Chapter 16:THE FOREIGN SECTOR PDF

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Contains questions about ECON 1st year second semester work about the foreign sector...

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SECTION A: MULIPLE CHOICE QUESTIONS Question 1 A monetary system where exchange rates are freely determined in response to the demand and supply for foreign currencies may best be described as a: 1. 2. 3. 4. 5.

fixed exchange rate system. managed float. floating exchange rate system. pegged exchange rate. Purchasing power parity system

Question 2 The figure below shows the demand and supply curves for dollars (in terms of the South African rand) in the foreign exchange market. Use this information to answer Question 2.

In the figure depicted above, an increase in American tourists to South African game reserves would cause the: 1. 2. 3. 4. 5.

supply curve to shift to the right. demand curve to shift to the left. supply curve and demand curve to remain unchanged. demand curve to shift to the right. supply curve to shift to the left.

Question 3 The exchange rate between the euro (€) and the US dollar ($) is $1,20 per euro. If an American tourist in Paris purchases a good valued at 60 euros, then in his own currency this would cost: 1. 2. 3. 4. 5.

$50. $72. $48. $720. $18.

Question 4 A tariff is: 1. 2. 3. 4. 5.

the real terms of trade. a penalty for failure to comply with the rules of the World Trade Organisation. the voluntary restraint on products from foreign countries. a limit on the quantity of foreign goods that can be sold in a nation’s domestic markets. a tax on imported goods.

Question 5 Use the following information to answer Questions 5.1 and 5.2. 5.1 If a South African citrus farmer can sell a carton of oranges for as net price of $10, how much would he receive in rand terms? 1. 2. 3. 4. 5.

R1. 33 R0.75 R75 R25 Not determinable.

5.2 If the exchange rate were to change to R7.80 to the dollar, the ____has appreciated and the ____ has depreciated? 1. 2. 3. 4. 5.

rand; dollar dollar; rand dollar; dollar rand; rand None of the currencies have depreciated nor appreciated

SECTION B: DISCUSSION QUESTONS Question 1 Name and briefly explain any three measures that governments can take to protect domestic firms against foreign competition. Import tariffs are duties or taxes imposed on products imported into a country. Import quotas seek to control the physical level of imports. Subsidies granted to home producers are a form of financial aid or support extended to domestic producers to ensure that domestic producers are better off. Have essentially the same economic impact as taxes on imported goods. Non-tariff barriers take the form of, for example, discriminatory administrative practices, such as deliberately channelling government contracts to domestic firms, insisting on certain technical standards or specifications that may be difficult for foreign firms to meet, special licensing requirements or, simply, unnecessary red tape.

Exchange controls can also be used to restrict imports by limiting the amount of foreign currency available for their purchase. Exchange rate policy: Deliberately altering exchange rates to influence the macro-economic environment. This is regarded as a much more effective instrument for influencing international trade than the traditional instruments of trade policy such as tariffs, quotas and subsidies.

Question 2 South Africa and Nigeria have over the years strengthened trading ties between them. These two countries are producers of cocoa and wood. Under conditions of full employment, production information per labourer is listed below. PRODUCT PER LABOURER SOUTH AFRICA NIGERIA Cocoa

100 kg

300 kg

Wood

150 kg

30 kg

2.1 What is the opportunity cost of producing 1 kg of wood in South Africa and Nigeria? South Africa = 100/150 = 0.67 or 2/3 kg of cocoa Nigeria = 300/30 = 10 kg of cocoa 2.2 Which country has the comparative (relative) advantage in the production of wood? South Africa 2.3 What is the opportunity cost of producing 1 kg of cocoa in South Africa and Nigeria? South Africa = 150/100 = 1.5 kg of wood Nigeria = 30/300 = 0.1 kg of wood

2.4 Which country has the comparative (relative) advantage in the production of cocoa? Nigeria

2.5 If there is to be mutually beneficial trade, which country should produce and export cocoa and which country should produce and export wood? Nigeria should produce and export cocoa to South Africa South Africa should produce and export wood to Nigeria

Question 3 Briefly explain how a depreciation of the rand would influence the following: 3.1 South African importers. Imports gets more expensive, therefore imports are discouraged 3.2 South African exporters.

Exports gets cheaper, therefore exports are stimulated 3.3 Inflation in South Africa. Inflation rises due to imported inputs getting more expensive

Question 4 List four possible reasons for an appreciation of the rand against the US dollar. 

An increase in the price of gold or other important mineral exports.



A decline in the amount of imports from the United States.



An increase in investment by Americans in South Africa, for example on the JSE.



An increase in spending by American tourists in South Africa.

SECTION C: CALCULATIONS Question 1 South Africa and Brazil are one of the two countries in the economic grouping named BRICS. These countries have decided to strengthen their trade ties by exploring products that they could trade with each other namely fresh produce like apples and sweets and confectionaries. Furthermore, suppose that if South Africa uses all of its resources can produce either 100kg of sweets and confectionaries or 50kg of apples in a day. Similarly, Brazil can produce either 40kg of sweets and confectionaries or 10kg of apples. 1.1 Calculate and determine which country has a relative advantage in the production of apples and which country has a relative advantage in the production of sweets and confectionaries. 2

Apples (A) In (Kg) 50 10

Ratio

South Africa Brazil

Sweets and confectionaries (S) In (Kg) 100 40

South Africa Brazil

100 40

50 10

1 Apples:2 Sweets (0.5 mark) 1 Apples: 4 Sweets (0.5 mark)

1 Sweets:0.5 Apples (0.5 mark) 1 Sweets:0.25 Apples (0.5 mark)

South Africa therefore has a relative advantage in the production of apples (1 mark) and Brazil has a relative advantage in the production of sweets and confectionaries (1 mark).

Question 2 1. Suppose a bedroom suit costs $50 000 in the United States (if we ignore transport costs and other costs of importing) what will be the cost in rands if $1 = ZAR 9?

2. How much will the same bedroom cost when the exchange rate is now $1 = ZAR 5 3. If a tractor costs R345 000 and a client is willing to pay you in US$, calculate the cost if $1 = ZAR 5.9700 4. How much will the same tractor cost when US$ 1 = ZAR 6.5955 1. 2. 3. 4.

US$50 000 x 9.00 = ZAR 450 000 US$50 000 x 5.00 = ZAR 250 000 ZAR 345 000 / 5.9700 = US$ 57 788.94 ZAR 345 000 / 6.5955 = US$ 52 308.39...