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What Is a Business Cycle?

How It Works
Measuring and Dating
Relationship With Stock Prices

The Bottom Line

Business cycle: what it is, how to measure it, and its 4 phases.

Depression in the Economy: Definition and Example
Economic Collapse
Business Cycle CURRENT ARTICLE
Boom And Bust Cycle
Negative Growth
What Was the Great Depression?
Were There Any Periods of Major Deflation in U.S. History?
The Greatest Generation
U.S. Government Financial Bailouts
Austerity: When the Government Tightens Its Belt
The New Deal
The Economic Effects of the New Deal
Gold Reserve Act of 1934
Emergency Banking Act of 1933

Madelyn Goodnight / Investopedia

Business cycles are a type of fluctuation found in the aggregate economic activity of a nation—a cycle that consists of expansions occurring at about the same time in many economic activities, followed by similarly general contractions. This sequence of changes is recurrent but not periodic.

The business cycle is also called the economic cycle .

Key Takeaways

Business cycles are composed of concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales.
The alternating phases of the business cycle are expansions and contractions.
Contractions often lead to recessions, but the entire phase isn't always a recession.
Recessions often start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.
The severity of a recession is measured by the three Ds: depth, diffusion, and duration.

Understanding the Business Cycle

In essence, business cycles are marked by the alternation of the phases of expansion and contraction in aggregate economic activity and the co-movement among economic variables in each phase of the cycle.

Aggregate economic activity is represented by not only real (i.e., inflation-adjusted) GDP —a measure of aggregate output—but also the aggregate measures of industrial production, employment, income, and sales, which are the key coincident economic indicators used for the official determination of U.S. business cycle peak and trough dates.

Popular misconceptions are that the contractionary phase is a recession and that two consecutive quarters of decline in real GDP (an informal rule of thumb) means a recession.

It's important to note that recessions occur during contractions but are not always the entire contractionary phase. Also, consecutive declines in real GDP are one of the indicators used by the NBER, but it is not the definition the organization uses to determine recessionary periods.

On the flip side, a business cycle recovery begins when that recessionary vicious cycle reverses and becomes a virtuous cycle, with rising output triggering job gains, rising incomes, and increasing sales that feedback into a further rise in output .

The recovery can persist and result in a sustained economic expansion only if it becomes self-feeding, which is ensured by this domino effect driving the diffusion of the revival across the economy.

Of course, the stock market is not the economy. Therefore, the business cycle should not be confused with market cycles , which are measured using broad stock price indices.

Measuring and Dating Business Cycles

The severity of a recession is measured by the three D's: depth, diffusion, and duration. A recession's depth is determined by the magnitude of the peak-to-trough decline in the broad measures of output, employment, income, and sales.

Its diffusion is measured by the extent of its spread across economic activities, industries, and geographical regions. Its duration is determined by the time interval between the peak and the trough.

An expansion begins at the trough (or bottom) of a business cycle and continues until the next peak, while a recession starts at that peak and continues until the following trough.

The National Bureau of Economic Research (NBER) determines the business cycle chronology—the start and end dates of recessions and expansions for the United States.

Accordingly, its Business Cycle Dating Committee considers a recession to be "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

The Great Depression featured many recessions, one of which lasted for 44 months.

The Dating Committee typically determines recession start and end dates long after the fact. For instance, after the end of the 2007–09 recession, it "waited to make its decision until revisions in the National Income and Product Accounts [were] released on July 30 and Aug. 27, 2010," and announced the June 2009 recession end date on Sept. 20, 2010.

U.S. expansions have lasted longer than U.S. contractions on average. Between 1945 and 2019, the average expansion lasted about 65 months. The average recession lasted approximately 11 months.

Between the 1850s and World War II, the average expansion lasted about 26 months and the average recession about 21 months. The longest expansion was from 2009 to 2020, which lasted 128 months.

Stock Prices and the Business Cycle

The biggest stock price downturns tend to occur—but not always—around business cycle downturns (e.g., contractions and recessions). For example, the Dow Jones Industrial Average and the S&P 500 took steep dives during the Great Recession. The Dow fell 51.1%, and the S&P 500 fell 56.8% between Oct. 9, 2007 to March 9, 2009.

There are many reasons for this, but primarily, it is because businesses assume defensive measures and investor confidence falls during contractionary periods. Many events occur before people in an economy are aware they are in a contraction, but the stock market trails what is going on in the economy.

So, if there is speculation or rumors about a recession, mass layoffs , rising unemployment, decreasing output, or other indications, businesses and investors begin to fear a recession and act accordingly. Businesses assume defensive tactics, reducing their workforces and budgeting for an environment of falling revenues.

Investors flee to investments "known" to preserve capital, demand for expansionary investments falls, and stock prices drop.

It's important to remember that while stock prices tend to fall during economic contractions, the phase does not cause stock prices to fall—fear of a recession causes them to fall.

What Are the Stages of the Business Cycle?

In general, the business cycle consists of four distinct phases: expansion, peak, contraction, and trough.

What Does a Business Cycle Describe?

A business cycle describes the fluctuations in an economy over a period of time, generally the period from the start of one recession to the start of the next. This would include periods when the economy grows.

Are Business Cycles Predictable?

Generally, business cycles are not predictable. Economies are complex machines that function in a variety of ways and are intertwined in as many ways. The ability to predict how they will move is extremely difficult. There can be signs of changes in an economy, such as changes in inflation and production, but to predict an all-out change in the business cycle is very tough if not impossible.

The business cycle is the time it takes the economy to go through all four phases of the cycle: expansion, peak, contraction, and trough. Expansions are times of increasing profits for businesses, and rising economic output, and are the phase the U.S. economy spends the most time in. Contractions are times of decreasing profits and lower output and are the phase in which the least amount of time is spent.

Federal Reserve Bank of St. Louis. " All About the Business Cycle: Where Do Recessions Come From? "

The National Bureau of Economic Research. " Business Cycle Dating ."

National Bureau of Economic Research. " The NBER's Recession Dating Procedure ."

Congressional Research Service. " Introduction to U.S. Economy: The Business Cycle and Growth ," Page 1.

National Bureau of Economic Research. " Business Cycle Dating Committee, National Bureau of Economic Research ."

Congressional Research Service. " Introduction to U.S. Economy: The Business Cycle and Growth ," Page 2.

Federal Reserve Bank of Atlanta. " Stock Prices in the Financial Crisis ."

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Economic Issues: Business Cycles Essay

To find inspiration for your paper and overcome writer’s block
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Macroeconomic concerns

Economic growth, phases of a business cycle, trend lines, macroeconomic policy challenges and tools.

It is crucial to note that over time, some of the main macroeconomic variables are prone to considerable changes. The aggregate level of real output of an economy (usually represented by GDP or GNP) tends to grow.

The recurring deviations from the real aggregate output about the trend can be referred to using various interchangeable terms such as business cycles economic cycles, or economic fluctuations. Thus, macroeconomics can be divided into two major areas of research: one related to the study of short-term behavior of a product (business cycles), which is

Short-term macroeconomics; and another related to the performance of the product in the long term (a trend). The latter can be explained using various theories of economic growth.

Additionally, it is possible to characterize the macroeconomic variables according to the direction along the following cycle. First, variables which increase when the product level (income) increases are called “pro-cyclical” while those that decreases are referred to as “counter-cyclical.” Those that do not have a standard defined throughout the cycle are called “acyclic” reductions. The same reasoning is valid for the product level.

These variables can also be classified according to their correlation with the economic cycle (high or low) and by the timing of their oscillations. Thus, a variable is considered to be “leading,” if it tends to move before the aggregate output, “lagging” if it moves slower than a product and “coincidental” if it presents a cyclical pattern that occurs simultaneously according to changes in a product.

Studies of the business cycle were rather vague at the beginning of the century. It later lost importance, only to return as a major research agenda dominant in macroeconomic in the 70s. As it stands now, the study of the business cycle is am an important entity for economists and policy makers in the discipline of economics.

The contemporary market economies are characterized by two phenomena: a long-term growth trend and more or less significant fluctuations in activity around this trend. Economic cycles cover a more or less regular succession of booms and recessions. Expansion is typically a low point of activity at a high point, and conversely, recession refers to economic movement from a high to a low point.

When the overall price level increases, it is referred to as inflation. Alternatively, it can be defined as the widespread and sustained increase in prices of goods and services within a particular economic region. To measure the growth of inflation at any given time, there are several key economic factors and parameters that must be put into consideration.

For instance, the Consumer Price Index (CPI) is used to measure the rate of inflation. Also, the National Consumer Price Index is used to compute the percentage increase in the pricing of products. Another measurement factor is the Producer Price Index. The latter is used to take a precise measurement of price growth of raw materials required for the process of production.

Realistically, three types of inflation can be identified. First, inflation for consumption or demand usually obeys the law of supply and demand. If the demand for goods exceeds the capacity of production or importation of goods, prices tend to increase indefinitely. Second, inflation costs occur when the price of raw materials goes up.

As a result, producers end up increasing their prices so that they can maintain a comfortable profit margin. The third type is known as self-constructed inflation. It automatically takes place when a strong future price increase is seen in advance. After that, it gradually adjusts itself.

Inflation expectations generated by the vicious circle is common in high-inflation countries where workers demand wage increases to counteract the effects of inflation that often give rise to a vicious cycle of inflation.

To curb inflation, central banks tend to increase the interest rate on public debt. As a result, interest rates are increased in consumer loans (credit cards, mortgages, and so on). By increasing interest rates of consumption, product demand slows down.

The downside of this control measure is that it slows the industry that produces given products. This can lead to economic stagnation and unemployment.

When inflation goes beyond the standard level, it is referred to as hyperinflation. It implies that there is a substantial or sharp rise in the price of goods and services within a very short period. In some instances, the price increase might go as up as 50 percent within one month. A fall in price level indicates that the rate of inflation is negative.

To measure the actual performance of an economy, an aggregate growth output is the right index to employ. It refers to the total of products generated by an economy. Other macroeconomic factors worth considering in this discussion include recession, depression, and unemployment rate.

When two quarters experience a drastic decline in aggregate outputs, it usually leads to recession. When recession persists for a considerably long period, it culminates into economic depression. The rate between those that are employed and the unemployment can be used to calculate the unemployment rate within any given jurisdiction.

When the production possibilities of an economy are expanded, it results in economic growth. This implies that an increase in the actual value of Gross Domestic Product (GDP) can be precisely used to measure the growth of an economy. It is equally crucial to understand the meaning of real GDP. Within a single year, any given nation produces goods and services from various sectors of the economy. When the total production is put together and then quantified in terms of prices, it results in the real Gross Domestic Product of a country.

A business cycle has four distinct phases. These include the peak (prosperity), recession, trough (depression), and recovery phases. These have been illustrated in the diagram below.

The Peak (prosperity) phase

The standard of living rises when the margin of profits, prices, employment, income, and output expand. Such a period in the business cycle is known as the peak or prosperity phase. Some of the key features of this phase include:

The high volume of output
Increased trade coupled with a high degree of demand
Increase in the rate of employment and income generation activities
Rising rates of interests
Investment and the marginal efficiency of capital improves
Impressive business optimism
Substantial expansion in credit pool offered by banks and other financial institutions.

Recession phase

This phase marks the point at which the peak turns to trough. In other words, the economy begins to shrink. Slow down in economic activities is experienced during this economic phase. Investors tend to give up future investments, and overproduction immediately, the demand level begins to drop.

This phase is also marked by a drop in profits, prices, employment, income, and the overall volume of production. An economy experiences a negative response from the business community, owing to pessimism and low confidence. The level of credit also falls because both individuals and financial institutions rush to secure more liquidity in their investment portfolios.

Tough (Depression) phase

Depression usually sets in when people begin to experience a low standard of living owing to persistent fall in the margin of profits, prices, employment, income, and output of production. This phase is characterized by:

A substantial drop in trade and output of production
The rise in unemployment and a decline in revenue
A drop in interest rates
A decline in the marginal efficiency of capital
Overall business pessimism
Bank credit contracts
A drop in investment

Recovery Phase

This is a phase at which an economy begins to revive itself from depression. Hence, it is the turning point from the trough phase to expansion. This phase is marked by a gradual rise in the number of economic activities. Investment portfolios tend to increase owing to improved production of goods and services coupled with a rise in demand. Also, profits, prices, employment, income, and output begin to experience a steady rise.

There is a positive response from the market owing to the increased confidence level to invest. Once investments have been stimulated, the economy which was once depressed begins to recover. This phase also warms up credit expansion from banks and other financial institutions. Activation of the stock markets is also evident during the recovery phase of the business cycle. The recovery phase eventually transforms into the peak or prosperity phase, and the cycle begins to repeat itself.

During a given business cycle, the economy’s output performance can be traced using trend lines. The latter is used to relate one business cycle phase to another, such as one prosperity to another one depression phase to another depression phase. When economic growth is in the offing, trend lines that slope upwards are used. Hence, as the trend lines get steeper, it signifies a rise or improvement in the growth of an economy. At a time when the growth of an economy is negligible, horizontal trend lines can be seen.

There are several challenges faced by macroeconomics in the modern economy. It is crucial to mention that these challenges are policy-based.

Hence, resolving the challenges demand a critical look at the prevailing economic policies. To begin with, boosting economic growth is a major challenge that most economies struggle with almost every financial year. Whereas there are both market and non-market forces that fuel economic growth at any given time, monitoring and regulation of these forces are sometimes hampered by policies on the ground.

Second, keeping inflation low is a strenuous economic task. When the prices for goods and services rise beyond the sustainable levels, it becomes quite difficult to maintain economic growth. Inflation may sometimes be fuelled by external factors that are beyond the control of a government. Other macroeconomic policy challenges include reducing local and international deficits, reducing the rate of unemployment, and stabilizing business cycles.

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IvyPanda. (2020, March 22). Economic Issues: Business Cycles. https://ivypanda.com/essays/economic-issues-business-cycles/

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1. IvyPanda . "Economic Issues: Business Cycles." March 22, 2020. https://ivypanda.com/essays/economic-issues-business-cycles/.

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What Is the Business Cycle?

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

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Table of contents, what is a business cycle.

The business cycle is a natural occurrence in the economy. It is generally described as a sequence of periods of expansion, followed by a period of contraction, and finally a period of recovery.

Importance of Knowing the Business Cycle

Knowing the business cycle is important for a few reasons.

First, it can help you understand how the economy works.
Second, it can help you make informed investment decisions.
Third, it can help you time your business decisions accordingly.

Phases of the Business Cycle

The business cycle has six phases:

1. Expansion

This is the first phase of the business cycle, and it’s generally marked by an increase in economic activity.

GDP (Gross Domestic Product) rises, unemployment falls, and prices increase. During this period, businesses are steadily growing their production and investing in new opportunities.

The peak is the point at which an expansion turns into contraction. It’s also known as the business cycle’s boom phase.

Expansion has reached its maximum growth, and now businesses are maxed out. They no longer have room to grow or invest, so they stop doing both—which affects supply (production), demand (usage of goods and services), employment, investment, prices, etc.

3. Recession

The recession is a period of economic decline that lasts from six months to a year; sometimes it can last up to 18 months or more (referred to as "Depression").

During this period most types of economic activity come to a halt. The unemployment rate rises as businesses lay off workers, and prices for goods and services drop.

4. Depression

This is the lowest point of the business cycle, which may also be referred to as the recession’s trough. At this point, GDP (Gross Domestic Product), employment, production, consumption, investment, personal income , and business profits are all low.

The trough is the bottom of the recession. This is where the economy hits its lowest point. In terms of GDP, employment, investment, prices, etc., it’s generally a very bleak time.

6. Recovery

The recovery phase starts when economic activity begins to rise again. It’s marked by an increase in economic activity, as businesses start hiring again and production begins to pick up.

Unemployment declines and prices begin to increase modestly.

This period can last for months or years depending on how long it takes an economy to recover from a depression—which happens in a small number of depressions that have been studied by economists.

Factors That Shape the Business Cycle

A number of things can trigger the business cycle, such as:

Labor Market Shocks

Changes in labor market conditions (changes in unemployment and wages) can affect businesses’ decisions about hiring and investing.

Demand-side shocks also play a role here: if consumers suddenly start spending more or less money that will affect businesses.

Supply-Side Shocks

These include changes in resource prices (the cost of oil, for example), which could decrease production costs—or they could increase them.

Supply-side shocks also include changes to technology. If technological advances allow companies to produce goods and services more cheaply, this will affect the economy by boosting supply and decreasing prices.

The Bottom Line

Understanding what happens during each phase of the business cycle is important because it can help you make better decisions about your finances.

For example, if you know a recession is on the horizon, you may want to start saving money or investing in short-term assets rather than long-term ones.

Business Cycle FAQs

What is the difference between a recession and a depression.

A recession is a period of economic decline that lasts from six months to a year. Depression is a longer period of economic decline that may last for up to 18 months or more.

How do labor market shocks trigger the business cycle?

Labor market shocks can affect businesses’ decisions about hiring and investing. For example, if unemployment rises, businesses may lay off workers. If wages change, that could also affect businesses’ decisions.

What is the difference between a supply-side shock and a demand-side shock?

A supply-side shock is an event that changes the cost of producing goods or services. A demand-side shock is an event that affects how much consumers want to buy.

How long does it usually take for an economy to recover from a depression?

It depends on how severe the depression is. In some cases, the economy may not fully recover for many years.

How should I react and protect myself in each stage of the business cycle?

During an expansionary period, it can be beneficial to invest in long-term assets. During the recession phase, you may want to start saving money or investing in short-term assets like CDs (Certificates of Deposit). When the economy is booming and prices are high, it could be a good time to buy goods; when the economy is weak this isn’t necessarily the best time to make purchases.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Economics Gr. 10 T1 W7 Lesson: Macroeconomics - Business cycles

Economics Grade 10 Term 1 Wk7 Lesson: Macroeconomics - Business cycles

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Economic Essays Grade 12

Grade 12 Economic Essays for the Next Three-Year Cycle (2021-2023)

Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow)

Discuss in detail 'The new economic paradigm'/Explain the 'smoothing of cycles (Business Cycles)

Discuss in detail the features underpinning forecasting (Business Cycles)

Discuss in detail the main objectives of the public sector in the economy (Public Sector)

Discuss in detail the reason(s) for public sector failure (link them to typical problems experienced through public sector provisioning) (Public Sector)

Discuss in detail the reasons for international trade (Foreign Exchange Markets)

Discuss in detail export promotion (Protectionism and FreeTrade)

Discuss in detail the arguments in favour of protectionism (Protectionism and Free Trade)

Discuss in detail the demand-side approach in promoting growth and development in South Africa (Growth and development)

Discuss in detail the following South African growth and development policies and strategic initiatives (Growth and development)

Discuss in detail South Africa's initiaties (endeavours) in regional development (Industrial Development Policies)

Discuss in detail the following economic indicators (Economic and Social Performance Indicators

Discuss in detail the following social indicators (Economic and Social Performance Indicators)

Discuss in detail the various equilibrium positions with the aid of graphs-PERFECT MARKET (Perfect Market)

Discuss the monopoly in detail (with/without the aid of graphs) (Imperfect Market)

Examine the oligopoly in detail (Imperfect Market)

Compare and contrast any TWO types of market structures

Discuss in detail how the following factors lead to the misallocation of resources in the market (Market Failures)

Discuss in detail state intervention as a consequence of market failures, with the aid of relevant graphs (Market Failures)

Discuss in detail the consequences of inflation (Inflation)

Discuss in detail the measures to combat demand-pull and/or cost-push inflation (Inflation)

Examine in detail the effects of tourism (Tourism)

Examine in detail the benefits of tourism (Tourism)

Discuss in detail how the government can ensure sustainable development (Environmental Sustainability)

Discuss in detail the following problems and the international measures taken to ensure sustainable development (Environmental Sustainability)

ESSAYS FOR THE NEXT THREE-YEAR CYCLE (2021-2023)

Macroeconomics- paper1.

Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow) INTRODUCTION The economy of a country is regarded as an open economy because of the presence of households, producers, government, foreign sector and financial sector as active participants in the economy. Markets link the participants in the economy 🗸🗸 [Max 2]

BODY: MAIN PART PRODUCT / GOODS/ OUTPUT MARKET🗸

These are the markets for consumer goods and services🗸🗸
Goods are defined as tangible items, like food, clothes, cars, etc. that satisfies some human wants or needs🗸🗸
Buying and selling of goods that are produced in markets e.g. 🗸🗸
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 include wholesale and retail, transport and financial markets. 🗸🗸

FACTOR / RESOURCE/ INPUT MARKETS🗸

Households sell factors of production on the markets: rent for natural resources, wages for labour interest for capital and profit for entrepreneurship🗸🗸
The factor market includes the labour, property and financial markets. 🗸🗸
The market where services of factors of production are traded e.g. labour is hired and capital is borrowed – these services earn wages, interest, rent and profits🗸🗸

FINANCIAL MARKETS🗸

They are not directly involved in the production of good and services, but act as a link between households , the business sector and other participants with surplus finds🗸🗸
E.g. banks, insurance companies and pension funds🗸

MONEY MARKETS🗸

In the money markets short term loans, and very short term funds are saved and borrowed by consumers and business enterprises 🗸🗸
Products sold in the market are bank debentures, treasury bills and government bonds 🗸🗸
The simplest form exists when parties make demand and short-term deposits and borrow on short term 🗸🗸
The SARB is the key institution in the money market🗸🗸

CAPITAL MARKETS🗸

In the capital markets long term funds are borrowed and saved by consumers and the business sector🗸🗸
The Johannesburg Security Exchange (JSE) is a key institution in the capital 🗸🗸
Products sold in this market are mortgage bonds and shares🗸🗸

FOREIGN EXCHANGE MARKETS🗸

On the foreign exchange markets businesses buy/ sell foreign currency to pay for imported goods and services🗸🗸
These transactions occur in banks and consists of electronic money transfers from one account to another🗸🗸
The leading centres/ most important foreign exchange markets are in London, New York and Tokyo 🗸🗸
e.g. traveller’s cheques to travel abroad🗸
Flows of private and public goods and services are real flows and they are accompanied by counter flows of expenditure and taxes on the product market🗸🗸
Factor services are real flows and they are accompanied by counter flows of income on the factor market🗸🗸
Imports and exports are real flows and are accompanied by counter flows of expenditure and revenue on the foreign exchange market🗸🗸[Max 26]
A change in investment of R 10m will result in a change in income of R 20m🗸🗸
An increase in investment causes the expenditure function to shift upwards from C1 to C2 so that C1 is parallel to C2🗸🗸
The effect of the increase in investment is that the total expenditure will increase from R 20m to R 30m🗸🗸
The increase in the value of output (Y) is greater than the increase in the expenditure (E) 🗸🗸 (Explanation must comply with the figures supplied in the graphical presentation) [Max 4] [Max 10]

CONCLUSION The circular flow ensures continued interdependence and coordination of the economic activities in the economy / markets are critically important institutions in our economic system, because they regulate the supply and demand and safeguard price stability and general business confidence. 🗸🗸 [Any other relevant conclusion] [Max 2]

INTRODUCTION The new economic paradigm in terms of the smoothing of business cycles discourages monetary policy makers from using monetary and fiscal policies to fine tune the economy but rather encourages achieving stability through sound long term decisions relating to demand and supply in the economy/smoothing out the painful part of economic down-fall that is part of the market economy🗸🗸 (Accept other relevant definition/description of smoothing/new economic paradigm). [Max 2]

BODY: MAIN PART The new economic paradigm is embedded in the demand and supply side policies. 🗸🗸

Demand-side policies

It focuses 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 lead to 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 in the general price level) 🗸🗸

Unemployment:

Demand-side policies are effective in stimulating economic growth. 🗸🗸
Economic growth can lead to an increase in 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 PC curve shows the initial situation. A is the point of intersection of the PC curve with the x- axis. It shows the natural rate of unemployment, for instance 14%🗸🗸
At point A inflation rate is zero. 🗸🗸
If unemployment falls to C for instance, 8%, inflation caused by wage increases is at 6%.🗸🗸
If unemployment increases from C to B to A, inflation falls from 6% to 2% to 0%.🗸🗸

Supply-side policies Reduction of costs 🗸

Infrastructural services: reasonable charge and efficient transport, communication, water
services and energy supply. 🗸🗸
Administrative 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 and businesses carry a heavy burden 🗸🗸
Cash incentives: it includes subsidies for businesses to locate in neglected areas where unemployment is high and compensation to exporters for certain costs they
incurred in development of export markets. 🗸🗸

Improving the efficiency of inputs 🗸

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, education and training. 🗸🗸
Free advisory service: these promote opportunities to export. 🗸🗸

Improving the efficiency of markets 🗸

Deregulation: removal of laws, regulations and by-laws and other forms of government controls makes the market free. 🗸🗸
Competition: encourages the establishment of new businesses 🗸🗸
Levelling the play field: private businesses cannot compete with public enterprises 🗸🗸 Answers must be in full sentences and well described with examples to be able to obtain 2 marks per fact. Learners should be awarded 1 mark per heading or sub-heading to a maximum of 8 marks. (8 x 1) (8) [Max 26]

Explanation: The above graph shows:

Aggregate demand (AD) and aggregate supply (AS) are in equilibrium at point C. 🗸🗸
If aggregate demand is stimulated so that it moves to AD1 and aggregate supply responds promptly and relocates at AS1; a larger real output becomes available without any price increases. 🗸🗸
Supply is often sticky and fixed in the short term. 🗸🗸
Therefore, if aggregate demand increases to AD1 and aggregate supply does not respond, intersection is at point F. Real production increases but so does the price, in other words, with more inflation. 🗸🗸
The aggregate demand locates at any position to the left of AS1 inflation prevails. 🗸🗸
The solution is to create conditions that ensure supply is more flexible. 🗸🗸
If the cost of increasing production is completely flexible, a great real output can be supplied at any given price level. 🗸🗸 [Max 10]

CONCLUSION It is clear from the discussion above that it is critically important to manage the aggregate supply and demand to ensure stability in the economy. 🗸🗸 [Accept any relevant higher order conclusion] [Max 2]

INTRODUCTION Accurate prediction is not possible in Economics. The best the economists can do is to try and forecast what might happen. There are a number of techniques available to help economists to forecast business cycles, e.g. economic indicators 🗸🗸 OR Successive periods of contraction and expansion of economic activities 🗸🗸 [Accept any other relevant introduction] [Max 2]

BODY: MAIN PART Business cycle indicators Leading economic indicators 🗸

These are indicators that change before the economy changes / coincide with the reference turning point 🗸🗸
They give consumers, business leaders and policy makers a glimpse (advance warnings) of where the economy might be heading. 🗸🗸
Peak before a peak in aggregate economic activity is reached.
Most important type of indicator in helping economists to predict what the economy will be like in the future 🗸🗸
When these indicators rise, the level of economic activities will also rise in a few months' time/an upswing 🗸🗸
E.g. job advertising space/inventory/sales ratio🗸

Coincident economic indicators🗸

They move at the same time as the economy / if the turning point of a specific time series variable coincides with the reference turning point🗸🗸
It indicates the actual state of the economy🗸🗸
E.g. value of retail sales. 🗸
If the business cycle reaches a peak and then begins to decline, the value of retail sales will reach a peak and then begin to decline at same time🗸🗸

Lagging economic indicators🗸

They do not change direction until after the business cycle has changed its direction🗸🗸
They serve to confirm the behaviour of co-incident indicators🗸🗸
E.g. the value of wholesalers' sales of machinery🗸
If the business cycle reaches a peak and begins to decline, we are able to predict the value of new machinery sold🗸🗸

Composite indicator🗸

It is a summary of the various indicators of the same type into a single value🗸🗸
Their values are consolidated into a single value , if this is done we find a value of a composite leading , coincident and lagging indicator🗸🗸 Accept ONE example from the table below:

This is the time that it takes for a business cycle to move through one complete cycle (measured from peak to peak) 🗸🗸
It is useful to know the length because the length tends to remain relatively constant over time.🗸🗸
If a business cycle has the length of 10 years it can be predicted that 10 years will pass between successive peaks or troughs in the economy. 🗸🗸
Longer cycles show strength. 🗸🗸
Cycles can overshoot. 🗸🗸

Ways to measure lengths:

Crisis to crisis 🗸🗸
Historical records 🗸🗸
Consensus on businesses experience 🗸🗸

Amplitude 🗸

It is the difference between the total output between a peak and a trough. 🗸🗸
It measures the distance of the oscillation of a variable from the trend line / It is the intensity (height) of the upswing and downswing (contraction and expansion) in economic activity 🗸🗸
A large amplitude during an upswing indicates strong underlying forces – which result in longer cycles 🗸🗸
The larger the amplitude the more extreme the changes that may occur / extent of change 🗸🗸
E.g. During the upswing inflation may increase from 5% to 10%. (100% increase) 🗸🗸
A trend is the movement of the economy in a general direction. 🗸🗸
It usually has a positive slope because the production capacity of the economy increases over time 🗸🗸
Also known as the long term growth potential of the economy. 🗸🗸
The diagram above illustrates an economy which is growing – thus an upward trend (positive slope) 🗸🗸
Trends are useful because they indicate the general direction in which the economy is moving – it indicates the rate of increase or decrease in the level of output🗸🗸

Extrapolation 🗸

Forecasters use past data e.g. trends and by assuming that this trend will continue, they make predictions about the future🗸🗸
Means to estimate something unknown from facts or information that are known 🗸🗸
if it becomes clear that the business cycle has passed through a trough and has entered a boom phase, forecasters might predict that the economy will grow in the months that follow 🗸🗸
It is also used to make economic predictions in other settings e.g. prediction of future share prices🗸🗸

Moving average 🗸

It is a statistical analytical tool that is used to analyse the changes that occur in a series of data over a certain period of time / repeatedly calculating a series of different average values along a time series to produce a smooth curve 🗸🗸
The moving average could be calculated for the past three months in order to smooth out any minor fluctuations 🗸🗸
It is calculated to iron out (minimize) small fluctuations and reveal long-term trends in the business cycle🗸🗸 Answers must be in full sentences and well described with examples to be able to obtain 2 marks per fact. Learners should be awarded 1 mark per 8 headings and examples. [8 x 1=8] [Max 26]

BODY: ADDITIONAL PART

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. 🗸🗸
Households and firms can borrow more and spend more. 🗸🗸
The increased spending increases the level of economic activity. 🗸🗸
Investment will increase and more factors of production will be employed. 🗸🗸
Higher levels of production, income and expenditure will be achieved. 🗸🗸
If the supply of goods and services does not increase in line with an increase in demand, inflation will increase. 🗸🗸
Inflation can be curbed by reducing money supply and availability of credit. 🗸🗸
To dampen demand at the peak the government will be able to reduce the 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) 🗸🗸
To devaluate the exchange rate (exchange rate policy) 🗸🗸 [Max 10]

CONCLUSION It remain clear that business cycles must be clearly monitored through the indicators available, policy makers must act quickly by using monetary and fiscal instruments in order to prevent instability in the economy. 🗸🗸 [Accept any other relevant conclusion] [Max 2]

INTRODUCTION: The government provides goods and services that are under supplied by the market and therefore plays a major role in regulating economic activity and 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 🗸🗸

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 manage 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. These uncertainties must 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 SARB 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 🗸🗸
South Africa uses a progressive income tax system – 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 to finance basic economic services 🗸🗸
E.g. Cash Grant to the poor, e.g. child grants and cash grants to vulnerable people, e.g. disability grants 🗸
Progressive taxation means that the higher income earners pay higher/more taxation 🗸🗸 [Max 26]
Learner responses can be positive or negative.
Follow the argument and see if the learner can produce enough evidence to support his/her answer.

Economic Growth:

SA targets 4–5% economic growth. Previously SA had a 5% growth rate 🗸🗸
In recent years the growth rate decreased steadily (presently below 3%) 🗸🗸

Full Employment:

Compared to foreign countries unemployment is very high. (Expanded – over 30%) 🗸🗸
Efforts by SA government to reduce these figures includes the GEAR strategy, focus on small business enterprises, Public Works Programme 🗸🗸

Exchange rate stability:

SA now operates on a free floating exchange rate system in line with international benchmarks 🗸🗸
Unfortunately our currency has lost its value, with a general trend of depreciation over the last few years 🗸🗸

Price stability:

For the past few years South Africa has managed to remain within the 3–6% target 🗸🗸
The current increase in the repo rate has put constraints on the inflation rate 🗸🗸

Economic equity:

Economic equity has improved (BEE, affirmative action, gender equity) and led to an improvement in economic equity 🗸🗸 [Any 5 x 2] [Max 10]

CONCLUSION: While some successes have been achieved by government, the fulfilling of some of the objectives are compromised by factors like lack of accountability, corruption, budgeting, nepotism and incompetence. 🗸🗸 [Any relevant conclusion] [Max 2]

INTRODUCTION The government responds to market failures by establishing and maintaining state owned enterprises to provide public goods and services 🗸🗸 [Any other relevant introduction] [Max 2]

BODY: MAIN PART

It is required to give an explanation of one's decisions, actions and expenditures over a period of time 🗸🗸
There are mechanisms for evaluating government's economic and financial performance 🗸🗸
That the desired quantities and quality of goods and services for which taxes are raised are delivered 🗸🗸
That monopolies, corruption, nepotism, incompetence and apathy does not occur 🗸🗸
Two important elements of accountability is participation and transparency🗸🗸
Ministerial responsibilities, i.e. the ministers of government departments are responsible for decisions and actions and expenditures 🗸🗸
Parliamentary questioning arises and members of the government departments have to respond 🗸🗸
The national treasury is responsible for treasury control 🗸🗸
The auditor-general reports annually in writing on each government department🗸🗸
Public goods are efficiently provided if Pareto efficiency is achieved 🗸🗸
That is if resources are allocated in such a way that no one can be made better off without making someone else worse off 🗸🗸
Bureaucracy the official rules and procedures. 🗸🗸/insensitivity to the needs of their clients 🗸🗸
Incompetence- the lack of skill or ability to do a task successfully🗸🗸/May have improper qualifications/or an attitude of apathy 🗸🗸
Corruption- the exploitation of a person's position for private gain /taking bribes, committing fraud, nepotism 🗸🗸
State-owned enterprises do not operate according to the forces of supply and demand 🗸🗸
It becomes thus very difficult for state-owned enterprises to assess needs and they are thus prone to under- or over-supplying public goods and services 🗸🗸
The census and other household surveys as well as local government structures provide this type of information 🗸🗸
Since resources are scarce, government must then decide which needs and whose needs are to be satisfied 🗸🗸
In the private sector houses are built according to the price that people are able and willing to pay 🗸🗸
In the public sector housing is regarded as a social responsibility and authorities supply them according to the needs of people 🗸🗸
In a market economy prices are determined by supply and demand 🗸🗸
The objectives of firms are to maximise their profits and they usually set prices to achieve this objective 🗸🗸
Government does not pursue the profit maximisation objective 🗸🗸
Government takes into account certain social, economic, political and environmental conditions as well as public opinion 🗸🗸
Free-of-charge services- this is met from taxes 🗸🗸 and applies to most community goods and collective goods 🗸🗸 (e.g.) defence, police whereby charges and toll fees are levied 🗸
User-charges 🗸 option to charge depends on technical reasons 🗸🗸 (e.g.) cost of providing a double lane road could be recovered by toll charges 🗸 Economic reasons 🗸 such as services like water and electricity 🗸 that have a zero price 🗸 political reasons 🗸 where income distribution is significantly unequal, administrative rationing according to need takes place 🗸🗸 (e.g.) public health and education 🗸
Direct and indirect subsidies direct subsidies are used to cover part of the costs 🗸🗸 (e.g.) urban bus service 🗸 and an indirect subsidy is used to write off accumulated losses or deficits 🗸🗸
Standing charges -called availability charges 🗸🗸 (e.g.) water and electricity 🗸 standing charges goes to meet fixed costs and the price per unit consumed covers variable costs 🗸🗸
Price discrimination - different users have different elastic ties of demand for a good 🗸🗸 (e.g.) commercial and manufacturing businesses pay higher rates than households and they pay on a sliding scale🗸🗸
State-owned enterprises that either render a service or when an existing enterprise is nationalised 🗸🗸
They focus on making a profit and maximizing cost at the expense of the needs of some groups 🗸🗸 (e.g.) Iscor 🗸 SABC, 🗸SAA, Spoornet 🗸
refers to the process whereby state-owned enterprises and state-owned assets are handed over or sold to private individuals 🗸🗸
cost of maintaining and managing state-owned enterprises are high which can lead to higher taxes and larger public debt 🗸🗸
State-owned enterprises are not run as efficiently as private enterprises 🗸🗸
Nationalisation is the process whereby the state takes control and ownership of privately owned assets and private enterprises 🗸🗸
It includes contracting of services, public-private partnerships, increasing competitiveness🗸🗸 [Max 26]

ADDITIONAL PART Possible problems in your community or elsewhere

Lack of drinking water due to burst pipes 🗸🗸
Lack of electricity due to lack of infrastructure (load shedding) 🗸🗸
Lack of schooling – no buildings available – lack of maintenance 🗸🗸
Lack of health services due to lack of staff, infrastructure, strikes 🗸🗸
Lack of adequate housing (RDP) 🗸🗸 [Max 10 marks - List of examples max 5 marks] [Accept any other relevant answer]

CONCLUSION If the above problems are not dealt with timeously by government, government will continue to fail its people in terms of service delivery, seeing many protests occurring regularly 🗸🗸 [Any other relevant higher order conclusion] [Max 2]

INTRODUCTION International trade can be defined as the exchange of goods and services between countries globally. 🗸🗸 These trade agreements are negotiated by protocols and agreement due to the uneven distribution of natural resources globally. 🗸🗸

BODY-MAIN PART The main reasons for international trade.

Demand reasons The size of the population impacts demand.

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

The population’s income levels effect demand.

Changes in income cause a change in the demand for goods and services. 🗸🗸 • An increase in the per capita income of people in more disposable income that can be spent on local goods and services, some of which may then have to be imported. 🗸🗸

An increase in the wealth of the population leads to greater demand for goods.

People have access to loans and can spend more on luxury goods, many of which are produced in other countries. 🗸🗸

Preferences and tastes can play a part in the determining of prices,

E.g. customers in Australia have a preference for a specific product which they do not produce and need to import and it will have a higher value than in other countries. 🗸🗸

The difference in consumption patterns is determined

By the level of economic development in the country, e.g. a poorly developed country will have a high demand for basic goods and services but a lower demand for luxury goods. 🗸🗸

Supply reasons Natural resources are not evenly distributed

Across all countries of the world. 🗸🗸
They vary from country to country and can only be exploited in places where these resources exist. 🗸🗸

Climatic conditions

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

Labour resources

Differ in quantity, quality and cost between countries. 🗸🗸
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. 🗸🗸

Specialisation in the production

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

Enjoy an advantage over underdeveloped countries. 🗸🗸
Due to a lack of capital, some countries cannot produce all the goods they require themselves. 🗸🗸

ADDITIONAL PART

Buying and selling goods and services from other countries: 🗸🗸
The purchase of goods and services from abroad that leads to an outflow of currency from SA- Imports (M). 🗸🗸
The of goods and services to buyers from other countries leading to an inflow of currency to SA – Exports (X) 🗸🗸
Different factor endowments mean some countries can produce goods and services more efficiently than others- specialisation is therefore possible: 🗸🗸

Absolute Advantage:

Where one country can produce goods with fewer resources than other. 🗸🗸

Comparative Advantage:

Where one country can produce goods at a lower opportunity cost it sacrifices less resources in production. 🗸🗸

CONCLUSION International trade is important of countries to survive economically, as barriers to trade would disadvantage all countries, due to their interdependency globally. 🗸🗸 [Any other relevant higher order conclusion] [Max 2]

ECONOMIC PURSUITS-PAPER 1

Discuss in detail export promotion (Protectionism and Free Trade)

INTRODUCTION Export promotion refers to measures taken by governments increase production of goods and services that can be exported. The government provides incentives to encourage production 🗸🗸 [Max 2]

BODY: MAIN PART REASONS:

Export promotion measures lower cost of production which makes it easier to compete on the international market 🗸🗸
Achieve significant export-led economic growth🗸🗸
Export enlarges production capacity of country because more and larger manufacturing industries are established. 🗸🗸
The first step to export-led economic growth is to implement policies that encourage the establishment of industries to produce goods and services for export markets🗸🗸

METHODS: Exports are promoted through: Incentives🗸

Export incentives include information on export markets, research with regard to new markets, concessions on transport charges, export credit and export credit guarantees and publicity commending successful exporters🗸🗸
This will encourage manufacturers to export an increased volume of their production🗸🗸
Trade missions help to market SA products abroad🗸🗸and supply SA companies with information about potential markets 🗸🗸

Direct Subsidies🗸

Described as direct because it involves government expenditure. 🗸🗸
Include cash payments to exporters, refunds on import tariffs and employment subsidies.
The aim is to increase the competitiveness of exporting company🗸🗸 reduce cost of production🗸🗸and explore and establish overseas markets🗸🗸

Indirect subsidies

Regarded as indirect because it results in the government receiving less revenue🗸🗸 e.g. general tax rebates,
Tax concessions on profits earned from exports or on capital invested to produce export goods, refunding
Of certain taxes e.g. custom duties on imported goods used in the manufacturing process🗸🗸
Allows companies to lower their prices and enables them to compete in international markets🗸🗸
Challenge for governments to design incentives and subsidies in such a way that prices of export goods can't be viewed as dumping prices🗸🗸

Trade neutrality 🗸

Can be achieved if incentives in favour of export production are introduced
Up to point that neutralises the impact of protectionist measures in place🗸🗸
E.g. subsidies equal to magnitude of import duties can be paid🗸

Export processing zones (EPZs) 🗸

Is free-trade enclave within a protected area –
Is fenced and controlled industrial park that falls outside
Domestic customs area, and usually located near harbour or airport 🗸🗸 NOTE : For the response with regard to the effectiveness of export promotion methods, a maximum of 5 marks can be allocated.
No limitations on size and scale since world market is very large🗸🗸
Cost and efficiency of production based on this and organised along lines of comparative advantage🗸🗸
Increased domestic production will expand exports to permit more imports and may result in backward linkage effects that stimulate domestic production in related industries🗸🗸
Exchange rates are realistic and there is no need for exchange control and quantitative restrictions🗸🗸
Value can be added to natural resources of the country 🗸🗸
Creates employment opportunities 🗸🗸
Increase in exports has positive effect on balance of payments 🗸🗸
Increase in production leads to lower domestic prices, which benefit local consumers🗸🗸

DISADVANTAGES

Real cost of production 🗸 subsidies and incentives reduce total cost of production which must be met from sales🗸🗸 real cost is thus concealed by subsidies🗸🗸products cannot compete in open market 🗸🗸
Lack of competition 🗸 businesses charge prices that are so low that they force competitors out of the market 🗸🗸
Increased tariffs and quotas 🗸can be against spirit of provisions of WTO🗸🗸overseas competitors retaliate with tariffs and quotas🗸🗸 goods are sold domestically below their real cost of production (export subsidies and dumping) 🗸🗸
Protection of labour-intensive industries 🗸 developed countries maintain high levels of effective protection for their industries that produce labour-intensive goods in which developing countries already have or can achieve comparative advantage 🗸🗸
Withdrawal of incentives often leads to closure of effected companies. 🗸🗸
Incentives often lead to inefficiencies in the production process, since companies don't have to do their best to compete🗸🗸
Can be seen as dumping 🗸🗸 [Max 26]

BODY: ADDITIONAL PART How successful is South Africa in protecting the local textile industry against foreign competition?

Not successful: 🗸 Many domestic textile manufacturers closed down due to unfair international competition 🗸🗸 Many wholesalers make use of suppliers from abroad 🗸🗸 e.g. Woolworths/Walmart🗸
Dumping still occurs – European manufacturers still dump clothing in Africa out of season at prices below cost 🗸🗸 Job losses due to a lack of protection in this industry 🗸🗸 [Accept any motivation relating to success indicators] [Max 10]

CONCLUSION South Africa's international trade policy facilitates globalisation thereby impacting positively on the balance of payment. 🗸🗸 [Accept any other relevant conclusion] [Max 2]

INTRODUCTION Protectionism refers to a deliberate policy on the part of the government to erect trade barriers, such as tariffs and quotas, in order to protect domestic industries against international competition. 🗸🗸 [Accept any other relevant definition] [Max 2]

BODY-MAIN PART Raising revenue for the government

Import tariffs raise revenue for the government. 🗸🗸
In smaller countries the tax base is often small due to low incomes of individuals and businesses. 🗸🗸
Low incomes do not provide much in the form of income taxes and therefore custom duties on imports is a significant source of income or revenue. 🗸🗸

Protecting the whole industrial base

Maintaining domestic employment. 🗸🗸
Countries with high unemployment are continuously pressured to stimulate employment creation and therefore resort to protectionism in order to stimulate industrialisation. 🗸🗸
It is thought that using protectionism the country’s citizens would purchase more domestic products and raise domestic employment. 🗸🗸
These measures on domestic employment creation at the expense of other countries, led to such measures as “beggar-my-neighbour” policies. 🗸🗸
Applying import policies is likely to reduce other countries ability to buy country’s exports and may provoke retaliation. 🗸🗸

Protecting workers

It is argued that imports from other countries with relatively low wages represent unfair competition and threaten the standard of living of the more highly paid workers of the local industries. 🗸🗸
Local industries would therefore be unable to compete because of higher wages pushing up the price levels of goods. 🗸🗸
Protection is thus necessary to prevent local wage levels from falling or even to prevent local businesses from closing down due to becoming unprofitable. 🗸🗸
Competition from low-wage countries may also reflect the fact that those countries have a comparative advantage in low-skilled labour-intensive industries. 🗸🗸

Diversifying the industrial base

Overtime countries need to develop diversified industries to prevent overspecialisation. 🗸🗸
A country relying too heavily on the export of one or a few products is very vulnerable. 🗸🗸
If a developing country’s employment and income is dependent on only one or two industries, there is the risk that world fluctuations in prices and demand and supply-side problems could results in significant fluctuations in domestic economic activity. 🗸🗸
Import restrictions may be imposed on a range of products in order to ensure that a number of domestic industries develop. 🗸🗸

Develop strategic industries

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

Protecting specific industries Dumping

Foreign industries may engage in dumping because government subsidies permit them to sell at very low prices or because they are seeking to raise profits through price discrimination. 🗸🗸
The reason for selling products at lower prices may be to dispose of accumulate stocks Of the goods and as a result consumers in the importing country stand to benefit however,
Their long term objective may be to drive out domestic producers and gain control of the market and consumers
Are likely to lose out in the reduction in choice and higher prices that the exporters will be able to charge. 🗸🗸

Infant industries

Usually newly established and find it difficult to survive due to their average costs being higher than that of their well-established foreign competitors. 🗸🗸
However, if they are given protection in their early years they may be able to grow and Thereby take advantage lower their average costs and become competitive and at this point protection can be removed. 🗸🗸

Declining industries/sunset industries

Structural changes in the demand and supply of a good may severely hit an industry such industries should be permitted to go out of business gradually declining industries
Are likely to be industries that no longer have a comparative advantage and however, if they go out of business quickly there may be a sudden and large increase in unemployment. 🗸🗸
Protection may enable an industry to decline gradually thereby allowing time for resources including labour to move to other industries. 🗸🗸
Protecting domestic standards domestic regulations of food safety human rights and environmental standards have been increasingly acting as trade restrictions. 🗸🗸 [Accept any other relevant fact] [Max 26]

ADDITIONAL PART South Africa promotes exports through subsidies

Direct Subsidies

Strict screening measures should be put in place when companies apply for financial assistance. Government expenditure can provide direct financial support to domestic producers for their exports e.g. 🗸🗸
Cash grants offered to South African exhibitors to exhibit their products at exhibitions overseas. To explore new markets. 🗸🗸
Foreign trade missions to explore new markets imposition of tariffs on imports. 🗸🗸
Funds for the formation of formal export councils. 🗸🗸
Subsidies for training or employing personnel. 🗸🗸
Funds for the export market research. 🗸🗸
Product registration and foreign patent registrations. 🗸🗸
Government can refund companies certain taxes to promote exports.
These types of indirect subsidies are:
General tax rebates (Part of the cost of production can be subtracted from the tax that has been paid) 🗸🗸
Tax concessions on profits earned from exports or on capital invested to produce export goods. 🗸🗸
Refunds on import tariffs in the manufacturing process of exported goods companies often use custom duties are paid on these goods and the government refunds them. 🗸🗸 [Max 10]

CONCLUSION Most countries agree that protectionism is harmful to the economy if not well managed. Protectionism is needed especially where industries are young and need expansion or development. 🗸🗸 [Any other relevant higher order conclusion] [Max 2]

INTRODUCTION Economic growth is responsible for the overall growth of the economy, in order to enhance the well being of the economy as a whole. Whereas economic development would focus on the individual well being of the citizens of a country. [Any other relevant higher order conclusion] [Max 2]

BODY-MAIN PART Growth and Development A demand-side approach includes discretionary changes in monetary and fiscal policies with the aim of changing the level of aggregate demand. 🗸🗸

Monetary policy

Is driven by the South African Reserve Bank (SARB). 🗸🗸
It aims to stabilise prices by managing inflation. 🗸🗸

Fiscal policy

Is driven by the Department of Finance. 🗸🗸
It aims to facilitate government, political and economic objectives. 🗸🗸
A demand-side approach to economic growth and development does not only depend on fiscal and monetary policy. 🗸🗸
It is dependent on all components of aggregate demand, that is, C, I, X and G. 🗸🗸

South African approach

The South African approach uses both monetary and fiscal measures to influence aggregate demand in the economy. 🗸🗸
The South African Reserve Bank (SARB) as the central bank in South Africa formulates the monetary policy. 🗸🗸
They use the following instruments:

Interest rate changes

It is used to influence credit creation by making credit more expensive or cheaper. 🗸🗸
The exchange rate is stabilised by encouraging inflow or outflows. 🗸🗸

Open market transactions

To restrict credit the SARB sells securities. When banks buy these securities money flows from banks to the SARB. 🗸🗸
The banks have less money to lend and cannot extend as much credit as before. 🗸🗸
To encourage credit creation the SARB buys securities. Money flows into the banking system.🗸🗸

Moral suasion

The SARB consults with banks to act in a responsible manner based on the prevailing economic conditions. 🗸🗸

Cash Reserve Requirements

Banks are required to hold a certain minimum cash reserve in the central bank. 🗸🗸
Banks have a limited amount to give out as credit. 🗸🗸
South Africa’s fiscal policy is put into practice through the budgetary process. 🗸🗸
The main purpose of fiscal policy is to stimulate macroeconomic growth and employment, and ensure redistribution of wealth. 🗸🗸
The following instruments are used:

Progressive personal income tax

Higher income earners are taxed at higher tax rates. 🗸🗸
These taxes are used to finance social development. 🗸🗸
The poor benefit more than those with higher incomes. 🗸🗸

Wealth taxes

Properties are levied (taxed) according to their market values. 🗸🗸
Transfer duties are paid when properties are bought. 🗸🗸
Securities (shares and bonds) are taxed when traded. 🗸🗸
Capital gains tax is levied on gains on the sale of capital goods (e.g. properties, shares). 🗸🗸
Estate duties are paid on the estates of the deceased. 🗸🗸
These taxes are used to finance development expenditures which benefit the poor more often. 🗸🗸

Cash benefits

Old age pensions, disability grants, child support and unemployment insurance are cash grants. These are also known as social security payments. 🗸🗸
Benefits in kind (natura benefits) 🗸🗸
These include the provision of healthcare, education, school meals, protection etc. 🗸🗸
When user fees are charged, poor or low income earners pay less or nothing. 🗸🗸
Limited quantities of free electricity and water are provided. 🗸🗸

Other redistribution

Public works programmes, e.g. the Strategic Integrated Projects (SIP) provides employment subsidies and other cash and financial benefits such as training, financing and export incentives.🗸🗸

Land restitution and land redistribution

Land restitution is the return of land to those that have lost it due to discriminatory laws in the past. 🗸🗸
Land redistribution focuses on land for residential (town) and production (farm) for previously disadvantaged groups. 🗸🗸
The money for these programmes is provided in the main budget. 🗸🗸

Subsidies on properties

It helps people to acquire ownership of fixed residential properties. 🗸🗸
E.g. government’s housing subsidy scheme provides funding to all people earning less than R3 500 per month🗸🗸

CONCLUSION The demand-side approach focuses on the expansion of the demand for goods and services produced in the economy. 🗸🗸 OR To ensure economic growth, there should be an adequate and growing demand for goods and services produced in the economy. 🗸🗸

[Any other relevant higher order conclusion] [Max 2]

INTRODUCTION Different growth and development strategies have been implemented in South Africa since 1994, each aimed at addressing particular needs at the time of introduction. 🗸🗸 [Any other relevant introduction] [Max 2]

BODY-MAIN PART The Reconstruction and Development Programme (RDP)

The RDP was an integrated, coherent socio-economic policy framework that was implemented directly after our first democratic elections in 1994. 🗸🗸
It seeked to mobilise all our people and our country’s resources toward the final eradication of apartheid and the building of a democratic, non-racial and non-sexist future. 🗸🗸

The RDP was based on six principles.

an integrated and sustainable programme. 🗸🗸
a people-driven process focusing on the needs of the population. 🗸🗸
peace and security for all, aimed at a non-violent society that respects all human rights. 🗸🗸
nation-building, focusing on the needs of all members of society. 🗸🗸
linking reconstruction and development. 🗸🗸
The RDP consisted of many proposals, strategies and policy programmes.
All of these could, however be grouped into five major policy programmes that were linked to each other.

The five key programmes were:

meeting basic needs. 🗸🗸
developing our human resources. 🗸🗸
building the economy. 🗸🗸
democratising the state and society. 🗸🗸
implementing the RDP. 🗸🗸

The Growth, Employment and Redistribution Programme (GEAR)

The GEAR built upon the strategic vision set out in the RDP, i.e. 🗸🗸
The importance of all the objectives of the RDP was reaffirmed but it recognized the implementation and macroeconomic problems that the government had been experiencing in implementing the RDP. 🗸🗸
The RDP placed much more emphasis on disciplined economic policy. 🗸🗸
While still recognizing that there were very serious needs that had to be addressed. 🗸🗸

The Accelerated and Shared Growth Initiative for South Africa Programme (AsgiSA).

AsgiSA resulted from government’s commitment to halve unemployment and poverty by 2014. 🗸🗸
The Joint Initiative on Priority Skills Acquisition (Jipsa) was established to address the scarce and critical skills needed to meet AsgiSA’s objectives. 🗸🗸

AsgiSA identified six important factors that prevented growth:

the relative volatility of the currency. 🗸🗸
the cost, efficiency and capacity of the national logistics system. 🗸🗸
shortages of suitably skilled labour, and the spatial distortions of apartheid affecting low-skilled labour costs. 🗸🗸
barriers to entry, limits to competition and limited new investment opportunities. 🗸🗸
the regulatory environment and the burden on small and medium enterprises (SME’s). 🗸🗸
AsgiSA was not intended to be a government programme. 🗸🗸
But rather a national initiative supported by all the key groups in the economy. 🗸🗸
Namely business, labour, entrepreneurs and government and semi-government departments and institutions. 🗸🗸

Joint Initiative on Priority Skills Acquisitions (JIPSA)

It is the skills development arm of ASGISA. Focus is on skills development, especially through the SETAS. 🗸🗸

Expanded Public Works Programme (EPWP)

It is a nationwide government intervention to create employment using labour-intensive methods, and to give people skills they can use to find jobs when their work in the EPWP is done. 🗸🗸

The New Growth Path (NGP)

The New Growth Path (NGP) was released in November 2011. 🗸🗸
This plan is designed to serve as a framework for economic policy, and to be the driver of the country’s job strategy. 🗸🗸

The New Growth Path therefore proposes certain strategies to ensure adequate demand:

Deepening the domestic and regional market by growing employment. 🗸🗸
Increasing incomes and undertaking other measures to equity and income distribution. 🗸🗸
Widening the market for South African goods and services through a stronger focus on exports to the region and other rapidly growing economies. 🗸🗸
On a macroeconomic level the NGP entails accommodating or looser monetary policy combined with stricter fiscal policy to limit inflationary pressures and enhance competitiveness. 🗸🗸
Government spending will be prioritised with the objective of long-term sustainable employment opportunities. 🗸🗸

The microeconomic measures to control inflationary pressures include the following:

A competition policy to supervise monopoly pricing on products and services. 🗸🗸
A review of administered prices to ensure that they do not increase above inflation without compelling reasons. 🗸🗸
Interventions in the case of rapidly rising prices of essential products and services such as private🗸🗸
Healthcare and basic food items. 🗸🗸
Active industrial policy. 🗸🗸
Rural development policy. 🗸🗸
Competition policy. 🗸🗸
Stepping up education and skills development. 🗸🗸
Enterprise development: promoting small business and entrepreneurship; eliminating unnecessary red tape. 🗸🗸
Broad-based Black Economic Empowerment (BBBEE). 🗸🗸
Labour practices. 🗸🗸
Technology policy. 🗸🗸
Developmental trade policies. 🗸🗸
Policies for African development. 🗸🗸
The different growth and development strategies that have been implemented in South Africa since 1994. 🗸🗸
Have all contributed to making our country more prosperous and to address problems created by inequalities of the past. 🗸🗸
However, problems such as a low level of education, unemployment and unequal distribution of income persist. 🗸🗸
The current NGP is a comprehensive policy that is focused on addressing all of these problems. [Any other relevant higher order conclusion] [Max 2]

INTRODUCTION South Africa’s overall objective of Industrial Development Policy is to ensure international competitiveness in its nine provinces. OR Regional development is aimed at increasing the economic livelihood of specific areas or regions. OR Regional development attempts to limit the negative effects of economic activities in only a few areas. OR It attempts to promote the advantages of a more even regional development by using labour and other natural resources and infrastructure in neglected areas. [Accept any relevant introduction] [Max 2]

BODY-MAIN PART SPATIAL DEVELOPMENT INITIATIVES

SDI Programme attracts infrastructure and business investments to underdeveloped areas to create employment. 🗸🗸
Department of Trade and Industry is driving force behind industrial and spatial development. 🗸🗸
DTI plans together with central, provincial and local government, IDC, parastatals and research institutions. 🗸🗸
Industrial Development Policy Programme (Spatial Development) has 2 focus points spatial development initiative (SDI) and financial incentives. 🗸🗸
SDI refers to government’s initiative and economic development potential of certain specific spatial locations in SA. 🗸🗸

Key Objectives:

Stimulate economic activity in selected strategic locations. 🗸🗸
Generate economic growth and foster sustainable industrial development. 🗸🗸
Develop projects of infrastructure in certain areas and finance them through lending and private sector investment. 🗸🗸
Establish private-public partnerships (PPP’s). 🗸🗸

In areas with high poverty and unemployment, SDI focuses on:

High level support in areas where socio-economic conditions require concentrated government assistance. 🗸🗸
Where inherent economic potential exists. 🗸🗸
The approach is towards international competitiveness, regional cooperation and a more diversified ownership base. 🗸🗸

Some of the main focus points of the SDI Programme are:

Lubombo Corridor (agro-tourism, education, craft, commercial and agricultural sectors); 🗸🗸
KwaZulu-Natal (Ports of Durban and Richards Bay); 🗸🗸
West Coast SDI (fishing and industrial ports); 🗸🗸
Coast-2-Coast Corridor with agro-tourism. 🗸🗸
It also makes it possible for private sector businesses to take advantage of the economic potential of underdeveloped areas in private-public partnerships (PPP’s) 🗸🗸
In PPP a private business may provide the capital to build the factory and to buy raw materials and employ labour, while the government provides the capital for the infrastructure such as roads and water and electricity. 🗸🗸
The business benefits from profits and the government benefits from taxes, levies and employment opportunities. 🗸🗸

There are TWO types of PPP’s which are compensated differently: Unitary payments:

Private sector builds and runs a project (it performs the function on behalf of the public sector); the payment provides an acceptable return on the total investment (building cost, maintenance, operational expenses). 🗸🗸
Private sector constructs the project and then is given the right to change a toll fee (e.g. public road); 🗸🗸
The toll covers costs of construction, maintenance, operation. 🗸🗸
The above options can be combined: E.g. hospital (cost of building is an annual payment and a user fee is also charged). 🗸🗸
A track of land that forms a passageway allowing access from one area to another and particular advantages to mining, manufacturing and other businesses. 🗸🗸
Domestic Corridor: e.g. Lubombo, West Coast, Fish River. 🗸🗸
Corridors beyond the South African Borders (SADC) e.g. Maputo Development Corridor Mozambique. 🗸🗸
Reasons in support of South Africa’s regional integration in Southern Africa: have political and stable neighbours have important export markets and a future source of water and energy supplies integration may be a precondition for support from foreign investors, donors and multilateral institutions. 🗸🗸
A robust regional transport system and a solid infrastructure base hold the key to attracting investment into the SADC region – improving competitiveness and promoting trade. 🗸🗸

Advantages from Corridor development:

Greater levels of economic efficiency and productivity compact urban form corridor urban form. 🗸🗸
Corridor developments will often occur due to private investment. 🗸🗸
Intergration of land use and transport planning will lead to generally efficient integration. 🗸🗸
Efficient urbanisation leads to efficient use of land and promotion of an efficient transport system. 🗸🗸

INDUSTRIAL DEVELOPMENT ZONES (IDZ’s)

Geographically designed, purpose-built industrial sites providing services tailored for export- orientated industries. 🗸🗸
Physically enclosed and linked to an international port or airport. 🗸🗸
Specifically designed to attract new investment in export-driven industries. 🗸🗸
Falls outside domestic customs zones and able to import items free of customs and trade restrictions, add value and then export their goods. 🗸🗸
Development and management done by private sector. 🗸🗸
Government IDZ policy designed to boost exports and jobs. 🗸🗸
IDZ’s aim to encourage economic growth –attract foreign investment in industrial development – facilitate international competitiveness regarding manufacturing. 🗸🗸 [Max 26]

ADDITIONAL PART FINANCIAL INCENTIVES Small and Medium Enterprise Development Programme (SMEDP) • This incentive has provided a tax-free cash grant for investment in industries in

South Africa. 🗸🗸
E.g. manufacturing, agricultural, processing, aquaculture and tourism. 🗸🗸

Critical Infrastructure Fund Programme (CIF)

A tax-free cash grant incentive for projects has improved critical infrastructure in South Africa. 🗸🗸
E.g. for installation, construction of infrastructure, payment of employees, materials directly consumed during installation. 🗸🗸

Duty Free Incentives (for businesses operating in the IDZ’s)

This has encouraged export-orientated manufacturing to increase their competitiveness 🗸🗸
And helped to promote foreign and local direct investment. 🗸🗸

Foreign Investment Grant (FIG)

This has assisted foreign investors to invest in new manufacturing businesses in SA. 🗸🗸
Benefited in terms of the cost of relocating new machinery and equipment from abroad. 🗸🗸

Strategic Investment Projects (SIP)

This has attracted investment from local and foreign entrepreneurs in manufacturing, computer, research and engineering sectors. 🗸🗸

Skills Support Programme (SIP)

This cash grant for skills development has encouraged greater investment 🗸🗸
In training in general and stimulated the development of new advanced skills. 🗸🗸

Black Businesses Supplier Development Programme (BBSDP)

This 80 % cash grant has provided black-owned enterprises with access to 🗸🗸
Training which has improved management of their enterprises. 🗸🗸

Special Economic Zones (SEZ)

It is an extention to the current financial incetives to further promoted regional development. 🗸🗸
The major incentive is a tax reduction of 15 % for businesses settling in this area. 🗸🗸
This does not mean that existing businesses in the IDZ can relocate to take advantage of this incentive. 🗸🗸
If a current business in the IDZ wants to expand they are allowed. 🗸🗸 [Max 10]

CONCLUSION From the above discussion it is clear that different initiatives form part of South Africa’s Regional Industrial Development Programme. [Max 2]

INTRODUCTION Economic indicators are used to evaluate the economic performance of an economic unit. This unit can be a company, an industry, a country or a region. Macro-economic indicators, measures the economic performance of a country as a whole. 🗸🗸

BODY-MAIN PART Such indicators can provide an indication of:

Changes taking place in a country. 🗸🗸
How a country compares to other countries. 🗸🗸

Inflation Rate

This is the general increase in the price level of goods and services in the economy over a certain period in time. E.g. one year. 🗸🗸
This is therefore an indicator of the health of the economy and it is monitored in two ways that is at the production wholesale level producer price level (PPI) and at the retail or consumer level consumer price index (CPI) 🗸🗸

The Consumer Price Index (CPI)

Shows the price increases of a representative (weighted) basket of goods and services that consumers buy. 🗸🗸
It is abbreviated as CPI this cover all the urban areas. 🗸🗸
It is an overall index and weights are obtained from expenditures of different income categories of households. 🗸🗸
It is the most comprehensive indicator measuring consumer inflation in the country. 🗸🗸
It shows changes in the general purchasing power of the rand and it is used for inflation targeting 🗸🗸
Is compiled by Stats SA and measures the change in the price level of a basket of consumer goods and services. 🗸🗸
The goods and services included in the basket are chosen to represent the goods and services purchased by an average household. 🗸🗸
This basket is adjusted from time to time as consumption patterns change. 🗸🗸
The inflation rate is the percentage change in the CPI from the previous year and can be calculated as follows:
Change in CPI x 100 🗸🗸 CPI

The Production Price Index (PPI)

Used to measure the price of goods that are produced domestically when they leave the factory year. 🗸🗸
The goods that are imported when they enter the country (at a port) and both of these are before consumers become involved. 🗸🗸
PPI consists of three baskets that are domestically manufactured outputs, e.g. changes in the PPI can be made monthly or quarterly or yearly. 🗸🗸
While changes in the imported products and exported commodities are given separately in the same report. 🗸🗸
PPI includes capital and intermediate goods but not services. 🗸🗸
It is based on a completely different type of a basket of items in the CPI. 🗸🗸
It measures the cost of production rather than the cost of living. 🗸🗸
It is used to predict consumer goods inflation (CPI) 🗸🗸
Which is also estimated and published on a monthly basis by Stats SA, is similar to the CPI, 🗸🗸
Except that it also includes the prices of raw materials and intermediary goods 🗸🗸 (i.e. goods that will be finished in the production process), excludes VAT and excludes services. 🗸🗸
Manufactured goods included in the PPI are priced when they leave the factory, not when they are sold to consumers. 🗸🗸
Unlike the CPI, the PPI therefore cannot be related directly to consumers’ living standards. 🗸🗸
The PPI is nevertheless very useful in the analysis of inflation because it measures the cost of production. 🗸🗸
A significant change in the rate of increase in the PPI is usually an indication that the rate of increase in the CPI will also change a few months later. 🗸🗸

The GDP Deflator Is a ratio that indicates the relationship of the GDP at nominal prices to the GDP at real prices. GDP deflator = Normal GDP x 100 🗸🗸 Real GDP

Nominal GDP

Is the value of total gross domestic product measured at current prices. 🗸🗸
While the real GDP is the value of total gross domestic product measured at constant prices.🗸🗸
So, the GDP deflator includes changes in the prices of exports but not of imports. 🗸🗸
In a small open economy, like that of South Africa where both, imports and exports are significant in relation to the total size of the economy. 🗸🗸
The exclusion of import prices is an important shortcoming. 🗸🗸

Unemployment rate

In terms of economic development, employment is a very important indicator. 🗸🗸
Employment is, however, not very easy to measure as so many people are employed in the informal sector which is not recorded. 🗸🗸
The concept of underemployment is also important. 🗸🗸
This is when someone is employed in a position that requires less skill than their ability. 🗸🗸
For example when a qualified accountant works as a delivery person because he or she cannot find employment as an accountant. 🗸🗸
Someone may also be employed on a part-time basis but would prefer to work full time. 🗸🗸
A labour force survey is published quarterly by Stats SA. 🗸🗸
This publication contains information and statistics concerning a variety of issues related to the labour market, including the official unemployment rate. 🗸🗸
It is a comprehensive survey and provides information on changes in employment in different provinces and industries. 🗸🗸
Employment in the informal sector, and even reasons for changes in employment figures. 🗸🗸
The unemployment rate is a percentage of the total labour force. 🗸🗸
The total labour force includes all employed people and unemployed people who are looking for work. 🗸🗸
The unemployment rate is a lagging indicator, which means that it will only change a few periods after the trend in the economy has changed. 🗸🗸
For example if the economy starts growing at a faster pace. 🗸🗸
The unemployment rate will only react to the growth after two or three quarters. 🗸🗸

Interest rates

Interest rates are important indicators of future economic activity, as the interest rate level is usually an important determinant when economic decisions are being taken. 🗸🗸
Both the general interest rate level and the structure of interest rates are important indicators.🗸🗸
There are many interest rates in the economy. 🗸🗸
Some are short term rates, such as the repo rate, which is the interest rates at which South Africa banks borrow from the Reserve Bank to finance their liquidity deficit. 🗸🗸
The difference between the short term interest rates and long term interest rates: 🗸🗸
Is called the interest rate spread and the term structure of interest rates provides an indication of the interest rates levels on loans or investments of different maturities. 🗸🗸
Usually we can expect the interest rates level in a developing country to be higher than the interest rate in a developed economy. 🗸🗸
This is due to the higher risk attached to the developing economy. 🗸🗸
Factors such as political and economic uncertainty cause this higher risk. 🗸🗸
Developing economies also need to attract foreign investment to their country to finance growth. 🗸🗸
Investors’ funds will move towards the highest yield and thereof. 🗸🗸
Developing countries cannot allow interest rates in their countries to become too low. 🗸🗸

Money Supply

The increase in the M3 money supply is an important economic indicator. 🗸🗸
If M, the money supply increases, this means that either (P) prices or Y (output) has to respond to the increase in M. 🗸🗸
Therefore, an increase in the money supply is an important indicator showing that output will increase. 🗸🗸
Whether this will translate to an increase in real production or the price level will depend on factors like production within the economy. 🗸🗸
In addition to economic growth the employment of people of working age (15 -64 years) is a majot economic objective. 🗸🗸
We need to know more than this; we need to know who the people are that need to be employed. 🗸🗸
The numbers are determined, not only by age, but also by people’s willingness to work. 🗸🗸

The Economically Active Population (EAP)

The EAP is also known as the labour force. 🗸🗸
It consists of people between the age of 15 and 64 who are willing to work for income in cash or in kind and includes: 🗸🗸
Workers in the formal sector- workers in the informal sector. 🗸🗸
Employers any one 🗸🗸
Self employed persons. 🗸🗸

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Unemployed Persons

The 2021 estimate of the South African population was million people. 🗸🗸
The EAP numbered million ( % of the population). 🗸🗸

The Employment Rate

The number of employed persons expressed as a percentage of the EAP gives the employment rate. 🗸🗸
The employment rate can also be converted into an index. 🗸🗸
The SA employment rate was % in 2011. 🗸🗸
This is low, compared to rates in developed and even some developing countries such as Argentina and Pakistan. 🗸🗸
In SA the growth in the economy is not accompanied by the similar growth in employment numbers. 🗸🗸

Employment indicators are used for:

To calculate trends in employment in different sectors or industries. 🗸🗸
This indicates structural changes in the economy. 🗸🗸
To calculate productivity. 🗸🗸
To show the success of the economy in utilizing its full potential. 🗸🗸

Unemployment Rate

Statistics SA (SSA) obtains its labour data each year from Quarterly Labour Surveys (QLFS). 🗸🗸
It uses the standard definition of the International Labour Office (ILO) to calculate unemployment. 🗸🗸
The strict definition of unemployment is used to calculate the unemployment rate. 🗸🗸
Did not work during the seven days prior to the interview. 🗸🗸
Want to work and are available to start work within a week of the week of the interview. 🗸🗸
Have taken active steps to look for work or to start some form of self-employment in four week prior to the interview. 🗸🗸
In SA the official unemployment rate was % in 2021. 🗸🗸
In developed countries, change in the unemployment rate trigger responses. 🗸🗸
From governments to fine-tune the economy. 🗸🗸
Increases require more funds for unemployment insurance (UIF) drawings. 🗸🗸
In developing countries, unemployment is the most important cause of poverty. 🗸🗸 [Accept current statistical data] [Max 16]
To give a policy direction in the country. 🗸🗸
To develop mechanism to caution the most affected sectors of the economy promptly
e.g.during the 2019-2020 recession/pandemic some companies required a bail out from the government. 🗸🗸
Develop some economic stabilisers to defuse the huge impact that may result from the unexpected economic downturn. 🗸🗸
Open some other alternative markets for their goods and services. 🗸🗸
To do research and advice the business community before the actual moment hits. 🗸🗸
It can be used to stimulate thinking and growth in a number of sectors in the Economy. 🗸🗸 [Accept any relevant consideration] [Max 10]

CONCLUSION Countries cannot survive and grow their economies if they do not pay attention to economic indicators for their planning processes. [Accept any relevant consideration] [Max 2]

INTRODUCTION Social indicators also called human development indicators as they promote improvement in the standard of living. 🗸🗸 [Any other relevant definition] [Max 2]

BODY-MAIN PART Demographics

This is the description of the physical population and its composition.
To get this a census is done regularly to obtain this information. 🗸🗸

Human development Index (HDI)

This is a measure of people’s ability to live long and healthy lives, to communicate, 🗸🗸
To participate in the community and to have sufficient income to experience a decent lifestyle. 🗸🗸

Human poverty index (HPI)

It measures life expectancy is measured by the percentage of newborns not expected to survive to age 40. 🗸🗸
Lack of education is measured by the percentage of adults who are ill- educated. 🗸🗸

Health and nutrition

Life expectancy birth. 🗸🗸
Infant mortality rate. 🗸🗸

Nutrition indicators

Daily calorie intake per person. 🗸🗸
The number of children who go hungry. 🗸🗸
These measures are important to government as they are supplying healthcare and sometime have to include legislation such as adding vitamin A to basic foodstuffs such as bread. 🗸🗸
The standard of living of people is directly connected to their education. 🗸🗸
Educated people are employable and can earn an income and provide for their own wants and needs. 🗸🗸

Two important measures are:

Secondary enrolment percemtage-how many children that start Grade 1 get to Grade 8 and finish Grade 12. 🗸🗸
Adult literacy- People over the age of 15 that can read and write. 🗸🗸
A large percentage of the annual budget is allocated to education. 🗸🗸
Because of our constitution certain basic services must be supplied by the government. 🗸🗸
These services have a direct effect on people’s living standards. 🗸🗸
Electricity 🗸🗸
Refuse disposal🗸🗸
Water supply🗸🗸
Sanitation🗸🗸

Housing and urbanisation

Urbanisation the process by which an increasing proportion of a country’s population is concentrated in its urban areas as a result of natural increase and migration from rural areas. 🗸🗸
This measures is important as more people come to live in urban areas the greater the demand for housing, services, education, health care etc. 🗸🗸
Housing the percentage of the population living in a permanent dwelling or house. 🗸🗸
The government issue housing subsidies to help poor people to own a house South African citizens or permanent residents earning R3 500 or less a month could apply for this subsidy. 🗸🗸

International comparisons

Figures collected by the World Bank, International Monetary Fund (IMF) and United Nations provide the best data for comparison purpose. 🗸🗸

Other measures used:

Purchasing power parity (PPP) The number of units of one country’s currency that give the holder the same purchasing power as one unit of another country’s currency. 🗸🗸
The Big Mac Index, The index is based on the price of the Big Mac around the world as compared to its price in the United States. 🗸🗸 [Max 40]

CONCLUSION From the above discussion it is clear that social indicators play a significant role in South Africa. It is, therefore, of the utmost importance that we should study their uses in depth. [Max 2]

MICROECONOMICS-PAPER 2

INTRODUCTION A perfect market is a market structure which has a large number of buyers and sellers. OR The market price is determined by the industry (demand and supply curves). OR This means that individual businesses are price takers, i.e. they are not able to influence prices. OR Perfect competition is an imaginary situation, whereas monopolistic competition is a reality. 🗸🗸 [Accept any other relevant introduction] [Max 2]

BODY-MAIN PART

The indicating of the equilibrium positions on the perfect market structure is of utmost importance because from this point where MC = MR
The dotted lines will be drawn to show economic profit or economics loss.
Where the dotted lines intersect the AC and AR curves either normal profit or economic profit or economic loss will be indicated and shadowed.

Mark allocation for graph:

Position / shape of MC curve = 1 mark
MR curve = 1 mark
Position / shape of AC curve = 2 marks
Equilibrium point = 1 mark
Indication of price / quantity = 1 mark
Shading of economic loss = 2 marks MAX MARKS = (8)

Allocate marks on the graph according to the rubric provided and if facts are duplicated again in writing, do not allocate marks. Max of 8 marks.

Equilibrium is at E 1 i.e. where MC = MR
At this point Q 1 goods are produced at a price of P 1
The averages cost for Q 1 units is point R on the AC curve
Price / AR is greater than AC ( TR > TC)
Therefore economic profit is represented by the area P 1 SRE 1
Equilibrium is at E 1 i.e. where MC = MR
At equilibrium (point E 1 ) average cost is equal to price
The AC curve is tangent to the demand curve which means that P/AR = AC (TR = TC)
The business makes normal profit which is the minimum earnings required to prevent the entrepreneur from leaving the industry.
Equilibrium is at E1, i.e. where MC = MR
At this point Q1 goods are produced at a price of P1
At equilibrium (point E1) price/AR is less than average cost/the AC curve is lies above the demand curve which means that P/AR < AC (TR < TC)
The business makes an economic loss A maximum of 24 marks will be allocated for graph illustration and analysis: 8 marks max per graph illustration - (Max 26 marks)

ADDITIONAL PART CONDITIONS For a market to successfully operate under perfect competition, the following conditions should prevail at the same time:

No firm can influence the market price (price takers) due to a large number of buyers and sellers
Products are identical (homogeneous)
There are no barriers of entry, meaning that there is freedom of entry and exit
Buyers and sellers act independently - no collusion between sellers
No government interference to influence the market – the market is unregulated
Free movement between markets - all factors of production are completely mobile
Both buyers and sellers have full knowledge of all the prevailing market conditions (perfect information)
If any of the above conditions are not met, the market is regarded as an imperfect market Any 5 x 2 = [Max 10 marks]

CONCLUSION Freedom of entry and exit into the perfect market alter the supply of goods on the market. This will result in changes in price which influences the profit or loss of a business. If price falls to a level where it is equal to the AVC then the firm will shut-down. [Max 2] Discuss the monopoly in detail (with/without the aid of graphs) (Imperfect Market)

INTRODUCTION A firm is regarded as a monopolist when it owns or controls the total supply of a scarce factor of production. Monopoly is a market structure where only one seller operates. 🗸🗸

BODY: MAIN PART The characteristics of a monopoly

Number of firms

The monopoly consists out of one single firm. 🗸🗸
The monopoly is also the industry. 🗸🗸
Example: Eskom or De Beers – diamond-selling 🗸🗸 [Accept any other relevant example]

Nature of product

The product is unique with no close substitute. 🗸🗸
Example: Diamonds are unique. 🗸🗸

Market entry

Refers to how easy or difficult it is for businesses to enter or to leave the market 🗸🗸
Is entirely/completely blocked. 🗸🗸
Economies of scale 🗸🗸
Limited size of the market 🗸🗸
Exclusive ownership of raw materials 🗸🗸
Licensing 🗸🗸
Sole rights 🗸🗸
Import restrictions 🗸🗸

They decide on their production level

The monopolist cannot set the level of output and the price independently of each other. 🗸🗸
If a monopolist wants to charge a higher price, it has to sell fewer units of goods. 🗸🗸 Alternatively, a reduction in price will result in a higher output sold. 🗸🗸
A monopolist is confronted with a normal market demand curve 🗸🗸
The demand curve slopes downwards from left to right 🗸🗸
Any point on the monopolist’s demand curve (D) is an indication of the quantity of the product that can be sold and the price at which it will trade. 🗸🗸

They are exposed to market forces

Consumers have limited budgets and a monopoly can therefore not demand excessive prices for its product. 🗸🗸
The monopolist’s product has to compete for the consumer’s favour and money with all other products available in the economy. 🗸🗸

They face substitutes

There are few products that have no close substitutes. 🗸🗸
For example, cell phones can compete with telephone services. 🗸🗸

They may enjoy favourable circumstances

Sometimes an entrepreneur may enjoy favourable circumstances in a certain geographical area. 🗸🗸
For example, there may be only one supplier of milk in a particular town. 🗸🗸

They may exploit consumers

Because a monopolist is the only supplier of a product, there is always the possibility of consumer exploitation. 🗸🗸
However, most governments continually take steps to guard against such practices. 🗸🗸

Market Information

All information on market conditions is available to both buyers and sellers. 🗸🗸
This means that there are no uncertainties. 🗸🗸

Control over price

In the case of a monopoly there are considerable price control, but limited by market demand and the goal of profit maximisation. 🗸🗸

Long-run economic profit Can be positive

Because new entries are blocked and short-run economic profit therefore cannot be reduced by new competing firms entering the industry 🗸🗸
The monopoly can thus continue to earn economic profit as long as the demand for its product remains intact 🗸🗸

Heading = 1 mark AC = 1 mark DD/AR = 1 mark MC = 1 mark Profit maximisation point =1 mark Labelling of the axis = 1 mark Labelling on the axis = 1 mark

Long run equilibrium of a perfect competitor

CONCLUSION A monopoly does not always make economic profit in the short run; it can also make economic loss in the short run if the total cost exceeds total revenue. 🗸🗸

INTRODUCTION

The oligopoly is a type of imperfect market in which only a few large producers dominate the market. 🗸🗸 [Accept any other relevant and correct response]

MAIN PART Nature of product

The product may be homogeneous in a pure oligopoly. 🗸🗸
If the product is differentiated, it is known as a differentiated oligopoly. 🗸🗸

Market information

There is incomplete information on the product and the prices. 🗸🗸
Market entry is not easy, it is limited in the sense that huge capital outlay might be necessary. 🗸🗸
Oligopolists have considerable control over price, it can influence price, but not as much as the monopolist. 🗸🗸
Oligopolies can frequently change their prices in order to increase their market share and this result in price wars. 🗸🗸

Mutual dependence

The decision of one firm will influence and be influenced by the decisions of the other competitors. 🗸🗸
Mutual dependence (interdependence) exists amongst these businesses.
A change in the price or change in the market share by one firm is reflected in the sales of the others. 🗸🗸

Non-price competition

Non - price competition can be through advertising, packaging, after-sales services. 🗸🗸
Since price competition can result in destructive price wars, oligopolies prefer to compete on a different basis. 🗸🗸
Participants observe one another carefully- when one oligopolist launches an advertising campaign, its competitors soon follow suite. 🗸🗸
If oligopolies operate as a cartel, firms have an absolute cost advantage over the rest of the other competitors in the industry. 🗸🗸
Collusion is a strategy used by firms to eliminate competition amongst each other. 🗸🗸
It can be in a form of overt collusion where firms can work together to form a cartel and tacit collusion where a dominating business controls the price. 🗸🗸

Limited competition

There are only a few suppliers manufacturing the same product. 🗸🗸

Economic profit

Oligopolies can make an economic profit over the long term. 🗸🗸
Abnormal profits may result to joint decision-making in an oligopoly. 🗸🗸

Demand curve

Slope from left down to the right. 🗸🗸
It is known as the kinked demand since it contains the upper relatively elastic slope and the lower relatively inelastic slope. 🗸🗸 [Accept any other relevant and correct response] [Max. 26]

ADDITIONAL PART Oligopolist may increase their market share using non-price competition strategies by:

branding their product to create an impression that its product is for a particular age group or income group. 🗸🗸
aggressive advertising which inform customers about the business or product it provides.🗸🗸
Using appealing packaging to bring out important features of their product.
improving their customer service in order to ensure that they return to their businesses.🗸🗸
providing relevant and precise information, which is crucial to the customers, since there are competitors in the market, customers will patronize the businesses that provides relevant information. 🗸🗸
extending shopping hours to the convenience of customers.
Offering loyalty rewards to customers which will encourage their return to spend accumulated rewards. 🗸🗸 [Accept any other relevant response] [Max.10]
In South Africa, oligopolists have been found to be illegally manipulating prices to their benefit, yet to the detriment of consumers and have been penalized for such action. 🗸🗸 [Accept any other relevant response]

Compare and contrast any TWO types of market structures (perfect to imperfect/imperfect to imperfect) in detail in terms of the following. - Number of businesses - Nature of product - Entrance - Control over prices - Information - Examples - Demand curve - Economic profit/loss - Decision-making - Collusion - Productive/Technical efficiency - Allocative efficiency (Perfect Market and Imperfect Market)

‘’Market structures are classified under Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly’’ Compare all FOUR market structures in a tabular form. NB: Learners should write in full sentences even if the comparison is done in a tabular format). (Marks depend on the combination of market structures to be examined)


Number of firms	So many that no firm can influence the market price	So many that each firm thinks others will not detect its actions	So few that each firm must consider the others’ actions and reactions	One seller and there is no competition. The seller is the price maker.
Nature of product	Homogeneous/i dentical in terms of the physical appearance	Heterogeneous /differentiated	Homogeneous or heterogeneous	Only one product with no close substitutes
Entry	Completely free/easy to enter. There are no barriers to enter	Free. There are no barriers to enter	Varies from free to restricted	Completely blocked by legal restrictions and cost advantages e.g. natural and artificial monopolies
Information	Complete	Incomplete	Incomplete	Complete/ Incomplete
Collusion	Impossible	Impossible	Possible	Unnecessary
Firm’s control over the price of the product	None. Prices are determined by demand and supply	Some	Considerable, but less that in monopoly	Considerable, but limited by goal of profit maximisation
Demand curve for the firm’s product	Horizontal (perfectly elastic)	Downward- sloping	Downward- sloping, may be kinked	Equals market demand curve: downward-sloping
Long run economic profit	Zero/normal profit	Zero/normal profit	Can be positive/econom ic profit	Can be positive/economi c profit

PLEASE NOTE: THE ABOVE TABLE SHOULD BE VERBALLY WRITTEN AS PER ESSAY INSTRUCTION

INTRODUCTION Market failure is when the forces of supply and demand fail to allocate resources efficiently / when markets fail to allocate goods and services efficiently. 🗸🗸 [Accept any other correct introduction] [Max 2]

BODY: MAIN PART

1. Missing Markets

Markets are often incomplete in the sense that they cannot meet the demand for certain goods. 🗸🗸
Public goods:
They are not provided by the price mechanism because producers cannot withhold the goods from non-payment and there is often no way of measuring how much a person consumes. 🗸🗸

Public goods have the following features: Non-rivalry:

The consumption by one person does not reduce the consumption of another person e.g. a lighthouse. 🗸🗸

Non-excludability:

Consumption cannot be confined to those who have paid, so there are free riders e.g. radio and TV in South Africa. 🗸🗸

Merit goods

These are goods/services that are deemed necessary or beneficial to the society, e.g. education, health care etc. 🗸🗸
These goods are highly desirable for general welfare but not highly rated by the market, therefore provide inadequate output/supply. 🗸🗸
If people had to pay market prices for them relatively too little would be consumed – the market will fail. 🗸🗸
The reason for undersupply of merit goods is that the market only takes the private costs and benefits into account and not the social costs and benefits. 🗸🗸

Demerit goods

These are goods/services that are regarded as bad or harmful for consumption hence we should use less of these e.g. alcohol, cigarettes, etc. 🗸🗸
Demerit goods lead to a lot of social costs, therefore, the government charges sin tax / excise duties to discourage the consumption of such goods. 🗸🗸
While the market is willing to supply demerit goods, it tends to oversupply demerit goods. 🗸🗸
Some consumers may be unaware of the true cost of consuming them. 🗸🗸

2 Lack of information

Technical and allocative efficiency require that both producers and consumers have complete and accurate information about the costs and benefits of the goods and services produced and consumed in the market. Producers and consumers make production and consumption decisions based on the information they have. 🗸🗸
When information is incomplete or inaccurate, it leads to wrong decisions about what to produce, how to produce and for whom to produce, and a waste of resources occurs. 🗸🗸
Producers might not know all the different technologies and production techniques that are available and the different resources that can best be used to produce goods/services more efficiently. 🗸🗸
Consumers might not know that the price of a product is lower from some other suppliers or about the harmful effects of a product since they might just base their decisions to consume on the information from a misleading suppliers. 🗸🗸

3. Immobility of factors of production

Markets do not respond to changes in consumer demand if resources cannot be easily reallocated or due to a lack of information🗸🗸
Labour takes time to move to into new occupations and geographically to meet the changes in consumer demand. 🗸🗸
Physical capital e.g. equipment, buildings, land and raw materials can only move from one place to another at a high cost, but cannot be moved to fit a change in demand. 🗸🗸
Technological applications change production methods e.g. use of robots rather than physical labour. It takes time for most industries to adapt. 🗸🗸
With greater technological change there is an increasing need for workers to become flexible, to update skills, change employment, occupations and work patterns. 🗸🗸 [Max 26]
Motivate why government has implemented a national minimum wage in the labour market. 🗸🗸
Pressure was put on the South African government to introduce labour laws which require employers to pay minimum wages. 🗸🗸
The application of minimum wage laws is needed to improve a redistribution of income. 🗸🗸

The main objectives were:

To redress inequality (Gap between wealthy and poor) 🗸🗸
To improve the standard of living. 🗸🗸
Government tried to protect domestic workers and farm workers — thus preventing exploitation. 🗸🗸 [Max 10] [Accept any other correct relevant response]

CONCLUSION Governments intervene in the market when market forces cannot achieve the desired output. [Max 2] [Accept any other relevant conclusion]

INTRODUCTION The purpose of government intervention is to ensure that the right quantity of resources is allocated to the production of output so that society as a whole [Accept any other relevant introduction] [Max 2] maximizes its benefits. 🗸🗸

Sometimes government will set the price of a good or service at a maximum level that is below the market price 🗸🗸
The government intervene and passes a law that suppliers may not charge more than the maximum price 🗸🗸
The immediate effect is that quantity supply will drop 🗸🗸
The original market equilibrium price and quantity is P and Q respectively 🗸🗸
The price set by the government is P1, at this price the demand will increase to Q1 and the supply will decrease to Q2 🗸🗸
The difference between Q1 and Q2 is the shortfall that will be created on the market 🗸🗸
The shortage caused by the price ceiling creates a problem of how to allocate the good since the demand has increased 🗸🗸
Black markets start to develop [Mark allocation: Graph 6 and discussion max. 10 marks]
The appropriate way to intervene in the market by government is by levying taxes as a method to recover external cost 🗸🗸
The original market equilibrium at e, with P as the equilibrium price and Q as the equilibrium quantity 🗸🗸
The tax increase will shift the supply curve to the left 🗸🗸
New equilibrium at E1 🗸🗸
A tax would raise the price from P to P1 🗸🗸
The production will decrease from Q to Q1 🗸🗸 [Mark allocation: Graph total 6 marks and discussion max 10 marks]
Explain the supply of undesirable goods in South Africa and how the government can deal with it. 🗸🗸
Items such as cigarettes, alcohol and non-prescription drugs are examples of demerit or undesirable goods. 🗸🗸
These goods are often over supplied in the market, due to the fact that the external cost is not added to the market price. 🗸🗸
Some consumers may be unaware of the true cost of consuming them, their negative externalities. 🗸🗸
Government can ban their consumption or reduce it by means of taxation. 🗸🗸
Taxation on these products will increase the market price and hopefully the demand for these products will drop. 🗸🗸 [10 marks] [Accept any other correct relevant response]

CONCLUSION The intervention of government ensures that inefficiencies is eliminated and that the market is operating effectively 🗸🗸 [Accept any other relevant conclusion] [Max 2]

CONTEMPORARY ECONOMIC ISSUES-PAPER 2

This is a constant and significant increase in the general price level of goods and services in the country over a certain period of time, e.g. a year. 🗸🗸 [Max 2] [Accept any relevant introduction]

BODY-MAIN PART Creditors and Debtors

Whereas borrowers (debtors) benefit from price increases, lenders (creditors) suffer due to price increases. 🗸🗸
This is because borrowers receive money with a relatively high purchasing power and they repay their loans with money with low purchasing power, unless interest rates are sufficient to prevent this occurrence. 🗸🗸

Salary and Wage Earners

Price increases affect people whose incomes are relatively fixed (in other words, people whose incomes remains constant or do not increase at the same rate as prices do. 🗸🗸
This group includes retired people, pensioners and the poor. 🗸🗸
As prices increase, their almost fixed incomes purchase less and less. 🗸🗸
However there are individuals and entrepreneurs whose incomes often increase at a rate that is higher than the inflation rate and they do not suffer but gain from inflation. 🗸🗸
Globalization results in increased employment opportunities in the economy due to increased productivity, the need to produce more goods both for local and international markets rises in globalised economies. 🗸🗸
The demand for increased skilled labour becomes a need as a result, this demand for labour benefits the local labour market in increased employment opportunities and growth. 🗸🗸

Investors and Savers

Different types of investments are affected by inflation: Assets with fixed nominal values. 🗸🗸
These assets have a fixed nominal value and give a return if they are held until maturity. 🗸🗸
When they are paid, because their nominal values remain constant, the purchasing power of the nominal values decreases as prices increase (that is, their real value decreases). 🗸🗸

Assets with Flexible Market Values

The holders of shares and fixed property usually gain by price increases because the nominal values of these assets tend to increase at least proportionately to the rate of inflation (that is, their market values are flexible). 🗸🗸
Often the prices of these assets increase more rapidly than increases in the general price level.🗸🗸
In this case, inflation creates wealth to the advantage of those holding such assets. 🗸🗸
South Africa has a progressive personal income tax system. 🗸🗸
This means that marginal and average tax rates increase in harmony with the income level. 🗸🗸
The higher level an individual’s income, the greater the percentage of income he or she has to pay tax. 🗸🗸
With inflation, taxpayers’ nominal income (wages and salaries) rise even when their real income remain unchanged. 🗸🗸

Taxes are levied on nominal income and not on real income.

Therefore if the income tax schedule remains unchanged inflation increases the average rate of personal income tax. 🗸🗸
Individuals will have to pay higher taxes even if they are actually no better off than before. 🗸🗸
This phenomenon known as bracket creep, lads to a redistribution of income from taxpayers to the government. 🗸🗸
Bracket deep results from a combination of inflation and progressive income tax. 🗸🗸
It has the same effect as an increase in the tax rate. 🗸🗸

Industrial Peace

Wage bargaining is often accompanied by strikes and mass action. 🗸🗸
These actions can sometimes spill over into violence, which affects society at large. 🗸🗸
In extreme situations in the presence of exceptionally high inflation together with a government that is determined not to yield to wage increase demands (which can push inflation to even higher levels), widespread civil unrest follows. 🗸🗸

Inflation has a negative effect on economic growth

Inflation leads to increased uncertainty in the economy. 🗸🗸
This uncertainty discourages savings and investments especially in the long term. 🗸🗸
Which are necessary for economic growth –result reduced economic growth. 🗸🗸

Inflation affects the real money value and savings

Because inflation reduces the real value of money, it affects the real value of money saved in particular. 🗸🗸
This means that inflation, the rand buys fewer goods and services than before. 🗸🗸
It also means that the real money value saved is worth less at the end of the savings period than when the money was saved. 🗸🗸
e.g. if a consumer receives 5 % interest on his/her savings account while the inflation rate is 8%, then the real rate of interest on the consumer’s savings is -3%.🗸🗸

Inflation has an adverse effect on a country’s balance of payments (BOP).

If a country’s rate of inflation is higher than that of its trading partners the prices of exported goods increase while the prices of imported goods decrease. 🗸🗸
This leads to loss of competitiveness in the export market, which in turn leads to decreased exports. 🗸🗸

This has a negative effect on the country’s balance of payments (BOP).

The loss of export competiveness can also increase unemployment inflation affects the redistribution of income in a country. 🗸🗸

The effects of inflation are uneven.

While it does not clearly benefit anyone and certainly harms most, it also harms some less than others. 🗸🗸
Inflation also tends to redistribute income from low-income groups to higher income groups. 🗸🗸
This is because people in the low income groups do not have assets than can rise in value faster than the rate of inflation to help them overcome the effects of inflation. 🗸🗸
Powerful groups such as trade unions large companies and the wealthy people, are able to increase their share of national income at the expense of disadvantaged people such as pensioners the unemployed and the welfare recipients. 🗸🗸

Inflation has social and political costs

When inflation continually causes rising prices it makes people unhappy and can disturb relations between employers and the employees and between customers and traders or service providers. 🗸🗸
People in lower-income brackets feel severe effects of increases in the price of essential items such as bread, maize meal rental and transport costs. 🗸🗸
This can lead to social unrest and political unrest. 🗸🗸

Inflation feeds on itself and causes further inflation

This is called the inflation spiral. 🗸🗸 e.g. higher wage demands cause producers to increase their prices to maintain their profits.
This happens again and again pushing prices further every time. 🗸🗸
If the government does not keep this wage price spiral in check, inflation may get out of control and become hyperinflation. 🗸🗸 [Max 26]

ADDITIONAL PART Debate the merits (benefits) of administered prices by the government

These are prices regulated by the government e.g. home owner’s costs on water/household fuel (paraffin and electricity) medical care (public hospitals) communication (telephone calls, telephone rentals and installations/postage cell communications /transport (petrol). 🗸🗸
Most of the administered prices are adjusted once a year which brings price stability. 🗸🗸
Regulated prices are restricted as to the extent to which prices may vary, depending on the government’s objectives. 🗸🗸
Administered prices provide additional revenue to national treasury. 🗸🗸
It appears that some of these prices remain extremely robust over the short term. 🗸🗸 [Accept any other relevant response] [Max 10]
If inflation is not controlled by the proper and effective instruments, it can have challenging problems to the economy in general. 🗸🗸

INTRODUCTION COST PUSH Inflation is a sustained and significant increase in general price level over a period of time and a simultaneous decrease in the purchasing power of money. Accept any other relevant introduction. 🗸🗸 [Max 2]

BODY: MAIN PART Causes of cost-push inflation

Increase in Wages:

In South Africa, increase in wages constitute more than 50% of Gross Value Added at basic prices 🗸🗸
If the increase in wages is not accompanied by an increase in production, the cost of production will rise 🗸🗸
Producers will increase the prices of their products to offset the high cost of production strikes and stay-aways / labour union activities 🗸🗸

Key inputs/ increase in prices of imported capital goods

When the prices of key inputs that are imported increase, domestic cost of production 🗸🗸
increases especially in the manufacturing sector 🗸🗸
Supply shocks e.g. sudden increase of oil causes a knock-off effect 🗸🗸

Exchange rate depreciation

A decrease in the value of the rand will result in an increase in prices of imports 🗸🗸

Profit margins

When firms increase profit margins, the prices that consumers pay also increase 🗸🗸
Sometimes firms use their market power to push up prices 🗸🗸

Productivity

Less productive factors of production will lead to increased cost per unit 🗸🗸
Strikes and stay-aways often reduce production output and can result in price increases 🗸🗸

Natural disasters

Natural disasters such as drought, flood and global warming can impact on the cost of production 🗸🗸
This is often the case in relation to food prices 🗸🗸
An increase in interest rates results businesses paying more money for capital loaned firms recover these costs by increasing the prices of their products 🗸🗸

Increase in taxation

Increase in direct tax like company income tax may lead to businesses increasing their prices to offset the extra burden 🗸🗸
Increase in indirect tax such as custom duty will lead to increase in costs of supplying a particular product, therefore the price will increase 🗸🗸
Administered prices increase e.g. fuel prices
Shoplifting and losses caused by employees are added to the prices of products 🗸🗸 [Accept any other relevant fact. Maximum 8 marks for headings] [Max. 26]

DEMAND PULL INFLATION Total spending on domestic goods and services in the economy consists of the spending by households, firms, the government and the foreign sector.

Total spending = C + I + G + (X-M). 🗸🗸

Causes of demand inflation Increase in consumption [C] – consumers expenditure will increase mainly for three reasons:

a. If consumers save less & spend more🗸🗸
b. Decrease in personal income tax. 🗸🗸
c. A greater availability of consumer credit, because of decrease in interest rate. 🗸🗸

Investment [I] –When business invest this increase demand for labour, cement, sand and bricks. 🗸🗸

Supply cannot keep up with the increase in demand and this will increase prices. 🗸🗸
Lower interest rates may result in an improvement in the sentiment and profit expectations of businesses. 🗸🗸
Businesses invest more and this may lead to an increase in the demand of goods and services that are part of the investment (for example, a new building requires cement bricks and labour).🗸🗸
If aggregate demand increases at a faster rate than aggregate supply, price increases will follow.🗸🗸

Government Spending [G] – Three main reasons.

a. New capital projects🗸🗸
b. Consumption expenditure on education, health, and protection. 🗸🗸
c. Social expenditure on public work programme to create jobs and increase in social allowances. 🗸🗸

Export earnings [X]

a. When economy of trading country improve. 🗸🗸
b. When global economy expands. 🗸🗸

Access to credit

There is greater availability of consumer credit (by means of credit cards) of the availability of cheaper credit as a result of decreases in lending rates. As new credit is extended the credit multiplier kicks in and more credit is created. 🗸🗸

Consumption spending

Most governments will at times increase expenditures on education, health, protection and safety (for example, military equipment such as bomber jets and submarines). 🗸🗸

Social spending

Governments sometimes feel they have to do something substantive about unemployment and poverty. 🗸🗸
They borrow money and spend it on public works programmes or raise the level of social grants year after year at a higher rate than the inflation rate. 🗸🗸
Such expenditures invariably lead to inflation because they add to aggregate demand without adding anything to aggregate supply. 🗸🗸

Commodities demand

The world’s demand for commodities expands and contracts like business cycles do. During an expansionary period, foreign demand increases and this leads to greater volumes of exports. The income earned from these exports adds to aggregate demand and prices increase. 🗸🗸

BODY: ADDITIONAL PART YES / NO

Inflation targeting is when a particular percentage is set as an acceptable level for an increase in general price levels 🗸🗸
The SARB's inflation target is a range of 3% and 6% 🗸🗸
The aim of inflation targeting policy is to achieve and maintain price stability 🗸🗸
The implementation of the inflation target is easy to understand – expressed in numbers which makes it very clear and transparent 🗸🗸
It reduces uncertainty and promotes sound planning in the public and private sectors 🗸🗸
It provides an explicit yardstick that serves to discipline monetary policy and improves the accountability of the central banks 🗸🗸
The SARB make use of monetary policy, specifically the repo rate to keep the inflation within the target range 🗸🗸
The government make use of fiscal policy regarding public sector revenue and expenditure 🗸🗸

Positive effects

Where demand is higher than supply an increase in interest rates help to bring the demand down 🗸🗸
The policy can helps businesses to make economic plans without worrying about the effects of high inflation 🗸🗸
South Africa's price level has been fairly stable since the introduction of the inflation targeting policy in 2000 🗸🗸

Negative effects

Inflation targeting can cause a reduction in economic growth 🗸🗸
This is because the raising of interest rates, result in a decrease in total spending which is needed for production to increase 🗸🗸
Decreased economic growth can increase unemployment 🗸🗸
South Africa has been experiencing an increase in unemployment since the implementation of the policy in 2000 🗸🗸
Inflation targeting is difficult to implement when the cause of inflation is supply shocks 🗸🗸 [Max. 10]
A summary of what has been discussed without repeating facts already mentioned in the body. 🗸🗸
An opinion or valued judgement on the facts discussed. 🗸🗸
Additional support information to strengthen the discussion. 🗸🗸
A contradictory viewpoint with motivation. 🗸🗸
Recommendations. 🗸🗸
E.g. Inflation can be a threat to the normal functioning of the economy; therefore, measures like monetary and fiscal are vital to keep the phenomenon under control. 🗸🗸
This is the activities of people travelling to and staying in places outside their usual environment for a period not longer than one consecutive year for leisure, business and other purposes and not related to a remunerative activity from within the place visited 🗸🗸 [Max 2]

BODY - MAIN PART Gross domestic product (GDP)

Tourism impacts mostly on the services industry than on agriculture or manufacturing although there are upstream effects when agriculture provides foodstuffs to restaurants and manufacturing provides vehicles for transport 🗸🗸

Direct contribution on GDP

Statistics South Africa (SSA) shows that in 2020 inbound tourists contributed R69 billion and domestic tourists R billion, amounting to R billion - about % of South Africa's GDP 🗸🗸

Indirect contribution on GDP

If the indirect contribution is added, tourism add about % to GDP 🗸🗸
The WTTC estimated that tourism contributed % to the GDP of the world economy in 2020🗸🗸
In developing economies the service sector is responsible for around % of GDP, while it is responsible for more than % of GDP in developed economies 🗸🗸
South Africa is similar to that of developed economies and services contributed more than % of GDP in 2020. 🗸🗸
Tourism has a major effect on employment and this amounted to million workers in 2020🗸🗸
Tourism is the world’s largest generator of jobs 🗸🗸
Tourism is labour intensive 🗸🗸
More jobs can be created with every unit of capital invested in tourism than elsewhere
Tourism employs many skills 🗸🗸
It ranges from accountants and hairdressers to tour guides and trackers, 🗸🗸
the tourism industry draws upon numerous skills 🗸🗸
Tourism can provide immediate employment 🗸🗸
If one quarter of tourists’ accommodation establishment in South Africa starts to offer live entertainment to quests, thousands of entertainers could be employed within days 🗸🗸
Tourism provides entrepreneurship opportunities 🗸🗸
The tourism industry accommodates informal sector enterprises, from craft and fruit vendors to pavement vendors, chair rentals 🗸🗸
Tourism is widely recognized as one of the fastest and more effective redistribution mechanisms in development 🗸🗸
It brings development to the poor in rural areas 🗸🗸
Tourism provides an alternative to urbanisation, permitting women and youth to continue a rural family lifestyle while giving them business opportunities 🗸🗸
E.g. to start and operate small-scale tourism businesses around community asserts (forests, parks and rivers) 🗸🗸

Externalities

The rapidly expanding tourism industry could have both positive and negative impacts that extend well into the future 🗸🗸
While tourism attracts large amount of revenue, it can also cause undue environmental damage that can harm the very foundation on which it depends 🗸🗸
All other economic resources, tourism uses resources and produces wastes and also creates environmental costs (pollution) and benefits in the process 🗸🗸
Rapid growth in tourism aiming at short-term benefits usually results in more negative effects and these includes the degeneration of traditions and cultural values and environmental damage to sites and setting 🗸🗸

Environment Tourism activities create environmental stress:

Permanent environmental restructuring which includes major infrastructure 🗸🗸
Waste product generation such as biological and non-biological waste that damages fish production 🗸🗸
Direct environmental stress caused by tourist activities, e.g. the destruction of vegetation and dunes 🗸🗸
Effects on population dynamics such as migration and increased urban densities 🗸🗸
Transport infrastructure, e.g. roads, airports 🗸🗸
Communication and infrastructure including telephone lines, electronic signal stations and radio, TVs’ 🗸🗸
Energy infrastructure such electricity and liquid fuel 🗸🗸
Basic service infrastructure such as clean water and sewerage systems 🗸🗸 [Max. 26]

ADDITIONAL PART How can Indigenous Knowledge Systems be used to promote tourism in South Africa?

More cultural villages can be improved to facilitate and promote tourism e.g. Shangana in Mpumalanga, Basotho in the Free State and Simunye Zulu Lodge in Kwazulu-Natal. 🗸🗸
Where guides explain and demonstrate storytelling and indigenous knowledge practices. 🗸🗸
Advertising campaigns domestically and internationally by travel agencies, hotels and B & B, lodges and SA Tourism can focus on promoting these heritage sites in brochures and fliers, social media. 🗸🗸
These actions will make tourists more aware of these attractions 🗸🗸
Encourage tourists to experience different cultures and townships - experience life at home with a household and eat at a shebeen or township restaurant 🗸🗸
World Heritage Sites of South Africa can be promoted for their cultural significance e.g. the Fossil Hominid Sites of Sterkfontein, Mapungubwe Cultural Landscape, Richtersveld Cultural and Botanical Landscape, Vredefort Dome and Robben Island 🗸🗸
Environmental World Heritage Sites of South Africa selected for their natural importance namely the Cape Floral Region Protected Areas, Isimangaliso Wetlands Park as well as uKhahlamba/Drakensberg Park which has been selected for its mixed significance 🗸🗸
Arts and culture festivals e.g. the National Arts Festival, the Hermanus Festival, Awesome Africa Music Festival and Macufe African Cultural Festival should more widely be advertised to encourage tourists to attend 🗸🗸
According to the World Health Organisation, a large majority of the African population make use of traditional medicines for health, social-cultural and economic reasons and forms part of the unique experience tourists experience when visiting local villages 🗸🗸
In South Africa tourists are made more aware of the important role traditional medicine plays in poverty reduction and employment creation 🗸🗸
Relaxation of restrictive tourist visa laws to facilitate easier entry into South Africa 🗸🗸 [Accept any other relevant answers] [Max. 10]
South Africa attracted over million tourists in 2020 /For every 8.1 additional tourist to South Africa, one new job is created/one per cent increase in tourism adds R million annually to the SA economy. 🗸🗸 [Accept any other relevant higher order conclusion] [Max. 2]
Tourism is the activities of people travelling to and staying in places outside their usual environment for no more than one consecutive year for leisure, business or other purposes PP 🗸🗸 [Accept any other correct relevant response] [Max 2]

MAIN PART Business sector

Tourism stimulates business in areas such as accommodation and entertainment 🗸🗸
The construction industry, in private-public partnership with the government to provide the infrastructure, manufacturing sector and recreation sector all benefits from increased demand due to tourism 🗸🗸
The previously disadvantaged communities get entrepreneurial opportunities through the black economic empowerment schemes 🗸🗸
A large number of people get business opportunities in the informal sector e.g. selling of artefacts 🗸🗸
Local retailers may have an increase in sales (and profits) because of increased demand from tourists 🗸🗸
Private businesses and government work in partnership to provide the infrastructure needed for tourism 🗸🗸
This increases the market share of and income of the these businesses 🗸🗸
Allow existing businesses to improve the quality and variety of their products PP 🗸🗸
Allow natural monopolies e.g. Table Mountain Cableway to achieve abnormal profits PP 🗸🗸
The public sector also provides a range of financial incentives for private sector tourism investment (grants, subsidies, loans, tax rebates) PP 🗸🗸 [Max 10]

Infrastructure development

Adequate and well-maintained infrastructure is essential for tourist destinations PP. 🗸🗸
Locals share this infrastructure with tourists 🗸🗸
Government often prioritises economic infrastructure such as ports and beaches 🗸🗸
In addition to physical and basic infrastructure, social infrastructure is also important for the growth of tourism🗸🗸
Most of the SDIs and development corridors also have tourism as an important focus PP 🗸🗸 [Max 8]
Members of households earn income from the tourism sector as tour operators, travel agents etc. 🗸🗸
Many households are indirectly involved in tourism as employees e.g. in hotels, transport sector. 🗸🗸
Entrepreneurs from households that operate as curio producers or musicians can earn income from tourism . 🗸🗸
A large number of households acquire skills in the tourism industry. 🗸🗸
School curriculum and learnership offer opportunities to acquire these skills . 🗸🗸
Encourages rural development because many tourist attractions are located in rural areas PP 🗸🗸 [Accept any other correct relevant response] [Max. 26]

ADDITIONAL PART Tourism can be successfully marketed in less popular destinations by:

advertising the firms' attractions in a variety of media including social media and internet which may reach both local and international potential tourists. 🗸🗸
focusing on a clear message that concentrates on the strength of the attraction/ uniqueness of the destination. 🗸🗸
using the indigenous knowledge systems of that particular area where possible PP. 🗸🗸
describing the service offered in the best possible way to catch the interest of the likely tourist PP E.g. the use of slogans. 🗸🗸
charging a price that is competitive and money well spent for the service offered. 🗸🗸
helping the tourist to view the entire service as value for money – deliver a worldclass visitor experience 🗸🗸
highlighting other places of interest in the vicinity of the attraction as part of a package 🗸🗸
focusing on proudly South African products/services / Sho’t Left campaign PP 🗸🗸
help disadvantaged South Africans to benefit from tourist attractions in the less popular destinations PP 🗸🗸 [Accept any other correct relevant response] [Max. 10]

CONCLUSION A weaker exchange rate has been a major contributing factor to South Africa's tourism industry growth over many years. 🗸🗸 [Accept any correct relevant response] [Max 2]

INTRODUCTION Environmental sustainability can be defined as development that meets the need of the present without compromising the ability of future generations to meet their own needs. 🗸🗸

BODY: MAIN PART Public sector intervention Because it is difficult to enforce measures to ensure sustainability the government has to intervene. 🗸🗸

Environmental taxes Environmental taxes (green taxes) can be added to the cost of goods and services for the negative impact they have on the environment. 🗸🗸 The government uses the income generated through these taxes to protect the environment. 🗸🗸 Taxes can be imposed on petrol, paper, emission gases etc. 🗸🗸 In 2003 the government has legislated the use of biodegradable plastic bags which consumers had to pay for🗸🗸 The hope is that they will use fewer bags and ensure a litter free environment. 🗸🗸

Charging for dumping of waste A monthly fee as part of municipal accounts is charged for collection of waste, sewage and garbage. 🗸🗸 Households already pay for the collection of rubbish. 🗸🗸 The factory owner might clean up his waste if it cost him to dump it. 🗸🗸 Industries might also pay for emitting gases that can be harmful to people and the environment. 🗸🗸 Subsidies Subsidies can be awarded to businesses that are willing to reduce pollution and waste. 🗸🗸 Waste can also be reduced by using new techniques or equipment such as solar energy. 🗸🗸 Emission gases from factories can be reduced using new technology. 🗸🗸

Granting property rights Normally owners of properties tend to be more protective over their resources than users who are only interested in the profits the resources offer. 🗸🗸 For this reason the government might grant property rights over a specific area. 🗸🗸 Property rights empowers owners to negotiate contracts with businesses who wish to exploit the area’s resources. 🗸🗸

Marketable permits A government can decide on the maximum desired level of pollution in an area. 🗸🗸 It then distribute pollution rights (marketable permits) to factories within that area. 🗸🗸 This means that each factory can pollute to a certain limit. 🗸🗸 It means that marketable permits are licenses that polluters can buy or sell to meet the control levels set by government. 🗸🗸

Education Incorporating topics into the curriculum of school fosters awareness. 🗸🗸 The public is gradually been made aware of this rising problem. 🗸🗸 Plastic, bottles and cartons can be recycled or made biodegradable. 🗸🗸

Public sector control If the government’s intervention does not attain the desired results, then it has to intervene more directly by setting and enforcing limits. 🗸🗸

Environmental Impact Assessment In SA every projected construction, mining or similar development has to undergo an assessment by qualified environmental professionals. 🗸🗸 To prove that it will not cause unwarranted environmental damage and that the damage can be repaired after construction. 🗸🗸 The cost if built into the project. 🗸🗸

Command and Control Regulations that are set and enforce environmental limits or standards. 🗸🗸 Quantity: e.g. set the limit to the amount of fish to catch, or limit the season catching certain species of fish. 🗸🗸 Quality: e.g. drinking water quality is carefully monitored and controlled. 🗸🗸 Air quality in workplace is subject to minimum standards. 🗸🗸 Social effect: e.g. noxious fumes from factories, dumping of medical waste near settlements, and noise pollution. 🗸🗸

Voluntary agreements Agreements between government and businesses voluntarily to address negative environmental impacts of industries. 🗸🗸 Businesses voluntary agree to decrease the emissions of pollutants. 🗸🗸 Most prefer negotiations so that they can tailor their specific needs and include it into their planning🗸🗸 Agreements can be formal, which is legally binding contract or informal. 🗸🗸 [Max 26]

ADDITIONAL PART Government does not exercise effective control over the continuous dumping of waste because of a lack of coordination between departments. 🗸🗸 The fines imposed on industries that dump waste are too lenient and they continue polluting the environment. 🗸🗸

The minimum standards set for hazardous gas and fuel emissions are not enforced or adjusted. 🗸🗸 The recycling of waste materials are not widely encouraged and promoted and landfill sites are overflowing. 🗸🗸 Government has various laws that is not really effectively implemented. 🗸🗸 Poor service delivery also adds to the problem in certain areas. 🗸🗸 [Accept any other relevant answer] [Max 10]

CONCLUSION Each and every individual, business and government needs to stand together to save our planet. [Accept any other relevant conclusion] [Max 2] Discuss in detail the following problems and the international measures taken to ensure sustainable development (Environmental Sustainability)

INTRODUCTION Environment refers to the physical surroundings and physical conditions that affect people’s lives. 🗸🗸 The ever-increasing pressure on our environment originates from increasing population numbers and excessive consumption🗸🗸 Our air, land, and water are under constant assault from the ever-growing ravages of man-made pollution generated chiefly by industrialized societies. 🗸🗸 [Accept any appropriate introduction] [Max 2]

BODY-MAIN PART Conservation

Conservation is necessary because human actions cause pollution and over-utilisation of resources. 🗸🗸
Conservation is a strategy aimed at achieving the sustainable use and management of natural resources. 🗸🗸
Conservation seeks a creative continuity of the environment while ensuring that change is sympathetic to the quality of life for both present and future generations. 🗸🗸
Certain aspects of conservation need to be taken into account.
Firstly, there is an opportunity cost. 🗸🗸
Secondly, externalities are often present. 🗸🗸
Lastly, self-interest has a short term horizon – meaning that decisions cannot be left entirely to market forces. 🗸🗸
Over utilization of resources causes a reduction in supply, increase in prices, contradiction of demand and a search for substitutes. 🗸🗸
This necessitates conservation of both renewable and non-renewable resources. 🗸🗸
Conservation has to be concerned with limiting what is harvested in order to maintain a stable stock at least at the minimum level. 🗸🗸
Government can use permits and quotas as two possible direct control methods in order to maintain the stock of resources at the minimum level. 🗸🗸

Preservation

Preservation involves any strategy undertaken to safeguard the environment, maintain its current condition and keep it as habitable as possible for people and animals. 🗸🗸
Heritage sites, indigenous forests, specifies of animals etc. that have special cultural or environmental significance, are often targeted preservation. 🗸🗸
Preservation is not likely to work as a private enterprise because the benefit to society is much bigger than the income of the producer. 🗸🗸
It may be possible to use cost-benefit analysis to calculate the social benefits of preservation of the environment.
The weaknesses in market solutions require the government to intervene in order to preserve environment assets. 🗸🗸
Government could do any of the following:
Buy or expropriate – Environmental assets are simply closed for human use. 🗸🗸
Subsidise-A subsidy would increase net benefits to the owner and raise the property’s present value. 🗸🗸
Controls – The government can compel the owner to apply control measures like restricting the quantities exploited or number of visitors allowed per day. 🗸🗸 [26 Max]

ADDITIONAL PART Stockholm Conference (1972)

The Stockholm Conference was the first major large scale international meeting on the environment convened with the support of the United Nations. 🗸🗸
The meeting agreed upon a declaration containing 26 principles concerning the environment and development, an action plan with 109 recommendations and a resolution. 🗸🗸
The meeting directly impacted on the environmental policies of many countries. 🗸🗸

Rio de Janeiro Earth Summit (1992)

This meeting acknowledged the importance of cooperation in addressing environmental concerns that threaten sustainability. 🗸🗸
The conference helped to make countries around the world aware of the dangers of unsustainable development. 🗸🗸
Unfortunately the principles outlined and accepted at the summit were not binding and subsequently many countries did not confirm to them. 🗸🗸

Rio + 5 (1997)

This conference noted that globalization made some countries poorer – 🗸🗸
In particular African countries and the least developed countries showed a low level of growth or even declined. 🗸🗸

Kyoto Protocol for Climate Change (1997)

Countries committed themselves to reducing their total emissions of greenhouse by 5 %.🗸🗸
Unfortunately, China was excluded from this agreement and the USA withdrew. 🗸🗸

World Summit on Sustainable Development (2002)

The objective of this summit held in Johannesburg was to conserve natural resources in a world that is growing in population. 🗸🗸
The meeting focused on issues like poverty eradication, water and sanitation, energy, health agriculture and biodiversity. 🗸🗸

COP 17 (2011)

The main goal of the conference held in Durban was to establish a treaty to limit carbon emissions and plan strategies to keep global temperature rise to less than 2 degree Celsius in the 21st Century. 🗸🗸
Although the framework for this treaty was established it was not finalised. 🗸🗸
The solution to our environmental problems will depend on our ability to make sound economic decisions that take account of the natural environment and to change our individual behaviour and attitudes. 🗸🗸 [Accept any other relevant conclusion] [Max 2]

What is Business Cycles? Phases, Types, Theory, Nature

Post last modified: 1 August 2021
Reading time: 40 mins read
Post category: Economics

What is the Business Cycle?

Business Cycle , also known as the economic cycle or trade cycle , is the fluctuations in economic activities or rise and fall movement of gross domestic product (GDP) around its long-term growth trend.

No era can stay forever. The economy too does not enjoy same periods all the time. Due to its dynamic nature, it moves through various phases.

Table of Content

1 What is the Business Cycle?
2 Business Cycle Definition
3.1 Expansion
3.3 Contraction
4.1 Cyclical nature
4.2 General nature
5 Types of Business Cycle
6.1 Hawtrey Monetary Theory
6.2 Innovation Theory
6.3 Keynesian Theory
6.4 Hicks Theory
6.5 Samuelson theory
7 Business Economics Tutorial

The change in business activities due to fluctuations in economic activities over a period of time is known as a business cycle . Business cycle are also called trade cycle or economic cycle. Business Cycle can also help you make better financial decisions.

The economic activities of a country include total output, income level, prices of products and services, employment, and rate of consumption. All these activities are interrelated; if one activity changes, the rest of them also change.

Business Cycle Definition

Arthur F. Burns and Wesley C. Mitchel defined business cycle definition as

Business cycle are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycle vary from more than one year to ten or twelve years; they are not divisible into shorter cycle of similar characteristics with amplitudes approximating their own. Arthur F. Burns & Wesley C. Mitchel

Phases of Business Cycle

4 Phases of Business Cycle are:

Contraction

Let us discuss 4 phases of business cycle in detail:

Expansion is the first phase of a business cycle . It is often referred to as the growth phase .

In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales. During this phase, the focus of organisations remains on increasing the demand for their products/services in the market.

The expansion phase is characterised by:

Increase in demand
Growth in income
Rise in competition
Rise in advertising
Creation of new policies
Development of brand loyalty

In this phase, debtors are generally in a good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.

In the expansion phase, due to increase in investment opportunities, idle funds of organisations or individuals are utilised for various investment purposes. The expansion phase continues till economic conditions are favourable.

Peak is the next phase after expansion. In this phase, a business reaches at the highest level and the profits are stable. Moreover, organisations make plans for further expansion.

Peak phase is marked by the following features:

High demand and supply
High revenue and market share
Reduced advertising
Strong brand image

In the peak phase, the economic factors, such as production, profit, sales, and employment, are higher but do not increase further.

An organisation after being at the peak for a period of time begins to decline and enters the phase of contraction. This phase is also known as a recession .

An organisation can be in this phase due to various reasons, such as a change in government policies, rise in the level of competition, unfavourable economic conditions, and labour problems. Due to these problems, the organisation begins to experience a loss of market share.

The important features of the contraction phase are:

Reduced demand
Loss in sales and revenue
Reduced market share
Increased competition

In Trough phase, an organisation suffers heavy losses and falls at the lowest point. At this stage, both profits and demand reduce. The organisation also loses its competitive position.

The main features of this phase are:

Lowest income
Loss of customers
Adoption of measures for cost-cutting and reduction
Heavy fall in market share

In this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid decline in national income and expenditure.

After studying the business cycle , it is important to study the nature of business cycle .

Read: Difference Between Micro and Macro Economics

Nature of Business Cycle

The nature of business cycle helps the organisation to be prepared for facing uncertainties of the business environment.

Cyclical nature

General nature.

Let us discuss the nature of business cycle in detail.

This is the periodic nature of a business cycle. Periodicity signifies the occurrence of business cycle at regular intervals of time. However, periods of intervals are different for different business cycle . There is a general consensus that a normal business cycle can take 7 to 10 years to complete.

The general nature of a business cycle states that any change in an organisation affects all other organisations too in the industry. Thus, general nature regards the business world as a single economic unit.

For example, depression moves from one organisation to the other and spread throughout the industry. The general nature is also known as synchronism.

Read: What is Business Economics?

Types of Business Cycle

Following the writings of Prof .James Arthur and Schumpeter, we can classify business cycle into three types based on the underlying time period of existence of the cycle as follows:

Short Kitchin Cycle
Longer Juglar cycle
Very long Kondratieff Wave

Short Kitchin Cycle (very short or minor period of the cycle, approximately 40 months duration)

Longer Juglar cycle (major cycles, composed of three minor cycles and of the duration of 10 years or so)

Very long Kondratieff Wave (very long waves of cycle, made up of six major cycles and takes more than 60 years to run its course of duration)

Business Cycle Theory

A business cycle is a complex phenomenon which is common to every economic system. Several theories of business cycle have been propounded from time to time to explain the causes of business cycle.

Business Cycle Theory are:

Hawtrey Monetary Theory

Innovation theory.

Keynesian theory

Hicks Theory

Samuelson theory.

Hawtray was of opinion that in depression monetary factors play a critical role. The main factor affecting the flow of money and money supply is the credit position by the bank. He made the classical quantity theory of money as the basis of his trade cycle theory .

According to him, both monetary and non-monetary factors also affect trade. His theory is basically the product of the supply of money and expansion of credit. This expansion of credit and other money supply instrument create a cumulative process of expansion which in return increase aggregate demand.

According to this theory the only cause of fluctuations in business is due to instability of bank credit. So it can be concluded that Hawtray’s theory of business cycle is basically depend upon the money supply, bank credits and rate of interests.

Criticism of this Business Cycle theory

Hawtray neglected the role of non-monetary factors like prosperous agriculture, inventions, rate of profit and stock of capital.
It only concentrates on the supply of money.
Increase in interest rates is not only due to economic prosperity but also due to other factors.
Over-emphasis on the role of wholesalers.
Too much confidence in monetary policy. vi. Neglect the role of expectations. vii. Incomplete theory of trade cycles.

The innovation theory of business cycle is invented by an American Economist Joseph Schumpeter. According to this theory, the main causes of business cycle are over-innovations.

He takes the meaning of innovation as the introduction and application of such techniques which can help in increasing production by exploiting the existing resources, not by discoveries or inventions. Innovations are always inspired by profits. Whenever innovations are introduced it results into profitability then shared by other producers and result in a decline in profitability.

Innovation fails to explain the period of boom and depression.
Innovation may be major factor of investment and economic activities but not the complete process of trade cycle.
This theory is based on the assumption that every new innovation is financed by the banks and other credit institutions but this cannot be taken as granted because banks finance only short term loans and investments.

Keynesian Theory

The theory suggests that fluctuations in business cycle can be explained by the perceptions on expected rate of profit of the investors. In other words, the downswing in business cycle is caused by the collapse in the marginal efficiency of capital, while revival of the economy is attributed to the optimistic perceptions on the expected rate of profit.

Moreover, Keynesian multiplier theory establishes linkages between change in investment and change in income and employment. However, the theory fails to explain the cumulative character both in the upswing and downswing phases of business cycle and cyclical fluctuations in economic activity with the passage of time.

Hicks extended the earlier multiplier-accelerator interaction theory by considering real world situation. In reality, income and output do not tend to explode; rather they are located at a range specified by the upper ceiling and lower floor determined by the autonomous investment.

In the theory, it is assumed that autonomous investment tends to grow at a constant percentage rate over the long run, the acceleration co-efficient and multiplier co-efficient remain constant throughout the different phases of the trade cycle, saving and investment co-efficient are such that upward movements take away from equilibrium.

The actual output fails to adjust with the equilibrium growth path overtime. In fact it has a tendency to run above it and then below it, and thereby, constitute cyclical fluctuations overtime. This basic intuition can be shown with the help of the following figure.

Wrong assumption of constant multiplier and acceleration co-efficient.
Highly mechanical and mathematical device.
Wrong assumption of no-excess capacity.
Full-employment ceiling is not independent

According to this theory process of multiplier starts working when autonomous investment takes place in the economy. With the autonomous investment income of the people rises and there is increase in the demand of consumer goods. It directly affected the marginal propensity to consume.

If there is no excess production capacity in the existing industry then existing stock of capital would not be adequate to produce consumer goods to meet the rising demand. Now in order to meet the consumer’s requirements, producers will make new investment which is derived investment and the process of acceleration principle comes into operation.

Then there is rise in income again which in the same manner continue the process of income propagation. So in this way multiplier and acceleration interact and make the income grow at faster rate than expected. After reaching its peak, income comes down to bottom and again start rising.

Autonomous investment is incurred by the government with the objective of social welfare. It is also called public investment. The autonomous investment is the investment which is done for the sake of new inventions in techniques of production.

Derived investment is the investment undertaken in capital equipment which is induced by increase in consumption.

This model only concentrates on the impact of the multiplier and acceleration and it ignored the role of producer’s expectations, changing business requirements and consumers preferences etc.
It is not practically possible to compute the fact of multiplier and acceleration principle.
It has wrong assumption of constant capital output ratio.

Business Economics Tutorial

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What is Economics?
Scope of Economics
Nature of Economics
What is Business Economics?
Micro vs Macro Economics
Laws of Economics
Economic Statics and Dynamics
Gross National Product (GNP)
What is Business Cycle?
W hat is Inflation?
What is Demand?
Types of Demand
Determinants of Demand
Law of Demand
What is Demand Schedule?
What is Demand Curve?
What is Demand Function?
Demand Curve Shifts
What is Supply?
Determinants of Supply
Law of Supply
What is Supply Schedule?
What is Supply Curve?
Supply Curve Shifts
What is Market Equilibrium?

Consumer Demand Analysis

Consumer Demand
Utility in Economics
Law of Diminishing Marginal Utility
Cardinal and Ordinal Utility
Indifference Curve
Marginal Rate of Substitution
Budget Line
Consumer Equilibrium
Revealed Preference Theory

Elasticity of Demand & Supply

Elasticity of Demand
Price Elasticity of Demand
Types of Price Elasticity of Demand

Factors Affecting Price Elasticity of Demand

Importance of Price Elasticity of Demand
Income Elasticity of Demand
Cross Elasticity of Demand
Advertisement Elasticity of Demand
Elasticity of Supply

Cost & Production Analysis

Production in Economics
Production Possibility Curve
Production Function
Types of Production Functions
Production in the Short Run
Law of Diminishing Returns
Isoquant Curve
Producer Equilibrium
Returns to Scale

Cost and Revenue Analysis

Types of Cost
Short Run Cost
Long Run Cost
Economies and Diseconomies of Scale
What is Revenue?

Market Structure

Types of Market Structures
Profit Maximization
What is Market Power?
Demand Forecasting
Methods of Demand Forecasting
Criteria for Good Demand Forecasting

Market Failure

What Market Failure?

Price Ceiling and Price Floor

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What is Inflation?
Determinants of Demand

What is Supply Schedule? Definition, Types, Example

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Law of Diminishing Returns: Definition, Example, Importance

What is Income Elasticity of Demand? Types, Formula, Example, Factors

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What is Utility in Economics? Definition, Meaning, Concept, Formula

What is Business Economics? Definition, Scope, Importance

What is Demand in Economics? Determinants, Types, Definition

What is market equilibrium definition, graph, price, demand & supply.

What is Law of Demand? Definition, Exceptions, Assumptions

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Features of Business Cycles

What is the Business Cycle?

The Business Cycle refers to the vast Economic fluctuations in trade, production, and general Economic activities. The Business Cycle is also known as the boom-bust Cycle or Economic Cycle. If we look at it conceptually then, the Business Cycle refers to the up and down movements of the GDP and refers to widespread expansions and contractions in the level of Economic booming and activities.

The Business Cycle graph is never constant. Depending on the Economic standout, the rise and fall of the curve occur. The features of the Business Cycle have different phases. Business Cycles are identified into four distinct phases: Expansion, Peak, Contraction, and Trough.

What are the Features and Phases of a Business Cycle?

As mentioned earlier, there are four different phases of the Business Cycle; all these phases have different features of the Business Cycle.

Expansion: Expansion is characterized by employment increase, Economic growth, and rise in prices.

Peak: Peak is considered to be the highest point in the Business Cycle. A Business Cycle is said to have reached a peak when there is maximum output, employment is full or near to full employment, and inflationary prices are somewhat evident.

Contraction: Once the peak is reached, the Economy usually enters into the contraction phase. In this phase, the growth slows down and unemployment increases.

Trough: The contraction then hits the trough point, and it is at this time that the Economy has its bottom. Once again, the Economy will hit bottom, and the next phase of expansion and contraction will start.

What are the Features of a Business Cycle?

There are several features of a Business Cycle. Let us take a look at five features of a Business Cycle.

Occurs Periodically: The different phases of a Business Cycle occur from time to time. Although, at certain times, these periods will vary according to the Economic conditions of the industry. This duration may last as long as 10-12 years. The intensity of the phases will also change depending on the Economy. For example, at times, the firm will see massive growth followed by a short span of depression.

Synchronous: Another advantageous and prominent feature of the Business Cycle is that it is synchronic. The features of a Business Cycle are not restricted to a single firm or industry. They originate in a free Economy and are prevalent. If there is any kind of disturbance or Business boom in one industry, it will affect the other firms too. Since different kinds of industries are interrelated, the Business in one firm disturbs that in another firm.

Major Sectors are Affected: It’s been noticed that fluctuations occur not only at the level of production but also in other variables such as employment, consumption, investment, rate of interest, and price level. The investment and consumption of durable consumer goods like houses and cars are continually affected by the periodical fluctuations. As the process of consumption is deferred the courses of the Business Cycle are also affected widely.

Profit Variation: Another significant feature of the Business Cycle is that the profits fluctuate more than any other income source. This makes any kind of Business a tricky and uncertain profession for many. It is difficult to predict Economic conditions. In situations of depression, profits may even become harmful. That is why many Businesses go bankrupt.

Worldwide Impact: Business Cycles are international in nature. If depression occurs in one country, then it is bound to spread to other nations too. This happens mainly because the countries depend on each other for import and export trades. The 1930 depression in the USA and Great Britain shook the entire world and resulted in a recession.

Fun Facts About Business Cycles

Business Cycles are an aggregate phenomenon. They do not affect a single Economic activity but several Economic variables.

Expansions and recessions accompany Business Cycles.

Although Business Cycles are recurrent, they are not periodic. They often occur at regular intervals but not at a fixed duration. It is therefore tough to predict times of recession.

The expansion and contraction phases can have different durations. The amplitude of both phases doesn't need to be the same or equal.

Business Cycle Characteristics

There is no such thing as a straight line in any Economy. They all go through Cycles of Economic expansion and decline. The Economic climate is extremely dynamic, and it has a considerable impact on Business enterprises. There are some traits that all of these Business Cycles have in common. So, let's have a look at the characteristics of Business Cycles.

Cycle of Business

The Business Cycle is the natural expansion and contraction of goods and service production and output over a period of time. It can be defined as the rise and collapse of a Business in the Economy.

It is, above all, a tool for understanding the firm's and the Economy's Economic conditions. This analysis can be used by the company to make appropriate policy adjustments.

Business Cycle Phases include:

Business Cycles have various phases, which may be studied to learn more about their underlying causes. These phases have been referred to by various economists under various titles.

The Following Business Cycle Phases Have Been Identified In General:

1. Expansion is number one (Boom, Upswing or Prosperity)

2. The pinnacle (upper turning point)

3. Reduction in size (Downswing, Recession or Depression)

4. Lower turning point

In Fig. 13.1, the four phases of Business Cycles are depicted, beginning with the trough or depression, when Economic activity, i.e., production and employment, is at its lowest point.

(Image will be Uploaded soon)

The Economy enters the growth phase with the revival of Economic activity, but owing to the reasons stated below, the expansion cannot last indefinitely, and after reaching its peak, contraction or downswing begins. We have depression when the contraction picks up speed.

Expansion, peak, depression, and recovery are the four stages of a Business Cycle. While each phase has its own distinct traits, there are some aspects that are shared by all stages. Take a look at these characteristics of Business Cycles.

Business Cycle Features:

1. Business Cycles occur on a regular basis. They feature identifiable phases such as expansion, peak, contraction, depression, and trough, albeit they do not show the same regularity. In addition, Cycle duration varies greatly, from a minimum of two years to a maximum of 10 to twelve years.

2. Business Cycles are also synchronised. That is, they have an all-encompassing nature and do not affect just one industry or area. Depression or contraction, for example, might occur in any industry or sector of the Economy at the same time.

3. Finally, changes have been found not only in the level of output but also in other variables such as employment, investment, consumption, interest rate, and price level.

FAQs on Features of Business Cycles

What Causes the Business Cycle?

Supply and demand forces are the primary drivers of the Business Cycle. This is accompanied by capital availability, future expectations, and GDP growth. In general, the Cycle is broken into four sections. It's also referred to as the characteristics and phases of Business Cycles. Expansion, peak, contraction, and trough are the four stages.

Any country's monetary policy affects the Economic Cycle. Changes in interest rates and money supply are made. You can read about the same in the free pdf of Features of Business Cycles from Vedantu.

What happens in the second expansion phase?

In the second expansion phase, the inflation rate is kept around 2 percent, while the banks raise the interest during the peak. Economic growth can slow down in the contraction phase, and turns negative. The trough phase is when the Economy is made to jump-start again. The proper definition, an explanation of the secondary phase in the expansion, can be checked with the help of the free PDF of the Features of Business Cycles. The monetary policy of any country changes the Economic Cycle. Interest rates and money supplies are altered.

What is an Example of a Business Cycle?

The Business Cycle since the year 2000 is the best example. The expansion process occurred from 2000 to 2007, while the recession hit from 2007 to 2009. Initially, bank loans and mortgages were easily accessible. As a result, people began purchasing homes since they could afford loans. As a result, real estate prices began to rise. The government couldn't refuse anyone because it had guaranteed money to the banks. As a result, they began to allow consumers to take out numerous mortgages on the same property. In 2007, the level of activity peaked. People started to observe a decrease in interest rates after that. Before the end of the Cycle, there was a period of Economic recession from 2007 to 2009.

What periodically occurs in the Business Cycle?

There are different phases that occur in the Business Cycle. It happens from time to time and hence is called the periodic occurrence. Although, at times, these timeframes will fluctuate depending on the industry's Economic conditions. This period could extend anywhere from 10 to 12 years. Depending on the Economy, the intensity of the phases will also differ. For example, the company may experience rapid expansion followed by a brief period of depression.

What is synchronization in the Business Cycle?

Synchronization is one of the prominent and most advantageous features of the Business Cycle. It is also called synchronic. A Business Cycle's characteristics are not unique to a single company or industry. They have their origins in a free market Economy and are used widely. If there is a disruption or a Business boom in one industry, it will influence the other Businesses as well. Different industries are intertwined, and the operations of one company can disrupt the operations of another.

Business Studies Grade 12 2018 Essays | Great Topics (South Africa)

Business Studies Grade 12 Essays | 2018, 2019, 2020 Topics (South Africa):

Table of Contents

Tips on answering Business Studies Essay Types of Questions

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Begin each essay by writing the word Introduction
The body of the essay must be divided into paragraphs
The heading for each paragraph is taken from the question.
Ensure that all the bullets of the question forms part of the body of your essay
Conclude your essay by writing the word conclusion, and a sentence, related to the topic, to conclude your essay.

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business cycle essay grade

IMAGES

COMMENTS

What Is a Business Cycle?

The Bottom Line

Key Takeaways

Understanding the Business Cycle

Measuring and Dating Business Cycles

Stock Prices and the Business Cycle

What Are the Stages of the Business Cycle?

What Does a Business Cycle Describe?

Are Business Cycles Predictable?

Economic Issues: Business Cycles Essay

Macroeconomic concerns

The Peak (prosperity) phase

Recession phase

Tough (Depression) phase

Recovery Phase

What Is the Business Cycle?

Written by True Tamplin, BSc, CEPF®

Are You Retirement Ready?

Importance of Knowing the Business Cycle

Phases of the Business Cycle

1. Expansion

3. Recession

4. Depression

6. Recovery

Factors That Shape the Business Cycle

Labor Market Shocks

Supply-Side Shocks

The Bottom Line

Business Cycle FAQs

How do labor market shocks trigger the business cycle?

What is the difference between a supply-side shock and a demand-side shock?

How long does it usually take for an economy to recover from a depression?

How should I react and protect myself in each stage of the business cycle?

True Tamplin, BSc, CEPF®

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Economics Gr. 10 T1 W7 Lesson: Macroeconomics - Business cycles

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