GRADE 12 SUBJECT ECONOMICS Week 8 -9

Topic FOREIGN EXCHANGE MARKETS (INTERNATIONAL TRADE)

(± 2 weeks)
Examination of the foreign exchange market, the establishment of exchange rates, and show
how the Balance of Payments Account is affected

ATP • The main reasons for international trade

• The balance of Payments
• Corrections of Balance of Payments surplus and deficit (disequilibria)
• Foreign exchange markets
• The establishment of foreign exchange rates

TERM DEFINITION
Absolute advantage Where one country can produce goods or services cheaper than another.
Appreciation Appreciation of a country’s currency is an increase in the price of the currency
in terms of another currency due to market forces
Balance of payments A systematic record of all transactions between one country and other
countries.
Comparative advantage A situation where one country has a relative advantage in the production of
goods and services.
Depreciation Depreciation of a currency is a decrease in the price of the currency in terms
of another country’s currency due to market forces
Devaluation refers to the deliberate decrease in the value of the currency in terms of
another currency. (As a result of central bank intervention)
Fixed exchange rate the value of a currency fixed in relation to an anchor currency – not allowed
to fluctuate.
Exchange rate The rate at which one currency is exchanged for another.
Free floating exchange price determined only by demand and supply of the currency – no
rate government intervention.
Foreign exchange market A market where foreign currency is traded.
Foreign Direct When foreign countries invest money in South Africa resulting in an inflow of
Investment capital in the country.
Globalisation Increased economic integration leading to cultural and economic harmony.
International Monetary An international organisation that lends money to countries with ongoing
Fund balance of payments problems.
International trade The exchange of goods or services across international borders.
Managed exchange rate the rate is influenced by government via central bank around a preferred rate
Net balance Money that enters the country is offset against money that leaves the
country.
Portfolio Investment Buying and selling equities and debt securities e.g. bonds and shares.

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 TERM DEFINITION
Revaluation refers to the deliberate increase in the value of the currency in terms of
another currency. (As a result of central bank intervention.) This occurs under
a fixed exchange system.
Special Drawing Rights A financing instrument distributed among members of the IMF.
(SDR)
Terms of trade Compares a country’s export prices with its import prices by means of indexes
Trade balance The value of exports minus imports.
Transfer payment Money received without any productive service rendered.

THE REASONS FOR INTERNATIONAL TRADE

DEMAND REASONS

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

The population’s income levels effect demand. Changes in income cause a change in the demand
for goods and services. An increase in the per capita income of people results in more disposable
income that can be spent on local goods and services, some of which may then have to be imported.

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

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

The difference in consumption patterns is determined by the level of economic development in the
country, e.g. a poorly developed country will have a high demand for basic goods and services but a
lower demand for luxury goods.

The level of Economic development impacts on the consumption patterns of countries. Those that
are more developed will need more luxury good, than those that are less developed (emerging
economies). The basic necessities such as food in developing countries may results in more goods
being imported.

Different levels of technical development; demand for the latest technologies which are not
available in all countries, must be imported.

Cost of Production :a country may not be able to produce goods at the lowest possible cost,
consumers will demand goods from other countries at a lower price.

SUPPLY REASONS

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Natural resources are not evenly distributed across all countries of the world. They vary from
country to country and can only be exploited in places where these resources exist. South Africa is
well equipped with different natural resources, but less resources with skilled labour and capital.

Climatic conditions make it possible for some countries to produce certain goods at a lower price
than other countries, e.g. Brazil is the biggest producer of coffee.

Labour resources differ between countries in quality, quantity, skills, training, knowledge and costs.
Some countries have highly skilled, well-paid workers with high productivity levels, e.g. Switzerland.

Technological resources are available in some countries that enable them to produce certain goods
and services at a low unit cost, e.g. Japan. Countries like Germany and the USA are able to use
capital which embodies high levels of technology, while other countries do not have access to the
latest technology, such as basic internet services and healthcare.

Specialisation in the production of certain goods and services allows some countries to produce
them at a lower cost than others, e.g. Japan produces electronic goods and sells these at a lower
price.

Capital allows developed countries to enjoy an advantage over underdeveloped

countries. Due to a lack of capital, some countries cannot produce all the goods they require
themselves, and therefor are compelled to import these goods (capital goods).

ABSOLUTE AND COMPARATIVE ADVANTAGE

Absolute Advantage:
Where one country can produce goods with fewer resources than another country.

Oil (Barrels) Whisky (Litres)

Russia 10 5
Scotland 20 40

• One unit of labour in each country can produce either oil or whisky.
• A unit of labour in Russia can produce either 10 barrels of oil per period or 5 litres of whisky.
• A unit of labour in Scotland can produce either 20 barrels of oil or 40 litres of whisky.

Comparative Advantage

Comparative Advantage: Where one country can produce goods at a lower opportunity cost – it
sacrifices less resources in production.

Russia:
• if it moved 1 unit of labour from whisky to oil it would sacrifice 5 litres of whisky but gain 10
barrels of oil (OC = 5/10 = ½). Moving 1 unit of labour from oil to whisky production would lead
to a sacrifice of 10 barrels of oil to gain 5 litres of whisky (OC of whisky is 10/5 = 2)

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 Scotland:
• if it moved 1 unit of labour from whisky to oil it would sacrifice 40 litres of whisky but gain 20
barrels of oil (OC = 40/20 = 2). Moving 1 unit of labour from oil to whisky production would lead
to a sacrifice of 20 barrels of oil to gain 40 litres of whisky (Opportunity cost of whisky is 20/40 =
½). For Scotland the opportunity cost of oil is four times higher than that in Russia (2 compared
to ½).

• In Russia, oil can be produced cheaper than in Scotland (Russia only sacrifices 1 litre of whisky to
produce 2 extra barrels of oil whereas Scotland would have to sacrifice 2 litres of whisky to
produce 1 barrel of oil.

• There can be gains from trade if each country specialises in the production of the product in
which it has the lower opportunity cost – Russia should produce oil, Scotland, whisky.

THE EFFECTS OF INTERNATIONAL TRADE

• Specialisation increases the standard of living, especially when the area of specialisation is in
great demand due to a shortage of supply
• Mass production becomes possible if the domestic demand is added to foreign demand, e.g.
manufacturing of cell phones.
• Efficiency increases when there is competition. Lower prices mean that the same income can
buy more goods and services.
• Globalisation is driven by international trade, e.g. trade in IT products and vehicles (cars and
trucks).
•
BALANCE OF PAYMENTS

The balance of payments is a systematic record of all transactions between one country and the rest
of the world.

Composition of the balance of payments:

• The current account

• The capital transfer account
• The financial account

1. CURRENT ACCOUNT
Goods exports
+ Net gold exports
+ Services receipts
+ Income receipts
less Merchandise imports
less Payment for services
less Income payments
Current transfers (net receipts)
Balance on Current Account
Memo item: trade balance

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 2. CAPITAL TRANSFER ACCOUNT
Net lending to (+) or borrowing from (-) rest of the world

3. FINANCIAL ACCOUNT
Net direct investment
Net portfolio investment
Net financial derivatives
Net other investments
Reserve assets

Balance on financial account

Memo item: balance on financial account excluding reserve assets
Unrecorded transactions

1. The current account

• The balance of the current account is an indication of whether the country can afford its day
to day transactions.
• In calculating the balance on the current account, 5 groups of items are taken into
consideration, namely:
- Merchandise (goods)
- Gold
- Services
- Income
- Current transfers
2. The capital transfer account
• The balance shown reflects the net amount of the capital transfer, either negative or
positive.
• The net balance includes:
- transactions and grants relating to the ownership of fixed assets for example a grant from
foreign NGO for a housing project in South Africa.
- debt forgiveness
- the value of households and personal effects and liabilities of migrants
3. The financial account
• It shows records of investments by South Africans in other countries and by foreigners in
South Africa. It also shows records of reserve assets.
• Records all international transactions in assets and liabilities.
• The financial account consists of the following items:

- Net direct investment: refers to investment in real estate (fixed property) and obtaining a
meaningful share (10 %+) or control of such business.
- Net portfolio investment: Refers to the buying of financial assets such as shares in
companies on the stock exchange of another country.
- Net financial derivatives: It is a financial instrument which derives its value/price from the
underlying assets. The most common types of derivatives are futures, options, forwards and
swaps. Originally, underlying corpus is first created which can consist of one security or a
combination of different securities. The value of the underlying asset is bound to change as
the value of the underlying asset keep changing continuously. Generally, stocks, bonds,
currency, commodities and interest rates form the underlying asset.

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 - Net other investments: Other investments are a residual category. Transactions cannot be
classified under direct investment, portfolio investment or reserves assets.
- Reserve assets: Records changes to the amount of gold and foreign exchange reserves such
as dollars, pounds, Euros etc. held by a country. Consists of short and long-term trade credits
as well as cross-border loans, currency and bank deposits, other accounts receivable and
payable in cross-border trade.

Determining the value of the BOP (balancing the BOP)

= balance on current account
+ capital transfer account
+ balance on financial account
+ unrecorded transaction

EXCHANGE RATES

A foreign exchange market is a market engaged in buying and selling of foreign exchange.

Exchange rate is the rate at which one currency is exchanged for another. It is also considered the
value of one country’s currency in terms of another country’s currency.

Types of exchange rates

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

FACTORS THAT WILL INFLUENCE DEMAND AND SUPPLY OF FOREIGN EXCHANGE

Demand factors for foreign exchange Supply factors of foreign exchange

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

Types of exchange rates

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The floating exchange rate
Price determined only by demand and supply of the currency – no government intervention

The Fixed Exchange Rates pegged exchange rate)

The value of a currency fixed in relation to an anchor currency. Government determine the exchange
rate.

The Dirty Floating or Managed Exchange Rate

The rate is influenced by government via central bank around a preferred rate
Appreciation

An increase in the price of a currency in terms of another currency due to market forces.

Implications
Exports become more expensive Imports become cheaper

Depreciation
A decrease in the price of currency in terms of another currency due to market forces
Implications
Exports become cheaper Imports become more expensive
Revaluation
An administered increase in the exchange rate of a currency in term of another currency under a
fixed exchange rate system.
It is administered by the government

Devaluation
An administered reduction in the exchange rate of a currency in term of another currency under a
fixed exchange rate system
It is administered by the government.

TERMS OF TRADE

Terms of trade compares a country’s export prices with its import prices by means of indexes.

Formula

𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠

X 100
𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠

The effect of terms of trade on the economy

(a) An improvement in the terms of trade may be the result of the following:

- An increase in export prices. This has the result, all things being equal, of increasing
economic welfare because more revenue is earned with the same expenditure.

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 - A decrease in import prices. This has the result, all things being equal, of increasing
economic welfare because expenditure on imports is less.

(b) A deterioration in the terms of trade may be the result of the following:

- A decrease in export prices. This has the result, all things being equal, that welfare is lost
because more resources were used to produce bigger volumes of exports that were needed
to compensate for the fall in their prices.

- An increase in import prices. This has the result, all things being equal, that welfare is lost
because more resources were used to produce more units of exports to finance the higher
costs of imports.

TYPICAL EXAM QUESTIONS

MULTIPLE CHOICE

1.1 Various options are provided as possible answers to the following questions. Choose the
answer and write only the letter (A–D) next to the question number.

1.1.1 The systematic record of all the transactions of a country's inhabitants with the rest of the
world, is known as the …

A. trade balance.
B. circular flow.
C. national budget.
D. balance of payments.

1.1.2 South Africa is currently following a … exchange rate system.

A. managed floating
B. free floating
C. fixed
D. pegged

1.1.3 A demand for US dollars will occur when …

A. placing a deposit with an American bank.

B. buying shares in South African firms.
C. receiving interest from the World Bank.
D. tourists visit South Africa.

1.1.4 Deliberate action by the government to lower the value of the currency is known as …

A. depreciation
B. appreciation
C. devaluation
D. revaluation

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1.1.5 The ratio of export prices and import prices is known as the …

A. terms of trade
B. exchange rate
C balance of trade
D. current account (5 x 2)

1.2 Choose a description from COLUMN B that matches the item in COLUMN. Write only the
letter (A-E) next to the question number (1.2.1 – 1.2.4) in the ANSWER BOOK.

Column A Column B
1.2.1 Terms of trade A. When debit and credit entries on the BOP are not in
1.2.2 Special Drawing Rights balance
1.2.3 Exchange rate B. Index of import prices and export prices
1.2.4 Appreciation C. A form of credit which can be used when balance of
1.2.5 Disequilibria payments difficulties is experienced
D. the price of one national currency in terms of another
currency
E. Increase of the price of a currency
(5 x 1) (5)

1.3 Give the economic term for each of the following descriptions.
Write only the term/concept next to the question number.

1.3.1 The worldwide interaction of economies, with trade as a key element

1.3.2 An international organisation that lends money to countries with ongoing balance of
payment problems

1.3.3 An account in the BOP that contains information on investments made by South Africans in
other countries

1.3.4 The market engaged in buying and selling of foreign currencies

1.3.5 An increase in the price of a currency in terms of other currencies through market forces

(5 x 1) (5)

SECTION B

2.1 Lower cognitive (Easy questions) (2 marks)

HINT: When the question requires you to “List” or “Name”, you need not write a sentence. This
MUST be done in bullet form.

This type of questions is found on the question paper: 2.1.1; 3.1.1; 4.1.1

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 2.1.1. List TWO demand reasons for international trade. (2)

2.1.2 List TWO supply reasons for international trade. (2)

2.1.3 Name TWO sub accounts of the balance of payments accounts. (2)

2.1.4 List TWO demand reasons for foreign exchange. (2)

2.1.5 List TWO supply reasons for foreign exchange. (2)

2.2 Middle order (Moderate to difficult questions) (2 marks)

HINT: This type of question is typical deep-level thinking. You need to answer this question in a
sentence that is comprehensive, and it should answer the question.

This type of questions is found on the question paper: 2.1.2; 3.1.2; 4.1.2

2.2.1 How can the increase in repurchase rate affect the direct investment by domestic businesses
in South Africa? (2)

2.2.2 How can the appreciation of the rand affect the exports of goods and services?
(2)

2.2.3 How can the influx of foreign tourists to South African affect the rand? (2)

2.2.4 What effect will the depreciation of the Rand have on the demand for
foreign goods? (2)

2.2.5 Why is gold listed separately in the Balance of Payments? (2)

3. PARAGRAPH QUESTIONS

3.1 Middle order (easy to moderate) (8 marks)

HINT: This type of question is typical deep-level thinking. You need to answer this question in a
sentence that is comprehensive, and it should respond to the question posed.

This type of questions is found on the question paper: 2.4; 3.4; 4.4

3.1.1 Explain natural resources and climate as reasons for international trade. (8)

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3.1.2 Compare a free-floating exchange rate system with a managed-floating
exchange rate system. (8)
3.1.3 Distinguish between devaluation and appreciation. (8)
3.1.4 Discuss the composition of the current account in the BOP. (8)
3.1.5 Briefly discuss the demand reasons for foreign exchange. (8)
3.1.6 Differentiate between the current transfers account and the capital transfers account.
(8)
3.1.7 Briefly discuss components of the financial account in the BOP. (8)
3.1.8 Briefly discuss size of population and income levels as demand reasons for international
trade. (8)
3.1.9 Differentiate between appreciation and revaluation. (8)
3.1.10 Explain the demand reasons for foreign exchange. (8)
3.1.11 Distinguish between a free floating and a managed floating exchange rates. (8)
3.1.12 Explain the reasons for the changes in the exchange rates. (8)

Paragraph type questions

3.2 Higher order (difficult)

HINT: The answers to these questions are not usually found in textbooks. You must apply your
content knowledge to answer them. You need to do some deep-level critical thinking. You need
to answer in full sentences.

These type of questions are found on the question paper: 2.5, 3.5 and 4.5

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

3.2.2 How will an increase in export prices and import prices affect the South African
economy? (8)

3.2.3 Evaluate the effects of international trade on the South African economy. (8)
3.2.4 How will foreign direct investment benefit the South African economy? (8)
3.2.5 How can imports be targeted to reduce the deficit on the balance of trade in
South Africa? (8)
3.2.6 Why will countries that can compete on global markets gain most from international
trade? (8)

3.2.7 Evaluate the value of fluctuating foreign currencies. (8)

3.2.8 Why is a free-floating exchange rate system considered as a better option than a fixed
exchange rate system? (8)

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

3.2.10 Why is there an interdependence between the exchange rate of a country and its balance
of payments? (8)

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4. DATA RESPONSE QUESTIONS

4.1 Study the graph below and answer the questions that follow.

-1

-2
-2
Percentage

-2,3
-3 -2,5
-2,8

-4 -3,5
-4
-4,4
-5
-5,2
-5,4
-6
-5,8

-7
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Performance -4 -2 -2,3 -5,2 -5,8 -5,4 -4,4 -2,8 -2,5 -3,5

South Africa recorded a Current Account deficit of 3.50 percent of the country’s Gross
Domestic Product in 2018.
Source:Tradingeconomics.com/South African Reserve Bank

4.1.1 Identify the year in which the lowest deficit on the current account was
recorded. (1)
4.1.2 What was the trend of the current account
Source:Tradingeconomics.com/South African(1)
since 2009? Reserve Bank

4.1.3 Briefly describe the term current account. (2)

4.1.4 What does a deficit on the current account imply? (2)

4.1.5 How does a strong economic expansion impact on the current account? (4)

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4.2 Study the following information and answer the questions that follow.

SOUTH AFRICAN TERMS OF TRADE

Year Index of import Index of export prices Terms of trade

Prices
2016 149 150 101

2017 140.7 152.2 108

2018 148.7 156.6 A

[Source: SARB Quarterly Bulletin 2018]

4.2.1 What is the relationship between the index of import prices and the index
of export prices? (1)

4.2.2 What was the trend on index of export prices between 2016 and 2018? (1)

4.2.3 Briefly describe the term terms of trade. (2)

4.2.4 How does a weak exchange rate impact on the terms of trade? (2)

4.2.5 Calculate the terms of trade for 2018. Show all calculations. (4)

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4.3 QUESTION 9

4.3.1 Identify the original equilibrium exchange rate in the above graph? (1)

4.3.2 What exchange rate system does South Africa currently use? (1)

4.3.3 Briefly describe the term exchange rate. (2)

4.3.4 What will be the effect of an undervalued rand on the economy? (2)

4.3.5. How will the depreciation in the value of currency affect businesses? (4)

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4.4 Study the graph below and answer the questions that follow

4.4.1 Identify the foreign currency used in the market above (1)

4.4.2 What kind of an exchange rate system in the graph above (1)

4.4.3 Briefly describe the term foreign exchange market. (2)

4.4.4 What effect does globalisation have on international trade? (2)

4.4.5 Use the above graph to explain the effect of the increase in the supply of US
dollars on the R/US$ exchange rate. (4)

4.5 Study the diagram below and answer the questions that follow.

BRICS EXCHANGE RATES (26/12/2020)

Currencies Foreign exchange rate
CN¥ CN¥1=R2.23
₽ ₽1=R0.19
₹ ₹1=R0.19
R$ R$1=R2.79

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4.5.1 Name the country that is represented by the R$ symbol. (1)

4.5.2 With reference with the currency in the table, which currency is the strongest against
the Rand? (1)

4.5.3 Briefly describe the concept foreign exchange rate. (2)

4.5.4 Why would South Africa gain most by exporting to Brazil than the other BRICS countries?
(2)

4.5.5 A businessman would like to import goods to the value of Chinese Yuan 250 000.
Calculate how much Rand the businessman should have for the imports.
Show all calculations. (4)

[10]

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QUESTION 5

HINT: All section C questions have TWO questions 5 & 6 NOT 9 & 10 like in this document. In the
examination you will need to answer only one.

ESSAY STRUCTURE

HINT: Section C – the long question, must be answered in FOUR sections: Introduction (definition), Body
(headings and full sentences in bullets) additional part and conclusion (summarising). The mark allocations
for Section C is as follows:

MARK
STRUCTURE OF ESSAY:
ALLOCATION:

Introduction Max 2
The introduction is a lower-order response.

• A good starting point would be to the main concept related to the question topic
• Do not include any part of the question in your introduction.
• Do not repeat any part of the introduction in the body

• Avoid saying in the introduction what you are going to discuss in the body

Body:
Main part: Discuss in detail/ In-depth discussion/ Examine/ Critically discuss/ Analyse Max 26
/ Compare/ Distinguish/ Differentiate/ Explain/ Evaluate
Additional part: Give own opinion/ Critically discuss/ Evaluate/ Critically evaluate/
Draw a graph and explain/ Use the graph given and explain/ Complete the given
graph/ Calculate/ Deduce/ Compare/ Explain Distinguish / Interpret/ Briefly debate/
How/ Suggest
Max 10

Conclusion
Any Higher or conclusion include: Max 2
• A brief summary of what has been discussed without repeating facts already
mentioned in the body
• Any opinion or value judgement on the facts discussed
• Additional support information to strengthen the discussion/analysis

• A contradictory viewpoint with motivation, if required

• Recommendations

TOTAL 40

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QUESTION 5.1

• Discuss in detail the demand reasons for international trade

• Evaluate the effects of a currency in an economy

QUESTION 5.2

• Discuss in detail the supply reasons for international trade

• Evaluate the effects of globalisation on an economy

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SOLUTIIONS

FOREIGN EXCHANGE MARKETS

1.1 Various options are provided as possible answers to the following questions. Choose the
answer and write only the letter (A–D) next to the question number.

1.1.1 D Balance of Payments

1.1.2 B free floating
1.1.3 A placing a deposit with an American Bank
1.1.4 C devaluation
1.1.5 A terms of trade (5 x 2) (10)

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

1.2.1 B
1.2.2 C
1.2.3 D
1.2.4 E
1.2.5 A (5 x 1) (5)

1.3 Give the economic term for each of the following descriptions.
Write only the term/concept next to the question number.

1.3.1 Globalisation
1.3.2 World Bank
1.3.3 Financial account
1.3.4 Foreign exchange market
1.3.5 Appreciation (5 x 1) (5)

2.1.1 List TWO demand reasons for international trade.

• Differing consumer wants and preferences

• International migration
• Differing levels of technical development
• Size of population
• Income levels
• Change in the wealth of the population
• Preferences and taste
• The difference in consumption patterns (2 x 1) (2)

2.1.2 List TWO supply reasons for international trade.

• Uneven distribution of natural resources

• Climate conditions
• Qualities of labour, technical skills and expertise
• Natural resources

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 • Labour resources
• Technological resources
• Specialisation
• Capital (2 x 1) (2)

2.1.3 Name TWO sub accounts of the balance of payments accounts.

• Current account
• Financial account
• Capital transfer account
• Official reserves account (2 x 1 (2)

2.1.4 List TWO demand reasons for foreign exchange.

• Imports
• Payment of interest and dividends on loans and foreign investments
• Outflow of capital to foreign countries
• Tourists expenditure in foreign countries (2 x 1) (2)

2.1.5 List TWO supply reasons for foreign exchange.

• Exports
• Receiving interest and dividends on loans and foreign investments
• Inflow of foreign capital
• Expenditure of money by tourists (2 x 1) (2)

2.2 MIDDLE ORDER (MODERATE TO DIFFICULT QUESTIONS)

2.2.1 How can the increase in repurchase rate affect the direct investment by domestic
businesses in South Africa?

The increase in repurchase rate lead to increase in prime rate therefor credits become more
expensive from commercial banks. 
South African businesses can find it cost effective to borrow financial capital from
commercial banks due to higher interest rates and that can lead to decline on direct
investments.  (2)

2.2.2 How can the appreciation of the rand affect the exports of goods and services?

There will be a reduction in exports

It makes goods and services more expensive (2)

2.2.3 How can the influx of foreign tourists to South Africa affect the rand?

The Rand will appreciate due to the inflow of foreign currency. (2)

2.2.4 What effect will the depreciation of the Rand have on the demand for foreign goods?

20 | P a g e ECON Grd 12
 The demand for imported goods will decrease because it will be too expensive to import.
 (2)

2.2.5 Why is gold listed separately in the Balance of Payments?

Gold has a significant impact on the BOP, the contribution of other merchandise become
more visible by listing it separately. (2)

3. PARAGRAPH QUESTIONS

3.1 MIDDLE ORDER (EASY TO MODERATE)

3.1.1 Explain natural resources and climate as reasons for international trade.

Natural resources
• Natural resources are unevenly distributed throughout the world. 
• Example: South Africa is richly endowed with minerals, which are exported to other
countries, but must import oil which it lacks. 
• Certain crops can only be cultivated in certain climates. 
• For example, sugar cane is a subtropical climate under Mediterranean conditions.,
countries that cannot produce should import it.  (8)

3.1.2 Compare a free-floating exchange rate system with a managed-floating exchange rate
system.

Free floating
• The forces of demand and supply determine the exchange rate. 
• Central banks do not intervene in the foreign exchange market on behalf of
government authorities
• The exchange rate fluctuates as market conditions change. 

Managed-floating
• The exchange rate can fluctuate between certain limits as set by the central banks.

• Central banks intervene if the exchange rate moves outside the set limits. 
• They buy and sell foreign exchange – to smooth out short term fluctuations in the
exchange rate. 
• Huge forex supplies (reserves) are required for such interventions. 
(8)

3.1.3 Distinguish between devaluation and appreciation.

Devaluation
• A deliberate downward adjustment to the value of a country’s currency

21 | P a g e ECON Grd 12
 • It’s a monetary policy tool of countries that have a fixed exchange rate or semi-fixed
exchange rate. 

Appreciation
• An increase in the price of a currency in terms of another currency
• Market forced determine the exchange rate (2 x 4) (8)

3.1.4 Discuss the composition of the current account in the BOP.

• The current account consists of the following sub accounts: trade balance, services
account, primary income account and capital transfers account. 
• Trade balance is a record of imports and exports of merchandise (physical goods) 
• The services account records all imports and exports of services
• The primary income account shows salaries, interest (from investments and profits
that flow between countries – income flows (credit items) an income outflows
(debit items) income inflow records income earned by SA residents in the rest of the
world.
• Current transfers account
• Record transfers of money by private individuals and firms. 
• This includes, for example, money transfers for the studies of South Africans students
at overseas universities, gifts, pension and taxes. 
• The account can show a positive or negative balance.  (8)

3.1.5 Briefly discuss the demand reasons for foreign exchange.

The demand for foreign exchange is determined by:

• Importing goods and services from foreign countries
• Payments of interests an dividends on loans and foreign investments
• Outflow of capital to foreign countries
• Tourists’ expenditure in foreign countries (8)

3.1.6 Differentiate between the current transfers account and the capital transfers account.

Current transfers account

•Current account records the trading in goods and services in the current period. 
•Current Account shows the net income of the country
•Current Account is mainly concerned with receipts and payment of cash and non-
capital items. 
• The key components of current account are export and import of goods and
services, the investment the income and current transfers. 
Capital transfers Account

• Capital Account records the movement of capital in and out the economy. 
• Capital Account shows the change in the ownership of the nation’s assets. 

22 | P a g e ECON Grd 12
 • Capital Account has thoroughly considered the sources and application of capital.

• Foreign direct investment, portfolio investment and Loans by the government of one
country to the government of another country are the key components of Capital
Account.  (2 x 4) (8)

3.1.7 Briefly discuss components of the financial account in the BOP.

• The financial account consists of two sub-accounts: the domestic ownership of

foreign assets and the foreign ownership of domestic assets. 
• If the domestic ownership of foreign assets portion of the financial account
increases, it increases the overall financial account. 
• If the foreign ownership of domestic assets increases, it decreases the overall
financial account, so the overall financial account increases when the foreign
ownership of domestic assets decreases. 
• Together, a country's domestic ownership of foreign assets and foreign ownership of
domestic assets measure the international ownership of assets with which the
country is associated. 
• The financial account deals with money related to foreign reserves and private
investments in businesses, real estate, bonds, and stocks. 
• Also detailed in the financial account are government-owned assets such as special
drawing rights at the International Monetary Fund (IMF), or private sector assets
held in other countries, local assets held by foreigners—government and private—
and foreign direct investment (FDI).  (8)

3.1.8 Briefly discuss size of population and income levels as demand reasons for international
trade.

Size of population

An increase in population growth, causes an increase in demand for goods and services, as
more people’s needs must be satisfied. 

Local suppliers may not be able to satisfy this demand and therefore necessitates imports
from other countries

Income levels

The population’s income levels effect demand. Changes in income cause a change in the
demand for goods and services. 

An increase in the per capita income of people results in more disposable income that can
be spent on local goods and services, some of which may then have to be imported
(2 x 4) (8)

3.1.9 Differentiate between appreciation and revaluation.

Appreciation

23 | P a g e ECON Grd 12
 •
When the value of the currency goes up as compared to other currency. 
•
Appreciation of a currency associated with a floating or managed floating exchange
rate system. 
• It is bound to market forces. 
Revaluation

• It is the increase in the price of the currency within a fixed exchange rate system.

• Revaluation of a currency is associated with the fixed exchange rate regime. 
• It is usually determined by the government.  (2 x 4) (8)

3.1.10 Explain the demand reasons for foreign exchange.

1. Imports of Goods and Services: 

Foreign Exchange is demanded to make the payment for imports of goods and services. 

2. Tourism: 

Foreign exchange is needed to meet expenditure incurred in foreign tours. 

3. Unilateral Transfers sent abroad: 

Foreign exchange is required for making unilateral transfers like sending gifts to other
countries. 

4. Purchase of Assets in Foreign Countries: 

It is demanded to make payment for purchase of assets, like land, shares, bonds, etc. in the
foreign countries. 

5. Speculation: 

Demand for foreign exchange arises when people want to make gains -from appreciation of
currency.  (8)

3.1.11 Distinguish between a free floating and a managed floating exchange rates.

Free floating
• A free-floating exchange rate is a flexible exchange rate system solely determined by
market forces of demand and supply of foreign and domestic currency. 
• The central bank or government have little control over it, and as a result they
prefer not to interfere 
• South Africa has a free-floating exchange rate system since 2002. 

Managed floating
• A managed floating exchange rate system is a hybrid exchange rate system
• The exchange rate is basically determined in the foreign exchange market through
the operation of market forces. 
• During extreme fluctuations, the central bank under a managed floating exchange
rate system intervenes in the foreign exchange market. 

24 | P a g e ECON Grd 12
 • A managed floating exchange rate is a system where currencies fluctuate daily but
the regulatory authorities, including the government and the Reserve Bank, may
step in to control and stabilise the value of the currency. 
• If these bodies do not step in, there is bound to be an ‘economic shock’ to the
country. 
• Objective of this intervention is to minimise the fluctuation in the exchange rate of
the currency.  (2 x 4) (8)

3.1.12 Explain the reasons for the changes in the exchange rates. (8)

1. Inflation Rates

• Changes in market inflation cause changes in currency exchange rates. 

• A country with a lower inflation rate than another's will see an appreciation in the
value of its currency. The prices of goods and services increase at a slower rate
where the inflation is low. 
• A country with a consistently lower inflation rate shows a rising currency value while
a country with higher inflation typically sees depreciation in its currency and is
usually accompanied by higher interest rates. 

2. Interest Rates

• Increases in interest rates cause a country's currency to appreciate because higher

interest rates provide higher rates to lenders, 
• Thereby attracting more foreign capital, which causes a rise in exchange rates

3. Country’s Current Account / Balance of Payments

• A country’s current account reflects balance of trade and earnings on foreign

investment. It consists of total number of transactions including its exports, imports,
debt, etc. 
• A deficit in current account due to spending more of its currency on importing
products than it is earning through sale of exports causes depreciation. 
• Balance of payments fluctuates exchange rate of its domestic currency. 

4. Government Debt

• A country with government debt is less likely to acquire foreign capital, leading to
inflation. 
• Foreign investors will sell their bonds in the open market if the market predicts
government debt within a certain country. Thus, a decrease in the value of its
exchange rate will follow. 

5. Terms of Trade

• The terms of trade is the ratio of export prices to import prices. 

• A country's terms of trade improve if its exports prices rise at a greater rate than its
imports prices. 

25 | P a g e ECON Grd 12
 • This results in higher revenue, which causes a higher demand for the country's
currency and an increase in its currency's value. 
• This results in an appreciation of exchange rate. 

6. Political Stability & Performance

• A country's political state and economic performance can affect its currency
strength. 
• A country with less risk for political turmoil is more attractive to foreign investors,
thus, drawing investment away from other countries with more political and
economic stability. 
• Increase in foreign capital, in turn, leads to an appreciation in the value of its
domestic currency. 
• A country with sound financial and trade policy does not give any room for
uncertainty in value of its currency. 
• But, a country likely to political confusions may see a depreciation in exchange rates.


7. Recession

• When a country experiences a recession, its interest rates are likely to fall,
decreasing its chances to acquire foreign capital. 
• As a result, its currency weakens in comparison to that of other countries, therefore
lowering the exchange rate. 

8. Speculation

• If a country's currency value is expected to rise, investors will demand more of that
currency to make a profit in the near future. 
• As a result, the value of the currency will rise due to the increase in demand. With
this increase in currency value comes a rise in the exchange rate as well. 

PARAGRAPH TYPE QUESTIONS

3.2 HIGHER ORDER (DIFFICULT)

3.2.1 Evaluate the effects of a currency depreciation in an economy

Positive effects

• Currency depreciation can be used as an expansionary monetary policy to counter cyclical

measures to stimulate demand, profits, output and jobs when an economy is in recession.

• Brings an improvement in the balance trade through higher export sales. 
• Provides a competitive boost to an economy through increasing the value of profits and
income for a country’s businesses with investments overseas. 

26 | P a g e ECON Grd 12
 • Leads to a positive multiplier within the circular flow of income and spending.

Negative effects

• Currency depreciation makes it harder for the government to finance a budget deficit if
foreign investors lose confidence. 
• Increases the cost of imports e.g. rising prices for essential foodstuffs, raw materials, which
affects long-run productive potential of an economy. 
• Can be used as an expansionary monetary policy to counter cyclical measures to stimulate
demand, profits, output and jobs when an economy is in recession. 
• Brings an improvement in the balance trade through higher export sales. 
• Provides a competitive boost to an economy through increasing the value of profits and
income for a country’s businesses with investments overseas. 
• Leads to a positive multiplier within the circular flow of income and spending. 
• Makes it hard to pay for a trade deficit that is owed to overseas creditors. 
(8)
3.2.2 How will an increase in export prices and import prices affect the South African economy?

An increase in export prices will:

• Result in terms of trade improving. 
• Increase economic welfare because more revenue is earned with the same expenditure. 
• However, over the long-term result in a decrease in sales volume depending on the price
elasticity of demand. 
• It will result in welfare loss eventually. 

An increase in import prices will:

• Result in terms of trade deteriorating. 
• Decrease welfare because more resources were used to produce more units to finance the
higher cost of imports. 
(Accept any other correct relevant response) (8)

3.2.3 Evaluate the effects of international trade on the South African economy.

The SA economy will be negatively influenced by:

• Less developed countries like S.A. might not be able to compete with
developed countries. 
• Specialisation causes some producers to close their businesses. 
• Globalisation let people tend to forget their cultures and indigenous
knowledge systems disintegrate. 
• Mass production leads to domestic people buying inferior quality goods
from other countries at the expense of local producers. 

3.2.4 How will foreign direct investment benefit the South African economy?

• Provide capital for new enterprises/expansion on existing enterprises / increased

competition. ✓✓
• Increase in income/revenue for business/state / more profits. ✓✓
• Creation of more job opportunities/improve standard of living. ✓✓

27 | P a g e ECON Grd 12
 • Increase economic growth. ✓✓
• Diversify the economy / a wider range of products available ✓✓
• Bring in new technology and knowledge into the country, that will benefit SA in
different spheres. ✓✓ (8)
Any other correct relevant response

3.2.5 How can imports be targeted to reduce the deficit on the balance of trade in South Africa?

• South Africa can use import substitution as part of their international trade policy ✓✓
• Tariffs can be imposed on imported goods, which will increase the prices of imported
goods for domestic consumers, and that will tend to shift demand from imports to
domestic products ✓✓ e.g. customs duties, ad valorem tariffs, specific tariffs ✓✓
• Quotas can be imposed to limit the import of goods and services ✓✓
• Subsidies will make local producers more competitive and switch from imported goods
to locally produced goods ✓✓
• Through exchange control government can reduce imports and limit the amount of
foreign exchange made available to those who wish to import ✓✓
• Physical control may put a complete ban or embargo on the import of certain goods
from a country
• Trade can be diverted through monetary deposits, time-consuming customs procedures
and high-quality standards are imposed to make the importing of goods more difficult
✓✓ (8)

3.2.6 Why will countries that can compete on global markets gain most from international
trade? (8)

• Developed countries seems to be more efficient in producing value added goods

and therefore dominate world trade. 

• Most developed countries have efficient production techniques and experienced

“captains of industries”. 

• These countries apply large-scale industrialization, thus enabled mass production.



• Developing countries find it difficult to compete with developed countries based on

availability of financial resources, lack of skills etc. 

• Efficiency depends on not only the skill of the workers, but also on the availability
and the cost of resources, which varies by country. 

(Accept any other correct relevant response)

3.2.7 Evaluate the value of fluctuating foreign currencies.

• Having a low exchange rate basically means that less foreign currency units can be
bought with a single domestic currency unit. 

28 | P a g e ECON Grd 12
 • Thus exports will become cheaper to foreigners since they can buy more currency of
another country with one unit of their currency. 

• On the other hand, imports, will become expensive since importers pay more for the
currency they are importing from. 

• Advantage: Exports become cheaper thus the demand for exports rise, this will raise
the trade revenue of a country. This will help balance the Balance of Payments
account if there was a deficit. 

• Disadvantage: Imports become more expensive, so you'll have to pay extra money
for foreign goods. Hurting consumer choice and making products that may have
good quality (and low prices) more expensive and thus hurting your living standards.


• Also other countries may also lower their exchange rates in retaliation.  (8)

3.2.8 Why is a free-floating exchange rate system considered as a better option than a fixed
exchange rate system?

• In a floating exchange rate system, the rates keep on changing according to the
economic conditions 

• Floating exchange rate is more real as it makes exchange rate according to the
strength of the country 

• For example, a currency is appreciating because country is growing but is also makes
exporters worse off but then it makes them make their goods more competitive in
international markets 

• No need for frequent central bank intervention 

• Countries with a fixed exchange rate system are often associated with having
unsophisticated capital markets and weak institutions of authority 

• To maintain a fixed exchange rate a country is required to have good foreign

exchange reserves so that every time currency moves away from the fixed rate the
foreign exchange cab be sold or bought in market 

(Accept any other correct relevant response)(8)

3.2.9 Why can large and persistent surpluses on the current account be a problem for some
countries?

• A surplus on the current account component of the Balance of payments indicates that the
country is exporting more goods and services than importing. 
• This means they are gaining foreign currency they can use to buy foreign assets such as
government bonds and invest in foreign factories. 

29 | P a g e ECON Grd 12
 • However, a large current account surplus may indicate an unbalanced economy. 
• For example, it may indicate the country is relying too heavily on exports and consumer
spending is relatively too low. 
• Large and persistent surpluses contribute to instability and may hurt growth and
employment in other countries (paradox of thrift)  (8)

3.2.10 Why is there an interdependence between the exchange rate of a country and its balance
of payments? (8)

• Fluctuations in the exchange rate between foreign currencies can cause a change in
a country's balance of payments 

• An increase in imports gives rise to an increase in a demand for foreign currency. To

obtain the foreign currency importers will sell the domestic currency for it 

• This will lead to the strengthening in the exchange rate of the foreign currency
against the domestic currency 

• If there is an increase in exports, then once the exporters exchange their foreign
currency earnings for domestic currency this sets in motion a strengthening in the
domestic currency exchange rate against the foreign currency 

• Exporters determine the supply of foreign currency whilst importers determine the
demand for foreign currency. Hence, the interaction between the supply and
demand establishes a foreign exchange rate 

• It makes sense that the state of the balance of payments, which is the result of the
interplay between exports and imports, is a key in determining the foreign exchange
rate 

DATA RESPONSE QUESTIONS

4.1 Study the graph below and answer the questions that follow.

4.1.1 Identify the year in which the lowest deficit on the current account was recorded.

2010 (1)

4.1.2 What was the trend of the current account since 2009?

Negative/declining (1)

4.1.3 Briefly describe the term current account.

• The current account records a country’s transaction with the rest of the world, especially
its net trade in goods and services, its net earnings on cross border on investments and its
transfer payments, over a period of time. 

30 | P a g e ECON Grd 12
 • That part of the balance of payments recording a nation’s exports and imports of goods and
services and transfer payments.  (2)

4.1.4 What does a deficit on the current account implies?

• A negative (deficit) current account balance indicates that a country is a net borrower. 
• It indicates that the value of imports is more than value of exports. 
• There is a net outflow of foreign exchange from a country. 
• A country’s net foreign assets decrease by the amount of the deficit.  (2)
(Accept any other correct relevant response)

4.1.5 How does a strong economic expansion impact on the current account?
• During a strong economic expansion, import volumes typically surge.
• If exports are unable to grow at the same rate, the current account deficit will widen. 
(4)
(Accept any other correct relevant response)

4.2 DATA RESPONSE

4.2.1 What is the relationship between the index of import prices and the index of export
prices?

Export prices were higher than import prices.  (1)

4.2.2 What was the trend on index of export prices between 2016 and 2018?

Export prices have increased.  (1)

4.2.3 Briefly describe the term terms of trade.

Terms of trade is measured by the ratio between a country’s export prices and its import
prices.  (2)

4.2.4 How does a weak exchange rate impact on the terms of trade?

A weak exchange rate increases the prices of imports – worsens the terms
of trade – e.g. makes imports of new technology more expensive.  (2)

4.2.5 Calculate the terms of trade for 2018. Show all calculations

Terms of trade= index of export prices / index of import prices x 100

(156.6 / 148.7 x 100) = 105.3  (4)

31 | P a g e ECON Grd 12
DATA RESPONSE

4.3.1 Identify the original equilibrium exchange rate in the above graph?

R17 ✓ (1)

4.3.2 What exchange rate system does South Africa currently use?

Free-floating exchange rate ✓ (1)

4.3.3 Briefly describe the term exchange rate.

Exchange rate is the price of one currency expressed in terms of another currency ✓✓
(2)

4.3.4 What will be the effect of an undervalued rand on the economy?

There will be sustained surpluses on the current account of the Balance of

Payments/Exports will be cheaper, and imports will be expensive which will
lead to more exports and less imports ✓✓ (2)

4.3.5 How will the depreciation in the value of currency affect businesses?

• Depreciation will increase the production costs for businesses as they will require more
money to buy from other currencies. ✓✓
• Exporting businesses can sell more to foreign countries as their products will become
cheaper. ✓✓
(Accept any other relevant correct response) (2 x 2) (4)

4.5

4.5.1 Name the country that is represented by the R$ symbol.

Brazil (1)

4.5.2 With reference with the currency in the table, which currency is the strongest
against the Rand?

Brazil (1)

4.5.3 Briefly describe the concept foreign exchange rate.

A foreign exchange rate is the price of the domestic currency stated in terms of another
currency.  (2)
4.5.4 Why would South Africa gain most by exporting to Brazil than the other BRICS countries?

The Rand is the weakest against the Brazilian Real and therefore attracts the most inflow of
foreign currency.  (2)

4.5.5 A businessman would like to import goods to the value of Chinese Yuan 250 000. Calculate
how much Rand the businessman should have for the imports. Show all calculations. (4)

32 | P a g e ECON Grd 12
 CN¥1/R2.23 x amount

2.33 x 250 000 = R582 500

The businessman would need R582 500 to import from China.

QUESTION 5.1

• Discuss in detail the demand reasons for international trade

• Evaluate the effects of a currency in an economy

INTRODUCTION

International trade is the exchange of goods and services between countries. Trading globally gives
consumers and countries the opportunity to be exposed to goods and ser-vices not available in their
own countries, or which would be more expensive domestically. ✓✓

MAIN PART

The size of the population✓ impacts demand. If there is an increase in population growth, it causes
an increase in demand, as more people’s needs must be satisfied. Local suppliers may not be able to
satisfy this demand. ✓✓

The population’s income levels✓ effect demand. Changes in income cause a change in the demand
for goods and services. ✓✓ An increase in the per capita income of people results in more
disposable income that can be spent on local goods and services, some of which may then have to
be imported. ✓✓

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

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

The difference in consumption patterns ✓is determined by the level of economic development in
the country, ✓✓e.g. a poorly developed country will have a high demand for basic goods and
services but a lower demand for luxury goods. ✓✓

The level of Economic development ✓impacts on the consumption patterns of countries. Those that
are more developed will need more luxury good, than those that are less developed (emerging
economies). ✓✓ The basic necessities such as food in developing countries may results in more
goods being imported. ✓✓

33 | P a g e ECON Grd 12
Different levels of technical development; ✓demand for the latest technologies which are not
available in all countries, must be imported. ✓✓

Cost of Production ✓ :a country may not be able to produce goods at the lowest possible cost,
consumers will demand goods from other countries at a lower price. ✓✓ (Max 26)

ADDITIONAL PART:

Evaluate the effects of a currency depreciation in an economy.

Positives

Currency depreciation:
• Can be used as an expansionary monetary policy to counter cyclical measures to stimulate
demand, profits, output and jobs when an economy is in recession. ✓✓

• Brings an improvement in the balance trade through higher export sales. ✓✓

• Provides a competitive boost to an economy through increasing the value of profits and
income for a country’s businesses with investments overseas. ✓✓
• Leads to a positive multiplier within the circular flow of income and spending. ✓✓
Negatives

Currency depreciation:
• Makes it harder for the government to finance a budget deficit if foreign investors lose
confidence. ✓✓
• Increases the cost of imports e.g. rising prices for essential foodstuffs, raw materials, which
affects long-run productive potential of an economy. ✓✓
• Makes it hard to pay for a trade deficit that is owed to overseas creditors. ✓✓
Accept any other correct relevant response) Max (10)

QUESTION 5.2

• Discuss in detail the supply reasons for international trade

• Evaluate the effects of globalisation on an economy

INTRODUCTION
• International trade is the exchange of goods and services between countries. Trading
globally gives consumers and countries the opportunity to be exposed to goods and ser-vices
not available in their own countries, or which would be more expensive domestically. ✓✓

34 | P a g e ECON Grd 12
 MAIN PART

SUPPLY REASONS

Natural resources ✓are not evenly distributed across all countries of the world. ✓✓They vary from
country to country and can only be exploited in places where these resources exist. South Africa is
well equipped with different natural resources, but less resources with skilled labour and capital.✓✓

Climatic conditions✓ make it possible for some countries to produce certain goods at a lower price
than other countries, e.g. Brazil is the biggest producer of coffee. ✓✓

Labour resources ✓differ between countries in quality, quantity, skills, training, knowledge and
costs. Some countries have highly skilled, well-paid workers with high productivity levels, e.g.
Switzerland. ✓✓

Technological resources ✓are available in some countries that enable them to produce certain
goods and services at a low unit cost, e.g. Japan. ✓✓Countries like Germany and the USA are able to
use capital which embodies high levels of technology, while other countries do not have access to
the latest technology, such as basic internet services and healthcare. ✓✓

Specialisation✓ in the production of certain goods and services allows some countries to produce
them at a lower cost than others, e.g. Japan produces electronic goods and sells these at a lower
price. ✓✓

Capital ✓allows developed countries to enjoy an advantage over underdeveloped

countries. ✓✓Due to a lack of capital, some countries cannot produce all the goods they require
themselves, and therefor are compelled to import these goods (capital goods). ✓✓
(MAX 26)

ADDITIONAL

Globalization is a positive development as it will give rise to new industries and more jobs in
developing countries.
Positive

• Foreign investment inflow that flows into the developing countries, thus pushes up
the reserve of foreign exchange available and it will support economic development
✓✓
• Countries do business through international trade whereby they import and export
goods and services across the world which increase economic growth and variety of
products ✓✓
• Increase in competition among countries (business) will increase the profits of
business and gross domestic product ✓✓
• The trade sector has increased the number of people that it employs both through
exports and imports ✓✓
• Household income has increased and gives consumers a variety of choices where to
obtain the goods or services ✓✓

35 | P a g e ECON Grd 12
 • New output is often greener and thrive on new technology leading to positive
change also outside the economy ✓✓
• Globalization decreases the cost of manufacturing; companies can offer goods at a
lower price to consumers
Negative

• Job displacement result in an increased number of jobs moving production from high
cost countries to lower cost. High cost countries will lose jobs as production goes to
countries that have a competitive advantage at producing these products ✓✓
• Exploitation of raw materials from less developed countries which creates a wide
gap between rich and poor countries ✓✓
• Uneven income distribution which can lead to an increase in social tensions that will
impact economic growth ✓✓
• Infant industries are suffocating due to cheap products from international trade
which causes negative economic growth ✓✓
• Creates exchange rate distortions which makes products cheaper from developing
countries ✓✓
• Increase dumping of inferior goods to developing countries and impact local firms’
production which eventually decreases the economic growth and leads to less
employment opportunities
• Selling of commodities based on foreign markets price increase domestic prices and
leads to inflation in the host country.
• Local economic fluctuations – developing countries are susceptible to the decisions
of developed nations as these countries are dependent on developing countries and
this will cause global instabilities (MAX 10)

Any other relevant correct response

CONCLUSION

Countries cannot survive and grow their economies if they do not pay attention to globalisation,
as the world grows in technology, we are almost immediately aware of developments across all
countries ✓✓
It’s important for all countries to be aware of supply reasons for international trade so that they
can intervene and supply those countries with the required goods ✓✓ (2)

36 | P a g e ECON Grd 12