1
SAJC SUGGESTED ANSWERS AND MARK SCHEMES
Case Study Question 1
(a)
Describe the 5-firm concentration ratio trend for 2007 – 2009 as given in Table 1. [1]
(i)
There is a decreasing/falling trend of the 5-firm concentration ratio from 96.2% in 2007
to 95.8% in 2009.
[Negative trend – 0m]
(ii)
Based on your answer to (a) (i), identify the market structure under which the
beverage firms operate in the U.S.
[1]
Oligopoly.
(iii)
Would firms in such an industry compete on price? Justify your answer.
[4]
An oligopoly industry is composed of a few large dominant firms (in this case, Coca-Cola
Co., PepsiCo etc) whose actions will affect market outcomes. Therefore, competing firms
in the beverage industry must be aware of each other’s actions and respond
appropriately. This means that in contemplating a strategy, a firm must take into
consideration the possible reactions of all rival firms and their countermoves (mutual
interdependence).
For example, if Coca-Cola Co. is considering a price reduction, it may wish to estimate
the likelihood that rival firms such as PepsiCo would also lower their prices and possibly
trigger a price war, which would result in making lesser revenue. Or if it is considering a
price increase, it may want to know whether other firms will also increase prices or hold
existing prices constant to retain their customers, which would also result in making
lesser revenue. Hence, there is usually price rigidity within an oligopolistic industry, and
firms would usually not compete based on price – Coca-Cola Co. is unlikely to lower the
prices of their drinks for fear of a price war. (2 marks)
Instead, the firms in the beverage industry usually compete based on non-price
competition. For example, through product differentiation such as advertising and product
innovation (coming up with new drinks), firms would usually be able to reduce the price
elasticity of demand for their drinks as well as increase the demand for their drinks. Thus
the firm would be able to capture a larger market share. (1 mark)
Evidence (from Extract 1): (1 mark)
1) “Pepsi and Coke, the world's most popular carbonated drinks, are losing their shares
in the country's beverage market due to aggressive marketing of similar products and
sudden emergence of so-called energy drinks”
2) “We'll have to survive through new market strategies and promotional activities”
Level 1 (1 – 2 m): Explanation of price competition only OR theoretical explanation and
elaboration on non-price competition without evidence.
Level 2 (3 – 4m): Explanation and elaboration on non-price competition with evidence.
[Listing of evidences only – 0m]
(b)
Assess the importance of achieving various types of efficiencies by the firms in the
beverage industry on improving consumers’ welfare.
[8]
Students are expected to:
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- Identify the various types of efficiencies and explain how these efficiencies by the firms in the
beverage industry will affect consumers’ welfare.
- Elaborate why it is important for the firms to achieve the various types of efficiencies to
improve consumers’ welfare.
- Compare and explain the relative importance of the various types of efficiencies.
1) Productive Efficiency
 Occurs at the point where a firm is able to use the lowest possible cost to produce each unit of
output – producing at any point along LRAC.
 Though it can be assumed that an oligopolistic firm in the beverage industry could have attained
productive efficiency in the long run, evidence from Extract 1 suggests that the firm may still be
able to reap further internal EOS and enjoy even lower average cost of production, saving about
US$300m a year by 2010 as predicted by PepsiCo, after acquiring the two large bottling
companies. Such cost savings, when passed on to consumers, may bring forth lower prices and
thus higher consumer surplus.
2) Dynamic Efficiency
 Refers to a case where firms constantly innovate and adapt quickly to the changing
environment by using the profits earned to conduct R&D to produce better and newer products
to the consumers.
 Given that an oligopolistic firm would still be able to earn supernormal profits in the long run due
to high barriers to entry + intense rivalry among firms within the beverage industry, they would
have the ability and incentive to conduct R&D. With R&D, consumers will benefit from an
increase in their welfare due to better quality and a wider selection & choice of beverages to
satisfy their tastes/preferences. Consumers will therefore get to enjoy a higher standard of
living. In some circumstances, R&D in production process (process innovation) can also lower
production costs, which may translate into lower prices of the beverages charged to the
consumers.
-
-
Evidence:
From Extract 1
“’Pepsi and Coke, the world's most popular carbonated drinks, are losing their shares in the
country's beverage market due to aggressive marketing of similar products and sudden
emergence of so-called energy drinks. … the demand for beverage, especially energy drinks, is
rising as youths, who represent a larger section of the consumers, prefer energy drinks to Coke
and Pepsi.”
From Extract 2
“There is a market for it. Consumers like the convenience of bottled water. A lot of people
believe it tastes better. It’s nice and cold. That’s what consumers want, and that’s what we’re
giving them.”
3) X-inefficiency

-
Refers to a case where the firm is complacent and producing at potential cost inefficiencies
arising from a lack of effective competition within a market. Such unnecessarily high cost of
production may be passed on to consumers as unnecessarily higher prices to maintain the
firm’s profit margin. Consumer’s welfare (both in terms of lower consumer surplus as well as
less output being produced) would then be negatively affected.
Evidence: (from Extract 1)
“But when suddenly immersed in a boiling market of stratospheric price increases in 2008,
beverage distributors’ intent on surviving jumped quickly out of the pot of complacency, with a
growing appreciation for the need to more closely manage fuel costs.”
Compare relative importance of achieving the above types of efficiencies
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

Attaining or improving dynamic efficiency would seem to be able to improve consumers’ welfare
more than improving the other two forms of efficiency. The ever increasing preference for more
variety of beverages (e.g. healthier energy drinks) indicates that more of such beverage should
be produced. Evidence from the extract also suggests that consumers place great value in the
ability to enjoy nice, cold beverage. Hence, making such cold, healthier beverage within easy
consumer reach through the advent of better technology could serve to improve the consumer
welfare more significantly.
On the other hand, the ability to further reduce cost by any one beverage firm may have minimal
impact on the reduction in prices charged to the end consumer. This is due to the multi-stage
production process before the beverage lands on the hand of the consumers. Given that
beverage is regarded as an affordable product by most consumers, the reduction in prices
charged, if at all, is unlikely to significantly improve the welfare of the consumers.
Note: Do not accept students’ answer for allocative efficiency as there is no incentive for the
beverage firms to be allocative efficient due to their profit-maximising objective.
Level
Descriptor
Well-developed answer which explains clearly the various types of efficiencies (all three
types of efficiencies) related to the beverage industry and how consumers’ welfare can be
improved. Explains with reference to evidence or data in the case study.
For an underdeveloped answer which explains the various types of efficiencies (at least two
types of efficiencies) and how consumers’ welfare can be improved. Explains with reference
to evidence or data in the case study.
Contains several/serious conceptual errors. Student demonstrates a lack of understanding of
the various types of efficiencies and is unable to explain how consumers’ welfare can be
improved.
3
(5 – 6)
2
(3 – 4)
1
(1 – 2)
Candidate is able to give a considered judgment on the relative importance of achieving the
various types of efficiencies on improving consumers’ welfare. Explaining the importance of
achieving AE, though not by the firms themselves, to improve consumer welfare should
deserve full evaluation marks.
E
(1 – 2)
(c)
(i)
Explain any one of the sources of market failure as mentioned in the data.
[6]
Candidate is expected to explain any one of the following:
(a) Imperfect Market – Oligopoly;
(b) Negative Externalities in Consumption;
(c) Negative Externalities in Production.
For each source of market failure, candidate is supposed to:
(i) State the source of market failure;
(ii) State and explain the original market equilibrium (optimal) outcome;
(iii) Introduce and explain the condition to measure social equilibrium (optimal) outcome;
(iv) Hence, justify the market failure – there had been inefficient allocation of resources
(either too much or too little resources had been devoted to the production of the
goods in the free/unregulated market). Where diagram is used, the area depicting
DWL is expected as evidence of market failure.
Note:
There is no need for any evaluation/comparison/judgment of any sort. Marks are to be
awarded for mastery of content knowledge and understanding.
Marks

5–6
© SAJC 2010
Descriptors
Answer convinces reader candidates possess thorough knowledge of facts and
theory. Hardly any mistakes/clumsiness detected. Application to context given in
the case material is a must. For the level of difficulty of this question, full marks
must only be reserved for near-perfect script.
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
3–4


1–2

(ii)
Knowledge displayed can be considered passable, but just. Firm grasp of basic
‘must-haves’ observed (e.g. MPC = MPB vs. MSC = MSB; P > MC, etc).
Mistakes are present but not lethal.
Answers which betray lack of basic understanding of market failure – not knowing
the criteria for optimality, wrongly drawn/labelled graphs, inability to define market
failure, etc.
Answers with countable words should deserve bottom mark.
Discuss the roles that a local government can play in dealing with the market failure
identified in (c) (i).
[10]
Note:
The focus of this question lies with the roles played by the government and NOT the various
policies which the government could avail itself to after assuming that role. Regardless of the
source of market failure identified in (c) (i), the various roles which a government could adopt
would include interventionist, educator and ‘bystander’. Candidates should then explain the
advantages and disadvantages of each of these roles. To score well in the evaluation, the
candidate should recommend which of these roles could the government adopt and provide
suitable justification for the recommendation. The following suggested answer assumes one of
negative externalities in production.
INTRODUCTION
- Why the need for government intervention
- The various roles would bring forth different impact to the market
The government plays a crucial role in correcting market failure so as to bring about optimal
allocation of resources in order to achieve maximum social welfare. The main roles a
government could adopt in its attempt to correct the market failure are: interventionist, educator
and ‘bystander’.
BODY
- Explain each of the roles
- Highlight the advantages and disadvantages of each role which the government plays.
- It would be necessary to bring in examples of policies within each role to provide a better
illustration of the role the government could play.
Interventionist – Taxes
The government could adopt the interventionist role to correct the market failure. The intention is
to implement certain policies so as to allow the ‘free’ market to continue to function, and yet
attain the socially optimal outcome at the same time. One example is to impose a tax on the
aluminium can or plastic bottle producers, which would force producers to internalise the
negative externalities caused. The higher MPC will thus make the firms produce at a lower
output level so as to maximise its profits. Assuming correctly measured and implemented, the
output thus chosen by the private producers will then be where the society would achieve its
maximum welfare, thereby eliminating the deadweight loss.
Using the above interventionist role continues to allow the free market to work. By incorporating
the appropriate amount of ‘charge’/‘tax’ into the cost structure of the firms, the incentive for profit
maximisation will ensure that the optimal amount of cans/bottles be produced. This also means
that there is no need for cumbersome monitoring mechanism to be maintained (‘could too easily
be avoided’), which will mean scarce resources could be saved and diverted to more productive
uses.
The downside of such a role usually originates from the difficulties faced when estimating the
extent of negative externalities which the government needs to translate into tax. The wrong
amount of tax imposed, whether due to error in measurement or inappropriate translation
methodology adopted, would imply that the market remains sub-optimal.
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Interventionist – Direct Provision
Should the government decide to take over the production of the cans/bottles, there would be no
need for any form of tax to be implemented. Such a role, a direct taking over of the production,
assumes that the government has the necessary expertise to produce the good to meet the
demand by the beverage producers. It also further assumes that the government is aware of the
optimal level of output to produce to achieve socially optimal output.
Adopting this role ensures that the optimal amount of output is produced. Assuming perfect
knowledge/information exists, over-production or under-production would be unlikely. Resources
used by competitive firms in advertising their cans/bottles could now be saved as the
government remains the only producer of such cans/bottles. Being non-profit motivated, any cost
savings (due to reaping of EOS) could also be readily passed on to the beverage producers who
might eventually benefit the beverage consumers at the retail end.
However, direct provision may also bring some disadvantages. The need to oversee the
operation would require the government to expend additional resources, which could incur
opportunity costs in the form of other goods and services (public or merit) which could have been
produced. The lack of profit incentive may also breed inefficiency and drive up costs. This
increase in cost may be passed down the production chain and end up with higher prices for
consumers, thereby harming the welfare of the consumers (lower consumer surplus for
beverage consumers).
Educator – Moral Suasion
The government can also devote resources to educate the producers about the harmful effect of
excessive production of cans/bottles. Should there be worsening of climate change in the long
term, it would be difficult for any guilty parties of such a ‘calamitous’ act be absolved from any
guilt/blame. Corporate backlash may hurt their bottom line eventually. In addition, there may be
other firms who were truly concerned about their corporate social responsibility but which do not
yet possess the knowledge of the damage they are causing to the society (producer ignorance).
In educating such firms, the society may in the end be able to produce at the socially optimal
output level.
Once successful, such a policy usually has enduring effects which no longer requires recurring
expenditure by the government. The subsequent cost-savings by the government could
therefore be spent elsewhere (e.g. providing more healthcare/providing better accommodation
for households which were displaced), thereby lowering the opportunity costs of such a policy. In
addition, the lower external costs generated could mean that more tracts of land could be spared
from flooding – less wastage of resources and less displacement of households. Welfare of the
economy should then see an improvement.
Education policies, like some others, attract two main grouses – take up rate, ‘gestation period’
and costly. It is often difficult to expect/hope that the bottle/can producer will subscribe to a new,
environmentally friendly but more costly way of producing bottles/cans. Being profit-motivated
and perhaps myopic, such firms may not heed the advice of the government and continue to
generate the negative externalities. Secondly, educating the private firms could also be very time
consuming due to the amount of time needed to collate and present data as evidence of damage
caused by the production of cans/bottles. Such laborious and long term nature studies of the
damage done would also require a lot of resources to ensure the reliability of data used to
convince/persuade the firms.
‘Bystander’ – lack of information/expertise to intervene
Especially true for the developing nations, the government may adopt a non-intervention policy
as it fears that its intervention may result in worse outcome. Such a decision usually stems from
the lack of sufficient information or know-how to intervene in the free market. Imposing
unnecessarily high tax or banning the production may actually bring more harm than good to the
society. The government may also not have the necessary technical knowledge to produce the
good even if it desires to replace the private firms in doing so. Lastly, the government may also
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not have the resources (budget) to set up the necessary infrastructure/framework to monitor the
firms so as to achieve the socially optimal level of production.
While the ‘hands-free’ approach may sound irresponsible, the worse outcome due to intervention
is less desirable. Draconian approaches such as a ban could deprive the society the net social
benefits should the optimal amount of cans/bottles were produced. In addition, conserving
precious resources and directing them to more urgent needs (healthcare, poverty reduction)
could produce more rewarding outcome than attempting to aim for multiple targets with less
‘inadequate tools’.
The government should, however, turn to resolve this market failure as soon as the opportunity
or its resources allow. This is especially true when excessive tracts of land become submerged
under even more dams being built or that the miners of the minerals (aluminium ores) turn
precious lands into wastelands. Such irreversible changes often pose immense costs to the
society in terms of tourism dollars as well as welfare of its citizens over the long run.
EVALUATION
Need to discuss which role should the government adopt and provide justification.
Whichever the role the government decides to play depends on depends on the net benefits
brought forth by that role. Where government failure prevails, it may sometimes be better off not
to intervene at all. Any highly excessive tax imposed or severe complacency due to lack of profit
motive may bring more harm than when the free market is left untouched.
The government could also consider a combination of both roles should that turn out to be the
best choice of strategy – to impose the tax in aim of reducing the deadweight loss and
simultaneously educate the firms to reduce their output over the long run.
CONCLUSION
Depending on the situation and expertise that the government could avail itself to, the
government could adopt the more cost-efficient role to correct the market failure. Given the
changing nature of the industry (ever-demanding consumers as well as constantly improving
technology etc), the government might consider changing its roles to ensure adopting the best
role to correct the market failure.
Level
(Marks)
3
(7 – 8)
2
(5 – 6)
1
(1 – 4)
E
(1 – 2)
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Knowledge, Application, Understanding and Analysis
Clear understanding of the question which leads to explicit discourse on the roles
which the government could adopt in resolving the market failure. Policies raised
serve to illustrate the roles a government can play and not to dominate the
discussion of the essay. Pros and cons are valid though not exhaustive, given the
time constraint and exam condition.
Candidate is able to explain each of the roles using appropriate economic analysis.
Pros and cons of each of the roles are provided though loopholes and incomplete
discussion is evident. Answers in this category may also tend to lean towards
discussion of government policies rather than the government’s role.
Confused answers stemming from lack of understanding of the question. Answers
which laboriously describe policy after policy and assessing the suitability of each of
them should fall into this category – do not deserve a pass.
Where the question is properly understood, meek answers in suggesting the
various roles without firm discussion of the pros and cons should be given high L1.
Though it is difficult to see how conceptual errors could be made in such answers,
such incidents/occurrences should be awarded low L1.
Candidate is able to provide a considered evaluation of the role/s the government
could take, giving the necessary conditions or breaking down any assumptions
which would alter the decision made by the government. For example, the multiple
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roles taken could simultaneously reduce short term pain as well as quicken the
pace of mindset change of the firms to achieve long term reduction in number of
cans/bottles produced.
Case Study Question 2
(a)
Using examples from Tables 2 and 3 and Extract 6,
(i)
explain if the U.S.’s pattern of trade is consistent with the Theory of Comparative
Advantage.
[4]
Teaching point: Pattern of trade - composition of trade & direction of trade.
1.
US’s pattern of trade appears to be consistent with the CA Theory.
o Exports:
- US appears to have a CA in capital goods like gas turbines, integrated circuits &
parts, aeronautic parts, motor vehicles parts and vehicles.
- Higher end capital e.g. aeronautic parts for Japan & Korea and lower end e.g. gas
turbine for Saudi Arabia & Mexico.
OR
o
Imports:
- US appears to lack CA in Apparel (fr China & Vietnam), crude oil (fr Canada, Saudi
Arabia, Mexico, Venezuela), toys (fr China & Japan), computers (fr China & Malysia)
However, lacks information on US’s resource endowment, thus cannot conclusively state its CA.
[Provide evidence of either Exports or Imports + explanation (linked to lower opportunity cost) –
2m; evidence only – 0m; explanation with no evidence – 1m]
2.
US’s pattern of trade is not entirely consistent with the CA theory:
o Intra-industry trade e.g.
- passenger cars – indicates US consumers’ preference for variety & not US’s CA
- motor vehicle parts, organic chemicals – indicate different sub categories, hence may
still consistent with CA.
o Trade pattern affected by the US’s economic problems e.g. collapse of housing market
 fall in US construction imports & not due to US improved CA in this area.
o Disproportionate amount of exports to EU & Canada [extract 6] may reflect economic
integration with these countries rather than CA.
[Any one of 3 points above – evidence + explanation - 2m; evidence only – 0m; explanation with
no evidence – 1m]
Note for marker: Students are not required to explain and link to U.S.‘s factor endowments.
(ii)
explain one factor which might account for the largest fall in the U.S. imports.
[2]
Largest fall – both absolute and % - passenger cars
Reason: Financial crisis in the US   income  DD for new cars, assume DD for new cars
is positively income elastic. Consumers may postpone the purchase of new cars. [Unless a
valid reason is given, cars as a whole may not necessarily be a luxury in the US.] Assume
imported cars are new ones.
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[Correct explanation without identification OR Correct identification of category of imports only –
0m
Correct identification of category of imports + factor – 1m
Correct identification of import + explanation of valid reason with application of economic
concept – 2m]
(b)
(i)
Economic forecasts made earlier are often revised later on. Suggest one reason for
the change in the world growth forecasts in Extract 4.
[3]
1. World Bank’s March prediction for the whole year and the next was based on limited data (first 2
months of this year only), thus, more uncertainty & forecasts likely to be less accurate.
Nearing end of June – more events have unfolded and new data (first 5 or 5½ months) are now
available, thus less uncertainty and any forecasts made based on more data would be more
accurate. [2m]
2. In this case, new data must have shown worsening global recession up to June, which is why
the recession is predicted to be deeper for the whole year and economic growth for next year
was revised downwards. [1m]
(ii)
From Extract 5, identify and explain any data which suggest an impending economic
slowdown in South Africa.
[5]
1. Economic slowdown – falling economic growth or real GDP (or real GNP) increasing at
decreasing rate.
2. Data (Must explain at least both internal and external economy):
o ER – the rand has depreciated.
o Export earnings severely affected.
o Economic growth rate expected to fall to 2.6%
o Large scale retrenchment & job losses
o Low consumer spending
[Note: Students need to show how the above data signal an impending economic slowdown in
South Africa.]
3. Most obvious evidence  expected  economic growth rate. Economic growth measures the
rate of change of real GDP.  EG rate  real GDP increasing at decreasing rate – suggests
economic slowdown.
4. Data
o Externally,
- ER
The rand has depreciated – may  investors’ confidence &  FDI inflows. Though
exports are now relatively cheaper, given that the demand for minerals is price inelastic,
earnings from mineral exports are likely to fall.
- BOP
Export earnings severely affected by fall in DD for its exports & falling commodity prices
due to global recession  may worsen South Africa’s BOT despite the depreciation of the
rand  BOP worsens ceteris paribus.
 FDI inflows + smaller growth in export earnings  dampen increase in AE  economic
slowdown
o Internally,
- Economic growth rate expected to fall by 2.5% to 2.6% economic slowdown.
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-  Unemployment as companies embarked on large scale retrenchment +  DD for
domestic manufactured goods  job losses  economic slowdown as output growth
slackens.
- Low consumer spending  reflects poor consumer sentiments  cannot be relied on to
boost AE due to  I &  X  slower EG
Insufficient information: [1m for any one point below]
o Lack information on other items in current account and financial and capital flows  cannot
conclude on BOT/BOP position.
o Overall unemployment rate
o Govt intervention e.g. cut in interest rate or fiscal stimulus to reduce the dampening effect on AE.
Note: All components of AE except G appeared to be adversely affected by the global recession –
strongly suggest impending economic slowdown. Insufficiency of data does not allow a definite
conclusion, as well as how serious is the economic slowdown.
[5m – Acknowledgement of insufficient information (1m) + explanation of both internal and external
economy in the ratio of 2m:2m OR 1m:3m OR 3m:1m
For explanation of internal economy - EG & UN or EG & Consumer spending only OR explanation of
external economy only - BOP & ER – Max 3m
Explanation of data is not linked to economic slowdown – Max 2m of 5m]
Point of clarification: Interpretation of economic slowdown – slower growth which may or may not end
up with a negative growth.
(c)
“Countries ‘catch’ recessions from their major export partners while transmitting
recessions to their major import suppliers.” Comment.
[6]
Students are expected to explain the above statement and discuss the statement using
information from the case as much as possible. They are expected to make a stand on whether
the above statement is justified using data/evidence from the case study.
Countries can ‘catch’ a recession from their major export partners while transmitting recessions
to their major imports suppliers. However, this depends very much on the country in question –
the economic fundamentals of the country, government macroeconomic policies as well as the
degree to which national income, or aggregate demand depends on external factors such as
exports.
Countries ‘catch’ a recession from their major export partners when slow economic growth or
recessions in export partners (i.e. a decrease in national income in export partners) result in low
export demand for the goods of the country in question. In Extract 5 for e.g., South Africa’s
‘export earnings, especially from minerals’ are being ‘severely affected by the lower demand for
South African exports... owing to the global recession’. One of the reasons for declining
economic growth in South Africa is due to the decrease in its exports, which has lowered AD
and lowered national income. Thus, a country like South Africa may ‘catch’ a recession from its
major export partners, especially if exports to its partners form a large component of total export
revenue. The other determining factor would be how much exports contribute as a % of AD. This
may be the case for South Africa as the economy may be dependent on commodity exports to
other countries.
However, the degree to which South Africa will ‘catch’ and be affected by the recession depends
much on government policy. In Extract 5, ‘fiscal prudence and stringent regulation’ has
cushioned the impact of a recession – thus fiscal policy characterised by fiscal surpluses rather
than deficits have prevented South Africa from suffering from a very serious recession.
Additionally, countries may transmit recessions to their imports suppliers. With a recession at
home, lower national income may result in lower demand for imported goods and services, as
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well as imports of raw materials and factors of production. This may be the case for the imports
suppliers to the US economy as seen in Extract 6. Declines in import demand have resulted
from ‘sectoral weaknesses’ in the U.S. economy, for e.g. a decline in the housing sector/industry
has led to lower demand for imports related to construction. Similarly, a recession has lowered
demand for passenger cars significantly (in Table 2) given that passenger cars are luxury goods,
whose demand falls with a fall in income. Thus, principal suppliers of passenger cars to the
U.S., such as Japan, Canada, Germany and Mexico may see lower exports of cars and lower
total export revenue if cars are a major export. This fall in export revenue will in turn lower AD
and national income in these countries. However, no data is given in the case study on the
effect of a fall in exports for these countries and thus it is insufficient to conclude that these
countries have indeed been ‘received’ recessions from the US.
Thus, the degree to which international trade can transmit recessions depends on a number of
factors, and the statement above holds true in economic theory, but the degree of impact of a
recession depends very much on realistic factors on the ground.
Marks
5–6
3–4
1–2
(d)
Descriptor
Candidate is able to assess the statement using economic analysis. No conceptual
errors in the explanation of the statement. Answer contains insightful evaluation.
Candidate is able to explain the statement and relate case material to the statement.
Explains statement with reference to evidence or data in the case study.
For 4m: answer must provide a discussion viewpoint – for e.g. discuss whether
countries can transmit recessions through international trade OR question adequacy
of data OR is able to recognise unstated assumptions in the statement (countries do
transmit recessions only when M/X form a large component of AD, etc.)
Contains several/serious conceptual errors and answer is unable to explain the
statement. Candidate demonstrates a lack of understanding of what the statement
explains or is unable to use economic analysis to explain the statement.
Assess the policies used by both the U.S. and South Africa to cope with the global
recession.
[10]
The US and South Africa have adopted vastly different policies to cope with the global recession.
While the US’ policies are more inward-looking, South African’s policies are more outward-looking
and take into account a longer-term perspective of not only recovery from the current recession,
but future economic growth as well.
The US has adopted protectionistic policies to cope with the global recession. Faced with a global
recession leading to declining exports, the US government has turned to legislative measures
which protect the domestic industries by forcing public sector projects to buy its supplies from
domestic industries. The US adopted expansionary fiscal policies by increasing government
expenditure on public works such as building of schools, highways etc, in extract 7. Such
increase in G will increase AD and offset decreases in AD due to declining exports or
consumption levels. However, the US has also used legislative measures to maximise the
multiplier effects of this policy by buying domestically-produced iron and steel as factors of
production for these public works, rather than using imports, which are leakages and may offset
the increase in AD due to increase in G.
Buying domestic raw materials will also lower unemployment levels in the US since domestic
firms are able to continue production and hence protect profit levels. This prevents a shutdown of
US firms and firms will continue to demand labour. With lower unemployment levels, US workers
will be able to keep consumption levels high which will further boost AD and national income. This
will ensure that the recovery from the recession is more sustainable.
However, such legislation is deemed to be protectionistic and may attract retaliatory measures as
seen in extract 7. This is especially detrimental as US firms want to increase their exports and
© SAJC 2010
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Suggested Answers and Mark Scheme
11
foreign direct investment to countries such as China and Europe who are also using expansionary
fiscal policy of increased G on public works to increase AD and national income during the global
recession. These countries may in turn set tariffs on US exports or limit FDI by US firms in such
countries which will further hurt US exports. Such tit-for-tat retaliatory measures will only lead to
decreased exports for both countries, and further lower AD and worsen the global recession.
Thus, although expansionary fiscal policy may be effective for the US given a significant multiplier
effect, artificially maximising this multiplier effect could render the fiscal policy ineffective.
In contrast, South Africa is using both demand-side and supply-side measures to tackle the
recession in both the short and long term. South Africa is using demand-side expansionary
monetary policy – cutting interest rate to lower cost of borrowing such that households and firms
will increase consumption and investment respectively. This will increase AD and national income
via the multiplier effect. However, this may not be sufficient as consumers may be unwilling to
spend given poor expectations of the economy and increased ‘job losses’ due to a fall in export
demand for manufactured goods (extract 7). If the country faces high unemployment levels,
consumers will not have an income to spend and they may borrow to save instead. Hence,
monetary policy may have limited effects on the economy.
However, South Africa is also encouraged to use more long-term measures to sustain
employment levels. The government could use supply-side measures or tap on the supply-side
effects of expansionary fiscal policy by increasing spending on infrastructure. Such policies not
only increase AD in the SR, but also increase AS in the LR by increasing the productivity of
existing factors of production. Additionally, extract 5 recommends that South Africa’s government
spends on ‘creating employment opportunities’ by developing new comparative advantages or
industries and encouraging efficiency in the private sector. The former policy ensures low
unemployment levels in the longer run, allowing consumption levels to be maintained, while the
latter may encourage exports by promoting firms’ competitiveness in the global market. Another
policy is the changing of legislation to attract FDI, which also has demand and supply side effects
on the macro economy. As such, AD may be increased in the short-term which results in
economic recovery from the recession, but long-term supply-side policies are also implemented to
ensure sustained growth (increase in potential growth).
As such, comparing the policies of both countries, South Africa’s policies may be more
appropriate and effective given that both short-term and long-term periods are considered and will
not result in counter-effects that may offset growth.
Level
(Marks)
3
(7 – 8)
2
(5 – 6)
1
(1 – 4)
E
(1 – 2)
© SAJC 2010
Knowledge, Application, Understanding and Analysis
Candidate considers policies of both countries and is able to provide detailed,
considered analysis on the effectiveness and appropriateness of the policies.
Candidate is able to explain policies using case study material and how the policies
are able to aid in economic recovery for both countries. However, elaboration is
insufficient or lacking in detailed economic analysis.
For L2, candidate must explain policies for both US and South Africa but each
country need not be treated equally. Answer must also provide a discussion
viewpoint – there must be a discussion on the limitations or inappropriateness of
policies adopted.
Contains several/serious conceptual errors or scattered economic analysis.
Candidate is unable to use case material and suggests policies not mentioned in the
case study. Only explains policies for one country or answer is one-sided.
Candidate is able to give a considered judgment on the policies used by both
countries in terms of relative effectiveness or appropriateness.
9732/01/PRELIM
Suggested Answers and Mark Scheme