MacroEconomics Paper 1 essays

Possible Essay *1 of 6 for Paper 1

*Discuss in detail the main reasons for international trade.*

*INTRODUCTION*
- International trade is an exchange (Exports and imports) involving a good or service
conducted between at least two different countries.

*MAIN PART*

*Demand Reasons for International Trade:*

1. Size of population
- The number of people in the country can increase because of migration or when there is
more births than deaths.
- The nation will require more food to feed the increased population and the only way out
could be to import them from other countries.

2. Change in income levels

- When per capita income of the country improves it means the disposable income each
person in the country has increases.
- This will cause a change in demand for goods and services and some of these goods will
then be imported.

3. Change in the wealth of the population

- If the wealth of the population increase because of a discovery of certain minerals or other
ways there will be a greater demand
for goods.
- People have access to loans and can spend more on luxury goods, many of which are
produced in other countries.

4. Preferences and taste

- Because of Globalisation population dynamics gets to change which leads to people in that
country having a change in preferences and taste.
- The new consumption habits will lead to locals demanding more of ther new found cravings
from the other countries that sell the goods. E.g. South Africa buying more of vanilla from
Madagascar.
5. The difference in consumption patterns
- Countries consumption patterns differ because of their level of economic development and
standard of living.
- Poorly developed countries usually have a high demand for basic goods and a less demand
for luxury goods.

*Supply Reasons for International Trade:*

-
1. Natural resources
- They are not evenly distributed across all countries of the world, some countries have gold
and some oil.
- They countries gets involved in international trade in order to acquire the resources that are
usually not available within their borders, they also avail the resources they have in
abundance to other countries.

2. Climatic conditions
- Favourable conditions makes it possible for some countries to have an absolute advantage
in the production of certain goods.
- Brazil is a biggest producer of coffee and South Africa produces a lot of citrus fruits.
- These countries will then be able to trade what they can never produce efficiently because
of unfavourable weather conditions.

3. Labour resources
- Human resources differ in quality, quantity, cost and level of skills from country to country.
- Countries with highly skilled labour tend to produce a wide variety of quality goods and the
countries with unskilled labour tend to import more goods.
- China has a highly skilled labour force and they export a lot of goods to other countries.

4. Technological resources
- Advantageous trade can occur between countries if the countries differ in their
technological abilities to produce goods and services.
- This is also known as Ricardian model of trade, and it concludes that everyone benefits
from trade as the two countries will receive the goods which they would never be able to
make on their own.

5. Specialisation
- Specialisation leads to the existence of economies of scale in production which is sufficient
to generate advantageous trade between two countries.
- Economies of scale refer to a production process in which production costs fall as the scale
of production rises which means more goods are produced at a lower cost.
6. Capital
- Capital allows developed countries to enjoy an advantage over under-developed countries.
- Due to a lack of capital, some countries cannot
produce all the goods they require themselves even if they have the resources and labour
skills.

ADDITIONAL PART
-

CONCLUSION
- It is important that countries on the South like South Africa work on their industrial
development as it will enable us to produce more goods and services in order to benefit from
trade between the countries.

Possible Essay *2 of 6 for Paper 1 question 5*

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

*INTRODUCTION*
- Public Sector Failure occurs when government intervention in the economy leads to an
inefficient allocation of resources and leads to an overall decline in economic welfare.

*MAIN PART*

1. Management Failure
- Management failure is a shortfall of duty or performance in directing and controlling a
government department, function or team.
-The government officials lack accountability and have ignorance, this is usually because of
lack of leadership, experience and training.
- This leads to mismanagement which leads to serious failure of duty that leads to losses,
errors, omissions and poor service delivery.

2. Apathy
- Apathy is when you lack motivation to do anything or just don't care about what's going on
around you which is one of the characteristics of some government servants.
-Government officials show little or no interest in delivering an efficient service to the public,
there is usually long ques in government offices as apathy affect behavior and ability to
complete daily activities.
-Corruption and poor service delivery are some of the symptoms of apathy.
3. Lack of motivation
-Workers rarely receive incentives for successful service delivery, but are only monitored on
inputs and correctly following procedures and processes. -This might lead to limited
services, high cost, low quality work as workers feel that they are not valued by the
employer.

4. Bureaucracy
-Bureaucrats tend to obey rules and regulations without judgement, bureaucrats are all
about following the law.
- There is no emphasis on creating additional competencies and there is less freedom to act
within a bureaucracy.
- Bureaucrats fosters a structure that doesn't create true productivity and thus lead to poor
service delivery.

5. Structural weaknesses
- Sometimes an economy’s problems are deeper and longer lasting usually as a result of
government policies
- Objectives are not met because they may work against each other.
- This might happen when government redistributes income and wealth too aggressively
without proper projections.

6. Special interest groups

- Certain people or groups with powerful influence usually manipulate politicians inside the
government to grant economic favours to them for their own selfish gain.
- The pressures of the upcoming elections or the influence of interest groups can support an
environment in which inappropriate spending and tax decisions can be made.
- Farmers tend to demand undeserved subsidies and organised labour tend to influence
government to their own advantage (More salary) at the expense of service delivery.

*ADDITIONAL PART*
-

*CONCLUSION*
- The government should try to form policies such as private public partnerships as this will
bring some motivation and ensure creativity and innovation which will improve service
delivery.

Possible essay *3 of 6 for Paper 1 question 5*

DISCUSS IN DETAIL THE FEATURES UNDERPINNING FORECASTING IN THE BUSINESS
CYCLE.

INTRODUCTION
Forecasting is the process of making predictions of the future based on past, present data
and analysing trends.

BODY: MAIN PART

1.*Indicators*
- Indicators are statistics that analyse the performance of the economy.

*1.1 Leading indicators*

-It changes before the economy changes.
-Leading indicators reach a peak before the economy reach a peak in and they reach a trough
before aggregate economic activity reaches a trough.
-These indicators give advance warning of changes in aggregate economic activity.
-They give consumers, business leaders and policy makers a glimpse into where the
economy might be headed.
-Examples of leading economic indicators includes; Job advertising space, average
manufacturing hours worked, building plans approval.

*1.2 Coincident indicator.*

-They move together with the aggregate economic activity.
-They indicate actual state of the economy.
-They reach a peak / trough at the same time as the business cycle.
-Economists use them to compile the business cycle.
Examples of coincident indicators includes; Volume of imports, Value of wholesale and new
vehicle sales.

*1.3 Lagging indicators.*

-These indicators don't change direction until after the business cycle has changed its
direction.
-They reach a peak/trough months after the business cycle has reached a peak/trough.
-They serve to confirm the behaviour of the coincident indicators.
-Economists use them to estimate whether individual indicators gave false signals.
-Examples of lagging indicators includes; Unemployment rate, Number of commercial
vehicles sold and Number of hours worked in construction.

*1.4 Composite indicators*

- The group the three indicators into a single value.

*2. Length/duration of a cycle.*

-The length of the businesses cycle is measured from peak to peak or from trough to trough.
-Longer cycles show strength and shorter cycles show weakness with regard
to economic activities.
- The length can also be used to determine the type of the business cycle based on the years
it lasted.

*3. Amplitude.*
-Amplitude refers to the vertical difference between a trough and a trendline or the vertical
difference between the peak and the trendline.
-It shows the intensity of the underlying forces and the size of change.
-The larger the amplitude, the more extreme the changes that occur and the big size of
change in the economy.
- A small amplitude indicates week forces in the economy and a small change in economic
activity.

*4. Trend line.*

- It shows the general direction in which the economy is moving.
-If the trendline is rising it indicates economic growth and a trendline facing downwards
indicates decrease in economic growth.

*5. Extrapolation.*
-This means using historical data to predict the future.
- To use facts that are known in order to predict something that is unknown.

*6. Moving averages.*

-This refers to the average price of an indicator over a specified time period. -Moving
averages are used to look at price trends.

ADDITIONAL PART
-

CONCLUSION
-Is is important for the government to always forecast economic activity accurately by using
quantitative and qualitative methods as it will lead to better decision making by the
stakeholders in the economy.

Possible essay *4 of 6 for Paper 1 Question 5*

DISCUSS IN DETAIL THE MAIN OBJECTIVES OF THE PUBLIC SECTOR IN THE ECONOMY.

INTRODUCTION
-Macroeconomic objectives are the goals that the government wants to achieve for the
economy.

BODY
The main objectives of the public sector.

1. *Economic growth*
-Economic growth refers to an increase in the production of goods and services by the
economy.
-It is measured in terms of the real GDP.
-For economic development to occur the economic growth rate must be higher than the
population growth rate.
- *The economic growth rate was -0.7% in the second quarter of 2022 according to Statistics
South Africa*

2. *Full employment*
- It is when all the people who want to work, who are looking for work must be able to get
work.
-A high level of employment is the most important economic objective of the government as
it improves the standard of living of the people.
-Informal sector activities must be promoted because it is an area where employment
increases.
- *The unemployment rate in South Africa was 33.9% in the second quarter of 2022
according to Statistics South Africa.*

3. *Exchange rate stability*

-It is when the value of the Rand as compared to other currencies does not change much
overtime.
- Effective Fiscal and Monetary policy can be used to keep the exchange rate relatively
stable.
-Depreciation and appreciation of the currency creates uncertainties for producers and
traders and should be limited.
-South Africa uses a free floating exchange rate system whereby the forces of demand and
supply determine the currency.

4. *Price stability.*
-Price stability means the market prices of goods and services do not change much
overtime.
-Stable prices lead to better results in terms of job creation and economic growth.
-The SARB *inflation target is 3% – 6%* and have been successful in keeping inflation within
this target.
-Interest Rates, based on the Repo Rate are the main instruments used to achieve price
stability.
-The inflation rate in the s was 7.6% in August of 2022 according to Statistics South Africa.

5. *Economic equity*
-It is the reasonable division of income within the population.
-Redistribution of income and wealth is essential as it leads to increased welfare.
-South Africa uses a *progressive personal income tax* system where those who earn more
pay more tax.
-Free social services like education, primary health and other services are offered by
government as an attempt to redistribute income.

ADDITIONAL PART
-

CONCLUSION
-The government should form and maintain the public private partnerships as the private
sector is vital in ensuring that the public sector achieve these objectives.

Possible essay *5 of 6 for Paper 1 Question 5*

*Discuss in detail the markets within the four sector model*

INTRODUCTION
The circular flow is a model that shows how the economy works and the relationship between
production, income and expenditure.

MAIN PART
*The markets within the four sector model*

1. *Product markets*
-These are markets for consumer goods, services and capital goods, it is a market where
goods and services are traded.
-Capital goods market for trading of buildings and machinery which are the goods that are
used to produce other goods by the businesses.
- Consumer goods market for trading of durable consumer goods(furniture), semi-durable
consumer goods(clothes) and non-durable consumer goods(food).
-Services are defined as non-tangible actions and includes wholesale and retail and
transport.
- This is the market whereby the businesses sell these goods and services to the households,
government and the foreign sector in the circular flow.

2. *Factor markets*
-Households sell factors of production on the factor markets.
- The households sell the natural resources and receive the remuneration which is rent on
this market.
-The businesses employ labour using this market and reward them with salaries and wages
from this market.
- When businesses hire machines out or anything that leads to gross capital formation the
remuneration it receives is interest.

3. *Financial markets*
-It is a market whereby the financial securities are traded, it acts as a link between
households, the business sector and other participants with providing for the money flow.
- This market is devided into two;
3.1 *Money markets*
-In the money market, short term loans, deposits and investments funds are saved and
borrowed by consumers and business enterprises.
-The South African Reserve Bank(SARB) is the key institution in the money market.
- The products sold in this market are bank debentures, treasury bills and government
bonds.

3.2 *Capital markets*

-In the capital market long term loans, deposits and investments are borrowed and saved by
consumers and business enterprises.
-The Johannesburg Security Exchange is a key institution in the capital market.
-Products sold in this market are mortgage bonds and shares.

4. *Foreign exchange markets*

-It is a market whereby a currency of one country is traded for the currency of another
country.
-These transactions occur in banks and consists of an electronic money transfer
from one account to another.
-The most important foreign exchange markets are in London/New York/Tokyo, the S.A Rand
is traded freely in these markets. e.g. when a person buys travellers cheques to travel
abroad.
ADDITIONAL PART
-

CONCLUSION
-Without the markets the economy would not function properly, it is important that the
government establish laws to allow them to operate freely to ensure prosperity in our
economy.

Possible essay *6 of 6 for Paper 1 question 5*

*DISCUSS IN DETAIL THE NEW ECONOMIC PARADIGM*

INTRODUCTION
-According to the new economic paradigm it is possible to have a high economic growth and
an increase in employment without being held back by supply limitations and inflation.

MAIN PART
THE DEMAND SIDE POLICY
- It refers to methods taken by the government in order to assist consumers to buy more
goods and services.

1. *Fiscal Policy*
-The use of tax and government spending in order to influence the economy.

*Tax*
-The government can decrease tax in order to make sure that people have money to spend on
goods and services.

*Government spending*
- When government spend more on public goods and services it will lead to increased
demand for goods and services.

2. Monetary policy
-It is the use of interest rate and other instruments in order to influence money supply.

*Interest rate*
-The reserve bank will reduce the interest rate in order to encourage people to borrow more
money from banks.
-When access to credit is more cheaper people will buy more goods and services which is an
increase in demand.

*Cash reserve requirements*

-The reserve bank will decrease the percentage cash reserves it requires from commercial
banks.
- The banks will thus have more money to give out as loans which increases demand for
goods and services.

*Open market transaction*

-The reserve bank will buy the securities such as shares from the commercial banks(e g
ABSA)
-Money will flow to the commercial banks leaving them with more capacity to grant loans
which increases demand in the economy.

*Moral persuasion*
-The reserve bank will encourage the banks to grant more loans to the people as it enable
them to buy more.
- The reserve bank can also do various campaigns to encourage people to spend more.

THE SUPPLY-SIDE POLICY

-Supply-side policies refer to any measures undertaken by the government to increase the
level of aggregate supply of goods and services in the country in order to meet changes in
demand. This can be done by;

1. *Reduction in production cost.*

*Infrastructure cost:*
- The government can implement measures to decrease production costs of businesses both
directly and indirectly.
-The cost of transport can be reduced by improving the roads and decreasing the petrol
price.
-The government can also work on the reduction of other infrastructure services such as
communications, water and energy.

*Administrative costs:*
-The government can work on reducing too much inspections and paperwork as they add to
costs of businesses.
-Deregulation should be applied in order to encourage other businesses to enter the market
in order to increase the supply of goods and services.

*Cash incentives:*
-This include subsidies for businesses to locate in areas where unemployment is high.
-Incentives like cash allowances and subsidies to encourage export promotion can also
decrease costs.

2. *Improving the efficiency in inputs.*

*Tax rates:*
-Higher personal income tax rates are a disincentive to work and they should be reduced.
-The government should work on reducing corporate income tax in order to encourage more
investments by businesses.

*Capital consumption:*
-Replacing capital goods regularly creates opportunities for businesses to keep up with
technological development.

*Human resource* development:

-Quality of the work force can be improved by improved health care, education, training
schemes and mobility of labour.

*Free advisory service:*

-Others provide special help to SMME’s to establish, manage and perform.

3. *Improving the efficiency in markets.*

*Deregulation:*
-Removal of laws and other forms of government controls that interfere in markets and make
the markets free.

*Competition:*
-Encourage the establishment of new businesses and monitoring collusion.
-Invite foreign direct investments to encourage an inflow of money into our economy.

ADDITIONAL PART
-

CONCLUSION
- When both the demand side and supply side policies are applied the natural rate of
unemployment in the Phillips Curve decreases without an increase in inflation which
improves the welfare of people in our country.