ECONOMICS STUDY NOTES
TERM 2
Aadit Aheer
IEB Grade 12
, ECONOMICS STUDY NOTES TERM 2
Topics covered:
• 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
TERM 2
Aadit Aheer
IEB Grade 12
, ECONOMICS STUDY NOTES TERM 2
Topics covered:
• 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
