GRADE 12 ECONOMICS

SOLUTIONS TO PAPER ONE ESSAYS: QUESTION 5 ONLY

FINAL EXAMINATIONS

Adapted by the Bojanala district Economics subject advisor: Mr Mkhize P.A

THIS MANUAL CONSISTS OF 21 PAGES
 PAPER ONE POSSIBLE ESSAYS FOR QUESTION 5 AS PER 2021
EXAMINATION GUIDELINES

QUESTION 5: MACROECONOMICS FINAL EXAMINATION

NO. SUB-TOPIC ESSAYS YEARS ASSESSED
1 CIRCULAR FLOW Discuss the role various markets with 2020 Nov
the circular flow model (NOT 2016 Nov
POSSIBLE FOR 2021 BUT TO BE
STUDIED FOR SECTION A & B)
2 BUSINESS CYCLE Discuss in detail 'The new economic 2015 Mar
paradigm'/Explain the 'smoothing of 2015 Nov
cycles'
3. Discuss in detail the features 2018 Nov
underpinning forecasting business
cycles
4. PUBLIC SECTOR Discuss in detail the main objectives 2021 June
of the public sector in the economy 2018 June
2017 Mar
2014 Nov
5. Discuss in detail the reasons for NEW ESSAY
public sector failure ( link them to
typical problems experienced
through public sector provisioning)

6. FOREX Discuss in detail the reasons BROUGHT BACK

(SUPPLY &DEMAND) for (ASKED IN 2016 MAR
international trade BUT ONLY THE
SUPPLY REASONS)

QUESTION 5: MACROECONOMICS

1. Discuss in detail the markets within the FOUR SECTOR MODEL (TO BE
STUDIED FOR SECTION B ONLY BY THE MATRIC CLASS OF 2021.)

INTRODUCTION
 Markets coordinate economic activities and determine prices for goods
and services /
 The circular flow model is a simplified representation of the interaction
between the participants of the economy
(Accept any other relevant introduction) (Max 2)

MAIN PART
Goods/Product/Output markets
 These are markets for consumer goods and services
In economics a distinction is made between goods and services:
 Goods are defined as any tangible items such as food, clothing and cars
that satisfy some human wants or need
 Buying and selling of goods that are produced in markets, include:

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  Capital goods market for trading of buildings and machinery
 Consumer goods market for trading of durable consumer goods,
semi-durable consumer goods and non-durable consumer goods
 Services are defined as non-tangible actions and includes wholesale and
retail, transport and financial markets
 Flows of private and public goods and services are real flows and they are
accompanied by counter flows of expenditures and taxes on the product
market

Factors/Resources/Input markets
 Factors of production are bought and sold in the factor market
 The factor market includes the labour, property and financial markets
 Factor services are real flows and they are accompanied by counter flows
of income on the factor market

Financial markets
 They are not directly involved in production of goods and services, but act
as a link between households, the business sector and other participants
with surplus funds
 Banks, insurance companies and pension funds form part of the financial
market

Money markets
 In the money market, short-term loans and very short-term funds (less than 3
years) are saved and borrowed by consumers and business enterprises
 Products sold in this market are bank debentures, treasury bills and
government bonds
 The SARB is the key institution in the money market

Capital markets
 In the capital market long-term funds (3 years or longer) are borrowed and
saved by consumers and business enterprises
 The Johannesburg Security Exchange is a key institution in the capital
market
 Products sold in this market are mortgage bonds and shares

Foreign exchange markets

 On the foreign exchange market businesses buy/sell foreign currencies to
pay for imported goods and services
 These transactions occur in banks and consists of an electronic money
transfer from one account to another
 The most important foreign exchange markets are in London/New
York/Tokyo
 The SA rand is traded freely in these markets when a person buys
travellers' cheques to travel abroad
 Imports and exports are real flows and they are accompanied by counter
flows of expenditure and revenue on the foreign exchange market
(Accept any other correct relevant response) (Max 26)

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 2. Discuss in detail the new economic paradigm/Explain the smoothing of
cycles.
2021 EXAMINATIONS GUIDELINES EXTRACT

INTRODUCTION
 Smoothing of business cycle is when policy is used to prevent dramatic
peaks and troughs in the level of economic activities.  /
 Smoothing means to take out the painful parts of economic down-fall
that is part of the market economy./
 Business cycles refer to consecutive periods of growth (increasing) and
decline (decreasing) in the level of economic activities over time.
(Accept any other correct relevant response.)

BODY: MAIN PART

Governments’ aim with business cycle policies is to achieve the best possible growth
rates
 They need to apply policies to smooth out cyclical movements, so that peaks
do not end up in high inflation and troughs do not result in high unemployment

Demand-side policies
 They focus on aggregate demand in the economy.
 When households, firms and the government spend more, demand in the
economy increases.
 This makes the economy grow but can lead to inflation.

Governments use monetary and fiscal policies to do this

 Fiscal policy - more successful in stimulating a depressed economy
 Monetary policy is more effective when ‘dampening’ an overheated economy
that has inflation rising

Monetary policies
When the level of economic activity changes the SARB can use expansionary
and contractionary measures reduce fluctuation of such economic activities.

Expansionary monetary measures to stimulate or increase demand

 An expansionary monetary policy is implemented when the economy is in
recession in order to stimulate economic activities
 Interest rates can be reduced to encourage spending
 Household and firms can therefore borrow more and spend more

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  The increased spending increases the level of economic activity. Investment
will increase and more factors of production will be employed
 Higher levels of production and income and expenditure will be achieved
 If the supply of goods and services does not increase in line with increase in
demand inflation will increase. This means that demand will be greater than
supply
 Implementation of open-market transactions by buying back securities and
bonds, will increase money available for loans
 Decreasing the cash reserve requirements that will allow banks to loan out
more money that will stimulate production
 Persuading commercial banks (moral suasion) to lend more money in a
recession to ensure that the production of goods do not decrease
 Managing exchange controls by liaising with SARB to manage the inflation
rate not to harm the economy

Contractionary monetary measures to dampen or cool-off the economy

(decrease demand).
 To dampen the demand at the peak the government will be able to reduce
money supply by increasing interest rates.
 selling government bonds and securities (open market transactions)
and reduce the supply of money in circulation
 increase the cash reserve requirements to manipulate money
creation activities of banks
 persuade banks to decrease lending (moral suasion)
 and to devaluate the exchange rate (exchange rate policy)

Fiscal policy
When the level of economic activity changes the Minister of Finance can use
expansionary and contractionary measures reduce fluctuation of such economic
activities.

Expansionary fiscal policy measures to stimulate demand

 An expansionary fiscal policy can be implemented when the economy is in
recession in order to stimulate economic activities
 An increase in government expenditure will increase aggregate demand
 This serves as an injection into the economy as production will increases,
more factors of production will be employed
 This will lead to higher income and higher expenditure
 Taxes can be reduced, which will lead to an increase in disposable income
 This serves as an injection into the economy and eventually aggregate
demand will increase

Contractionary monetary measures.

 When the economy grows too fast government can reduce its spending and
increase taxes
 This will lead to a decrease in aggregate demand which will reduce production
as fewer goods and services will be needed

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2021 EXAMINATIONS GUIDELINES EXTRACT

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

Unemployment:
 Demand-side policies are effective in stimulating economic growth.
 Economic growth can lead to an increase in the demand for labour.
 As a result more people will be employed and unemployment will increase.
 As unemployment decreases inflation is likely to increase.
 This relationship between unemployment and inflation is illustrated in the
Phillips curve.
The Phillips curve

 The PC – curve indicates the original situation.

 Point A indicates the natural rate of unemployment (NRU) where
unemployment is at 14% and the inflationary pressures are at 0%.
 A movement from point A to point B will cause a decrease in unemployment
and an increase in inflation.
 At point B, economic growth occurs and unemployment decreases to 10%
whilst inflation rises from 0% to 2%
 At point C, unemployment decreases to 8% and inflation rises to 6%
 This will then lead to the government introducing supply measures to
stimulate the economy and the PC will shift from PC to PC 1.

2021 EXAMINATIONS GUIDELINES EXTRACT

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Supply-side policies
 They focus on the aggregate supply of the economy the government
measures (ways) to stimulate supply or production of goods and services
 And those supply measures are:

1. Reduction in costs.
Costs can be reduced in the following THREE ways:
 Infrastructural services
Reasonable charge and efficient of Transport, communication, water
services and energy supply.

 Administration costs
These costs include inspection, reports on applications of various laws,
regulations and by-laws, tax returns and returns providing statistical
information.
It adds to costs. In SA businesses carry a heavy burden.

 Cash incentives
Include subsidies for businesses to locate in neglected areas where
unemployment is high and compensation to exporters for certain costs
they incur in development of export markets.

2. Improving the efficiency of inputs

Efficiency of inputs can be improved in the following ways:
 Tax rates
Low tax rates can serve as an incentive to workers.
It will improve the productivity and output.
 Capital consumption
Replacing capital goods regularly creates opportunities for businesses
to keep up with technological development and better outputs

 Human resource development

To improve the quality of manpower by improving health care,

 Free advisory service

These promote opportunities to export

3. Improving the efficiency of markets

Efficiency of the markets can be improved in the following ways:
 Deregulation
Remove laws, regulations and by-laws and other forms of government
controls makes the markets free.

 Competition
Encourages the establishment of new businesses.

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  Levelling the playing field
Private businesses cannot compete with public enterprises.

3. Discuss in detail the features underpinning the business cycles

forecasting.

INTRODUCTION
The business cycles refers to the successive periods of growth and decline in the
level of economic activities over time.

BODY: MAIN PART

LEADING INDICATORS
 When these indicators rise, the level of economic activities will also rise a few
months later
 Leading indicators give consumers, businesses and the state a glimpse of
the direction in which the economy is heading
 Leading economic indicators are also important for investors, because they
are used to predict the future of the economy
 e.g. job advertising spaces, inventory and sales

COINCIDENT INDICATORS
 Indicators that change at the same time and in the same direction as the
economy changes if the turning point of a specific time series variable
coincides with the reference turning point
 It indicates the actual state of the economy
 E.g. value of retail sales. If the business cycle reaches a peak and then
begins to decline, the value of retail sales will reach a peak and then begin to
decline at same time

LAGGING INDICATORS
 Won't change direction until after the business cycle has changed its direction
/ the specific turning points tend to follow the reference turning points
 They serve to confirm the behaviour of the coincident indicators
 Examples of these indicators are hours worked in construction and total of
commercial vehicles sold

COMPOSITE INDICATORS
 A summary of the various indicators of the same type into a single value or
index
 All three indicators could be calculated as a single composite indicator to
benchmark a country's economic performance
 E.g. find a value for a composite leading, coincident and lagging indicator
 A composite indicator measures multi-dimensional concepts e.g.
competitiveness, e-trade or environmental quality, which cannot be captured
by a single indicator
 Ideally a composite indicator should be based on theoretical framework which
allows individual indicators to be selected, combined and weighted in a

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 manner which reflects the dimensions or structure of the economy being
measured

LENGTH
 Is measured from peak to peak or from trough to trough / It's the time used to
move through a complete cycle
 If the length is 10 years it can be predicted that it will take 10 years for the
economy to move through another complete cycle
 Cycles may overshoot
 Longer cycles are stronger / Shorter cycles are weak
 The strength of the underpinning forces

AMPLITUDE
 Amplitude refers to the deviation from the trend line to the trough and from the
trend line to the peak of the business cycle
 It is the difference between the value of total output between peak and trough
measured from the trend line to the peak and trough
 Amplitude reflects the intensity of the upswing and downswing in economic
activity
 The amplitude shows two things:
 The power of the underlying forces, e.g. interest rates, exports or
consumer spending
 A large amplitude during the upswing signifies strong underlying forces
– which result in longer cycles
 It demonstrates the extent of change: the larger the amplitude, the more
extreme the changes that may occur
 It indicates the effect of economic activity
 During an upswing, unemployment may decrease from 20% to 10% (a
decrease of 50%) / inflation may increase from 3% to 6% (i.e. 100%) / a
surplus on the current account (BOP) can change from a surplus to a deficit

TREND LINE
 It represents the average position of a cycle.
 Indicates the general direction in which the economy is moving.
 An upward trend suggest that the economy is growing.
 The trend line usually has a positive slope, because production capacity
increases over time.

EXTRAPOLATION
 Past data is used, where predictions are made about the future based on
assumptions related to trends
 Extrapolation means to estimate something unknown from the facts and
information that is known
 Extending a trend into the future may provide information on what is likely to
happen
 If a business cycle has passed through a trough and entered into a boom
phase, forecasters may predict that the economy will grow in the months to
follow
 Extrapolation techniques are sometimes used to predict future share prices

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  The trend of the curve must be followed to complement the completed
section. Take a calculated decision to continue beyond the level of a
resistance point

MOVING AVERAGES
 A moving average is a tool used to analyse changes that occur in a series of
data over a period of time
 It is calculated to iron out small fluctuations and reveal trends in the business
cycles
 This method is repeatedly calculating a series of different average values
along a time series to produce a smooth curve
 It is used to analyse the changes in a series of data over a certain period of
time
 To eliminate the effect of sharp fluctuations in the business cycle, economists
use moving averages to smooth out the business cycle so that it looks more
like a straight of slightly curved line
 The moving average for the business cycle could be calculated for the past
three years in order to smooth out any minor fluctuations and to indicate the
trend over the past five years
E.G.


 The five year moving average for above table would be:
- (4 + 7 + 9 + 11 + 4) / 5 = 7
- (7 + 9 + 11 + 4 + 6) / 5 = 7.4
- (9 + 11 + 4 + 6 + 10) / 5 = 8

4. Discuss in detail the macro-economic objectives of the state.

INTRODUCTION
 The government provides goods and services that are under-supplied by the
market and therefore plays a major role in regulating economic activity,
guiding and shaping the economy (Max 2)

BODY: MAIN PART

Objectives
 Economic growth
 Refer to an increase in the production of goods and services
 Measured in terms of real GDP
 For economic growth to occur, the economic growth rate must be higher
than population growth
 Growth and development in a country benefit its citizens because it often
leads to a higher standard of living

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  Full employment
 It is when all the people who want to work, who are looking for a job must
be able to get a job
 High levels of employment is the most important economic objective of
the government
 The unemployment rate increased over the past few years
 Informal sector activities must be promoted because it is an area where
employment increase

 Exchange rate stability

 The economy must be managed effectively and effective fiscal and
monetary policy must be used to keep the exchange rate relatively stable
 Depreciation and appreciation of the currency create uncertainties for
producers and traders and should be limited
 The SARB changed the exchange rate from a managed floating to a free
floating exchange rate

 Price stability
 Stable price causes better results in terms of job creation and economic
growth
 The government's inflation target is 3% - 6% and they are successful in
keeping inflation within this target
 Interest rates, based on the repo rate are the main instruments used in
the stabilisation policy
 The stable budget deficit also has a stabilizing effect on the inflation rate


 Economic equity
 Redistribution of income and wealth is essential to reduce poverty
 South Africa uses a progressive income tax system where the higher
income earners pay more tax
 Taxation on profits, taxation on wealth, capital gains tax and taxation
on spending, are used to finance free services
 Free social services are basic education; primary health and financing
basic economic services
 Cash grant to the poor/vulnerable, for example child grants and
disability grants (Max. 26)

5. Discuss in detail the reasons for public sector failure.
INTRODUCTION
 Public sector failure occurs when the public sector fails to provide goods and
services to the people.
(Accept any other correct relevant response) (Max 2)

MAIN PART
Management failure
 Ignorance/applying conflicting policies or lack of leadership, training
and experience might result in the improvement of the welfare of
someone at the expense of someone else..

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  Many public sector entities lack capacity because of a shortage of
skills, e.g Eskom, Transnet, Denel, etc

Apathy
 Successful public production relies on long-term accountability which if
not addressed properly could lead to inefficiency, corruption and poor
services
 The potential to diagnose inefficiency, corruption and poor services are
the determinants of these symptoms.
 For example, lack of resources, low motivation, poor training and lack
of competence
 Government officials show little or no interest in delivering an efficient
service to the public.
 There is no accountability. Corruption and poor service delivery are
some of the symptoms of apathy

Lack of motivation
 Workers rarely receive incentives for successful service delivery.
 This leads to services being limited, low in quality and high in cost.
 frontline workers rarely receive incentives for successful service
delivery
 There are few rewards and little or no stipulation for service quality and
quantity

Bureaucracy
 Bureaucrats tend to obey rules and regulations without judgement.
 They tend to be more interested in obeying the rules than the efficient
delivery of goods and services to the people.
 This means that funds are often left unspent and then returned to the
treasury which leads to inefficiency, corruption / crime, and poor
service delivery

Politicians
 Politicians tend to promote policies and spend money on projects as
long as they get votes in return.
 These policies might involve an inefficient allocation of resources.

Structural weaknesses
 Objectives are not met.
 Some objectives may work against each other, e.g.government
redistributes income and wealth too aggressively.
 economic growth and economic development could suffer in the long
run
 This can result in social goals not being attained

Special interest groups

 Attempts by interest groups such as farmers, organized labour to
influence government behaviour to their own advantage

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  Individuals and enterprises influence government to act in their interest
e.g. profitable contracts, favourable regulations etc. 
 Ignorance, personal and hidden agendas, questionable motives
improve the welfare of someone at the expense of another
 Rent seeking / special interest groups / own interest 
 Individuals and enterprises influence government to act in their
interest (26 marks)

6. Discuss the reasons for international trade in detail.

INTRODUCTION
 There are many reasons for international trade. Countries may have a surplus
of some goods and a shortage of other goods, and they will trade in order to
correct these imbalances./
 Trade that takes place between different countries of the world
(Accept any other correct relevant response) (Max 2)

MAIN PART
DEMAND REASONS

The size of the population

 If there is an increase in population growth, it causes an increase in demand,
as more people’s needs must be satisfied. 
 Local suppliers may not be able to satisfy this demand.

Income levels
 Changes in income cause a change in the demand for goods and services
 Consumable income for example may increase due to a decrease in tax, or
increased employment of factors of production which may lead to increased
consumption expenditure 
 Higher income creates more needs, wants, and subsequently greater demand for a
greater variety of goods even if it necessary to get the goods from abroad
 An increase in the per capita income of people results in more disposable income
that can be spent on local goods and services, some of which may then have to be
imported

Change in the wealth of the population

 An increase in the wealth of the population leads to greater demand for goods. 
 People have access to loans and can spend more on luxury goods, many of which
are produced in other countries.

The difference in consumption patterns

 It is determined by the level of economic development in the country.
 e.g. a poorly developed country will have a high demand for basic goods and
services but a lower demand for luxury goods.

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Preferences and taste
 Not all the goods wanted are produced in a country
 Consumer preferences and taste play a decisive role in demand of goods
from foreign countries
 If consumers in China have a preference for tea and consumers in America
have a preference for coffee, the relative prices of tea and coffee will differ
between these countries
 This is influenced by international migration in terms of religion and life
styles

SUPPLY REASONS
Natural resources
 These resources are not evenly distributed across all countries of the
world
 They vary from country to country and can only be exploited in places where
these resources exist
 South Africa is well endowed with different natural resources but less well
endowed with skilled labour and capital
 whilst Japan and Ireland have relative abundance of skilled labour but they
lack natural resources

Labour resources
 Labour differs from country to country in terms of skills, knowledge, training,
quality, quantity and cost between them
 Some countries have highly skilled, well-paid workers and high productivity
levels
 E.g. Switzerland

The availability of capital

 Some countries need to modernize their industries and economies with
advanced machinery, equipment and plant but cannot manufacture this
equipment because they lack the capital to do so
 This has increased the need for international trade

Climatic conditions
 These conditions make it possible for some countries to produce certain
goods at a lower price than other countries
 E.g. Brazil is the biggest producer of coffee
 Countries have different climatic conditions and are therefore able to produce
different products

Technological resources
 The development levels and innovation processes of countries will always
differ and as a result other countries may have them in abundance while
others may not
 Countries like Germany, the United States, are able to use capital that
embodies high levels of technology while other countries do not have access
to the latest technology

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  These countries that have high technological labour force are able to produce
certain goods and services at a low unit cost
 E.g. US and Germany

Specialisation
 The production of certain goods and services allows some countries to
produce them at a lower cost than others 
 E.g. Japan produces electronic goods and sells these at a lower price 
 International trade enables countries to specialize in the production of goods
and services in which they have a comparative advantage 
 Most of such surplus production gets exported to other countries and the
revenue earned from these exports can be used to finance imports 
(Max 26)
2021 SCE MAY-JUNE

2019 NOV

15
2019 SCE MAY- JUNE

2018 NOV

2018 SCE MAY-JUNE

16
2018 MARCH

2017 NOV

2017 JUNE

17
2017 MARCH

2016 NOV

2016 SCE MAY – JUNE

18
2016 MARCH

2015 NOV

2015 SCE MAY- JUNE

19
2015 MARCH

2014 NOV

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 QUESTION 6: ECONOMIC PURSUITS FINAL EXAMINATION)
NO SUB-TOPIC ESSAYS YEARS
ASSESSED
1. EXPORT Discuss in detail export promotion 2019 Nov
PROMOTION 2017 Jun,
2. PROTECTION Discuss in detail the arguments in favour of BROUGHT
ISM protectionism BACK (Was
in 2016 Mar)
3. ECON Discuss in detail the demand-side approach in 2018 Nov
GROWTH promoting growth and development in South Africa 2017 Jun;
&DEV 2016Mar
4 Discuss in detail the following South African growth BROUGHT
and development policies and strategic initiatives BACK (Was
(such as RDP, GEAR, NSDS, AsgiSA, JIPSA, in 2014 Nov)
EPWP, NGP, NDP, SMMEs & BBBEE)
5. SOUTH Discuss in detail South Africa's initiatives 2019 Nov
AFRICA’S (endeavours) in regional development: 2018 Jun
ENDEAVOUR - Spatial development initiatives (SDI's) 2016 Nov
S TO - Corridors
REGIONAL - Industrial Development Zones (IDZ's)
DEVELOPME - Special Economic Zones (SEZ's)
NT
6. ECONOMIC Discuss in detail the following economic indicators: 2021 June
INDICATORS -inflation rate indicators 2015 Mar
-foreign trade indicators 2015 Nov
-employment indicators 2016 Mar
-productivity indicators
-interest rate indicators
-money supply indicators
NB. The production indicators have been
removed from the economic indicators in the
2021 examination guidelines. Not for teaching
&learning
7. SOCIAL Discuss in detail the following social indicators: 2019 Jun
INDICATORS -Demographic indicators 2017
-Nutrition and health indicators Mar2015 Jun
-Education
-Services
-Housing and urbanisation
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