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TABLE OF CONTENTS

Table of Contents
Question One
1.1 Autonomous and Induced Consumption 2
1.2 Economic Growth and economic Development 2
1.3 Nominal Gross Domestic Product and Real GDP 3
Question Two
2.1 Theory of Absolute Advantage and Comparative Advantage 4
2.2 Full Employment and Zero Employment 4
2.3 Floating Exchange and Fixed Exchange Rate 5
Question Three
Introduction 6
Costs of Inflation 7
Conclusion 8

Question Four
Introduction 9
Obstacles Faced by Businesses in the Informal Sector 10
Possible Solutions 13
Conclusions 15
Question Five
Introduction 16
Government Policy as Regards Trade Barriers 16
The Importance of Trade Barriers 17
The Major Draw Back of Trade Barriers 19
Conclusion 20
Bibliography 21

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1.1

Autonomous consumption refers to household consumption expenditures that do not depend on


income or production especially disposable income, national income, or even gross domestic
product. That is, changes in income do not generate changes in consumption. Autonomous
consumption is best thought of as a baseline or minimum level of consumption that the
household sector undertakes in the unlikely event that income falls to zero. Induced consumption
on the one hand is consumption which is based on the level income or production as illustrated in
the equation below,

C = a + bY

Where:
C is consumption expenditures,
Y is income (national or disposable),
a is the intercept, and b is the slope. Begg and Ward (2007:244)

• An Autonomous Intercept: The intercept of the consumption function (a) measures the
amount of consumption undertaken if income is zero. If income is zero, then consumption is
Ra.
• An Induced Slope: The slope of the consumption function (b) measures the change in
consumption resulting from a change in income. If income changes by R1, then
consumption changes by Rb. It is conceptually identified as induced consumption and the
marginal propensity to consume (MPC).

1.2
Economic growth is an increase in the economic activity in an economy of a country. It can be
described as a positive change in the level of production of goods and services by a country over
a certain period of time. Mohr & Fourie (2004:23). It is often measured as the rate of change of
gross domestic product (GDP). Economic growth refers only to the quantity of goods and
services produced; it says nothing about the way in which they are produced. Mohr & Fourie
(2004:576)

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Economic development on the one hand in its broadest terms refers to the reduction or
elimination of poverty, inequality and unemployment in a growing economy. It focuses more on
the human aspect of growth, that is economic development would emphasise on the quality of
life the members of a society undergo. The level of economic development is measured based on
the level of real GDP per capital, infant mortality rates, life expectancy, literacy, nutrition,
unemployment and inequality. Mohr and Fourie (2004:589)

1.3

The Nominal Gross Domestic Product (GDP) refers to the total face value of all final goods and
services produced within the boundaries of a country during a particular time period usually one
year.

The Real GDP on the one hand would refer to the total actual value of all final goods and
services produced within the boundaries of a country during a particular time period usually one
year. The real GDP eliminates the impact of inflation hence it is generally lower than the
nominal GDP which does not take into account the effects of inflation. Both concepts can be
illustrated on the table below.

Nominal GDP 2009 Nominal GDP 2010 Real GDP in 2010


2 Kg of Meat at R100 R200 4 Kg of Meat at R150 R600 4 Kg of Meat at R100 R400
5Kg of Fish at R80 R400 8Kg of Fish at R100 R800 8Kg of Fish at R80 R640
R600 R1200 R1040

Increase in Nominal GDP between 2009 and 2010

= (1200 - 600)/600 x 100/1

= 100%

Increase in Real GDP between 2009 and 2010

= (1040 - 600)/600 x 100/1 = 73% Mohr & Fourie (2004)

QUESTION TWO

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2.1

The law of comparative advantage refers to the ability of a firm, or a country to produce a
particular good or service at a lower marginal cost and opportunity cost than the other party. It is
the ability to produce a product most efficiently given all the other products that could be
produced. Absolute advantage on the other hand refers to the ability of a country to produce a
particular good at a lower absolute cost than another country. Begg and Ward (2007:323).
Comparative advantage explains how trade can create value in international trade even when one
country can produce all goods with fewer resources than the other country as illustrated below in
the examples.

If South Africa can produce 80 tons of wheat or 20 cars with a given amount of resources while
France can use those same resources to produce 10 cars and 160 tons of wheat we can say South
Africa has an absolute advantage in the production of cars while France has an absolute
advantage in the production of wheat.

Looking at the case of comparative advantage if France can use a given amount of resources to
produce 20 cars and 80 tons of wheat while South Africa can only produce 10 cars and 60 tons of
wheat, we can say that France has an absolute advantage in the production of both cars and
wheat. But looking at the opportunity cost, France has a lower opportunity cost in the production
of cars while South Africa has a lower opportunity cost in the production of wheat. This
therefore means that France has a comparative advantage in the production of cars while South
Africa has a comparative advantage in the production of wheat.

2.2

Full employment describes a situation in which all available labor resources are being used in the
most economically efficient way that is, all the available labour that is willing and able to work
have been recruited, but it excludes Frictional unemployment. This is because frictional
unemployment is the amount of unemployment that results from workers who are in between
jobs, but are still in the labor force. Full employment is attainable within any economy, but may
result in an inflationary period. The inflation would result from workers, as a whole, having more
disposable income, which would drive prices upward.

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Zero unemployment on the one hand is an ideal situation in which all economies would like to
be, but in reality it is unattainable. Zero unemployment describes a situation where all those in
the active working population have a job. This is not possible because some jobs are seasonal
and some employees might be in the job market because of frictional unemployment. Peter
(2000:39-40).

2.3

A fixed or pegged exchange rate is a rate the central bank or reserve bank of a country sets and
maintains as the official exchange rate against a particular currency. A set price is determined
against a major world currency usually the U.S. dollar, but also other major currencies such as
the euro, the yen or a basket of currencies can be used. In order to maintain the local exchange
rate, the central bank buys and sells its own currency on the foreign exchange market in return
for the currency to which it is pegged. For example the CEMAC countries run a fixed exchange
rate regime where the French Francs is pegged against the Euro.
www.investopedia.com/terms/floatingexchangerate.sap Accessed on the 24/09/10.

Unlike the fixed rate, a floating exchange rate is determined by the private market through
supply and demand. A floating rate is often termed "self-correcting", as any differences in supply
and demand will automatically be corrected in the market. For example if demand for a currency
is low, its value will decrease, thus making imported goods more expensive and stimulating
demand for local goods and services. This in turn will generate more jobs, causing an auto-
correction in the market. A floating exchange rate is constantly changing. The floating exchange
rate is a policy maintained by the South African Reserve Bank, this explains the strength of the
Rand during the world cup as there was an increase in demand for the home currency by
foreigners.

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QUESTION THREE

Introduction
Inflation is a consistent, significant and general increase in the prices of goods and services at a
particular time. There are major types of inflation, demand pull and cost push inflation. Demand
pull inflation can be summarized as "too much money chasing too few goods". In other words, if
demand is growing faster than supply, prices will increase. This usually occurs in growing or
emerging economies where there is usually an increase in consumer expenditure, private
investments, government spending and increase in net exports as illustrated on the diagram
below. G
en
er AS
al
P E4
Pr 4
ic E3 AD4
e P3
L
ev AD3
E2
el P2
AD2
P1 E1

AD1
Y
Y1 Y2 Yf

Diagram; Fourie2004:548

An increase in aggregate demand from AD1 to AD2 to AD3 leads to an increase in the price level
from P1 to P2 to P3 respectively. When the economy attains full production Yf any further increase
lead to rapid increase in price thereby leading to demand pull inflation

Cost push inflation rather describes a situation where companies' costs go up, and the companies
in tend increase their prices to maintain their profit margins as would be shown on the diagram
below. Increased costs can include things such as wages, taxes, or increased costs of imports and
raw materials.

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General Price Level
AS2

E AS1
P2 2

E1
P1
Diagram; Fourie 2004:549
AD

An increase in the cost of production will cause a backward shift of the supply curve from AS1 to
AS2 reducing quantity supplied from Y1 to Y2 and consequently pushing up price level from P1 to
P2.

Costs of Inflation

Inflation is not always looked upon as friendly by governments and citizens of a country, and can
be blamed for some of the tensions and conflicts created in the society. Almost everyone thinks
inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. As
we shall discuss in the coming paragraphs inflation has a negative impacts on the society and its
citizens.

Inflation is viewed as being undesirable because of some serious economic and social effects.
Inflation impacts on income distribution making a random redistribution of real income. Those
receiving fixed money incomes e.g. pensioners and beneficiaries are usually disadvantaged
because often their incomes are not adjusted upwards fast enough to compensate for the effects
of continually rising prices. Their real incomes i.e., the goods and services their incomes will buy
will fall. Individuals whose incomes rise more rapidly than the inflation rate will experience
increasing real incomes. Generally, the pattern of income distribution tends to become more
unequal than it was before inflation. This has created situation of high wage demands especially

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in South Africa where for the past few months workers have been demanding a salary increase
higher than the inflation rate.

Inflation tends to increase spending and encourage borrowing at the expense of savings. If prices
are rising quicker than incomes, individuals will tend to buy at current prices before goods and
services become more expensive and less affordable. Some consumers may buy using higher
levels of debt i.e., borrowing than otherwise might be the case. Savings may be discouraged
because with high inflation when the money saved is repaid, it can be worth much less than when
it was lent and the real rate of interest may be low.

Investment in economics means the creation of new capital goods Peter (2000:52-53).
Investment can only take place if there is saving. Inflation encourages spending and discourages
saving, so funds that might otherwise have been available for investment tend to dry up. With
lower levels of investment there is likely to be a slowing of the rate of growth of national output
(GDP). This in turn leads to a reduction in new jobs and so can increase the level of
unemployment.

Inflation can distort market price signals and the market may fail to allocate resources efficiently.
Planning and investment decisions become more difficult to predict as firms are unsure what will
happen to prices and costs during times of inflation. If firms are unable to pass on the increase in
costs to consumers this will impact on profits possibly causing some firms to close or cut back
production and subsequent employment.

Inflation in South Africa at a faster rate relative to our trading partners can harm exporters and
benefit importers. South African firms exporting their products overseas will find it more
difficult to sell their products because they are less competitive price wise. Local producers may
find it difficult to compete in domestic markets because of relatively cheaper foreign imports.
Declining exports and increasing imports can lead to deterioration in the balance of payments.
High inflation in South Africa may see nations trading elsewhere while a lack of business
confidence because of the perceived higher risks may see firms investing elsewhere. This high
inflation will slow growth and employment through the dampening effects on investment and
declining exports.

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The Reserve in an attempt to reduce the rate of inflation definitely has to increase the repo rate
forcing banks and other financial institutions to increase the prime lending rate. This has a
negative impact on the cost of borrowing which goes up and the rate at which citizens pay their
bonds also goes up thereby reducing their disposable income. This was reflected during the
tenure of Tito Mboweni as Reserve Bank governor where interest rates where double digits and
repossessions of personal property, default in debt repayment was record high.

Conclusion

Besides all the tensions, conflicts and difficulties created by inflation, there are some people
who still benefit from the effects of inflation according to Peter (2000:23); the real rate of
interest rates fail to keep pace with inflation the saver loses purchasing power, i.e., their ability to
buy things falls. Rising prices are a boon to borrowers because the repayment of interest and the
sum borrowed i.e., the principal is with lower valued money. Inflation reduces the real value of
the amount they owe, as the sum repaid has less purchasing power. Of course, any gain by
borrowers must be weighed against the interest they must pay.

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QUESTION FOUR
Introduction
The informal sector is unorganized, unregulated and mostly legal, but unregistered small
business enterprises operating in a country or region. As observed by Todaro (1997), the massive
additions to the urban labour force by this sector do not show up in formal modern sector
unemployment statistics. The buck of new entrants to the urban labour force creates their own
employment or work for small scale family owned enterprises. The concept of “informal sector”
since its invention in the 1970s has attracted much interest, discussion and disagreement. There
are currently two approaches to defining informal sector activities: the definitional and
behavioural (Farrel, Roman and Fleming, 2000).

Farrel et al defines the informal sector as one which consists of economic activities which are not
recorded in the gross domestic product (GDP) and or the national income accounts. The
behavioural which is at times referred to as the legalistic definition is based on whether or not an
activity complies with the established judicial, regulatory, and institutional framework however,
Sethuraman (1981) defines the informal sector as consisting of small scale units engaged in
production and distribution of goods and services with the primary objective of generating
employment and income, notwithstanding the constraints on capital, both physical and human,
and the technical-knowhow. Common features of operators in the informal sector as identified by
Ademu, (2006) include:

• Easier access to production factors which are derivable from social organisation of
family and friends.
• Involves entrepreneurs in virtually all branches of the economy ranging from
productive activities general services and specialized services.
• Technology is determined more by the constraints of the social relations.
• Motivation for production by the operators in the informal sector is becoming more
profit oriented.

The coming section would examine some of the problems businesses in the informal sector go
through and propose possible ways of resolving these problems.

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OBSTACLES FACED BY BUSINESSES IN THE INFORMAL SECTOR
Enterprises in the informal economy are facing obstacles that are sometimes similar to those
experienced by formal enterprises. However, businesses in the informal sector are much more
vulnerable in relation to these problems which are discussed below:

Lack of Credit

A lack of capital is one of the major constraints faced by participants in the informal sector. As a
result, informal sector workers are forced to use hand driven tools and outdated machinery,
which keeps their productivity low. Due to a lack of working capital, they cannot purchase raw
materials in bulk at lower prices and take their goods to market, where they can attract better
prices.

Since the participants in the informal sector tend to have low incomes, they are unable to save
much of their income for reinvestment in their businesses. To obtain capital for investment,
entrepreneurs in the informal sector usually borrow from their relatives, friends and informal
lenders like shack loans. However, informal lenders tend to lend money at daily, weekly or
monthly rates; if converted on an annual basis, these rates would be extremely high.

Poor Infrastructure
A general lack of access to physical infrastructure and services, such as roads, electricity, water
supply and public transport, dampens the productivity of both the formal and informal sectors.
Participants in the informal sector often use their houses as their work premises. Otherwise, their
businesses may be located in public places, such as on streets or sidewalks, or in unregistered
shops and workshops. Informal entrepreneurs need electricity for both lighting and power tools
in order to improve their productivity. They require water, sanitation services and places to store
their goods. Some government schemes impose the large-scale resettlement of informal sector
businesses to locations considered suitable by policymakers and planners, but such resettlement
is seldom successful.

Informal workers often lack legal property rights or secure tenure of places where they live or
work. This makes it difficult to extend infrastructural services to them. Electric companies may

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not provide electricity for business owners who do not have secure property rights, as it would be
difficult for them to monitor the services and collect the payments.

No Management Skills / Poor Education and Training


Education and skills training are important for enhancing the productivity of informal workers,
who generally lack education and skills. Many are migrants from rural areas and have few
opportunities to receive a formal education. In addition, children of poor people in urban areas
find it difficult to attend school for economic reasons and end up in the informal sector at a
young age. Informal workers usually acquire skills through on-the-job training or a traditional
apprenticeship system.

Harassment
Various types of regulations are enforced by different government agencies dealing with the
establishment and operation of businesses. In many cases, government officials utilise these
regulations to harass business owners. A lack of awareness of the laws and regulations in the
informal sector is a major reason for informal workers’ susceptibility to the harassment.

Social protection
Participants in the informal sector enjoy little social protection against illness, disability,
unemployment, old age or the death of a main income earner. In fact, even the formal sector in
most developing countries is unable to provide comprehensive social protection for its workers,
as usually enjoyed in developed countries. Social insurance schemes, such as health insurance,
disability allowances or retirement benefits, are financed through a mix of taxation and
contributions from employers and the formal workers themselves. The implementation of social
insurance schemes for the informal sector, which consists largely of self-employed individuals, is
extremely difficult. Informal producers’ and workers’ incomes are usually low, making financial
contributions difficult. Apart from high financial costs, the administration of social insurance
schemes is very challenging.

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With respect to working conditions, informal workers who are employees usually suffer from
exploitation in the form of long workdays, a lack of a weekly holiday, a lack of job security or
generally low wages.

POSSIBLE SOLUTIONS
There are different views from economist, governments, and lobbyist groups on how to solve the
problems of businesses in the informal sector. Below we have proposed a more general approach
on how the survival of businesses in the informal sector can be sustained given the very
important role they play in the economy of every society and country.

Direct Government Intervention


Governments can provide tax incentives for commercial banks to defray additional transaction
costs. Government can provide subsidized credit for microenterprises and make the procedures
for obtaining such loans less lengthy and cumbersome.

Better still instead of providing subsidized credit to the informal sector, improved access to
credit and other financial services is more important than the cost of credit. The Government can
introduce a concessional credit programme largely aimed at helping youth to become self
employed.

Increasing Access to Credit Finance


One of the main hurdles in obtaining credit from formal financial institutions is the need to
provide collateral, which poor participants in the informal sector usually lack. The government
can introduce a group guarantee method, where small homogeneous groups of poor people are
established for group guarantee loans.

The government can stand as a surety for the loans taken by these young entrepreneurs, for
example the South African government backs most young entrepreneurs to get loans from the
banks after scrutinizing their business plan. In case these businesses fail to repay the loan the
government pays the loan to the bank.

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Improving on Infrastructure
Besides developing roads, increasing access to power and water the government must ensure that
the informal sector is been provided with property rights or secure tenure of their places of
residence and work. Apart from improving productivity in the informal sector, this would
encourage informal entrepreneurs to bring improvements to their land and its surroundings,
without the fear of eviction.

Human Capital Development


Human capital development is key to making the informal sector more productive and dynamic.
For this to happen, basic education, including primary education, should be made universal.
Universal primary education would help workers in acquiring vocational training and would
make them more flexible and mobile, as they could be trained and retrained more easily. Adult
literacy programmes should be provided in places where informal sector participants live. Apart
from allocating more of their own resources, Governments should encourage NGOs and the
private sector to provide skills training.

Special vocational training institutions can be established for informal workers, and existing
vocational training institutions can be used “after hours”. It is important to upgrade trainers’
skills at regular intervals in order to help avoid the transfer of obsolete skills. The upgrading of
skills can help with the use of modern technology, which in turn raises productivity.

Increased Communication
Information about regulations and laws should be publicized and made easily accessible to
informal businesses. At the same time, government officials dealing with the informal sector
need to be sensitized to the importance of the informal sector in generating employment and in
fulfilling the needs of a large body of customers. The formation of informal business associations
should strengthen the capability of the business owners to articulate their interests and to protect
themselves from harassment. Issuing a membership card for a small fee to association members
can be a useful mechanism for reducing harassment, since the low-level government officials
would be more careful when dealing with a member of an organized group.

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Increase Social Protection
The informal sector is extremely heterogeneous, and there is a need for a careful analysis of
different options for different categories of workers in specific industries or sectors. Where
participants in the informal sector are organized, the private insurance industry and the
Government can negotiate with them a cost-sharing arrangement for social insurance schemes. It
is important that Governments subsidize the social insurance schemes and that most of the
responsibility for risk coverage is not placed on the poor participants in the informal sector
themselves.

Conclusion

The informal sector, in whatever way one defines it, is quite large, particularly in terms of its
contribution to employment in the developing countries of the region. However, due to a lack of
employment opportunities in the formal sector, people are forced to join the informal sector to
earn their livelihood. Without the informal sector, the intensity of poverty, if not its extent,
would be much higher. Therefore, it is necessary to enhance the productivity and earnings of the
informal sector.

To minimize their exploitation, there is an urgent need for laws and regulations to protect
informal workers. At the same time, however, it is important to remember that the informal
sector is a source of employment for a large number of people. Excessive laws and regulations
can stifle its growth and erode its employment-generating potential. Therefore, a balance
between the protection and welfare of workers and the maintenance of the sector’s employment
potential needs to be found.

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QUESTION FIVE

Introduction
Trade barriers as defined by Mohr and Fourie (2004:426) as duties or taxes imposed on products
imported into the country and Mohr mentions two reasons why it is necessary; firstly it helps
protect domestic industries against foreign competition and secondly it is a source of government
revenue. We have different types of trade barriers ranging from Specific tariffs, Ad valorem
tariffs, Licenses, Import quotas, Voluntary export restraints and Local content requirements.

Government Policy as Regards Trade Barriers


South Africa participates in a number of preferential trade relationships, both regional and
bilateral. It was a founding member of the General Agreement on Tariffs and Trade in 1947, and
is an active member of the World Trade Organisation. It is committed to the principles of these
organisations, and to increasing South Africa's global competitiveness. Tariffs have been
reduced, and non-tariff barriers are being phased out.

Forming strong trading blocs

Given the high level of competition for foreign direct investment among emerging markets,
South Africa has placed greater importance on forming strong economic trading blocs to gain
access to key markets. The South African government has actively pursued negotiations for an
agreement on trade, development and co-operation with the European Union (EU). South Africa
has also turned its attention to pursuing agreements for greater South-South co-operation. The
move to establish trade relations with Mercusor via a free trade agreement with Brazil, and also
with India, is top of the government's export-oriented trade agenda.

South Africa's participation in the Southern African Development Community (SADC),


comprising 14 sub-Saharan African countries, allows access to a market of approximately 140-
million, which is expected to grow at an annual rate of around 3%.

General Trade Agreements


South Africa has negotiated a host of general trade agreements since 1994 as part of the process
of normalising trade relations with international trading partners. General trade agreements do

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not make provision for market access in specific sectors, but essentially allow for Most Favoured
Nation tariff treatment, which is the global minimum standard for international trade relations as
established under the World Trade Organisation (WTO).

Free Trade Agreements

In addition to these general trade agreements, South Africa has also negotiated two free trade
agreements, which allow for preferential access via lower tariffs between signatory countries for
specific products across sectors: The one agreement is with the South African Development
Community (SADC), and the other is with the European Union (EU), named the SA-EU Trade
Development Co-operation Agreement.

http://www.southafrica.info/business/trade/relations/traderelations.htm Accessed on 20/09/10

The Importance of Trade Tariffs


Tariffs are often created to protect infant industries and developing economies, but are also used
by more advanced economies with developed industries. Here are five of the top reasons tariffs
are used

Protecting Domestic Employment


The levying of tariffs is often highly politicized. The possibility of increased competition from
imported goods can threaten domestic industries. These domestic companies may fire workers or
shift production abroad to cut costs, which means higher unemployment and a less happy
electorate. The unemployment argument often shifts to domestic industries complaining about
cheap foreign labor, and how poor working conditions and lack of regulation allow foreign
companies to produce goods more cheaply.

Protecting Consumers
A government may levy a tariff on products that it feels could endanger its population. For
example, South Africa may place a tariff on imported beef from the Zambia if it thinks that the
goods could be tainted with disease.

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Infant Industries
The use of tariffs to protect infant industries can be seen by the Import Substitution
Industrialization (ISI) strategy employed by many developing nations. The government of a
developing economy will levy tariffs on imported goods in industries in which it wants to foster
growth. This increases the prices of imported goods and creates a domestic market for
domestically produced goods, while protecting those industries from being forced out by more
competitive pricing. It decreases unemployment and allows developing countries to shift from
agricultural products to finished goods.

National Security
Barriers are also employed by countries to protect certain industries that are deemed strategically
important, such as those supporting national security. Defense industries are often viewed as
vital to state interests, and often enjoy significant levels of protection.

Retaliation
Countries may also set tariffs as a retaliation technique if they think that a trading partner has not
played by the rules. For example, if South Africa believes that the Zimbabwe has allowed its
wine producers to give its domestically produced wines South African names, it may levy a tariff
on imported meat from the Zimbabwe unless they agrees to crack down on the improper
labeling. Retaliation can also be employed if a trading partner goes against the foreign policy
objectives of the government.

The Major Draw Back of a Trade Barrier


Due to the effects of tariffs the prices of imported goods go up because of this, domestic
producers are not forced to reduce their prices from increased competition, and domestic
consumers are left paying higher prices as a result. Tariffs also reduce efficiencies by allowing
companies that would not exist in a more competitive market to remain open.

The figure below illustrates the effects of world trade without the presence of a tariff. In the
graph, DS means Domestic Supply and DD means Domestic Demand. The domestic price of
goods indicated by P, while the world price is found at P*. At a lower price, domestic consumers

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will consume Qw worth of goods, but because the home country can only produce up to Qd, it
must import Qw-Qd worth of goods.

Price without the influence of a tariff, Source: www.investopedia.com Accessed on the 24/09/10.

When a tariff or other price-increasing policy is put in place, the effect is to increase prices and
limit the volume of imports. The diagram below shows the price increases from the non-tariff P*
to P'. Because price increases, more domestic companies are willing to produce the good, so Qd
moves right. This also shifts Qw left. The overall effect is a reduction in imports, increased
domestic production and higher consumer prices.

Price under the effects of a tariff, Source: www.investopedia.com Accessed on the 24/09/10.

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Conclusion
Free trade benefits consumers through increased choice and reduced prices, but because the
global economy brings with it uncertainty, many governments impose tariffs and other trade
barriers to protect industry. There is a delicate balance between the pursuit of efficiencies and the
government's need to ensure low unemployment. But from our discussion above it would
beneficial for the government to impose less barriers when it comes to trade, though it might be
threat to small and medium size enterprises who cannot compete in a whole it leads to better and
higher living standards as quality products can be gotten a cheaper prices as illustrated on the
diagram above.

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Todaro, M.P. 1997. Economic Development, New York: Longman Publishing

Mohr & Fourie (2004) Economics for South African Students Pretoria, South Africa: Van Schaik
Publishers

Peter K. (2000) Macroeconomic Essentials: Understanding Economics in the News


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Pinelopi K. & Nina P., (January 2003) “The response of the informal sector to trade
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Sethuraman, S.V (1981) The urban informal sector in developing countries: Employment,
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www.investopedia.com/terms/floatingexchangerate.sap Accessed on the 24/09/10.

http://www.southafrica.info/business/trade/relations/traderelations.htm Accessed on 20/09/10

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