Learning activity 10.1 (10.

2 ONLINE)
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Learning activity 10.2 (10.1 ONLINE)

Choose correct answers

(a) The correct option is [1] as the statement is true.

Given the information, China proves to have absolute advantage over South Africa in the
production of tables and chairs, given the fact that China produces four tables and 12
chairs, which is more than what South Africa produces (two tables and eight chairs).
China also has comparative advantage over South Africa in the production of tables, in
other words the opportunity cost of producing tables in China is lower than in South
Africa. To produce one table, South Africa has to sacrifice four chairs. China on the other
hand, has to sacrifice three chairs to produce one table. Thus, China is comparatively
more efficient in producing tables.

(b) The correct option is [1].

The idea behind comparative advantage is that countries can and will benefit from trade
if the opportunity costs of production (relative prices) differ between two countries. For
example if country B can produce schoolbags at a lower cost than country A, and country
A can produce shoes at a lower cost than country B, then clearly it is best for country A
to trade its own relatively cheaper shoes for cheaper schoolbags. According to the law
of comparative advantage, both countries benefit from this trade. Therefore, alternative
[2] is incorrect.

Such specialisation should result in an overall increase in global production, since

available resources are used more effectively. Alternative [3] is not correct as total
 production of the two countries can be expected to increase. We can also expect that
this increase in production will result in an increase in income, and therefore also an
increase in consumption. Therefore alternative [4] is also incorrect.

(c) A country has absolute advantage in the production of a good, if it can produce most
of that good in absolute terms. Therefore, Country B has absolute advantage in the
production of both boats and cars. Option c is incorrect and option d is correct.

A country has comparative advantage in the production of a good, if it can produce a

good at a lower cost (in terms of the other good that cannot be produced). The following
table shows the information regarding the comparative advantage of the two countries:

Country Number that can be Amount to give up (opportunity cost)

produced in a week

Boats Cars To produce one To produce one car

boat
A 100 120 120/100=1,2 car 100/120=0,83 boat
B 150 130 130/150=0,87 car 150/130=1,15 boat

B is 1,5 (150/100) times more effective than A in producing boats.

B is 1,08 (130/120) times more effective than A in producing cars.
Thus B is more effective in the production of boats and thus has a comparative
advantage in the production of boats. Country A has comparative advantage in
production of cars. It has to give up less of a boat to produce one car than B. Options
a and b are correct.

The correct alternative is [3].

(d) In section 10.2, it is explained that countries will benefit from trade, if each country
specialises in the good or service that it has comparative advantage in producing and
that this will ensure maximum global output. Therefore, alternative [4] is correct.

Although it is true that firms behave more competitively if trade with foreign countries
take place (because there are more competitors), this is not the main reason why
countries trade. Alternative [1] is not correct.
 Alternative [2] is not correct. Not all firms have access to cheap labour. This is one of
the reasons why trade will be beneficial – countries, where labour is cheap, will
specialise in the production of goods that are labour intensive.

Alternative [3] is not necessarily correct. Comparative advantage is not only determined
by productivity of resources, but also by the relative cost of the resources. It may be
that labour is so much cheaper in one country that they can still produce a good at a
lower price, even if their productivity is not that high.

Alternative [5] is not correct. Not every country has an absolute advantage in the
production of a particular good or service, but due to comparative advantage global
production can still increase if countries specialise and trade takes place.

The correct alternative is [4].

Learning activity 10.3

Choose correct answers

(a) This statement is false. The top trading partners of South Africa in terms of exports and
imports are listed in tables 10.1 and 10.2. You will notice that all the countries that appear
in the list of topic export trading partners also appear in the list of top import trading
partners, and in the same sequence! In some cases, South Africa will export raw
materials to these countries and will import technology and manufactured goods from
these countries, but this is not always the case.

The correct alternative is [2].

(b) As you can see from tables 10.3 and 10.4, this statement is true. The largest part of both
our imports and our exports consist of manufacturing goods.

The correct alternative is [1].

(c) As you can see from tables 10.3 and 10.4, this statement is not true. South Africa exports
much more agricultural products (in terms of rand value) than it imports.
 The correct alternative is [2].

(d) As you can see from tables 10.3 and 10.4, this statement is not true. South Africa exports
much more mining products (in terms of rand value) than it imports.

The correct alternative is [2].

Learning activity 10.4

Choose correct answers

(a) The correct option is [3].

We can calculate the exchange rate for $1 as follows:

If R13 = $2, then:
𝑅13
= $1
2
𝑅6,50 = $ 1
As the price of the laptop is $700, the amount that has to be paid in rand can
now be calculated as follows:
𝑅6,50 × 700 = 𝑅4 550

(b) The rightward shift of the demand curve for dollars to D' can be caused by an increase
in the amount of goods and services imported from the US. Due to the increase in
imports from the US, domestic businesses and individuals need more dollars to pay the
US exporters. Therefore, statement [1] is incorrect and statement [2] is correct.

Due to the increase in demand for dollars, the price of dollars will increase in rand
terms. This means that you will have to pay more rand per dollar after the increase in
demand for dollars than previously. In figure 1, this can be seen by the increase in the
rand price of dollars from R/$1 to R/$2. This means that the rand has depreciated against
the dollar (declined in value in $ terms) and the dollar has appreciated against the rand
(increased in value in terms of R). Both statements [3] and [4] are incorrect.
 Figure.1

The correct alternative is [2].

(c) If the rand/dollar exchange rate is R13,50 per dollar, the price of a machine with a dollar
price of $15 000 can be calculated as follows:
R13,50 = $1,00
R13,50 x 15 000 = $1,00 x 15 000
R202 500 = $15 000

Therefore, option a is correct.

If the rand/pound exchange rate is R17,65 per pound, the pound value of R100 000
can be calculated as follows:
R17,65 = £1,00
R17,65/17,65 = £1,00/17,65
R1 = £0,56657
R1 x 100 000 = £0,566572 x 100 000
R100 000 = £5 665,72
 Therefore, option b is not correct.

The price of a $50 tool in rand terms, given the exchange rate of R13,50 = $1,00, can
be calculated as follows:
R13,50 = $1,00
R13,50 x 50 = $1,00 x 50
R675 = $50

The price of a £40 tool in rand terms, given the exchange rate of R17,65 = £1,00, can
be calculated as follows:
R17,65 = £1,00
R17,65 x 40 = £1,00 x 40
R706 = £40

In rand terms, the tool is cheaper if it is bought from the US company. Therefore,
statement c is correct.

The correct alternative is [3].

(d) When the rand/dollar exchange rate changes from R1,00 = $13,50 to R1,00 =
$14,10, it means that the price of one rand increases from $13,50 to $14,50.
Therefore, the rand became more expensive in dollar terms. The rand
appreciated, while the dollar depreciated in terms of rand. Option a is correct,
while option b is incorrect.

As dollars are now cheaper, goods and services purchased from the US will
be less expensive for South Africans. Option c is incorrect.

As rands are now more expensive for Americans, South African goods become
relatively more expensive for Americans. Option d is correct.

The correct alternative is [4].

Learning activity 10.5
Choose correct answers

(a) The correct option is [3].

The trade balance is calculated as follows:

merchandise exports + gold exports – merchandise imports
Therefore we can calculate the trade balance as follows:
𝑅800 000𝑚 + 𝑅60 000𝑚 − 𝑅950 000𝑚 = 𝑅 − 90 000𝑚

(b) The correct option is [3].

The balance on the current account is calculated as follows:

𝑇𝑟𝑎𝑑𝑒 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 + 𝑛𝑒𝑡 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 + 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 + 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑠

In the previous question we calculated that the trade balance is equal to 𝑅 − 90 000𝑚.
𝑁𝑒𝑡 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 = 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 − 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
= 𝑅61 000𝑚 − 𝑅55 000𝑚 = 𝑅6 000𝑚
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 = 𝑖𝑛𝑐𝑜𝑚𝑒 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 − 𝑖𝑛𝑐𝑜𝑚𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
= 𝑅75 000𝑚 − 𝑅120 000𝑚 = −𝑅45 000𝑚
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑠 = −𝑅20 000𝑚

Now we can calculate the balance on the current account:

𝑅 − 90 000𝑚 + 𝑅6 000𝑚 − 𝑅45 000𝑚 − 𝑅20 000𝑚 = −𝑅149 000𝑚

(c) The correct option is [2].

A portfolio investment refers to the purchase of financial assets where the investor is
interested only in the financial return of the investment. An investment in the money
market yields a financial return in the form of interest. Therefore, when a South African
resident places funds in a money market fund in the UK, this will be reflected as a
portfolio investment in the balance of payments.
 Option [1] is incorrect because direct investments include all transactions where the
purpose of the investor is to gain control of or have a meaningful say in the
management of the enterprise in which the investment is made. An example of a direct
investment is when a South African resident establishes a new business in Nigeria.

Income payments refer to income earned by South Africans in the rest of the world
and can include wages, salaries, benefits as well as investment income. Therefore
alternative [3] is not correct.

Other investment is a residual category and includes financial transactions that are
not included under direct or portfolio investments. Examples that form part of other
investments are trade credit, loans, currency and deposits. Alternative [4] is therefore
incorrect.

(d) The balance on the current account for Country X for the year 2017 can be calculated
as follows:

Item Amount (Z)

Merchandise exports 150 000
Minus Merchandise imports 130 000
Minus Net gold imports 45 000
Plus Service receipts 120 000
Minus Payments for services 100 000
Plus Income receipts 75 000
Minus Income payments 95 000
Plus Current transfers -43 000
Balance on the current account -68 000

All amounts that are received in the country from foreigners are added together and all
amounts that are paid to foreigners are subtracted. Note that this country was, unlike
South Africa, a net importer of gold and, therefore, the amount of gold that was imported
has to be subtracted. Current transfers were negative, in other words, it is money that
flowed out of the country; thus, although we indicate that it should be added, we should
really subtract it, as it is a negative number. If this figure for current transfers was positive,
the amount would be added.

The correct alternative is [5].

Learning activity 10.6
Choose correct answers

(a) The correct option is [1] as the statement is true.

When a nation’s income increases, this leads to an increase in demand. Consumers and
investors have a choice to spend in the domestic market and/or the international market.
In the case where the choice is made to spend on imports, foreign currencies will be
required to purchase those goods/imports from foreign nations.

(b) The correct option is [3].

Economic growth may result in a higher income level, and therefore consumers also buy
more imported goods. Producers wishing to increase production capacity will also import
investment goods. This results in an increase in imports. The increase in imports also
result in an increase in the demand for foreign currency. This will lead to the rand
depreciating, making imported goods more expensive and fueling inflation in the
domestic economy. This will also affect the price of locally produced goods, and
therefore the demand for our exports may decrease. The balance of payments will
therefore deteriorate due to the higher imports and lower exports. Higher inflation leads
to a higher interest rate, which then decreases investment and thus result in curbing
economic growth. The balance of payments constraint therefore explains that economic
growth results in a worsening of the balance of payments, which results in a depreciation
of the rand which subsequently decreases economic growth again.

Option [1] tells part of this story, but does not refer to the balance of payments, and
therefore does not describe the balance of payments constraint.

Although statement [2] is true, it does not describe the balance of payment constraint.
The same applies to statement [4] – some government policies may hinder economic
growth but this does not explain the balance of payment constraint.
Learning activity 10.7
Quiz on learning unit 10

1. South African citizens would be better off economically if the country did not engage in
international trade at all.

1. True
2. False

Export creates job opportunities and income for South Africans; therefore, exports are
beneficial to South Africans. Goods are imported that cannot be produced in South
Africa. This includes capital goods that are used for production. Therefore, imports are
also important to the economy.

Anna can knit four jerseys or sew eight dresses per week, while Joan can knit three
jerseys or sew four dresses per week.

2. Anna has an absolute advantage in knitting jerseys.

1. True
2. False

Anna can produce more jerseys in one week than Joan, thus Anna has an absolute
advantage in the production of jerseys.

3. Anna has a comparative advantage in knitting jerseys.

1. True
2. False

To produce one jersey Anna has to give up 2 (8/2) dresses while Joan only has to give
up 1,3 dresses (4/3) to produce one jersey. Thus, Anna has a comparative advantage
in making dresses.

4. Joan should specialise in knitting jerseys, while Anna should specialise in sewing
dresses.

1. True
2. False
 To produce one dress, Anna has to give up 0,5 (4/8) jerseys. Joan has to give up 0,75
(3/4) jerseys to produce one dress. Thus as Anna has to give up less jerseys to produce
one dress, she has a comparative advantage in producing dresses. In the previous
question we explained that Joan has a comparative advantage in knitting jerseys. Thus
Joan should specialise in knitting jerseys and Anna should specialise in sewing dresses.

5. All economic activities taking place within the borders of a country are recorded in the
balance of payments.

1. True
2. False

Only transactions involving the foreign sector are recorded in the balance of payments.

6. The balance of payments is a summary record of a country’s transactions with the rest
of the world during a particular period.

1. True
2. False

See section 10.5.1 for a discussion of the balance of payments.

7. The flow of goods between South Africa and the rest of the world is recorded in the
current account of the South African balance of payments, while the flow of services is
recorded in the financial account.

1. True
2. False

The flow of services is also recorded in the current account. Financial investment (i.e.
when financial assets are purchased and sold) is recorded in the financial account.

8. Exports create a supply of foreign exchange, while imports constitute a demand for
foreign exchange.

1. True
2. False

When foreigners buy our goods, they pay using their own currency, therefore exports
result in an inflow of foreign capital into South Africa, thus an increase in the supply of
foreign currency. When South Africans import from other countries our citizens have to
use rand to purchase foreign currency to pay for the imports, therefore imports create a
demand for foreign currency.
9. An increase in South African imports from the United States will give rise to an
appreciation of the rand against the US dollar.

1. True
2. False

When imports from the US increase, the demand for dollars will increase (illustrated by
a rightward shift of the demand for dollars curve to D’ in Figure 1) to pay for the imports,
thus the rand will depreciate against the dollar (pay more rand per dollar).

Figure 1

10. A fall in the value of the rand against the Japanese yen is described as a depreciation
of the rand against the yen.

1. True
2. False
 A depreciation of the rand against the yen means that you will now have to pay more
rand for a Japanese yen.

Learning activity 10.8

Short questions on learning unit 10

1. An increase in exports increases the supply of foreign exchange and the supply curve
for foreign exchange shifts to the right.
2. An increase in imports increases the demand for foreign exchange and the demand
curve for foreign exchange shifts to the right.
3. An increase in the demand for foreign exchange leads to a (rise) in the rand exchange
rate and the rand (depreciates).
4. An increase in the supply of foreign exchange leads to a (fall) in the rand exchange
rate and the rand (appreciates).
5. Consider the rand/dollar exchange rate. Assume that the exchange rate is currently
quoted as R11.50 to the US dollar.

5.1 How many US cents would be required to buy R1.00?

5.2 If you bought an economic textbook for $45 over the internet, how much would
you have to pay in rand terms? (Ignore shipping costs, etc.)
5.3 If the exchange rate were to change to R11.80 to the dollar, which currency has
appreciated and which has depreciated?
5.4 How much will the textbook (still $45) cost you now in rand terms?
5.5 Explain how a change in the exchange rate results in ‘winners’ and ‘losers’.

5.1 To determine how many US cents would be required to buy R1,00 if the
exchange rate is R11,50=$1, we can do the following calculation:

R11,50 = $1

R11,50/11,50 = S1/11,50

R1 = $0,087, thus 0,087 US cents are required to buy R1,00

5.2 45 x 11,50 = R517,50

5.3 US dollar has appreciated, rand has depreciated
5.4 45 x 11,80 = R531,00
 5.5 If the South African rand depreciates (as was seen above), imported goods
become more expensive in rand terms. Consumers of imported goods would
have to pay more or do without them. On the other hand, if the rand depreciates,
exporters benefit because they now receive more rand for the same number of
US dollars.

6. Consider the following information.

Merchandise exports 300

Net gold exports 80
Merchandise imports 350
Service receipts 150
Service payments 200
Income receipts 90
Income payments 120
(Net) current transfers -30
Capital transfer account 0
Balance of financial account 150
Unrecorded transactions 0

6.1 Calculate the trade balance.

6.2 Calculate the balance on current account.
6.3 Calculate the change in (net) reserves, given the information above.
6.4 Of which four sub-accounts does the financial account consist?

6.1 300 + 80 – 350 = 30

6.2 300 + 80 + 150 + 90 – 350 – 200 – 120 – 30 = -80
6.3 -80 + 150 = 70
6.4 Net direct investment, net portfolio investment, financial derivatives and net other
investment