This is a comprehensive summary of the economics topics of: the foreign sector, elasticity, dynamics of markets, market failure, economic growth and development, as well as the socio and economic indicators in SA. This is an easy to interpret study set with everything you need to know for each list...
• The foreign sector and balance of payments
• Elasticity
• Dynamics of perfect and imperfect markets
• Market failures
• Economic growth and development
• South Africa’s social and economic indicators
1
, ECONOMICS STUDY NOTES TERM 2
The foreign sector:(foreign exchange and balance of payments)
Reasons for international trade:
• Demand reasons: (People In Witbank Prefer Coffee)
o Population size and their income
o Income levels of countries differ
o Wealth levels
o Preferences and choices of consumers
o Consumption patterns differ
o Religious, cultural and sociological lifestyles differ
o Extension and improvement of communication and transport
• Supply reasons: (Rich Countries Like To Send Chocolate)
o Natural resources are not spread equally
o Climatic conditions differ
o Labour quality, quantity and costs differ
o Technological resources differ between countries
o Specialisation; some countries specialise in making certain products
o Capital and the access to it differs between countries
The effects of international trade:
• Specialisation
• Mass production
• Efficiency
• Globalisation
The balance of payments:
• The balance of payments is a systematic record of all transactions between a country
and the rest of the world.
• When money flows in, it improves the balance. When money flows out, the balance
weakens
• There is a surplus when the outflows exceed inflows
• There is a deficit when the inflows exceed outflows
• The state of the BoP influencing the exchange rate:
1. When in surplus: the exchange rate appreciates (strengthens)
2. When in deficit: the exchange rate depreciates (weakens)
• NB: South Africa’s BoP consists of 4 components:
1. The current account
2. The capital transfer account
3. The financial account
4. The change in foreign reserves
2
, ECONOMICS STUDY NOTES TERM 2
Foreign exchange/currency market
• Foreign exchange market consists of: banks and other financial institutions
• The exchange rate is the price of one currency expressed in terms of another
• Appreciation: when the value of one currency increases
• Depreciation: when the value of one currency decreases
Supply and demand for foreign currency:
• Demand for foreign currency:
o Occurs when:
§ Purchasing of foreign goods and services by local residents (Imports)
§ Foreign investments by local residents
§ Foreign currency speculation by local residents (assumptions)
§ Local residents travelling abroad
§ Repayments of foreign loans or debt by government and businesses
• Supply for foreign currency:
o Occurs when:
§ The buying of local goods and services by foreigners (exports)
§ The buying of local financial and real assets by foreigners (FDI and
Portfolio investments)
§ Domestic currency speculation by foreigners
§ Tourists from abroad visiting SA
§ Taking up of foreign loans by governments and businesses
Foreign exchange rate systems: (check the enjoy textbook) pg 90
• Fixed exchange rate systems:
o The government determines the exchange the exchange rate, which is fixed
and it can only change it, e.g.) china
o Can only maintain this if enough foreign currency is available which means a
large trade surplus (using foreign currency to buy own currency) especially
speculators enter the market
o Done to avoid running out of foreign reserves and avoid the volatility in the
exchange market
• Free floating exchange rate systems:
o Demand and supply determine the exchange rate and there is no
interference from the government, e.g.) USA and EUROPE
• Managed/ controlled free floating exchange rate systems:
o Demand and supply determines the exchange rate but the governments will
intervene to assist with short term fluctuations.
o However it remains between certain trade levels
o South Africa uses this one!
o Sometimes own currency must be bought to support it, only if there is
sufficient levels of foreign currency
3
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