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Question 1
Globalization has meant that countries are increasingly dependent on each other. The USA
is one of South Africa’s largest trading partners. Explain how the South African economy will
be affected by a stimulation of the American economy (15 marks)
Globalization is the process by which businesses or their organization develop international
influence or start operating on an international scale. Another definition suggests that globalization
is the movement toward economic, financial, trade and communications integration. Globalization
is one term that is used in every day live, it might mean the opening up of local and nationalistic
perspective to a broader outlook of an interconnected and interdependent world with free transfer
of capital, goods and services across national frontiers. As suggested by some economist,
globalization does not imply free movement of labor. In regard to trade globalization have encourage
different countries to increase trade through the breaking up of various barriers.
Globalization brings numerous benefits and advantages as well as disadvantages to countries. The
advantages and disadvantages of globalization depend on the economic development of the
country. The advantages and disadvantages of globalization are not restricted to economic issues
only, rather they do span to political, social, legal, ethical and environmental issues. In regard to
international trade, globalization did bring advantages and disadvantages like improved
communication systems, transport system that allowed quick movement of people and conclusion
of deals. Trade liberalization is one the terms and concept that has been brought up through
globalization. A closer look on trade liberalization will assist us in identifying the advantages and
disadvantages of globalization.
Impact on South African Economy due to stimulus in USA
Among its trading partners, USA is one of the major trading partners of South Africa, despite the
fact that South Africa exports. USA has got the biggest economy in the world, such increase in the
gross domestic of USA will lead to increase in the gross domestic product in South Africa as well.
This essay seeks to address the reasons behind economic growth in South Africa due to economic
growth in the USA. These reasons are as follows, increase in USA economy activity will lead to
increase in the demand of the South African products, like wine, gold and other minerals.
,Increase in the South African exports will increase the level of employment in South Africa. Increase
in the employment levels, help the South African government in fighting the problems like poverty
and income inequality. Assuming a flexible long-run aggregate supply curve, increase in exports will
increase the equilibrium output without some inflationary pressures, and thus raise the standards of
living of the South African people.
The other way in which the SA economy will benefit is through increase in the tax revenue which
the government will collect from taxes levied on exports, as well as the companies which produces
the goods exported. Increase in the profitability of these firms, as more is exported will imply more
tax revenue for the government. The tax revenue will be used by the government in trying to reduce
problems like income inequality through the use of transfer payments. The tax revenues may also
be used in provision of public goods which the private sector cannot provide at the social optimum
level.
As the USA economy gets stimulated more tourist will come to SA, visiting for leisure. As they come
here in SA, they will bring foreign currency. This foreign currency will be used in the purchase of
other commodities which are not locally available like oil. Increase in the availability of the foreign
currency as more people come into SA, will mean appreciation of the rand. As the rand appreciates,
the prices of imports will go down, assuming holding all other things constant.
Increase in the level of economic activity in USA will bring, more foreign direct investment to the
economy of South Africa, since the Americans will have more funds to invest outside their country
as their economy prospers. The increase in foreign direct investment, will create more jobs in SA,
and boost the economic growth in SA as well. This will also improve the South African economy’s
global competitiveness, because more direct investment from USA will be more advanced
technologies. The advanced technology will improve the productivity of the South African economy
as compared to its other trading partners.
Question 3
Define the terms import tariff and export subsidy. (2)
According to the prescribed text, an import tariff is a duty on the imported commodity. Tariffs can be
ad valorem, specific, or compound. The ad valorem tariff is expressed as a fixed percentage of the
value of the traded commodity. The specific tariff is expressed as a fixed sum per physical unit of
the traded commodity. Finally, a compound tariff is a combination of an ad valorem and a specific
tariff.
According to the prescribed text, export subsidy are direct payments (or the granting of tax relief
and subsidized loans) to the nation’s exporters or potential exporters and/or low-interest loans to
foreign buyers to stimulate the nation’s exports. As such, export subsidies can be regarded as a
,form of dumping. Although export subsidies are illegal by international agreement, many nations
provide them in disguised and not-so-disguised forms.
Question 3 (b)
According to your understanding what is or are the main motives (reasons) for a country
imposing a tariff or an export subsidy? Which of the two is considered more harmful to the
economy
A country may impose tariff as way to protect infant industries. The tariff will push the prices of
imports up, and thus encourage local consumption from the upcoming industries which allows the
small firms to grow and compete with international firms in the future.
The desire to earn tax revenue is another reason why a country may impose tariffs on imports. In
its own right tariff is a tax, and its use will allow the government to earn revenue which it can use for
public expenditure?
Some tariffs can be regarded as “bargaining tariffs “that are to be used to induce other nations to
agree to a mutual reduction in tariffs.
Retaliation towards the first mover is another reason why a country may impose tariffs on another
country. This occurs when one country imposes tariffs on another country and the second country
will then impose tariffs as revenge, the current trade wars between USA and China is a good
example why a country may impose tariffs in retaliation.
Export subsidy is imposed when the government wants to encourage more exports, through the
reduction in the cost of production. The use of subsidies may be perpetuated by the desire to
improve employment opportunities in the country. On the same note, creation of employment
opportunities may also be the reason why tariffs are used.
Using diagram (in the space provide below), discuss the effects in a small nation when it
imposes a tariff on goods coming into the country versus when it imposes an export subsidy.
(18)
According to the prescribed text book, the partial equilibrium effects of tariff can be analyzed using
the diagram below, where Dx is the demand curve and Sx is the supply curve of commodity X in a
small nation, for industry X. Point E in the diagram shows the equilibrium point where the demand
and supply curves intersect or where Dx and Sx meets, with output level of 30X. This is the quantity
demanded and quantity supplied, at price of $3 in a small nation. This is the price and quantity
demanded and supplied below international trade.
When the small opens for international trade, on free international trade basis, prices will fall to $1,
and the country will now be able to consume 70X AB, in which case 10X, will be produced locally
and 60X CB, is imported. The international supply curve is represented by the SF curve, which is
Infinitely elastic free trade foreign supply curve of commodity X of the small nation.
With the desire to reduce unemployment and to protect local industries the small nation may impose
a tariff of $1 on imports, which will push the prices up from $1 to $2. This increase in the price will
lead to increase in the domestic production from 10X to 20X, and also lead to reduction in imports
from 70X to 50X. Thus, reduction of imports by 20X and increase in domestic production by 10X.
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