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Economics Assignment 2013

Economics 1A (Management College of Southern Africa)

Studocu is not sponsored or endorsed by any college or university

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ASSIGNMENT COVER SHEET

MBA 1 YEAR JANUARY 2012

ZONDI
Surname
THOBEKA FELICITAS
First Name/s
119360
Student
Number
ECONOMICS
Subject
1
Assignment
Number
BLOEMFONTEIN
Tutor’s Name
BLOEMFONTIEN
Examination
Venue
17 OCTOBER 2012
Date
Submitted
√
Submission (√) First Submission .resubmission
58 DEWAAL DRIVE
SOUTHLANDS
Postal Address
PIETERMARITZBURG

SOUTH AFRICA 3201

tzondi@setsoto.co.za or tzmazondi@gmail.com
E-Mail
(Work) 051 933 9300
(Home) 033 386 7557
Contact
Numbers (Cell) 082 299 4012

Course/Intake MBA Year One Jan 2012

Declaration: I hereby declare that the assignment submitted is an original piece of work
produced by myself.

Signature: TF ZONDI Date: 17 OCTOBER 2012

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Table of Contents

Question 1............................................................................................................................... 3
1.1. Exchange Rate Regime........................................................................................ 3
1.1.1. Introduction..................................................................................................................3
1.1.2. Macroeconomics Objectives........................................................................................4
1.1.3. Conclusion....................................................................................................................4
Question1.2.............................................................................................................................. 6
1.2. Macroeconomic objectives.................................................................................... 6
1.2.1. Introduction..................................................................................................................6
1.2.2. Macroeconomic Objectives..........................................................................................6
1.2.3. Economic growth.........................................................................................................6
1.2.4. Full employment..........................................................................................................7
1.2.5. Price stability................................................................................................................8
1.2.6. Balance of payments stability......................................................................................8
1.2.7. Which objective is the most important?.....................................................................9
Question 2 (25).................................................................................................................. 10
2. Monopoly Powers............................................................................................................... 10
2.1. Introduction........................................................................................................................10
2.2. The advantages of monopolies..............................................................................................11
2.3. The disadvantages of monopoly to the consumer.................................................................12
2.4. Control of Monopoly Powers................................................................................................13
2.5. Conclusion............................................................................................................................13
Question 3............................................................................................................................. 14
3. Inflation and the concept of cost-push and demand-pull inflation........................................14
3.1. Introduction....................................................................................................... 14
3.2. The effect of Inflation........................................................................................... 14
3.3. Cause of Inflation................................................................................................ 14
3.3.1. Cost-push Inflation............................................................................................................15
3.3.1.1. Causes responsible for the rise of Cost Push Inflation:...................................................15

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3.3.2. Demand-pull inflation........................................................................................................17

3.3.2.1. Factors Pulling Prices Up................................................................................................18
3.3.2.2. Putting It Together..........................................................................................................18
3.4. Conclusion........................................................................................................ 19
Question 3.2........................................................................................................................... 20
3.2. Government Policies to reduced inflammation in our country..........................................20
3.2.1. Introduction.......................................................................................................................20
3.2.2. Conclusion.........................................................................................................................20
Question 4............................................................................................................................. 21
4. How can Government try to increase the living standards of the people?............................21
4.1. Introduction....................................................................................................................21
4.2. Living Standards............................................................................................................21
4.3. Issues to be address by living standards.......................................................................21
4.4. Policies for addressing/ uplifting living standards.......................................................22
4.5. Meeting basic needs:......................................................................................................25
4.6. Conclusion......................................................................................................................25
5. References:................................................................................................................ 26

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Question 1
1.1. Macroeconomic objectives
1.1.1. Introduction
Macroeconomics examines the economy as a whole and answers question such as ‘What
causes the economy to grow over time?’ what causes short run fluctuation in the
economy? What influences the values various economic indicators and how do those
indicators affects economic performance? Macroeconomics can be best understood in
contrast with microeconomics which considers the decision made at individual or firm
level. Macroeconomics considers the larger picture, or how all these decisions sum
together. An understanding of microeconomics is crucial to understand macroeconomics.
To understand why a change in interest rates leads to change in real GDP, we need to
understand how lower interest rates influence decisions, such as the decisions of how
much to save, at the firm or household level. Once we understand how individual, on
average, will change their behaviour we will then understand the large scale relationship
in an economy.

Therefore macroeconomics can be best defined as “The study of whole economic system
aggregating over the functioning of individual economic units. It is primarily concerned
with variables which follow the systematic and predictable paths of behaviour and can be
analyse independently of the decision s of the many agents who determine their level.
More specifically, it is a study of national economies and the determination of national
income.

1.1.2. Macroeconomic Objectives

Broadly, the objective of macroeconomic policies is to maximise the level of national

income, providing economic growth to raise the utility and standard of living of
participants in the economy. There are also a number of secondary objectives which are

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held to lead to the maximisation of income over the long run. While there are variations
between the objectives of different national and international entities, for the purpose of
this paper we will focus on the main objectives as detailed below:

1.1.3. Economic growth

Economic growth is an increase in the capacity of an economy to produce goods and

services, compared from one period of time to another. Economic growth can be
measured in nominal terms, which include inflation, or in real terms, which are
adjusted for inflation. For comparing one country's economic growth to another, GDP
or GNP per capita should be used as these take into account population differences
between countries.

In principle, an adjustment for population growth should also be made. For example,
if real GDP grows at a rate of 2% per year but the population is also growing at a rate
of 2% per year, then on average everyone in the economy is no better off than before.

Economic growth is influenced by for example: supply side the size of real GDP
depends on the quantity and the quality of the country’s factors of production. Without
natural resources, labour, capital and entrepreneurship there can be no production and
if production is to increase, the quantity or quality of these factors of production must
increase. The quality of these factors is often referred to as their productivity. In other
words, for production to expand there must be more, or more productive, natural
resources, labour, capital and entrepreneurship

For example Zimbabwe, has no economic growth therefore the average living
standards cannot increase, the living standards are poor and there is no job creation.
Due to high percentage of unemployment Zimbabwean citizens are forced to leave the
country.

1.1.4. Full employment

Full employment can be used to judge the performance of the economy because the
purpose of the economy is to create employment opportunities for a growing

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population. Therefore, the economic growth is a necessary condition for the

expansion of employment opportunities. Nevertheless economic growth cannot
guarantee full employment. For example, South Africa has experienced an increased
in economic growth however the growth of the labour force is greater than the growth
in a number of job opportunities, therefore unemployment is at 24.% which is very
high. The percentage of the labour force that is employed is a key indicator of the
country economy health. Unemployment poses serious cost for the economy in terms
of crime, violence, loss of human development and mortality.

1.1.5. Price stability

A situation in which prices in an economy doesn't change much over time. Price
stability would mean that an economy would not experience inflation or deflation. It
is not common for an economy to have price stability. For prices to be stable,
therefore, the inflation rate should be zero. Generally, governments are happy if they
can keep the inflation rate down to a low percentage. Price stability exists when
average prices are constant over time, or when they are rising at a very low and
predictable rate. Price inflation occurs when average prices are rising above this low
and predictable rate, and price deflation occurs when average prices are falling. In
both cases, the effects are potentially extremely harmful to a country’s economic
performance and to the welfare of its citizens. Price inflation is regarded as a serious
economic problem because it causes a number of significant costs to an economy:

 It erodes the value of money and assets.

 It redistributes income from lenders to borrowers.
 It is bad for the balance of payments.
 It causes uncertainty and falling investment.
 It can create unemployment.

1.1.6. Balance of payments stability

The balance of payments is a systematic statistical account or record of all economic

transactions between the residents of the reporting country (eg South Africa) and the
rest of the world in a specific period (usually quarter or year). It includes all

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transactions by individuals, firms and government agencies and covers the exchange
of physical goods, services, assets, gifts and all financial claims.

If the country economy is not doing well then a country is unable to pay for essential
imports or service its debt repayments. Typically, this is accompanied by a rapid
decline in the value of the affected country's currency. Crises are generally preceded
by large capital inflows, which are associated at first with rapid economic growth.

However a point is reached where overseas investors become concerned about the
level of debt their inbound capital is generating, and decide to pull out their funds.
The resulting outbound capital flows are associated with a rapid drop in the value of
the affected nation's currency.

1.1.7. Which objective is the most important?

In the 1960s, the Balance of Payments was considered very important. A deficit was
considered highly embarrassing in the days when many still believed, mistakenly, that
Britain was a world power. The long term sustainability of a deficit was a big
problem in the days before global free movements of capital, and so sterling would be
affected which was unacceptable within the 'Bretton Woods' fixed exchange rate
system. Nowadays, with a floating pound and huge global capital flows, many
economists believe that balance of payments deficits or surpluses simply do not
matter. This was reflected in the fact that nobody seemed to bat an eyelid at the
continual deficits of the 90s.

Full employment was considered very important after the Second World War. It was
probably the number one objective of the socialist government of the late 40s and
continued to be at the front of politicians' minds for the next three decades.
Growth and low inflation have always been important. Without growth peoples'
standard of living will not increase, and if inflation is too high then the value of
money falls negating any increase in living standards. Low inflation is an objective,
the rate of interest is an instrument used to control inflation, not an objective in itself.
If one had to pick the most important objective today, it would have to be inflation.
Although it should be growth, all government's efforts are devoted to the control of

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inflation. If this goal is missed, it is felt, and then the goal of higher growth will not be
attainable either.
1.1.8. Performance of economy under Allende
Form the case study it is clear that the unequal income distribution was an issue under
Allende hence he considered it as the most serious problem faced by the country.
1.1.9. Performance of economy under Pinochet

Question 2

2. Monopoly Powers
2.1. Introduction

A monopoly occurs when there is only one supplier of a good, service or asset in a
particular market. The word monopoly is derived from the Greek words monos,
meaning “single” and polein, meaning “sell”. In its pure form monopoly is a market
structure in which there is only one seller of a good or service that has no close
substitutes.

Monopolies are usually the result of barriers to entry which protects monopolists from
potential competition. Such barriers include patents, licences, and the limited size of
the market and exclusive ownership of raw materials. However, in the modern era of
globalisation, local monopolists are increasingly subject to international
compe78tition which limits their monopoly power. Under monopoly, prices tend to be
higher and volumes lower than under perfect competition. Based on the reasons below
government should completely eliminate monopoly power:

 Marginal revenue and price: In a perfectly competitive market, price equals

marginal cost. In a monopolistic market, however, price is set above marginal
cost.
 Product differentiation: There is zero product differentiation in a perfectly
competitive market. Every product is perfectly homogeneous and a perfect

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substitute for any other. With a monopoly, there is great to absolute product
differentiation in the sense that there is no available substitute for a monopolized
good. The monopolist is the sole supplier of the good in question. A customer
either buys from the monopolizing entity on its terms or does without.
 Number of competitors: Since there is no substitute goods therefore monopoly
involves a single seller.
 Barriers to Entry: Barriers to entry are factors and circumstances that prevent
entry into market by would-be competitors and limit new companies from
operating and expanding within the market. Monopolies have relatively high
barriers to entry which are strong and prevent or discourage any potential
competitor from entering the market.
 Elasticity of Demand: The price elasticity of demand is the percentage change of
demand caused by a one percent change of relative price. A successful monopoly
would have a relatively inelastic demand curve.
 Excess Profits: Excess or positive profits are profit more than the normal
expected return on investment. A monopoly can preserve excess profits because
barriers to entry prevent competitors from entering the market.
 Profit Maximization: A monopoly maximizes profits by producing where
marginal revenue equals marginal costs. The rules are not equivalent.
 Price and profit: If a monopolist obtains control of a formerly perfectly
competitive industry, the monopolist would increase prices, reduce production,
and realize positive economic profits.
 Supply Curve: in a perfectly competitive market there is a well-defined supply
function with a one to one relationship between price and quantity supplied. In a
monopolistic market no such supply relationship exists.

For example, there is only one railway system in South Africa, which does not have
competition and charges high prices and delivers poor service. The railing system is
unreliable and unsafe and yet due to lack of competition there is nothing that the
customers can do.

Eskom in South Africa has experienced a lack of capacity in the generation and
reticulation of electricity. As a result, in the first quarter of 2008, blackouts became

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common place in the country, with damaging effects on South Africa’s economy the
economic growth of the first quarter of 2008 fell to 1.57% from 5.4% in the last
quarter of 2007.

2.2. The advantages of monopolies

Monopolies can be defended on the following grounds:
1. They can benefit from economies of scale, and may be ‘natural’ monopolies, so it
may be argued that it is best for them to remain monopolies to avoid the wasteful
duplication of infrastructure that would happen if new firms were encouraged to build
their own infrastructure.
2. Domestic monopolies can become dominant in their own territory and then penetrate
overseas markets, earning a country valuable export revenues. This is certainly the
case with Microsoft.
3. According to Austrian economist Joseph Schumpeter, inefficient firms, including
monopolies, would eventually be replaced by more efficient and effective firms
through a process called creative destruction.
4. It has been consistently argued by some economists that monopoly power is required
to generate dynamic efficiency, that is, technological progressiveness. This is because:
 High profit levels boost investment in R&D.
 Innovation is more likely with large enterprises and this innovation can
lead to lower costs than in competitive markets.
 A firm needs a dominant position to bear the risks associated with
innovation.
 Firms need to be able to protect their intellectual property by
establishing barriers to entry; otherwise, there will be a free rider
problem.
 Why spend large sums on R&D if ideas or designs are instantly copied
by rivals who have not allocated funds to R&D?
 However, monopolies are protected from competition by barriers to
entry and this will generate high levels of supernormal profits.
 If some of these profits are invested in new technology, costs are
reduced via process innovation. This makes the monopolist’s supply
curve to the right of the industry supply curve. The result is lower
price and higher output in the long run.

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2.3. The disadvantages of monopoly to the consumer

Monopolies can be criticised because of their potential negative effects on the
consumer, including:
1. Restricting output onto the market.
2. Charging a higher price than in a more competitive market.
3. Reducing consumer surplus and economic welfare.
4. Restricting choice for consumers.
5. Reducing consumer sovereignty

2.4. Control of Monopoly Powers

Monopoly power can be controlled by the government by anti-monopoly laws and
restrictive trade practices legislation. These aim at removing unfair competition,
preventing unfair price discrimination and fixing prices equal to competitive prices.
The government can also bring down monopoly price to competitive level by price
regulation and taxation. It may impose price ceiling so that monopoly price should be
near or equal to competitive price. This can be done by appointing a regulating
authority of commission which fixes a pie for the monopoly product below the
monopoly price. Taxation is another way to control monopoly power. The tax may be
levied lump sum without any regard to the output of the monopolist. Or it may be
proportional to the output, the amount of tax rising with the increase in output. In
either case, the aim is to bring monopoly price to the competitive level.

2.5. Conclusion
Based on the above deliberations, I believe that it is not a good policy for government
to eliminate monopoly. Monopoly is better in some organizations because it gives
economy of scale and its gives better services because of its large scale business but
monopolistic competition is better than monopoly because in monopolistic
competition, organization has discretionary power on either quantity or price but in
monopoly organization have more control on price or supply than monopolistic
competition and can charge price of its own will.

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Question 3

3. Inflation and the concept of cost-push and demand-pull inflation.

3.1. Introduction
According to Philip Mohr, 4th Ed, Economics for South African Students, Inflation is
one of the economic concepts that can easily cause great confusion if it is incorrectly
defined. Therefore Inflation is the increase in the average level of prices of goods and
services. It thus refers to an increase in the general price level, rather than a once-off
increase in the price level.

3.2. The effect of Inflation

Price Effect: When goods and services of a particular country start to become too
expensive for people to buy, they will stop buying. This is bad not only for the people
who want the goods but also for the people who are selling the goods. Inflation can
also cause hyperinflation (hyperinflation is inflation that is extremely high and out of
control), under the right circumstances. Hyperinflation is not something any country
or government wants since it basically makes their currency worthless, and therefore
there will little to no demand for it. When a country is expanding and their currency is
appreciating, usually that will be followed by an increase in interest rates. When a
sovereign national bank wants to cool their economy, they will use interest rates as a
way to raise the cost of money. Inflationary countries usually see foreign capital
investments slow down considerably.

Income Distribution: when people nominal income rises faster than the rate of
inflation and end up with a large share of total income.

Wealth Effect: wealth naturally applies to all assets whose nominal value is fixed
such as money, government securities, bonds, certain insurance policies and certain
pensions.

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3.3. Cause of Inflation

According to Philip Mohr, 4th Ed, Economics for South African Students, the cause of
inflation is a complex dynamic process which cannot be ascribed to a single cause.
The element of this process can be explained by examining four approaches which
provides useful framework for discussing policies that can be used to combat
inflation. The approaches are the monetarist approach, the demand-pull and cost- push
approach, the structuralist approach and or the conflict approach. For the purpose of
this paper we will only focus on demand-pull and cost-push inflation.

3.3.1. Cost-push Inflation

Supply-shock inflation also known as Cost-push inflation is an economic phenomena
where there is an escalation in the normal level of prices, owing to increases in input
costs. In fact, a condition where there is a continuous rise in the general price levels
due to increasing output costs gives birth to what is called the Cost Push Inflation.
Therefore cost-push inflation is a type of inflation caused by substantial increases in
the cost of important goods or services where no suitable alternative is available.
Increases in production costs push up the price level.

3.3.1.1. Causes responsible for the rise of Cost Push Inflation:

 Cost Push Inflation develops when the high cost of inputs lead to a fall in
aggregate supply. But the demand for the good is consistent. This leads to a
situation where the demand for the final good exceeds the supply. This in turn
causes a rise in the general price level.

Cost-push inflation occurs under five special circumstances. Keep in mind that,
whatever the circumstances, rising costs won't create inflation unless producers have
the ability to raise prices because demand is inelastic.

First, cost-push inflation can be created by companies that achieve a monopoly over an
industry. This has the same effect as reducing the supply, because the company controls
the supply of that good or service. Monopoly power over oil was the goal behind the
formation of OPEC, the Organization of Petroleum Exporting Countries. As long as

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these oil-exporting countries competed with each other on price, they could not receive
what they thought was a reasonable value for a non-renewable natural resource. By
banding together, the members of OPEC now produce 46% of oil each year, and control
80% of the worlds proven oil reserves. As long as they conform to OPEC's price
decisions, they can raise oil prices, creating cost-push inflation.

Wage inflation is a second creator of cost-push inflation. This is when wage earners
have the power to force through wage increases, which companies then pass through to
consumers in higher prices. This happened in the U.S. auto industry, when the labor
unions were able to push for higher wages. Thanks to China and the decline of union
power in the U.S., this has not been a driver of inflation for many years.

Natural disasters are a third catalyst for cost-push inflation. This happened right after
Japan's earthquake, which disrupted the supply of auto parts. It also occurred after
Hurricane Katrina, when oil refineries were destroyed, causing gas prices to skyrocket.
A growing problem will be cost-push inflation as a result of the depletion of natural
resources. Each year the price of many types of fish gets higher, thanks to overfishing.
The U.S. has recently enacted laws to restrict fisherman to prevent overfishing.

`That leads to a fourth driver of cost-push inflation, government regulation and

taxation. These regulations can reduce supplies of many other products. Taxes on
cigarettes and alcohol were meant to lower demand for these unhealthy products. This
may have happened, but more important it raised the price, creating inflation.
Government subsidies of ethanol production led to inflation in food prices in 2008.
That's because agribusinesses grew corn for energy production, taking it out of the food
supply. Food prices were so high that there were food riots around the world that year.

A fifth, and more complicated, reason for cost-push inflation is a shift in exchange
rates. Any country that allows the value of its currency to fall will experience higher
import prices. That's because the foreign supplier does not want the value of its product
to drop along with that of the currency. If demand is inelastic, it can raise the price and
keeps it profit margin intact. (Source: The Intelligent Economist, Cost-Push
Inflation; Biz/Ed, Cost-Push Inflation) Article updated March 12, 2012

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Figure 1: ADAS model

Cost push inflation can be illustrated with the aid of AD_AS model. The cost push is
reflected in an upward shift of the AS curve. For example in South Africa, the
important cost item is the cost of imported capital and intermediate goods. These
goods are essential to the functioning of the domestic economy especially
manufacturing sector. To be specific when the cost of imported machinery or oil
increases the domestic costs of production increases. This increase could be the result
of price increase in the rest of the world or of a depreciation of the domestic currency
against the currencies of the exporting countries.

3.3.2. Demand-pull inflation

Demand-pull inflation is asserted to arise when aggregate demand in an economy
outpaces aggregate supply. Demand-pull inflation occurs when there is an increase in
aggregate demand, categorized by the four sections of the macro economy:
households, businesses, governments and foreign buyers. When these four sectors
concurrently want to purchase more output than the economy can produce, they
compete to purchase limited amounts of goods and services. Buyers in essence “bid
prices up”, again causing inflation. This excessive demand, also referred to as “too
much money chasing too few goods”, usually occurs in an expanding economy.

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3.3.2.1. Factors Pulling Prices Up

The increase in aggregate demand that causes demand-pull inflation can be the result
of various economic dynamics. For example, an increase in government purchases
can increase aggregate demand, thus pulling up prices. Another factor can be the
depreciation of local exchange rates, which raises the price of imports and, for
foreigners, reduces the price of exports. As a result, the purchasing of imports
decreases while the buying of exports by foreigners increases, thereby raising the
overall level of aggregate demand (we are assuming aggregate supply cannot keep up
with aggregate demand as a result of full employment in the economy). Rapid
overseas growth can also ignite an increase in demand as more exports are consumed
by foreigners. Finally, if government reduces taxes, households are left with more
disposable income in their pockets. This in turn leads to increased consumer spending,
thus increasing aggregate demand and eventually causing demand-pull inflation. The
results of reduced taxes can lead also to growing consumer confidence in the local
economy, which further increases aggregate demand.

3.3.2.2. Putting It Together

Demand-pull inflation is a product of an increase in aggregate demand that is faster
than the corresponding increase in aggregate supply. When aggregate demand
increases without a change in aggregate supply, the ‘quantity supplied’ will increase
(given production is not at full capacity). Looking again at the price-quantity graph,
we can see the relationship between aggregate supply and demand. If aggregate
demand increases from AD1 to AD2, in the short run, this will not change (shift)
aggregate supply, but cause a change in the quantity supplied as represented by a
movement along the AS curve. The rationale behind this lack of shift in aggregate
supply is that aggregate demand tends to react faster to changes in economic
conditions than aggregate supply.

As companies increase production due to increased demand, the cost to produce each
additional output increases, as represented by the change from P1 to P2. The rationale
behind this change is that companies would need to pay workers more money (e.g.
overtime) and/or invest in additional equipment to keep up with demand, thereby
increasing the cost of production. Just like cost-push inflation, demand-pull inflation

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can occur as companies, to maintain profit levels, pass on the higher cost of
production to consumers’ prices.

Figure 2: ADAS model

In South Africa the increase in export earnings, increases in prices of export products
such as minerals will increase will cause demand pull inflation.

3.4. Conclusion
Inflation is not simply a matter of rising prices. There are endemic and perhaps
diverse reasons at the root of inflation. Cost-push inflation is a result of decreased
aggregate supply as well as increased costs of production, itself a result of different
factors. The increase in aggregate supply causing demand-pull inflation can be the
result of many factors, including increases in government spending and depreciation
of the local exchange rate. If an economy identifies what type of inflation is occurring
(cost-push or demand-pull), then the economy may be better able to rectify (if
necessary) rising prices and the loss of purchasing power.

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Question 3.2

3.2. Government Policies to reduced inflammation in our country.

3.2.1. Introduction
The role of government according is to defend a country against attacks, to establish an
administration of justice and or must provide for collective benefit projects. Most
governments have priorities keeping control of inflation. This issue has become one of the
dominant objectives of macroeconomic policy. Inflation can be reduced by policies that,
slows down the growth of AD and boost the rate of growth of aggregate supply (AS). The
main anti-inflation controls available to government are:

 Fiscal policy
Through the use of taxation or government spending or debt management if the
economy is not doing well government can reduce tax to increase household
spending.
 Monetary policy
Interest rates, open markets operations, consumer credit law or bank reserve
requirements. The reserve bank could influence the economy by buying
government bonds
 Trade policy

Trade agreements, import tariffs and non- tariff barriers. Government could
implement less or more tax on imported products

 Exchange policy

Fixed exchange rate, managed exchange rate, floating exchange rate

 Price and incomes

Price controls, minimum wages, moral suasion

3.2.2. Conclusion
The most appropriate way to reduce inflammation is that Government together with the
Reserved Bank must keep control of aggregate demand to a level consistent to production
capacity.

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Question 4

4. How can Government try to increase the living standards of the people?
4.1. Introduction

According to Greg Mills, 2011, Why Africa is Poor. South Africa is a constitutional
democracy and government strives to serve all the people in the country. The country comes
from a long history of division and conflict. Throughout the years of colonialism and
Apartheid, the State played a key role in maintaining inequality and protecting the privileges
of a minority. Since the birth of democracy in 1994, the country has faced incredible
challenges to overcome the legacy of the past and meet the needs of people today.

4.2. Living Standards

Living standard can be defined as the financial health of a population, as measured by
the quantity of consumption by the members of that population. The measure most
frequently used to estimate standard of living is gross national income per capita. One
drawback to the standard of living measurement is that it does not take into account
some factors which are important but hard to quantify, such as crime rate or
environmental impact.

4.3. Issues to be address by living standards

 Education

There are huge differences in the quality of education different classes of people have access
to. Many schools still lack basic facilities like electricity, running water, libraries and
laboratories. The majority of the population still have little access to tertiary education. There
is a legacy of schools in rural areas producing mostly children who only graduate from
primary school. The majority of the adult population are unskilled and very few people have
tertiary qualifications that will help them to find work in a globally competitive and modern
economy.

 Housing and land

The country also has huge housing backlogs with millions of people living in informal
settlements without access to decent sanitation and other services. The distribution of land

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and farms is still very unequal and the vast majority of land remains the property of white
people.

 Crime

Crime is a serious problem and a direct result of the poverty that so many people live in.
Crime affects all communities in South Africa and the highest incidence of violent crime is in
the poorest areas. Gangster’s, drug or alcohol abuse and violence against women are all
problems that plague the South African communities.

 Poverty

In terms of wealth, South African society is still divided along racial lines and while a small
minority of formally disadvantaged people have managed to become economically
empowered, the majority are still living in poverty. Around half of her people survive on less
than R430 per month (the 2006 Stats SA estimate for the amount an individual needs to buy
basic foods and services).

 Unemployment

Unemployment figures ranges between 25% and 38% depending on which measures are
used. The challenge that faces government is to build a strong economy that can provide jobs
and opportunities for all the people. This is a long term project and there are many other
things that need to be done to make sure that government creates a better life for people now
by providing better access to services, health care, education and employment opportunities.

4.4. Policies for addressing/ uplifting living standards

Unemployment negatively impacts the economy of the country. Specifically, South Africa has
high unemployment rate which contributes to the living standard of the people. When
unemployment is high, fewer people are paying taxes to the government. At the same time,
unemployment means there are fewer people with disposable income to spend on goods and
services. Low consumer spending makes it more difficult for businesses to thrive and expand,
which dampens economic growth.

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Government can increase the living standards of people by implementing the following
policies:

Taxation

Taxation is one of the primary fiscal policy tools the government has at its disposal to reduce
improve the standard of living High taxes mean consumers have less disposable income,
which results in less consumption. When consumers buy less, business take in less revenue
and are less likely to hire new workers or may even lay off workers to reduce costs. Cutting
taxes is a common method the government uses to spark economic growth and reduce
unemployment. Tax cuts put more money into the hands of consumers, which can lead to
increased revenue for business and expansion and hiring.

Government Spending

Spending on government programs is another way the government can attempt to influence
the standard of living in its country. For example, if the government funds new public works
programs, health and skills development programme such as building infrastructure like roads
or train systems, it can create jobs that serve to reduce unemployment and increase disposable
income and spending. Such programme encourage overall economic growth.

Job creation through Public Works Programme

The national public works programme that has been implemented aims to provide basic needs
such as water supply, sewerage and roads and at the same time creating jobs particularly in
poor and rural areas. These programs provide adequate wages, working conditions and skills
training and are based on community involvement. Recently through municipalities and other
government institutions, Department of Public Works have provided incentives to assist in
reducing unemployment with projects like Food for waste and Working for fire.

Considerations

While reducing taxes and increasing spending can encourage economic growth and reduce
unemployment, both practices can increase the government's debt. Lower taxes mean that the
government takes in less revenue, and if spending exceeds revenue, the government has a
deficit, meaning it is losing money over time and increasing its debt load. When economic

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growth is high and unemployment is low, the government may increase taxes and reduce
spending to make up for debts accumulated during periods of low growth and high
unemployment.

Reconstruction and Development Programme

Government has many policies that target poverty and development. The vision of
government is still based on the Reconstruction and Development Programme (RDP) that
was developed in 1994. This programme has been based on the following principles:

 Peace and security for all – development in South Africa has to provide
peace and security for all. The development of one community cannot be at
the expense of another

 People-driven - development has to be driven by the people and consultation

is a key element of any developmental programme. Without consultation the
government cannot be sure that it is meeting the needs of people in the best
possible way.
 Housing and Services – people below a certain income level are entitled to a
housing subsidy. Acquisition of land by farmers from historically
disadvantaged backgrounds is also subsidised.
 Water and Sanitation
 Health care – government tries to provide free and accessible health care to
all who cannot afford private health care. More money is being spent on
clinics and hospitals and equipment is being upgraded. The Department of
Health is also trying to attract more skilled health workers to the public
service, especially to work in rural areas.
 Social grants – grants are a direct measure to assist poor people. Almost one
in every four South Africans now receives a pension, child support grant or
disability grant from government every month.

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4.5. Meeting basic needs:

Developing human resources

Building the economy

Democratising the state and society

The RDP and present government policies and programmes

4.6. Conclusion
Sustainable economic growth to create more jobs and build a more prosperous nation,
Poverty alleviation that directly and urgently improves the lives of the poor and
marginalised, improved service delivery that build a better life for all and makes
effective use of state resources.

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5. References:
1. Economics for South African Students, 4th Edition by Philip Mohr,
Louis Fourie and Associates published © 2008 by Van Schaik Publishers
2. The Economy Today 12th ed by Schiller, McGraw Hill.
3. Economics Study Guide: 2012 Copywriter by Management College of
South Africa (MANCOSA).
4. Why Africa is Poor and what Africans can do about it, Oxford
University by Greg Mills
5. The Intelligent Economist, Cost-push inflation; Biz/Ed, Cost-push
inflation Article updated March 2012.
6. Principles of Economics by Carl Menger © 2007 by the Ludwing von
Mises Institute.
7. Managerial Economics in a Global Economy, 7 th Edition by Dominick
Salvatore © 2011.
8. Monetary Policy Frameworks in a Global Context by Lavan
Mahadeva, Gabriel Sterne © 2000.
9. Economics for Business: Competition, Macro-Stability, and
Globalisation by Dermot McAleese © 2004.
10. Internet

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