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ECS3703 Assignment 2 Semester 2 2024
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QUESTIONS WITH ANSWERS ECS3703 Assignment 2 Semester 2 2024
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[Company name]ECS3703
Assignment 2
Semester 2
2024
QUESTIONS WITH COMPLETE ANSWERS
, ECS3703 Assignment 2 Semester 2 2024
Question 1
Assume that South Africa trades with the rest of the world and has a deficit in its trade
balance. With the aid of a diagram, explain how South Africa would use exchange rates
to correct the deficit……………………………………………………….[25 marks]
To explain how South Africa would use exchange rates to correct a trade balance
deficit, we need to understand the relationship between exchange rates and trade
balances. Here’s a detailed explanation along with a diagram to illustrate the process:
Understanding Trade Balance Deficit
A trade balance deficit occurs when a country imports more goods and services than it
exports. This situation means that more money is leaving the country to pay for imports
than is coming in from exports, resulting in a negative trade balance.
Exchange Rate Mechanism
Exchange rates can influence a country's trade balance. A country's currency value can
impact the price competitiveness of its goods and services.
Correcting Trade Balance Deficit through Exchange Rate Adjustment
When a country like South Africa has a trade balance deficit, one way to address this
issue is by allowing its currency to depreciate. Currency depreciation means that the
value of the South African Rand (ZAR) decreases relative to other currencies. Here’s
how this works:
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