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Table of Contents
Question 1.1.......................................................................................................................3
Concept of supply and demand.....................................................................................3
Figure 1: diagram reflection supply, demand, production and scarcity.........................4
Concept of production....................................................................................................4
The concept of scarcity..................................................................................................5
How inconsistent access to energy will affect the South African economy...................5
An ethical approach to the prioritization and allocation of resources to solve the
energy crisis...................................................................................................................6
Question 1.2.......................................................................................................................8
Question 2.1.......................................................................................................................9
Question 2.2.....................................................................................................................10
The expenditure approach:..........................................................................................10
The income approach:..................................................................................................10
The production approach:............................................................................................10
Question 3........................................................................................................................11
Question 4 invasion of Ukraine by Russia.......................................................................12
Impact on Globalization:...............................................................................................12
Disruption of Global Supply Chains.............................................................................12
Political Tensions and Sanctions..............................................................................13
Energy Markets.........................................................................................................13
Implementation of Protectionist Policies:.....................................................................13
Examples of Protectionist Policies............................................................................14
Effectiveness and Consequences of Protectionist Policies......................................14
References:......................................................................................................................17
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Question 1.1
The article highlights the negative impact of load shedding on the South African
economy, which is affecting various sectors, including food security, mobile networks,
and business industries. The decrease in economic output due to load shedding has led
to a decline in the country's gross domestic product (GDP) by 0.7% in the second
quarter of 2022 (Stats SA, 2022). This decline is likely to continue in the third quarter,
according to the Bureau of Economic Research (BER), which notes that the current
round of load shedding is likely to have a similar impact on the nation’s GDP.
The supply and demand of electricity in South Africa can be visualized through a simple
graph that shows the relationship between the quantity of electricity supplied and the
quantity demanded at different price levels. The vertical axis represents price, while the
horizontal axis represents quantity.
In the case of South Africa, the supply of electricity has been constrained due to various
factors, including inadequate investment in power generation and infrastructure
maintenance, aging power plants, and technical problems at the state-owned utility
Eskom. This has resulted in regular power outages, or load shedding, which has
disrupted economic activity and caused significant damage to various sectors of the
economy.
As shown in the graph below, the supply of electricity in South Africa has fallen short of
the demand for electricity) in recent years, resulting in a shortage of electricity at the
prevailing price level. This shortage has led to an increase in the price of electricity,
which has in turn reduced the quantity demanded.
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Figure 1: diagram reflection supply, demand, production and scarcity
Price increase
Shortage /scarcity
As the graph shows, the shortage of electricity in South Africa has led to a situation
where the price of electricity is higher than it would be in a situation of equilibrium where
supply and demand are equal. This higher price reflects the scarcity of electricity and
the opportunity cost of using it for productive activities. The higher price has also led to
a reduction in the quantity demanded of electricity, as consumers and businesses have
sought to conserve energy or switch to alternative sources of power.
Overall, the graph illustrates how the concepts of supply, demand, scarcity, and
opportunity cost can be applied to the case of electricity in South Africa, and how load
shedding has disrupted the balance between supply and demand, resulting in economic
losses and social hardship.
Concept of production
The concept of production is also relevant to the article, as load shedding affects
production levels, leading to a decrease in economic output. As businesses struggle to
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operate without electricity, production levels decrease, leading to a decrease in the
supply of goods and services. This decrease in production, in turn, affects the
economy's overall growth and development, as evidenced by the decline in the
country's GDP due to load shedding (Jiang and Kim 2020).
If there is a scarcity of a good the supply will be falling, and this causes the price to rise.
In a free market, this rising price acts as a signal and therefore demand for the good
falls (movement along the demand curve) (Aguilera et al, 2021:33). Also, the higher
price of the good provides incentives for firms to:
Look for alternative sources of the good e.g. new supplies of oil from the
Antarctic.
How inconsistent access to energy will affect the South African economy
Inconsistent access to energy can have significant negative impacts on the South
African economy. South Africa has been facing a severe energy crisis for several years,
with frequent power outages and load shedding resulting from inadequate power
generation capacity and maintenance of existing infrastructure. This has led to
disruptions in industrial production and services, increased costs for businesses, and
reduced investor confidence (Zaman et al, 2022).
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According to a study conducted by the Harvard Kennedy School in 2020, South Africa's
electricity crisis has cost the country's economy between 1% and 2% of GDP annually
over the past decade (Siddiqi, 2020). Inconsistent access to energy can also hinder
economic growth and job creation, as businesses may be reluctant to invest in a country
with an unstable energy supply (Jiang and Kim 2020).
Moreover, inconsistent access to energy can have significant impacts on social and
environmental issues, such as health, education, and climate change. A lack of energy
access can limit the ability of hospitals and schools to provide essential services, while
also contributing to carbon emissions and air pollution through the use of inefficient and
polluting energy sources (Aguilera et al, 2021:33).
To address the energy crisis, South Africa needs to invest in diversified and sustainable
energy sources, such as renewable energy and energy efficiency measures, while also
improving the efficiency and reliability of the existing energy infrastructure. By doing so,
the country can ensure a stable and sustainable energy supply, which will have positive
impacts on the economy and society as a whole (Kyere and Ausloos, 2021).
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In addition, an ethical approach would involve engaging in transparent and participatory
decision-making processes, where all stakeholders have a voice in the allocation of
resources and the development of energy policy. This could help to build trust and
promote accountability, while also ensuring that policies are aligned with the needs and
values of the broader society (Kyere and Ausloos, 2021).
Overall, an ethical approach to the prioritization and allocation of resources to solve the
energy crisis in South Africa would involve taking into account the needs of all
stakeholders and ensuring that resources are allocated in a fair and just manner. By
doing so, South Africa can address the energy crisis in a way that is consistent with its
commitment to social justice and sustainable development (Bhagat and Bolton,
2019:78).
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Question 1.2
North Korea and Australia have vastly different economic systems. North Korea is
known for its centrally planned economy, while Australia has a market-based economy.
North Korea's economy is centrally planned, meaning that the government controls all
economic decisions, including what goods and services are produced, how they are
produced, and who receives them. The government owns most of the country's
businesses and industries. This system has hindered North Korea's economic growth as
it has resulted in inefficiencies, mismanagement, and a lack of incentives for innovation
and productivity. Economic sanctions and isolation from the international community
have also contributed to the country's economic struggles. (Kivimaki, 2018)
On the other hand, Australia has a market-based economy where the forces of supply
and demand determine the allocation of resources. The government's role is mainly
limited to regulation, public goods and services, and providing social safety nets. This
system has contributed to Australia's economic growth, as it provides incentives for
innovation, entrepreneurship, and productivity. However, it also creates income
inequality and can result in externalities such as pollution or exploitation. (Sorensen,
2018)
In conclusion, North Korea and Australia have vastly different economic systems, with
North Korea's centrally planned economy hindering its economic growth and Australia's
market-based economy contributing to its economic growth. However, both systems
have their limitations and can lead to economic inequality and externalities.
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Question 2.1
Gross Domestic Product (GDP) and Gross National Product (GNP) are two widely used
indicators of a country's economic performance. GDP is the total value of all final goods
and services produced within a country's borders in a specific period, usually a year. On
the other hand, GNP is the total value of all goods and services produced by a country's
residents, whether within or outside the country's borders, in a specific period (Zaman et
al, 2022).
One of the primary differences between GDP and GNP is that GDP only considers the
economic activities that take place within a country's borders, regardless of who owns
the resources used in production. In contrast, GNP considers the contribution of a
country's citizens and businesses to the production of goods and services, whether they
are operating within or outside of the country's borders (Mankiw et al., 2015).
For instance, if a U.S.-based company, such as Apple, produces iPhones in China, the
value of the iPhones produced would be included in China's GDP but would be included
in the U.S. GNP, as the company is owned by U.S. residents. Additionally, if a citizen of
a foreign country works in the U.S. and earns income, their contribution to the U.S.
economy would be reflected in the U.S. GNP but not the GDP (Jiang and Kim 2020).
Another difference between GDP and GNP is how they account for net foreign income.
GDP excludes the income earned by foreigners living in the country, while GNP
includes income earned by citizens abroad. Thus, a country's GNP will be higher than
its GDP if the income earned by its citizens abroad is greater than the income earned by
foreigners living in the country (Aguilera et al, 2021:33).
In conclusion, GDP and GNP are essential measures of economic activity, and
understanding the differences between them is critical for accurately assessing a
country's economic performance. While GDP focuses on the economic activities that
take place within a country's borders, GNP includes the contributions of a country's
citizens and businesses, regardless of where they operate.
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Question 2.2
There are three ways to calculate a country's gross domestic product (GDP): the
expenditure approach, the income approach, and the production approach.
Each approach provides a different perspective on a country's economy and may yield
slightly different results. However, all three approaches should give roughly the same
estimate of a country's GDP.
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Question 3
The South African Reserve Bank's decision to increase interest rates is likely an effort to
combat inflationary pressures in the economy. By increasing interest rates, the central
bank is making borrowing more expensive, which reduces spending and can help to
control inflation. Inflation occurs when the general price level of goods and services
increases, reducing the purchasing power of money. When inflation gets too high, it can
lead to a number of negative consequences, including reduced economic growth, lower
investment, and decreased consumer confidence.
Another reason for interest rate increases is to stabilize the currency. If the South
African rand is weakening against other currencies, the SARB may increase interest
rates to make holding rand-denominated assets more attractive, which can help to
strengthen the currency (Aguilera et al, 2021:33).
In addition, interest rate increases may be used to attract foreign investment and reduce
the risk of capital flight during times of economic uncertainty or instability. By increasing
interest rates, the SARB can make holding South African assets more attractive to
investors, which can help to stabilize the economy and support growth (Zaman et al,
2022).
Finally, interest rate increases may be used to address imbalances in the economy,
such as a large current account deficit or high levels of household debt. By making
borrowing more expensive, the SARB can encourage households and businesses to
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reduce their debt levels, which can help to reduce financial risks and support
sustainable growth (Kyere and Ausloos, 2021).
According to a study by the South African Reserve Bank, high inflation can also lead to
higher borrowing costs, as lenders demand higher interest rates to compensate for the
increased risk of inflation (Mboweni, 2021). This can make it more difficult for
businesses and households to obtain credit, which can lead to a slowdown in
investment and economic activity.
Furthermore, inflation can exacerbate income inequality by reducing the real value of
wages and pensions for low-income households. This can lead to social unrest and
political instability, as households struggle to make ends meet and demand for
government assistance increases (Kyere and Ausloos, 2021).
To mitigate these negative consequences, the South African Reserve Bank has set an
inflation target range of 3% to 6%, and uses monetary policy tools such as interest rate
adjustments to keep inflation within this range.
Allowing inflation to rise unchecked could have serious consequences for South Africa's
economy. Inflation erodes the value of money, leading to higher costs for consumers
and businesses alike. This can lead to reduced investment and lower economic growth,
as businesses become less willing to invest and expand in a high-inflation environment.
Additionally, high inflation can lead to social unrest and political instability, as people
become increasingly dissatisfied with their decreasing purchasing power (Zaman et al,
2022).
In the case of South Africa, the high interest rates and resulting increase in debt
servicing costs for the middle class could lead to decreased consumer spending and
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economic activity. This could further exacerbate the inflationary pressures in the
economy, creating a vicious cycle of higher interest rates, higher debt servicing costs,
and reduced economic activity (Jiang and Kim 2020).
In summary, the South African Reserve Bank's decision to increase interest rates is
likely an effort to combat inflation and maintain economic stability. Allowing inflation to
rise unchecked could lead to a number of negative consequences for the country's
economy, including reduced economic growth, lower investment, and decreased
consumer confidence.
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Question 4 invasion of Ukraine by Russia
Introduction:
The invasion of Ukraine by Russia on 24th February 2022 had severe economic
repercussions on both the global and domestic economies, with the cost being felt
across all sectors of the economy. The article by Wiseman and McHugh (2023)
highlights the impact of the war on the global economy, with emerging economies
suffering more than developed ones. This essay will critically evaluate the impact of the
Russian invasion of Ukraine on globalization and discuss how the implementation of
protectionist policies by governments can mitigate the impact of such conflict on
domestic economies.
Impact on Globalization:
The Russian invasion of Ukraine had a significant impact on globalization, as it
disrupted the global supply chain, leading to the scarcity of essential commodities like
grain, fertilizer, and energy, among others. This scarcity led to the surge in prices of
these commodities, leading to inflation and economic uncertainty. The rise in commodity
prices had a ripple effect on all sectors of the economy, as it led to an increase in the
cost of production and reduced the purchasing power of consumers. The International
Monetary Fund (IMF) reported a rise in consumer prices of 7.3 percent in developed
countries and 9.9 percent in poorer ones, with the latter experiencing a more significant
impact due to their dependence on imports (Wiseman and McHugh, 2023). The Russian
invasion of Ukraine on February 24, 2022, had a significant impact on globalisation,
affecting various aspects of international trade, investment, and economic relations..
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2022). The conflict also led to the closure of several Ukrainian factories, leading to
shortages of essential goods such as steel and electronics, further impacting global
supply chains (Brookings Institution, 2022).
Energy Markets
The Russian invasion of Ukraine also had a significant impact on energy markets,
leading to increased volatility and higher prices. Ukraine is a key transit country for
Russian gas supplies to Europe, and the conflict disrupted gas supplies, leading to
shortages and price increases (Bloomberg, 2022). The conflict also impacted oil prices,
with fears of supply disruptions leading to price increases (Lynch, 2022). The impact of
the conflict on energy markets has had a significant impact on the global economy,
leading to higher production costs and reduced economic activity.
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the case of the Russian invasion of Ukraine, protectionist policies may be seen as a
means to mitigate the impact of the conflict on domestic economies (Bhagat and Bolton,
2019:78).
Protectionist policies can take many forms, including tariffs, import quotas, and
subsidies for domestic producers. These measures are designed to limit imports and
promote domestic production, thereby shielding domestic industries from the negative
effects of foreign competition (Kyere and Ausloos, 2021).
Tariffs are taxes on imported goods, and they increase the cost of imported goods,
making them less competitive with domestic products. Import quotas limit the amount of
a particular product that can be imported, while subsidies are payments made by the
government to domestic producers to help them compete with foreign imports (Aguilera
et al, 2021:33).
In the context of the Russian invasion of Ukraine, protectionist policies can help to
mitigate the impact of disruptions in global markets. By protecting domestic industries,
governments can ensure that essential goods remain available and affordable for
consumers, even in the face of disruptions in global trade (Jiang and Kim 2020).
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Effectiveness and Consequences of Protectionist Policies
While protectionist policies may be effective in mitigating the impact of the conflict on
domestic economies, they can also have unintended consequences. For example,
tariffs and import quotas can lead to higher prices for consumers, and subsidies can be
expensive for governments to maintain (Bhagat and Bolton, 2019:78).
Protectionist policies can also lead to retaliation from other countries, which can in turn
harm domestic industries that rely on exports. This is known as the "trade war"
phenomenon, where countries impose tariffs or other trade barriers in response to each
other, leading to a spiral of increased protectionism that can ultimately harm global
trade and economic growth (Kyere and Ausloos, 2021).
Import tariffs are taxes imposed on imported goods to protect domestic industries from
foreign competition. By increasing the cost of imported goods, import tariffs make local
products more competitive, leading to increased demand for domestic products. Export
subsidies, on the other hand, are payments made by governments to local exporters to
make their products more affordable and competitive in the international market. By
promoting local exports, governments can reduce the dependence of their economies
on imports, leading to increased economic growth (Kyere and Ausloos, 2021).
Another way governments can mitigate the impact of conflicts on domestic economies is
by investing in strategic sectors like agriculture, energy, and manufacturing, among
others. By investing in these sectors, governments can promote local production and
reduce the dependence of their economies on imports. This strategy can lead to
increased productivity, job creation, and economic growth (Jiang and Kim 2020).
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In conclusion, the Russian invasion of Ukraine had severe economic repercussions on
the global and domestic economies, with emerging economies suffering more than
developed ones. The invasion disrupted the global supply chain, leading to inflation and
economic uncertainty, and reduced global trade, leading to reduced productivity and job
losses. Governments can implement protectionist policies to mitigate the impact of
conflicts on domestic economies. By promoting domestic production and investing in
strategic sectors, governments can reduce their economies' dependence on imports,
leading to increased productivity and economic growth. It is crucial to promote peace
and stability to reduce the impact of conflicts on the economy.
The Russian invasion of Ukraine on February 24, 2022, had a significant impact on
globalisation, disrupting global supply chains, leading to political tensions and sanctions,
and impacting energy markets. The conflict has had far-reaching consequences,
leading to a reduction in trade and investment, higher production costs, and reduced
economic activity. To mitigate the impact of such conflicts on globalisation, countries
should adopt measures to diversify their supply chains, reduce their dependence on
vulnerable regions, and promote regional economic integration (Brookings Institution,
2022).
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