MTG Economics Grade 12 Study Guide PDF

GRADE Econ o m i c s STUDY G U I D E 12 © Department of Basic Education 2014 GRADE Economics 12 E STUDY GUID © Department of Basic Education 2014 This content may not be sold or used for commercial purposes. Curriculum and Assessment Policy Statement (CAPS) Mind the Gap Grade 12 Study Guide Economics ISBN 978-1-4315-1949-1 This publication has a Creative Commons Attribution NonCommercial Sharealike license. You can use, modify, upload, download, and share content, but you must acknowledge the Department of Basic Education, the authors and contributors. If you make any changes to the content you must send the changes to the Department of Basic Education. This content may not be sold or used for commercial purposes. For more information about the terms of the license please see: http://creativecommons.org/licenses/by-nc-sa/3.0/. Copyright © Department of Basic Education 2014 222 Struben Street, Pretoria, South Africa Contact person: Dr Patricia Watson Email: [email protected] Tel: (012) 357 4502 http://www.education.gov.za Call Centre: 0800202933 The first edition published in 2012 Revised National Curriculum Statement (RNCS) Mind the Gap Grade 12 Study Guide Economics ISBN 978-0-621-40910-9 Second edition published in 2014 Curriculum and Assessment Policy Statement (CAPS) Mind the Gap Grade 12 Study Guide Economics : ISBN 978-1-4315-1949-1 Mind the Gap team Series managing editor: Dr Patricia Watson Production co-ordinators for CAPS edition: Lisa Treffry-Goatley and Radha Pillay Authors: Richard Gouws, Janice Hardine, Andre Olivier, Nithiananthan Pillay, Irmela Roodt Expert readers: Eugenia Maila, Maureen Mashinini, Neo Mejoane, Mogale Philemon Mochaki, Tammy Pike, Edwin Pretorius, Natalie Winter Editors: Julia Grey, Herbert Opland Proofreader: Jenny de Wet Designers: Alicia Arntzen, Philisiwe Nkosi, Michele Dean, Nomalizo Ngwenya Study skills: Margarita Karnasopoulos Illustrators: Michele Dean, Kenneth Kunene, Vusi Malindi, Bié Venter Cover illustration: Alastair Findlay Onsite writers’workshop support: Wayne Cussons © Department of Basic Education 2014 Ministerial foreword The Department of Basic Education has pleasure in releasing the second edition of Mind the Gap study guides for Grade 12 learners. These study guides continue the innovative and committed attempt by the Department of Basic Education to improve the academic performance of Grade 12 candidates in the National Senior Certificate (NSC) examination. The study guides have been written by subject expert teams comprised of teachers, examiners, moderators, subject advisors and subject co- ordinators. Research started in 2012 shows that the Mind the Gap series has, without doubt, had a positive impact in improving grades. It is my fervent wish that the Mind the Gap study guides take us all closer towards ensuring that no learner is left behind, especially as we move forward in our celebration of 20 years of democracy. Matsie Angelina Motshekga, MP The second edition of Mind the Gap is aligned to the 2014 Curriculum and Minister of Basic Education Assessment Policy Statement (CAPS). This means that the writers have considered the National Policy pertaining to the programme, promotion requirements and protocol for assessment of the National Curriculum Statement for Grade 12 in 2014. The Mind the Gap CAPS study guides take their brief in part from the 2013 National Diagnostic report on learner performance and draws on the 2014 Grade 12 Examination Guidelines. Each of the Mind the Gap study guides provides explanations of key terminology, simple explanations and examples of the types of questions that learners can expect to be asked in an exam. Marking memoranda are included to assist learners in building their understanding. Learners are also referred to specific questions in past national exam papers and examination memos that are available on the Department’s website – www.education.gov.za. The CAPS edition include Accounting, Economics, Geography, Life Sciences, Mathematics, Mathematical Literacy and Physical Sciences. The series is produced in both English and Afrikaans. There are also nine English First Additional Language study guides. They include EFAL Paper 1 (Language); EFAL Paper 3 (Writing); and a study guide for each of the Grade 12 prescribed literature set works. The study guides have been designed to assist those learners who have been underperforming due to a lack of exposure to the content requirements of the curriculum and aims to mind-the-gap between failing and passing, by bridging the gap in learners’ understanding of commonly tested concepts so candidates can pass. All that is now required is for our Grade 12 learners to put in the hours preparing for the examinations. Learners make us proud – study hard. We wish each and every one of you good luck for your Grade 12 examinations. _________________________________ Matsie Angelina Motshekga, MP Minister of Basic Education May 2014 © Department of Basic Education 2014 Table of Contents Dear Grade 12 learner.........................................................................................................vii How to use this study guide.................................................................................................xi Top 10 study tips..................................................................................................................xii Question words to help you answer questions................................................................xiii Study skills to boost your learning....................................................................................xiii On the day of the exam ….................................................................................................xvi Learner’s checklist............................................................................................................xviii Chapter 1: The circular flow model, national account aggregates and the multiplier............................................................................................... 1 1.1 Key concepts..........................................................................................................4 1.2 The open economy circular flow model.................................................................6 1.3 National account aggregates............................................................................. 12 1.4 The multiplier....................................................................................................... 19 Chapter 2: Business cycles and forecasting................................................ 23 2.1 Key concepts....................................................................................................... 25 2.2 The composition and features of business cycles............................................ 25 2.3 Explanations........................................................................................................ 27 2.4 Government policy............................................................................................... 29 2.5 The new economic paradigm.............................................................................. 32 2.6 Features underpinning forecasting with regard to business cycles.................. 32 Chapter 3: The role of the public sector........................................................ 37 3.1 Key concepts....................................................................................................... 40 3.2 Composition and necessity.................................................................................. 41 3.3 Problems of public sector provisioning.............................................................. 42 3.4 Objectives of the public sector and its budgets................................................. 43 3.5 Fiscal policy......................................................................................................... 46 3.6 Public sector failure............................................................................................ 48 Chapter 4: The foreign exchange market and the balance of payments accounts......................................................................................... 51 4.1 Key concepts....................................................................................................... 54 4.2 The reasons for international trade................................................................... 55 4.3 The balance of payments accounts................................................................... 56 4.4 Foreign exchange markets.................................................................................. 59 4.5 Establishment of foreign exchange rates........................................................... 61 4.6 Corrections of the balance of payments............................................................. 63 Chapter 5: Protectionism and free trade....................................................... 67 5.1 Key concepts....................................................................................................... 70 5.2 Export promotion................................................................................................. 71 5.3 Import substitution............................................................................................... 72 5.4 Protection............................................................................................................. 73 5.5 Free trade..............................................................................................................74 5.6 A desirable mix of protection and free trade...................................................... 75 5.7 Evaluation of South Africa’s trade policies......................................................... 76 Chapter 6: The dynamics of perfect markets................................................ 78 6.1 Key concepts....................................................................................................... 81 6.2 Review of production, costs and revenue.......................................................... 82 6.3 Perfect competition............................................................................................. 83 6.4 The individual business and the industry.......................................................... 85 6.5 Market structures................................................................................................. 89 6.6 Output, profit, losses and supply......................................................................... 90 6.7 How to draw graphs to show various equilibrium positions.............................. 95 6.8 Competition policies............................................................................................. 96 Chapter 7: Dynamics of imperfect markets.................................................. 99 7.1 Key concepts..................................................................................................... 101 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics CONTENTS v © Department of Basic Education 2014 7.2 Monopolies......................................................................................................... 102 7.3 Output profit and loss......................................................................................... 104 7.4 Oligopolies.......................................................................................................... 107 7.5 Monopolistic competition................................................................................. 110 7.6 Summary of market structures......................................................................... 111 Chapter 8: The reasons for and consequences of market failures.......... 115 8.1 Key concepts.....................................................................................................118 8.2 The reasons for market failures....................................................................... 119 8.3 Consequences/effects of market failures.......................................................122 8.4 Cost-benefit analysis (CBA)...............................................................................129 Chapter 9: Economic growth and development......................................... 133 9.1 Key concepts.....................................................................................................135 9.2 Economic growth and economic development...............................................136 9.3 Demand-side approach.....................................................................................136 9.4 The supply-side approach.................................................................................138 9.5 Evaluation of the South African approaches used in South Africa................139 9.6 The North/South divide.....................................................................................141 Chapter 10: South Africa’s industrial policies and their suitability in terms of international best practice............................................................. 145 10.1 Key concepts..................................................................................................... 147 10.2 Industrial development policies in South Africa.............................................. 148 10.3 Regional development....................................................................................... 149 10.4 South Africa’s endeavours................................................................................150 10.5 Incentives to encourage industrial development............................................ 152 10.6 Appropriateness of South Africa’s industrial policies......................................155 10.7 Appropriateness of South Africa’s regional development policies..................156 10.8 Small business development policies...............................................................156 10.9 The appropriateness of black economic empowerment in the South African economy.................................................................................................156 Chapter 11: South African economic and social indicators...................... 159 11.1 Key concepts..................................................................................................... 161 11.2 The performance of an economy...................................................................... 162 11.3 Economic indicators.......................................................................................... 162 11.4 Social indicators................................................................................................164 11.5 International comparisons................................................................................ 166 Chapter 12: Inflation...................................................................................... 170 12.1 Key concepts..................................................................................................... 172 12.2 Measuring inflation (define, explain, examine)................................................ 173 12.3 Types and characteristics of inflation.............................................................. 173 12.4 The causes of inflation........................................................................................174 12.5 The consequences of inflation.......................................................................... 176 12.6 Measures to combat inflation........................................................................... 176 Chapter 13: Tourism....................................................................................... 180 13.1 Key concepts.....................................................................................................182 13.2 Definition of tourism..........................................................................................183 13.3 The purposes of tourism....................................................................................183 13.4 Measuring tourism.............................................................................................183 13.5 Reasons for growth............................................................................................183 13.6 The effects of tourism.......................................................................................184 13.7 The benefits of tourism.....................................................................................186 13.8 A South African tourism profile.......................................................................... 187 13.9 Tourism policy suggestions............................................................................... 187 Chapter 14: Environmental sustainability.................................................... 191 14.1 Key concepts.....................................................................................................193 14.2 The state of the environment...........................................................................194 14.3 Measures to ensure sustainability...................................................................196 Appendix: Exemplar exam paper................................................................ 201 © Department of Basic Education 2014 vi CONTENTS Mind the Gap CAPS Grade 12 Economics © Department of Basic Education 2014 Dear Grade 12 learner This Mind the Gap study guide helps you to prepare for the end-of-year Education is the passport to the CAPS Economics Grade 12 exam. future, for tomorrow belongs to those The study guide does NOT cover the entire CAPS curriculum, but it does who prepare for it today. focus on core content of each knowledge area and points out where you can earn easy marks. You must work your way through this study guide to improve your understanding, identify your areas of weakness and correct your own mistakes. To ensure a good pass, you should also cover the remaining parts of the curriculum using other textbooks and your class notes. We are confident that this Mind the Gap study guide can help you to prepare well so that you pass the end-of-year exams. The importance of your success cannot be over-emphasised. You form part of the future generation, and we all hope for a better future, a future where all our young South Africans can enjoy a high standard of living. Overview of the exam for CAPS Economics Grade 12 The Economics exam consists of TWO × 1½ hour papers of 150 marks each. The paper consists of SIX questions divided into three sections. Question ONE is COMPULSORY. There are FIVE other questions from which THREE must be answered. The detailed requirements for each section are shown below: FORMAT OF THE GRADE 12 ECONOMICS QUESTION PAPERS Economics 1. CLASSIFICATION OF TOPICS FOR GRADE 12 ECONOMICS QUESTION is a life journey… PAPERS Use it daily MIDYEAR EXAMINATION PAPERS The two question papers are structured as follows: ECONOMICS GRADE 12 PAPER 1 PAPER 2 150 MARKS – 1½ HOURS 150 MARKS – 1½ HOURS MAIN TOPIC: MACROECONOMICS MAIN TOPIC: MICROECONOMICS TOPICS: TOPICS: Circular flow Perfect markets Business cycles Imperfect markets Public sector Market failures Foreign exchange markets Protectionism and Free Trade © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics INTRODUCTION vii © Department of Basic Education 2014 TRIAL AND FINAL EXAMINATION PAPERS ECONOMICS GRADE 12 PAPER 1 PAPER 2 150 MARKS – 1½ HOURS 150 MARKS – 1½ HOURS MAIN TOPIC: MAIN TOPIC: MACROECONOMICS MICROECONOMICS TOPICS: TOPICS: Circular flow Perfect markets Business cycles Imperfect markets Public sector Market failures Foreign exchange markets Protectionism and Free Trade MAIN TOPIC: MAIN TOPIC: ECONOMIC PURSUITS ECONOMIC ISSUES Growth and Development Inflation Industrial development policies Tourism PAY SPECIAL ATTENTION NB Economic and social NB Environmental sustainability performance indicators Each paper carries 150 MARKS HINT! hint The duration of each paper is 1½ HOURS Each paper comprises of SIX QUESTIONS divided into three sections. From the six questions only FOUR must be answered as follows: e.g. –– SECTION A: Question 1 is COMPULSORY EG - worked examples –– SECTION B: Consists out of THREE questions: Questions 2–4 from which the candidate must choose only TWO –– SECTION C: Consists out of TWO questions: Questions 5–6 from which the examscandidate must choose only ONE The above papers must not be written on the same day. The detailed requirements for each section are indicated on the following pages: activity ACTIVITIES boy and girl-left and right of page activity Step by step comment comment © Department of Basic Education 2014 viii INTRODUCTION Mind the Gap CAPS Grade 12 Economics © Department of Basic Education 2014 1. DETAIL OF GRADE 12 ECONOMICS QUESTION PAPERS SECTION A (COMPULSORY) TOTAL: 30 QUESTION 1 (TO BE ANSWERED IN THE ANSWER BOOK – NO LOOSE ANSWER SHEETS ARE ALLOWED) 1.1 Multiple-choice items (lower order) FOUR per main topic = 8 items (2 marks per item) (8 × 2) (16) 1.2 Matching column A and B (lower order) FOUR items per main topic = 8 items (1 mark per item) (8 × 1) (8) 1.3 Identify the concept (middle/lower order) THREE items per main topic (6 × 1) (6) SECTION B (Answer TWO QUESTIONS FROM THIS SECTION) TOTAL: 80 QUESTIONS 2 – 4 (THREE QUESTIONS) ONE question per MAIN TOPIC and ONE combination question (not necessarily equally distributed) of the 2 MAIN TOPICS 2.1 Short items 2.1.1 Lower order (2 × 1) (2) 2.1.2 Middle order (1 × 2) (2) (4) 2.2 Data response (middle order): Study the following graph/cartoon/ table/text, etc. and answer the questions that follow: (10) 2.3 Data response (middle order): Study the following graph/cartoon/ table/ text, etc. and answer the questions that follow: (10) 2.4 ONE short question (middle order): (2 × 4) OR (4 × 2) (8) 2.5 ONE short question (higher order): (2 × 4) OR (4 × 2) (8) SECTION C (ANSWER ONE QUESTION FROM THIS SECTION) TOTAL: 40 QUESTIONS 5-6 (TWO ESSAY QUESTIONS) – ONE question per MAIN TOPIC STRUCTURE OF ESSAY MARK ALLOCATION Introduction Max. 2 Body: Main part: Discuss in detail/Indepth discussion/Examine/ Max. 26 Critically discuss/Analyse/Compare/Evaluate/Distinguish/ Differentiate/Explain/Assess Max. 10 Additional part: Give own opinion/Critically discuss/ Evaluate/Critically evaluate/Draw a graph and explain/Use the graph given and explain/Complete the graph/Calculate/ Deduce/Compare/Explain/Distinguish/Interpret Conclusion Max. 2 TOTAL 40 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics INTRODUCTION ix © Department of Basic Education 2014 Essays play a very big role in your success in Economics, because you must choose ONE essay to answer in each question paper, counting 40 marks out of the grand total of 150 marks. Each essay counts 40 marks. This study guide includes essay topics that have been asked in past question papers. Make sure that you study each of these topics in detail in your preparation for your preparatory and final papers. Never leave a question unanswered if you are asked to offer your own opinion. Remember: each section includes questions that are easy and almost-easy, so make sure you get these marks too. Good luck for your NSC exams, your doorway to a better future. Dream big, set your goals and go for it! © Department of Basic Education 2014 x INTRODUCTION Mind the Gap CAPS Grade 12 Economics © Department of Basic Education 2014 Look out for How to use this study guide these icons in the study guide. PAY SPECIAL ATTENTION NB NB The study guide includes a table of key NBconcepts with definitions NB PAY SPECIAL ATTENTION which need to be learnt off by heart. You can gain easy marks for the recall of definitions in the single mark questions. PAY SPECIAL ATTENTION NB NB HINT! HINT! hint hint Hints to help you remember a concept NB PAY SPECIAL ATTENTION Pay special attention NBhint HINT! orEGguide you in e.g. EG - worked examples Worked examples e.g. - worked examples solving problems exams HINT! e.g. exams EG - worked examples Activities with Step-by-step Refers you to exam hint instructions questions questions for you to answer exams e.g. EG - worked examples activity A checklist from the exam guidelines foractivity Economics has been ACTIVITIES boy provided on page xvi for you to keep track of your progress. Once ACTIVITIES boy and girl-left and right of page exams you have mastered the core concepts and have confidence right of in page your and girl-left and activity activity answers to the questions provided, tick the last column of the activity checklist. ACTIVITIES boy and girl-left and right of page The activities are based on exam-type questions. activity Cover the answers Step by step comment comment activity comment and do the activity on your own. Then check your ACTIVITIES boy answers.comment Step by step Reward yourself for the things you get right. If you get any incorrect answers, and girl-left and right of page make sure you understand where you went wrong before moving on comment activity Step by step comment to the next section. Use this study guide as a workbook. Each topic is briefly covered according to the exam guidelines. Make notes, draw pictures Valuable guidelines are provided comment to help you answer questions and highlight important Step by step comment on graphs. concepts. Exemplar Exam papers are included in the study guide for you to do. Check your answers by looking back at your notes and the exam memoranda. An example of a paper goes a long way in preparing you for what to expect and helps reduce exam anxiety. Go to www.education.gov.za to download more past exam papers. True individual freedom cannot exist without economic security and independence. Franklin D Roosevelt © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics INTRODUCTION xi © Department of Basic Education 2014 Top 10 study tips The golden rule of effective study is the ABC – Apply 1. Have all your materials ready before you begin studying – pencils, pens, highlighters, paper, etc. Bottom to Chair! 2. Be positive. Make sure your brain holds onto the information you are learning by reminding yourself how important it is to remember the work and get the marks. 3. Take a walk outside. A change of scenery will stimulate your learning. You’ll be surprised at how much more you take in outside in the fresh air. 4. Break-up your learning sections into manageable parts. Trying to learn too much at one time will only result in a tired, unfocused and anxious brain. 5. Keep your study sessions short but effective and reward yourself with short, constructive breaks. 6. Teach your concepts to anyone who will listen. It might feel strange at first, but it is definitely worth reading your revision notes aloud. 7. Your brain learns well with colours and pictures. Try to use them whenever you can. 8. Be confident with the learning areas you know well and focus your brain energy on the sections that you find more difficult to take in. 9. Repetition is the key to retaining information you have to learn. Keep going, don’t give up. 10. Sleeping at least 8 hours every night, eating properly and drinking plenty of water are all important things you need to do for your brain. Studying for exams is like tough exercise, so you must be prepared physically. © Department of Basic Education 2014 xii INTRODUCTION Mind the Gap CAPS Grade 12 Economics © Department of Basic Education 2014 Study skills to boost your learning This guide makes use of three study techniques you can use to help you learn the material: 1. Mobile notes 2. Mnemonics 3. Mind maps Mobile notes These mobile notes will Mobile notes are excellent help you study tools for learning all the key smarter… concepts in the study guide. Mobile notes are easy to make and you can take them with you wherever you go: 1. Fold a blank piece of paper in half. Fold it in half again. Fold it again. 2. Open the paper. It will now be divided into 8 parts. 3. Cut or tear neatly along the folded lines. 1. Fold an A4 paper into 4. On one side, write the 8 squares. Cut or tear basic concept. neatly along the folded lines. 5. On the other side, write the meaning or the explanation of the basic Y OLIGOPOL concept. 6. Use different colours and add pictures to help you remember. 7. Take these mobile notes with you 2. Write the basic concept wherever you go and on one side of a bit of look at them whenever paper. you can. 8. As you learn, place the Market stru cards in three different controlled bctyure group of busia small piles: nesses. I know well Getting there I need more practice 3. Write the definition of 9. The more you learn the basic concept on them, the better you the back of the piece of will remember them. paper. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics INTRODUCTION xiii © Department of Basic Education 2014 Mnemonics A mnemonic code is a useful technique for learning information that is difficult to remember. Here is a made-up word to help you remember the 6 reasons for market Look at pages failure – EMILII – each letter of the word stands for a reason: 42, 56, 184 and 196 for some more examples of mnemonics. E – Externalities M – Missing markets I – Imperfect competition L – Lack of information I – Immobility of factors of production I – Imperfect distribution of income & wealth Here is a sentence to help you remember the 5 demand reasons for international trade – each word in the sentence begins with the same letter as one of the reasons: People In Witbank Prefer Coffee Population Income Wealth Preferences Consumption Mnemonics code information and make it easier to remember. The more creative you are and the more you link your ‘codes’ to familiar things, the more helpful your mnemonics will be. This guide provides several ideas for using mnemonics. Be sure to make up your own. © Department of Basic Education 2014 xiv INTRODUCTION Mind the Gap CAPS Grade 12 Economics © Department of Basic Education 2014 Mind maps There are several mind maps included in this study guide, which summarise some of the sections. Have a look at the following pictures of a brain cell (neuron) and a mind map: Figure 1: Brain cell or neuron Figure 2: Mind map rules Mind maps work because they show information that we have to learn in the same way that our brains ‘see’ information. As you study the mind maps in the guide, add pictures to each of the branches to help you remember the content. You can make your own mind maps as you finish each section. How to make your own mind maps 1. Turn your paper sideways so your brain has space to spread out in all Mind directions. mapping your notes makes 2. Decide on a name for your mind map that summarises the them more interesting information you are going to put on it. and easier to 3. Write the name in the middle and draw a circle or bubble or picture remember. around it. 4. Only write key words on your branches, not whole sentences. Keep it short and simple. 5. Each branch should show a different idea. Use a different colour for each idea. Connect the information that belongs together. This will help build your understanding of the learning areas. 6. Have fun adding pictures wherever you can. It does not matter if you can’t draw well. © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics INTRODUCTION xv © Department of Basic Education 2014 Remember to take your calculator to your mapwork On the day of the exam … exam! 1. Make sure you have all the necessary stationery for your exam, i.e. pens, pencils, eraser, calculator (with new batteries), as well as your ID document and exam admission letter. 2. Arrive on time, at least one hour before the start of the exam. 3. Go to the toilet before entering the exam room. You don’t want to waste valuable time going to the toilet during the exam. 4. Use the 10 minutes reading time to read the instructions carefully. This helps to ‘open’ the information in your brain. Start with the question you think is the easiest to get the flow going. 5. Break the questions down to make sure you understand what is being asked. If you don’t answer the question properly you won’t get any marks for it. Look for the key words in the question to know how to answer it. A list of these words is on page xvii of this study guide. 6. Try all questions. Each question has some easy marks in it so make sure that you do all the questions in the exam. 7. Never panic, even if the question seems difficult at first. It will be linked with something you have covered. Find the connection. 8. Manage your time properly. Don’t waste time on questions you are unsure of. Move on and come back if time allows. GOOD LUCK! 9. Check weighting – how many marks have been allocated for your answer? Take note of the ticks in this study guide as examples of marks allocated. Do not give more or less information than is required. 10. Write big and bold and clearly. You will get more marks if the marker can read your answer clearly. © Department of Basic Education 2014 xvi INTRODUCTION Mind the Gap CAPS Grade 12 Economics © Department of Basic Education 2014 Question words to help you answer questions It is important to look for the question words (the words that tell you what to do) to correctly understand what the examiner is asking. Use the words in the following table as a guide when answering questions. Question word What is required of you Account for Explain the cause of; explain why; give reasons for Analyse Separate; examine and interpret critically; positives and negatives; pros and cons Argue Put forward reasons in support of or against a statement Assess Estimating the nature, quality or value of something Calculate Use maths to work out an answer Classify Place things with similar characteristics in the same group; arrange according to type or sort Comment Give your opinion, based on facts Compare To list both similarities and differences Contrast Stress the differences between things, events or problems Critically Analyse something, expressing agreement or disagreement with it Define Give a short and clear meaning Demonstrate Show or make clear; illustrate or explain; prove by reasoning and evidence (note that you can give examples) Describe List the main characteristics of something; give an account of (note that a diagram or map may be part of a description) Discuss Give the reasons for your statement; present both sides and reach a conclusion Evaluate Express an opinion, using evidence, of how good/bad, negative/positive, successful/ unsuccessful something is Examine Look at something carefully and in detail Explain Make clear, interpret, and spell out the material you present. Give reasons for differences of opinion or of results Give To state facts without discussions or explanations (note that you may be asked to ‘Give a reason’) Identify Single out one particular piece of information PAY SPECIAL ATTENTION NB Illustrate Explain or make something clear NB by using examples, charts, pictures and drawings Interpret To give an explanation of; to give the meaning of List Writing a list of the facts in their simplest form State Write down information without discussion Suggest Give possible reasons or ideas HINT! Summarise Reduce a lot of information to its main points hint In every exam question, put a CIRCLE e.g. Examples of question words EG - worked examples around the question word and underline any other important key words. These words tell Refer to Table 1.2.2 (income method) and answer the following questions: you exactly what is being asked. exams 1. Which organisation is responsible for the recording and publishing of GDP figures in South Africa? (2) 2. Explain the concept ‘subsidies on products’.(3) 3. Give TWO examples of taxes on products. (4) 4. Calculate the consumption of fixed capital in 2009 as a percentage of GDP at market price. Show all calculations.(4) activity ACTIVITIES boy and girl-left and right of page activity © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics INTRODUCTION xvii © Department of Basic Education 2014 Learner’s Checklist Use this checklist to monitor your progress when preparing for the exam. The ticks (3) tell you which aspects of the curriculum are covered in the study guide. The stars (*) tell you to go to textbooks and class notes. Covered in I do not I Topic Aspects of the curriculum Study guide understand understand Main Topic: Macroeconomics Topic 1 Concepts 3 Open economy Four sector diagram 3 circular flow model Participants 3 National account aggregates and conversions 3 Multiplier 3 Topic 2 Concepts 3 Business cycles and Composition and features of business cycles: 3 forecasting Causes of business cycles 3 Types of business cycles 3 Government policy 3 The new economic paradigm (smoothing of 3 cycles) Features underpinning forecasting with regard to 3 business cycles Topic 3 The composition and necessity of the public 3 Public sector Sector Problems of public sector provisioning 3 Objectives of the public sector and its budget 3 Fiscal policy (including the Laffer curve) 3 Reasons for public sector failure 3 Topic 4 The main reasons for international trade 3 Foreign exchange The balance of payments 3 market The establishment of foreign exchange rates 3 Foreign exchange markets 3 Corrections of BOP surplus and deficit 3 (disequilibria) © Department of Basic Education 2014 xviii INTRODUCTION Mind the Gap CAPS Grade 12 Economics © Department of Basic Education 2014 Covered in I do not Topic Aspects of the curriculum I understand Study guide understand Main Topic: Macroeconomics Topic 5 Export promotion 3 Protection and free trade Import substitution 3 (Globalisation) Protectionism (the arguments) 3 Free trade (the arguments) 3 A desirable mix 3 Evaluation of South Africa’s trade policies 3 Main Topic: Microeconomics Topic 6 Perfect competition 3 Dynamics of Perfect Individual business and industry 3 Markets Market structure 3 Output, Profits, Losses and Supply 3 Competition policy 3 Topic 7 Monopoly 3 Dynamics of imperfect Oligopoly 3 markets Monopolistic competition 3 Topic 8 The causes of market failures 3 Dynamics of markets: Consequences of market failures 3 Market failures Main Topic: Economic Pursuits Topic 9 Background/A comparison between 3 Economic Growth & The demand-side approach 3 Development The supply-side approach 3 Evaluation of the approaches used in South 3 Africa The North/South divide 3 © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics INTRODUCTION xix © Department of Basic Education 2014 Covered in I do not I Topic Aspects of the curriculum Study guide understand understand Main Topic: Economic Pursuits Topic 10 Industrial development in South Africa 3 Economic growth and Regional development 3 development: industrial South Africa’s endeavours 3 development policies Incentives to encourage industrial development 3 Appropriateness of South Africa’s industrial 3 policies Appropriateness of South Africa’s regional 3 development policies Small business development 3 The appropriateness of Black Economic 3 Empowerment in the SA economy Best practice for regional development 3 Topic 11 The performance of an economy 3 Economic and social Economic indicators 3 performance indicators Social indicators 3 International comparisons 3 Main Topic: Contemporary Economic Issues Topic 12 Definition 3 Economic issues of the Measuring inflation 3 day: Inflation Types and characteristics of inflation 3 Causes of inflation 3 Consequences of inflation, on 3 The inflation problem in South Africa 3 Measures to combat inflation 3 © Department of Basic Education 2014 xx INTRODUCTION Mind the Gap CAPS Grade 12 Economics © Department of Basic Education 2014 Covered in I do not Topic Aspects of the curriculum I understand Study guide understand Main Topic: Contemporary Economic Issues Topic 13 Definition 3 Economic issues of the Purposes/types of tourism 3 day: Tourism Measuring tourism 3 Reasons for its growth 3 The effects of tourism on 3 The benefits of tourism on 3 South Africa’s profile (indigenous knowledge systems) 3 Policy suggestions – Department of 3 Tourism Topic 14 The state of the environment 3 Economic issues of Measures to ensure sustainability 3 the day: Environmental Major international agreements 3 sustainability © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics INTRODUCTION xxi © Department of Basic Education 2014 © Department of Basic Education 2014 xxii INTRODUCTION Mind the Gap CAPS Grade 12 Economics Chapter 1 The circular flow model, national account aggregates and the multiplier The circular flow model, national account aggregates and the multiplier CONSUMER BUSINESS are three key terms in Economics. According to the circular flow model, the three key sectors of the economy (consumer, business and government) all work together to ensure that society’s needs are provided for through the creation of goods and services. The national account aggregates are an important means of analysing the performance of a country. The most important of these aggregates is GOVERNMENT the Gross Domestic Product (GDP). The marginal propensity to consume is what shows the amount of each rand that people will use for consumption within a country at a particular time. The multiplier is derived from the marginal propensity to consume. It is a 1 ratio which shows that the increase in income in a country will be greater Formula: M = (1 − mpc) than the initial increase in spending. 1 1 The formula can also be written as K = or α = (1 – mpc) (1 – mpc) © Department of Basic Education 2014 CHAPTER 1 THE CIRCULAR FLOW MODEL, NATIONAL Mind the Gap CAPS Grade 12 Economics ACCOUNT AGGREGATES AND THE MULTIPLIER 1 1 Chapter Overview TOPIC CONTENT CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT PURPOSES 1. Present the circular flow as a Circular flow macroeconomic model The open economy circular flow model Definitions and explanations –– Concepts Identification of participants, flows, injections –– The complete four sector diagram and leakages from a diagram –– Participants In-depth discussion of the inter-relationships –– Households between participants –– Business sector Draw and interpret a circular flow diagram –– Government Discussion of an economy in equilibrium –– Foreign sector Justify the equality: L = J and illustrate its component elements –– Real and money flows –– Injections (J = I + G + X) –– Leakages (L = S + T + M) –– Equations e.g. Y = C + I + G + (X – M) Explain the relationship between markets –– Markets within the FOUR SECTOR model –– Factor market Link the operation of financial and foreign –– Market for goods and services/ exchange markets to the other participants products of the circular flow –– Financial Market – Money and Capital –– Foreign market/foreign exchange –– Flows through different markets (production, income and spending) Definitions and explanations Deduce and analyse the national account aggregates and conversions Identify from table Briefly discuss the THREE methods National account aggregates and Explain the concepts used in national conversions accounts Measuring National Account Aggregates: Analyse, interpret and derive aggregates –– Production GDP(P) – GDP Analyse the national account conversions –– Income GDP(I) – GDI –– Expenditure GDP(E) – GDE HOT QUESTION: How is expenditure related to National Account Conversions: income and production? –– System of National Accounts (SNA) –– (Nominal and Real prices, Basic prices, Factor cost, Market prices, Net Figures, Domestic and National figures and disposable national income) CHAPTER 1 THE CIRCULAR FLOW MODEL, NATIONAL © Department of Basic Education 2014 2 ACCOUNT AGGREGATES AND THE MULTIPLIER Mind the Gap CAPS Grade 12 Economics Chapter 1 Derive and apply the multiplier Define the concept The multiplier HOT QUESTION: Explain the multiplier process –– Definition of multiplier effect by using the graph and the following formula: ∆Y/∆E –– Explanation of the multiplier process –– Aided with a circular flow and examples (using a graph and illustration) HOT QUESTION: What is the effect of the marginal propensity to consume (mpc) and –– Application of basic formulae marginal propensity to save (mps) on the multiplier (1/1-mpc or 1/mps)? Link the multiplier to the circular flow model HOT QUESTION: Why is the value of the multiplier in reality a small figure? © Department of Basic Education 2014 CHAPTER 1 THE CIRCULAR FLOW MODEL, NATIONAL Mind the Gap CAPS Grade 12 Economics ACCOUNT AGGREGATES AND THE MULTIPLIER 3 1 Chapter Make mobile notes (see instructions on page xiv) to learn the meanings of these basic concepts. 1.1 Key concepts These definitions will help you understand the meaning of key Economics concepts that are used in this study guide. Understand these concepts well. Term Definition Base year A year with very small price changes or price fluctuations. The current base year used by the Reserve Bank is 2005 Basic prices (bp) Used when GDP is calculated according to the production method and represents the production costs of firms Capital market Market for long-term financial instruments, for example, bonds, shares Circular flow model Continuous flow of spending, production and income between different sectors Closed economy An economy that has no foreign sector as a participator Consumption (C) Consumption spending by the population Domestic figures Value of all final goods and services produced within the borders of a country for a (GDP) specific period Economic The economy is in equilibrium if leakages are equal to injections: equilibrium L = J or S + T + M = I + G + X Expenditure method When the national accountants add together the spending of the four major sectors of the economy: C + G + I + (X – M) Exports (X) Goods and services produced locally and then sold for consumption outside the borders of the country Factor market Market where factors of production are traded, e.g. labour market Factor cost/Factor These terms can be used interchangeably and refer to the cost of or price paid for the prices factors of production (land, labour, capital and entrepreneurship) used by firms. [Note that the term factor income may also be used] Financial market The market where both short- and long-term financial assets are traded Financial sector Those financial institutions that are not directly involved in the production of goods and services, e.g. banks, insurance companies, pension funds and the JSE Foreign exchange The market in which one currency can be traded for another, e.g. rands for dollars market Goods market Market where goods and services are traded, e.g. cars, milk (also known as Product market) Government (G) The expenditure of the government sector Imports (M) Goods and services produced in other countries and purchased by local firms or households. Imports can also be represented by “Z” CHAPTER 1 THE CIRCULAR FLOW MODEL, NATIONAL © Department of Basic Education 2014 4 ACCOUNT AGGREGATES AND THE MULTIPLIER Mind the Gap CAPS Grade 12 Economics Chapter 1 Term Definition Income method Gross Domestic Income is derived by adding all income earned by the owners of the factors of production – GDP(I) Injections (J) The introduction of additional money into the economy by investment (I), government (G), and payments for exports (X) Investments (I) Spending by firms on capital goods Leakages (L) Money withdrawn from the circular flow, e.g through savings (S), taxes (T) and import expenditure (M) Marginal propensity The marginal propensity to consume (mpc) indicates that, as disposable income to consume (mpc) increases, an increase in personal consumer spending (consumption) occurs. For example, a marginal propensity to consume of 0.65 indicates that for every extra rand earned, the household will spend 65 cents and save 35 cents Market price (mp) Prices actually paid by consumers for goods and services plus all taxes less subsidies. Calculated according to the expenditure method Money flow The flow of income and expenditure between the participants in the circular flow Money market The short-term and very short-term market for savings and loans Multiplier A small initial increase in spending produces a proportionately larger increase in aggregate national income National figures Value of all final goods and services produced by the permanent citizens of the country (GNP) for a specific period Net figures Net indicates that some amount has been taken away, e.g. net exports reflects the value of exports less imports Open economy An economy that trades with the foreign sector Production method The adding of final values of all goods and services calculated as gross value added – GDP(P) Real flow The flow of goods and services between the participants in the circular flow Savings (S) Income that is not consumed Subsidies on Refers to subsidies that are not linked to specific goods or services, e.g. subsidy made production on employment Subsidies on Financial incentives to help struggling industries produce, as well as direct subsidies products payable per unit exported to encourage exports (e.g. government subsidy on bread) Taxes (T) Compulsory payments made by private individuals or business enterprises to the government sector with no direct benefit Taxes on production Refer to taxes on production not linked to a specific good or service (e.g. tax on land and buildings) Taxes on products Taxes that are payable per unit of some good or service (e.g. VAT, import duties) © Department of Basic Education 2014 CHAPTER 1 THE CIRCULAR FLOW MODEL, NATIONAL Mind the Gap CAPS Grade 12 Economics ACCOUNT AGGREGATES AND THE MULTIPLIER 5 1 Chapter Learn these well. 1.2 The open economy circular flow model Description The circular-flow model of the economy is a simplification showing how the economy works and the relationship between income, production and spending in the economy as a whole. The circular-flow model of an open economy shows the workings of an economy that is open to foreign trade. It is different to a closed economy because it includes the foreign sector. 1.2.1 Four sector diagram PRODUCTION FACTORS GOODS AND SERVICES BUSINESS SECTOR Expenditure on production factors Income (I) (T) Payment for X Public services FOREIGN SECTOR Expenditure (G) (G) X FACTOR GOODS MARKET STATE MARKET Production (G) M factors (S) Public services (T) FINANCIAL MARKET Payment for M Income (T) (wages/interest/rent/profit) (S) Private consumption expenditure (C) NOTE Leakages = T, S and M PRODUCTION FACTORS PRIVATE GOODS AND SERVICES Injections = I, G and X HOUSEHOLDS Figure 1.1 An open economy circular flow model 1.2.2 Participants Household sector Households are the major consumers of economic goods and AL ATTENTION services – they use their income to buy from firms. NB Households are the primary economic participants because they are the owners of the four factors of production. You must be able to draw a Households sell factors of production in the factor market to firms. detailed diagram of a circular Households receive a remuneration from the firms in the form of flow model. Figure 1.1 is a wages, rent, interest and profit. typical example of an open economy circular flow model. ed examples CHAPTER 1 THE CIRCULAR FLOW MODEL, NATIONAL © Department of Basic Education 2014 6 ACCOUNT AGGREGATES AND THE MULTIPLIER Mind the Gap CAPS Grade 12 Economics Chapter 1 Firms/business sector Firms purchase the factors of production from the household in the factor market. Households = consumers Firms use the factors of production to produce goods and services. Firms = suppliers Businesses sell goods and services to households, government and the foreign sector. Businesses receive an income from the other three participants (households, government and the foreign sector). The state/public sector This refers to local, regional and national government. The state provides the households and businesses with public goods Do you and services. know the difference The state receives taxes from households, e.g. income tax. between an open economy and a closed The state receives taxes from the business sector, e.g. company tax. economy? The state spends money in the economy. (G) Foreign sector There is a flow of goods or imports that flow from the foreign sector and are paid for by the individual households, businesses and the public sector. These imports can be seen as expenditure by individual households, businesses and public sector. (A monetary outflow.) There is also a flow of goods and services to the foreign sector from businesses (exports). These exports will result in an income for individual households, businesses and public sector. (A monetary inflow.) Interaction between participants Households provide production factors to producers (firms). Households receive an income (Y) in return – rent, wages, interest and profits. Households purchase goods and services from firms. Firms receive income from sales revenue. Households and firms purchase goods and services from the foreign sector as imports (M). The foreign businesses receive money from firms and households. Firms sell goods and services to the foreign sectors, and this is called exports (X). Households and firms pay taxes to the government. (T) The government provides public goods and services to households and firms. The unexhausted (unspent) part of the household and firms’ income earned is saved in the financial sector of the economy. (S) The money invested by firms and households is known as savings (S). The funds received by the financial sector are used by firms/ businesses to purchase infrastructure for the production of goods and services. This flow of money from the financial sector for use by firms is known as investment (I). © Department of Basic Education 2014 CHAPTER 1 THE CIRCULAR FLOW MODEL, NATIONAL Mind the Gap CAPS Grade 12 Economics ACCOUNT AGGREGATES AND THE MULTIPLIER 7 1 Chapter 1.2.3 Real and money flow Real flow: Factors of production flow from the owners (households) to producers via the factor markets. Goods and services flow from the producers via the goods markets to households and other users of goods and services. Factors of production and goods and services flow from foreign countries to South Africa (imports). Factors of production and goods and services flow from South Africa to foreign countries (exports). Money flow: Factor remuneration represents the expenditure of producers and the income of households (wages, rent, interest and profit). On the other hand, consumption expenditure represents the expenditure of households and the income of producers. Leakages is 1.2.4 Leakages and injections when the economy Leakages refer to the outflow of money from the economy. gets weaker. Injection is when the economy The following are leakages or withdrawals from the circular flow: gets stronger. Savings (S) Taxation (T) Payment for Imports (M) In other words: L = S + T + M Leakages = Savings + Taxes + Import expenditure Injections refer to an inflow of money into the economy. The following are injections (additions to) the circular flow: Investment (I) Government expenditure (G) Payments for exports (X) In other words: J = I + G + X Injections = Investments + Government expenditure + Export Income 1.2.5 Equations Equilibrium The economy is in equilibrium when leakages are equal to injections. In other words L= J S+T+M = G+I+X CHAPTER 1 THE CIRCULAR FLOW MODEL, NATIONAL © Department of Basic Education 2014 8 ACCOUNT AGGREGATES AND THE MULTIPLIER Mind the Gap CAPS Grade 12 Economics Chapter 1 Disequilibrium The economy is in disequilibrium when: Leakages are more than Injections. Injections are more than Leakages. Restoring the equilibrium causes changes to national income National Income increases when Injections are more than Leakages J>L G+I+X>S+T+M The amounts of injections which exceed leakages contribute to additional demand. This additional demand must be satisfied. This causes an increase in the production of goods and services. National Income decreases when Injections are less than Leakages J TC it makes a profit. Figure 6.5 Maximum profit is achieved at units 3 and 4. provides a clearer Once the maximum profit is achieved, profits start to decrease with picture of Profit the next unit of output. Maximisation. Interpret it! Therefore the firm will not produce more than 4 units. TC TR 60 50 B 40 Cost/Revenue 30 A 20 10 0 1 2 3 4 5 6 Quantity Figure 6.5: Profit maximisation © Department of Basic Education 2014 88 CHAPTER 6 THE DYNAMICS OF PERFECT MARKETS Mind the Gap CAPS Grade 12 Economics Chapter 6 Interpretation of graph: At all points where TR is above TC, the firm is making a profit. At all points where TC is above TR, the firm is making a loss. The gap between TR and TC represents profit. Profit is maximised when the gap between TR and TC is the greatest. This is occurs at between 3 and 4 units. 6.5 Market structures There are FOUR different market structures: Perfect competition Monopolistic competition Oligopoly Monopoly Table 6.6 shows the 5 broad characteristics which distinguish the four market structures: As you study each market structure in detail, you will be able to identify more distinguishing characteristics. Characteristic Perfect competition Monopolistic Oligopoly Monopoly competition Number of Enough that a single A very large So few that each business One business businesses business cannot influence number must take the actions of the market price the others into account Nature of Homogenous (same kind) Differentiated, Homogenous or Unique product product e.g. cool drinks differentiated without any close substitutes Market entry Completely free Free From free to restricted Blocked Control over None Few Considerable, but less than Considerable price with a monopoly Information Complete Incomplete Incomplete Complete Examples International commodity Fast-food Petrol and oil markets Eskom markets, e.g. gold and oil outlets Table 6.6: The characteristics of different market structures The illustration below shows the four different market structures: Perfect competition Monopolistic competition Oligopoly Monopoly Figure 6.6: The four different market structures © Department of Basic Education 2014 Mind the Gap CAPS Grade 12 Economics CHAPTER 6 THE DYNAMICS OF PERFECT MARKETS 89 6 Chapter 6.6 Output, profit, losses and supply 6.6.1 The individual business Short term equilibrium position 1. Economic profits AL ATTENTION NB MC MR = MC When Average Revenue is AC Unit revenue and cost above Average cost the firm makes an ECONOMIC PROFIT. E3 P3 AR = MR C1

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