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Economics · Oct / Nov 2020 · Paper 21 · Question 2

0455

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The election of a new president in South Africa in 2018 led to improvement in business and consumer confidence. Inflation rates fell despite a rise in total demand. One government policy measure established areas known as economic zones where firms pay lower, or no, taxes. These zones encourage domestic firms to become internationally competitive which could reduce the deficit on the current account of South Africa’s balance of payment.

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  • 2(a)[2]

    State two components of the current account. Any two from:

    trade in goods
    trade in services
    primary income
    secondary income 2 Any two components. Accept exports and imports for 1 mark.

  • 2(b)[4]

    Explain why inflation may fall even if there is an increase in total demand. Logical explanation which might include: There may have been an increase in total supply (1)

    which may be greater than the increase in total demand (1). There could be an improvement in productivity (1)

    better technology / capital (1). Costs of production could have gone down (1)

    e.g. lower taxes / lower costs of raw material, stronger exchange rates (1).

  • 2(c)[6]

    Analyse how a country’s current account deficit might be reduced if its firms become internationally competitive. Coherent analysis which might include: Being internationally competitive e.g. high productivity, low inflation, low exchange rates (max 2) increases production (1)

    reduces cost of production (1)

    decreases price of exports (1)

    increases quality of exports (1)

    increases demand for exports (1)

    increases value of exports / net exports (1). Imports relatively more expensive / other countries products more expensive (1)

    lower relative quality of imports (1)

    decreases imports (1).

  • 2(d)[8]

    Discuss whether or not lower taxes on firms will be beneficial for an economy. In assessing each answer, use the table opposite. Why it might be beneficial:

    will increase after tax profits
    increase ability and incentive to invest
    firms may expand output leading to higher employment and economic growth
    higher investment may increase innovation and productivity which may improve the current account
    will reduce cost of production. This may reduce inflation Why it might not be beneficial:
    firms might not invest more and just keep the profits to themselves
    government will get less revenue from firms, reducing ability to spend to improve the economy
    may attract MNCs which may replace domestic firms
    capital goods may replace labour, causing unemployment
    higher output may result in external costs e.g. pollution. Level Descriptors Mark A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development or may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content. Guidance Example of L3 answer: Lower taxes on firms will be beneficial for an economy, as this will reduce the production costs for firms and increase their profits. With greater profits, firms may invest in labour, which will decrease unemployment, and allow the firm to increase its output. With greater output, a firm’s exports may increase, and this will improve the current account position. Furthermore, lower taxes may allow for lower prices as the reduced production costs may be passed on to consumers. Also, lower taxes may allow a firm to increase its wages which not only increase average incomes, but also increase productivity and so economic output. On the other hand, low taxes may not be beneficial, as firms may use their increased income for expansion, but may also increase external costs such as pollution when they do this. Furthermore, lower taxes may allow firms to become monopolies, which will hurt competition and the potential for new firms. Moreover, with increased income, firms may choose to become capital-intensive rather than labour-intensive, which would increase unemployment. Principal Examiner comment: Strong on one side and reasonable on the other side.
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