free. (6) Education: no-fee schools (Candidates must mention some of these basic needs and how it affects the poor) (Max.10) Conclusion Any relevant conclusion (Max. 2) [40] TOTAL SECTION C: 40 GRAND TOTAL: 150 ____________________________________________________________ © Gauteng Department of Education
