2022 Workbook.Economics Grade 12

2022 WORKBOOK | Grade ECONOMICS 12 2022 SUBJECT WORKBOOK Grade 12 ECONOMICS A joint initiative between the Western Cape Education Department and Stellenbosch University.

2022 WORKBOOK | Grade ECONOMICS 12 BROADCAST SESSIONS THE MACROECONOMIC MULTIPLIER GRADE 12 BUSINESS CYCLE FOREIGN EXCHANGE MARKETS GADE 12 Session Date Time Topic The Multiplier (4 sector English 21/02/2022 16h00-17h00 model) Die Vermenigvuldiger Afrikaans 22/02/2022 16h00-17h00 (4 sector model) English 16/03/2022 15h00-16h00 Business Cycles Afrikaans 16/03/2022 16h00-17h00 Sakesiklusse Foreign exchange English 07/04/2022 16h00-17h00 market Afrikaans 11/04/2022 16h00-17h00 Buitelandse Valuta mark Page 2

2022 WORKBOOK | Grade ECONOMICS 12 INTRODUCTION AND TOPICS INTRODUCTION In these three sessions we shall be investigating three concepts: 1. The Macroeconomic Multiplier 2. The Business Cycles 3. The Foreign Exchange Markets The economic activity is activated by Injections into the economy. These include Consumption by Households (C), Government Spending (G) and Investments by Firms (I). Any of the spending will result into a ‘ripple – effect’ phenomenon. All this will be dealt with in the first session. Economic activity as shown by Real GDP fluctuates every year. These fluctuations are then referred to as Business Cycles. This will be the second session which will be dealt with in this workbook. The third and last session deals with Foreign Exchange markets where the values of currencies change due to various reasons. Graphical illustrations will be used to explain this. Topics Description Initial government spending causes a ripple effect on the The macroeconomic entire economy and leads to more total spending. multiplier The business cycle shows the long run fluctuations of real The Business cycle GDP over time. The Foreign Exchange A market where foreign currency is bought and sold through Market International trade Page 3

2022 WORKBOOK | Grade ECONOMICS 12 THE MACROECONOMIC MULTIPLIER THE KEYNESIAN MODEL OF THE MULTIPLIER Aggregate income = C + S which will represent supply C: consumption S: savings Aggregate demand = C + I I: investment Point E: equilibrium Y = R200b E = R200b Page 4

2022 WORKBOOK | Grade ECONOMICS 12 TERMINOLOGY Term Definition Initial government spending causes a ripple effect on the entire Description of The economy and leads to more total spending. Macroeconomic Multiplier The initial spending becomes someone’s income. They spend some and save some. The spent portion becomes someone else’s income. Explanation: This someone spends some and saves some. And so it goes on. This is known as the multiplier effect. There are only two things one can do with new income and that is spend or save it. This is known as the marginal propensity to save (mps) and the marginal MULTIPLIER EXPLAINED propensity to consume (mpc). The size of the ripple effect depends on whether people save or spend. If you picked up a R100 and spend R75 and decide to save R25. Example: Then your mpc = 0.75 and you mps = 0.25. Therefore: mpc + mps = 1 The equation for the simple multiplier is as follows: k = 1/mpc = 1-mpc Calculation: Therefore, if mpc = 0.5, then mps = 0.5. Thus, 1/0.5 = 2 • k = 1/1 – mpc • k = 1/mps Formulae • k = △Y/△E • k = Y/E Page 5

2022 WORKBOOK | Grade ECONOMICS 12 CALCULATIONS Term Definition If the government spends R2 million, total spending will become R4 EXAMPLE 1: million. Assume the mpc is 0.9 and government wants the total spending to increase by R20 million: EXAMPLE 2 You need to ask yourself two questions. 1. How much is the multiplier? 2. How much must government initially spend to reach the goal? To calculate the value of the multiplier, you need to use the following formula: k = 1/1 - mpc = 1/1 - 0.9 EXAMPLE 2 EXPLAINED = 1/0.1 = 10 In order to achieve the goal of R20 million spending, government will have to spend R20m/10 = R2million No government present Households and businesses only 2-sector model Closed economy No corporate savings Households (C) Businesses (I) 3-sector economy Government (G) • Households • Businesses 4-sector economy • Government • Foreign sector Page 6

2022 WORKBOOK | Grade ECONOMICS 12 TAKE NOTE THE MULTIPLIER We note that in both examples the initial spending was R2 million, but the total spending differs. This is because the mpc differed. In example 1, the mpc = 0.5, total spending = R4 million. In example 2, the mpc = 0.9, total spending = R20 million. Therefore the higher the mpc, the higher the multiplier. AUTONOMOUS CONSUMPTION C = Autonomous + mpc(Y) C = 20 + 05 (Y) Autonomous Consumption - Expenditure that occurs when income levels are zero. - Expenditure is not dependent on income. - Money is borrowed, or available savings are used. Page 7

2022 WORKBOOK | Grade ECONOMICS 12 EFFECTS OF EXPORTS AND IMPORTS Symbols used to depict exports and imports: X = Exports M = Imports Effects: • If X > M = Net injection therefore, National Income will increase. • If X < M = Net leakage therefore, National Income will decrease. Injections increase NI & Leakages decrease NI INJECTIONS (J) LEAKAGES (J) • Government Expenditure (G) • Taxes (T) • Investment (I) • Savings (S) • Exports (X) • Imports (M) ➢ The multiplier is derived from the marginal propensity to consume (mpc) ➢ The size of the multiplier is determined by the portion of the increase in income spent. The greater the mpc, the greater the multiplier. If leakages decrease, the mpc and the multiplier will be greater If injections increase, the mpc and the multiplier will be greater. The smaller the mpc, the smaller the multiplier. If leakages increase, the mpc and the multiplier will be smaller. If injections decrease, the mpc and the multiplier will be smaller. Page 8

2022 WORKBOOK | Grade ECONOMICS 12 3-SECTOR MODEL – LEAKAGS (L) AND INJECTIONS (J) Households S (L) 3 SECTOR MODEL Goverment Businesses G (J) I (J) T (L) 4-SECTOR MODEL - LEAKAGS (L) AND INJECTIONS (J) Households S (L) Foreign Sector 4- Goverment X (J) sector M (L) G&T model Businesses I Page 9

2022 WORKBOOK | Grade ECONOMICS 12 IMPACT OF LEAKAGES If TAXES →Less money is available to spend on local goods and services If SAVINGS →MPC is smaller →MULTIPLIER is smaller →Smaller change in If IMPORTS in National Income IMPACT OF INJECTIONS If INVESTMENT →More people has jobs and earn an income. →Demand for goods and services If GOVERNMENT increase. EXPENDITURE →MPC is greater. →MULTIPLIER is greater. If EXPORTS →Greater change in NI. Page 11

2022 WORKBOOK | Grade ECONOMICS 12 TAKE NOTE EQUILIBRIUM LEVEL OF INCOME EQUILIBRIUM POSITION OF AN OPEN ECONOMY Will exist when National Income (Y) = National Expenditure (E). Y = Consumption + Savings + Taxes → GNI→ Aggregate Supply E = C + I + G + (X - M) → GNE → Aggregate Demand Equilibrium exists where AS = AD A GRAPHIC REPRESENTATION OF A 4 SECTOR MODEL Page 11

2022 WORKBOOK | Grade ECONOMICS 12 CONCEPTS An injection of the new demand for goods and services into the THE MULTIPLIER Before circular flow of income, stimulates further rounds of WHAT YOU SHOULD KNOW spending. 2 SECTOR MODEL Y=C+I Government aims to build new schools to the value of R20m. 3 SECTOR MODEL Businesses, such as Y=C+G+I During construction industries, architects, furniture suppliers, etc. will benefit directly. A new flow of income created 4 SECTOR MODEL in the form of wages and profits. Y = C + G + I + (X - M) If this new income remain in the After circular flow, the multiplier effect will be strong and thereby have a larger impact on GDP. ATTRIBUTIONS Page 12 ICON | www.flaticon.com

2022 WORKBOOK | Grade ECONOMICS 12 INTRODUCTION TO THE SECOND SESSION BUSINESS CYCLES The business cycle shows the long run fluctuations of real GDP over time. Unpacking the definition: • Real GDP is when inflation has been accounted for. • GDP is used to measure economic growth which is directly linked to the levels of production. • Fluctuations refers to the upswings and downswings. • Time relates to the number of months or years. Page 13

2022 WORKBOOK | Grade ECONOMICS 12 • Assuming the state is meeting its objective of economic growth, there is a trendline showing growth which is an upward sloping line • The fluctuations around the trendline is known as the business cycle. • If the economy grows very fast, the line is above the trendline until it reaches a peak, then the economy will contract or recede, and the line moves below the trendline until it reaches a trough, and the cycle starts all over again. Page 14

2022 WORKBOOK | Grade ECONOMICS 12 REASONS FOR CYCLES EXOGENOUS/ MONETARIST APPROACH • Believe market is stable • Invisible hand theory • Outside factors influence • Big factor being government intervention ENDOGENOUS/ INTERVENTIONISTS • Believe market is unstable • Government intervention needed • Fiscal and monetary policies Page 15

2022 WORKBOOK | Grade ECONOMICS 12 THE SMOOTHING OF CYCLES • Governments want to ensure that the fluctuations remain as close as possible to the goals set for growth. • Economist would predict what will occur, but it is very difficult if not impossible to predict the business cycle as one cannot always tell how people will react to varying situations. • Governments try to smooth out the cycles by making use of both fiscal and monetary policies. • Expansionary policies are used when they want to stimulate economic activity and restrictive policies are employed when they wish to reduce the amount of money in circulation. Page 16

2022 WORKBOOK | Grade ECONOMICS 12 NEW ECONOMIC PARADIGM • The new economic paradigm explains the shift governments have employed. Instead of fine tuning the economy, they are more focused on inflation targeting. • The SARB has set inflation for SA between 3 and 6 percent. • Ensuring stability of prices is another macroeconomic objective. • Government uses demand-side and supply side policies to achieve its objectives of ensuring that output increases and maintaining price stability. Page 17

2022 WORKBOOK | Grade ECONOMICS 12 DEMAND SIDE POLICIES • The fiscal policy is more successful in stimulating a depressed economy and the monetary policy is more effective when ‘dampening’ an overheated economy that has inflation rising. • The demand-side policies are there to mainly stimulate demand, but we need to bear in mind that supply also needs to be stimulated to avoid inflation setting in. • Tools of the fiscal policy: government spending and taxation • Tools of the monetary policy: interest rates, cash reserve requirements, moral persuasion and open market transactions SUPPLY SIDE POLOCIES • Improving efficiency of markets • Improve efficiency of inputs • Reduction of costs Page 18

2022 WORKBOOK | Grade ECONOMICS 12 CONCEPTS Before LEADING BUSINESS CYCLE WHAT YOU SHOULD KNOW During COINCIDENT After LAGGING FEATURES UNDERPINNG FORECASTING COMPOSITE: Summary of various indicators of the same type into one index. EXTRAPOLATION: Past data is used, where predictions are made about the future based on assumptions related to trends AMPLITUDE: It is the difference between the value of total output between peak and trough measured from the trend line to the peak and trough TREND: The trend indicates the general direction in which the indexes that were used in the business cycle, moves LENGTH: We measure a business cycle from a peak to a peak and a trough to a trough MOVING AVERAGE: This method is repeatedly calculating a series of different average values along a time series to produce a smooth curve ATTRIBUTIONS Page 19 ICON | www.flaticon.com

2022 WORKBOOK | Grade ECONOMICS 12 CLASS DISCUSSION WHY WAS SOUTH AFRICAN BUSINESS CYCLE AT ITS PEAK IN 2010 AND DECLINED THEREAFTER TO A CONTRACTION? LET US DISCUSS! RECAP OF TODAY’S CLASS We discussed the following aspects with regard to Business cycles: • Definition • Phases • Reasons • Smoothing • New economic paradigm • Features underpinning forecasting • Indicators Page 20

2022 WORKBOOK | Grade ECONOMICS 12 INTERNATIONAL TRADE: Introductory Pointers In Open Economies, countries trade with each other. Some countries are endowed with resources that others do not have. It is for this reason that trade (buying and selling) between countries takes place. Various currencies are used as mediums of exchange for this reason. These are governed by various exchange rate systems. These include the following: • Free-floating exchange rate system • Fixed exchange rate system • Managed floats or Controlled floats Page 21

2022 WORKBOOK | Grade ECONOMICS 12 REASONS FOR INTERNATIONAL TRADE DEMAND REASONS SUPPLY REASONS • Size of the • Natural resources population • Income levels • Climatic conditions • Change in the wealth of the • Labour resources population • Technological • Preferences and resources tastes • Specialisation • The difference in consumption • Capital patterns Page 22

2022 WORKBOOK | Grade ECONOMICS 12 UNDERSTANDING THE FOREIGN EXCHANGE GRAPHS • We will start with the explanation of supply and demand for different currencies as well as the reasons for the shifts of the curves. • When the value of the currency of one country appreciates, the value of the other country depreciates. • The exchange rate is the rate at which one country’s currency can be exchanged for that of another country. • For example, R15 for 1 US Dollar ($1:R15) . This means that South Africans pay R15 for every dollar purchased. Page 23

2022 WORKBOOK | Grade ECONOMICS 12 THINKING ACTIVITY WHAT WILL HAPPEN TO THE RAND? 1. More Chinese travelling to South Africa. D↑ Rand appreciates 2. A severe recession in China. D↓ Rand depreciates 3. Increase in price level in South Africa. D↓ Rand depreciates 4. Higher interest rate in South Africa. D↑ Rand appreciates Page 24

2022 WORKBOOK | Grade ECONOMICS 12 ANALYSING FOREIGN EXCHANGE GRAPHS GRAPH 1: analysing demand and supply of Rands. GRAPH 2: analysing demand and supply of Dollars. Always take the other currency over the currency you analysing, to calculate the price of the currency (exchange rate) It is important to determine who is demanding and who is supplying in each graph. • Graph 1: SA is the supplier and US is demanding. • Graph 2: SA is demanding, and US is supplying. NB: Pay close attention to graphs drawn by presenter. Page 25

2022 WORKBOOK | Grade ECONOMICS 12 ACTIVITY – FOREIGN EXCHANGE GRAPH Study the graph below and answer the questions that follow. • What is the equilibrium quantity at $1: R8,00? • What is the result of a decrease in the supply of the dollar on the value of the rand? • Briefly describe the term appreciation of a currency. • What will the impact be of an overvalued currency on the Balance of Payments? • Why do some countries prefer a fixed exchange rate system? Page 26