ECS3703 Assignment 2 Semester 2 2024

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ECS3703
Assignment 2
Semester 2
2024
QUESTIONS WITH DETAILED ANSWERS

, ECS3703 Assignment 2 Semester 2 2024


Question 1

Assume that South Africa trades with the rest of the world and has a deficit in
its trade balance. With the aid of a diagram, explain how South Africa would
use exchange rates to correct the
deficit……………………………………………………….[25 marks]

To address a trade balance deficit, South Africa can use exchange rates to
influence its exports and imports. Here is an explanation of how this process
works, along with a diagram to illustrate it:

Explanation:

1. Understanding Trade Balance Deficit:

o A trade balance deficit occurs when the value of a country’s
imports exceeds the value of its exports.

o This means more money is leaving the country to pay for imports
than is coming in from exports.

2. Role of Exchange Rates:

o Exchange rates determine the value of a country’s currency
relative to other currencies.

o A depreciation of the South African Rand (ZAR) makes South
African goods cheaper for foreign buyers and foreign goods more
expensive for South African consumers.