N.B:  

• This topic is being poorly answered by the learners especially in section B,  Learners perform better in Section C 
• Learners were showing some content gaps on Contemporary Economic Issues  as the responses of the learners indicate lack of knowledge and lack of  understanding. 

COMPARE CONSUMER PRICE INDEX (CPI) AND PRODUCER PRICE INDEX (PPI)

BRIEFLY DISTINGUISH BETWEEN THE DIFFERENT CHARACTERISTICS OF DEMAND PULL AND COST-PUSH INFLATION 

Demand-pull inflation 

• Demand-pull inflation occurs when aggregate demand for goods and services exceeds  the aggregate supply of goods and services. 

Causes of demand-pull inflation  

Increased consumption by households (C) 

• The disposable income of households can increase at a faster rate than aggregate  supply for the following reasons
• It is caused by easier access to credit or lower interest rates, which make credit  cheaper. With credit being cheaper, households will borrow more. 

Lack of savings

Consumers may spend their entire income and fail to save. This  results in a lack of liquidity for banks to finance essential capital investment.

Reduction in taxes

If the government decides to decrease personal income tax, consumers will use the extra income to buy more goods and services. 

Investment spending (I) 

• A reduction in interest rates will encourage firms to expanding their operations
• Businesses invest more and this may lead to an increase in the demand for goods and  services that are part of the investment, e.g. new buildings, cement, bricks and labour
• If aggregate demand increases at a faster rate than aggregate supply, price increases  will follow 

Government spending (G) 

• An increase in government spending without an increase in productivity will lead to  inflation
• If increases in government spending are financed by borrowing from financial  institutions, large sums of money are placed into circulation – aggravating the  demands in the economy's real capacity
• Government uses three channels for increased spending: 
  • Infrastructure - government may embark in capital projects, such as roads,  housing and water; the sizes of these projects outstrip the economy's capacity  which will increase prices.
  • Consumption expenditure- most governments will at times increase expenditures  on education and health 
  • Social spending- Governments sometimes feel they have to do something  substantive about unemployment and poverty, e.g. public work programmes. Such expenditures invariably lead to inflation because they add to aggregate demand  without adding anything to aggregate supply 

Export earnings (X)

• Increases in earnings from exports can come from various sources: - Foreign growth - growth of the economies of trading partner countries may create a  demand for a variety of locally produced goods. The sales of exports bring money  into the country, demand increases without corresponding increases in supply,  resulting in an increase in prices.
• Commodities demand - the world's demand for commodities expands and  contracts like business cycles do. During an expansionary period, foreign demand  increases and this leads to greater volumes of exports. The income earned from  these exports adds to aggregate demand and prices increase. 

Cost-push inflation 

• Cost push inflation is triggered by an increase in the cost of production, which push up  the general price level of goods and services. 

Causes of cost-push inflation  

Wages 

• Wage increases that are higher than productivity cause a cost increase for producers.
• Single most important cost item in any economy
• Contributes to almost 50% of value added to basic prices 

Key inputs 

• When the price of imported key inputs increases, the domestic costs of production  increase
• Producers recover these costs by increasing the prices of their products

Profit margins 

• When businesses push up their profit margins, they increase the cost of production and the price that the consumers have to pay
• This is because manufacturers recover the higher prices they have to pay by  increasing their prices 

Productivity 

• If various factors of production become less productive while still receiving the same  remuneration, the cost of producing each unit of output increases 

Exchange rate depreciation 

• If the rand depreciates against the major currencies, imports from such countries will  be more expensive
• Producers have to pay more money for the same quantity of products than before; as  such, they often shift the increase to the consumers 

Natural disasters 

• Disasters, such as floods and droughts, affect the cost of production negatively
• Food prices are one of the most volatile price items as a result of the effect of weather changes 

Theft by employees/Shoplifting 

• Many businesses make provision for losses caused by theft by employees and  shoplifting, which increases the prices of goods
• Cost of installing security measures increases the input costs 

BROADLY OUTLINE THE INFLATION PROBLEM IN SOUTH AFRICA 

• In 2000, the SARB set an inflation target of between 3% and 6% as part of its  monetary policy.
• The inflation rate in South Africa is currently higher than the inflation rate of its trading  partners.
• It makes South African goods more expensive than other countries, thus South Africa  is less competitive.
• The high prices have a negative effect on exports.
• The weakening value of the Rand against its trading partners' currencies also  contributes to the high cost of imports.
• Income and wealth is very unevenly distributed in South Africa.
• Trade unions therefore demand wage increases higher than inflation to eliminate the  inequality.
• If the money supply increases in a country without a corresponding increase in  production, inflation will also increase.
• Some key prices are set by the government (Administered price inflation – API), for  example Eskom's electricity price.
• A significant increase hereof leads to an increase in inflation.
• South Africa's citizens lend and spend excessively their money.
• They do not have a savings culture. Inflation therefore also increases as a result of  this culture of spending. 

FISCAL POLICY MEASURES AS MEASURES TO COMBAT DEMAND-PULL AND/OR COST-PUSH INFLATION. 

• Fiscal policy: entails a reduction in government spending and/or increased taxation.
• The minister of finance uses policies of taxation and expenditure to control inflation.
• This reduces the demand for goods but also has a negative effect on employment and  production. 

Fiscal measures that can be used to combat inflation 

• Increasing indirect taxes which will increase the price of specific products and  therefore reduce aggregate demand, e.g. VAT
• Increasing direct taxes to reduce disposable income and demand, e.g. personal  income tax
• Reducing corporate tax to encourage production of goods and services to increase  supply, i.e. tax rebates to improve productivity
• Implementing or increasing a surcharge on imported goods to curb the buying of  imported goods
• Increasing excise duties (sin tax) will help to reduce the demand for demerit goods ▪ Reducing government spending, e.g cancel government projects.
• Loan levy can be introduced.

EXAMINE THE BENEFITS OF TOURISM 

• South Africa benefits directly from tourism because of the growth it causes in GDP,  government, infrastructure development and exposure to foreigners.
• A major spin-off benefit is foreign exchange earnings. 

Households 

• Income is earned through employment.
• Infrastructure is created for use by both tourists and local people e.g. roads, hotels,  etc.
• Skills require education and training – offered as school subjects: Tourism and  Hospitality Studies.
• Creation of job opportunities and learnerships for a number of skills required. by the  tourism industry are offered e.g. tour guides, travel agents and chefs. 

Businesses 

• Economic and basic services infrastructure is usually provided by the public sector.
• A superstructure consists of businesses that provide accommodation, transport, and  retailing and recreation services.
• E.g. accommodation, transport, built attractions, retailing and recreation services.
• Informal opportunities like car rental, arts and craft also exist.
• Tourism also stimulates certain socio-economic objectives such as entrepreneurship  development, Black Economic Empowerment and SMME development.
• They are normally private sector activities and make up the profit-generating element  of a tourist destination.
• A combination of public and private sector finance is used to develop destinations  (Public-private-partnerships).
• The public sector also provides a range of financial incentives for private sector  tourism investment (grants, subsidies, loans, taxes).
• There are also many informal and less traditional opportunities for tourism benefits  and these serve as stepping stones for previously neglected groups in the tourism  business. (E.g.) car rentals, craft curios sales. 

State 

• The main avenue for governments to benefit from tourism is through the levying of  taxes.
• These taxes have a dual purpose:
  • To recover external costs - This cost is recovered from the tourist through adding  the taxes to the supply price / normal expenditure taxes (e.g. VAT, excise duties,  customs duties). This amount serves to compensate the host community for  providing the infrastructure, public amenities (showers, toilets) to the tourists.
  • To raise revenue. Tourists are seen as part of the overall tax base. (E.g.) through  airport departures, air ticket taxes and taxes on hotel rooms.) 

Infrastructure development 

• Adequate and well-maintained physical and basic services infrastructure are essential  for tourist destination areas.
• Economic infrastructure has been prioritised by Department of Tourism. (SDI,  corridors and PPPs) with tourism as focus. (E.g.) accesses to beaches, lakes and rivers)
• Social infrastructure has also been improved. (E.g.) ambulance services, medicines,  and information services

EFFECTS OF TOURISM ON EMPLOYMENT AND INVESTMENT 

• Tourism represents a unique industry in an economy because its effects extend far  beyond the tourism industry itself.
• Tourism is an industry that provides a substantial economic stimulus to other  industries.
• We must see tourism as a means for a better life for all.
• Tourism is the world’s largest industry and every year it ‘pumps’ millions of dollars into  some of the poorest countries. 

Employment 

• Tourism is labour intensive - more jobs are created with every unit of capital invested  in tourism than elsewhere.
• Tourism employs many skills. Numerous skills are needed. The potential of job  training is enormous.
• Tourism can provide immediate employment - if organized and focused, many jobs  can be created in short period of time.
• Tourism provides entrepreneurial opportunities. Significant part of tourist expenditure  goes towards informal sector activities.
• Employs an estimated 7% of the South African workforce (2010 employ more than 1,2  million people) and is potentially regarded as the largest provider of jobs and earner of  foreign exchange.
• Largest generator of jobs - provide one in every nine jobs.
• Every eight tourists to visit results in the creation of one permanent job.
• Creates direct jobs - tourist accommodation establishments, entertainment,  restaurants etc.
• Creates indirect jobs - other sectors of the economy as a result of tourism. 

Investment 

• SA has a modern, world-class infrastructure, sophisticated transport system, low-cost  and widely available energy and advanced telecommunication system
• Quality infrastructure will increase the volume of tourism. It needs good travel facilities,  well-maintained road network and excellent tourist accommodation, such as hotels  and lodges
• Most centres have good transport lines, superior road and highway infrastructure
• Proper infrastructure planning needed to accommodate growth in tourism
• Development of infrastructure is seen as public investment 

DISCUSS THE DEPARTMENT OF TOURISM'S POLICY SUGGESTIONS UNDER THE  FOLLOWING HEADINGS: 

• The Department of Tourism leads and directs tourism policy.
• The starting point for policy on tourism is the White Paper on Tourism.
• Tourism policy is also supported and directed by the Tourism Forum, which is an  advisory body to the Minister of Tourism.

Spatial distribution 

• Three approaches are followed to distribute tourists effectively to the many tourist  sites:
  • Create representative bodies: Tourist-based industries are linked to form  representative bodies. Tourists can then easily access knowledge about all tourist  destinations. 
  • Improve marketing: Tourists receive accurate product descriptions and information  about competitive prices. Less well-known destinations are aggressively marketed.
  • Improve supporting services: The standards of transport, accommodation and other  amenities (facilities and services) are world class. 

Taxing 

• Growth in tourism results in increased tourist taxes. Guidelines for levying taxes are:
  • Equity: Taxes must be fair, e.g. taxes on air tickets.
  • Efficiency: Nature and game reserves charge entry taxes to regulate tourist flows.
  • Simplicity: A flat tax rate is used to ensure taxes are easy to pay and administer. 

Infrastructure development 

• Tourism requires economic infrastructure (roads), social infrastructure (ambulances)  and basic services (clean water):
• Infrastructure is maintained for the benefit of domestic and foreign tourists, as well as  local citizens.
• The basic considerations are:
  • More infrastructure is required, e.g. water supplies.
  • Existing infrastructure must be upgraded, e.g. upgrade dirt roads to tarred roads.
  • Use new technology to extend the infrastructure, e.g. build the Gautrain. 

DISCUSS IN DETAIL HOW THE GOVERNMENT CAN ENSURE SUSTAINABLE  DEVELOPMENT 

Environmental sustainability refers to the ability of the environment to survive its use  for economic activity / Environmental sustainability means meeting the needs of the  present generation without compromising the needs of future generations. 

Granting property rights  

• Property rights are legal titles to the ownership, use and disposal of factors of  production and goods and services.
• Property rights have a conservationist effect whereby people will take care of  resources that belong to them.
• Property rights promote collective responsibility towards the environment while at the  same time preventing overexploitation.
• To prevent fauna and flora species from becoming extinct, people are granted  property rights if they agree to preserve the flora and fauna.
• Property rights can be expanded to common resources such as clean air.  

Charging for the use of the environment 

• The government levies fees for waste produced and disposed of in the environment.
• In South Africa, local authorities levy charges on rubbish collection and sewage  disposal.
• The best results are achieved when charges are proportional (related to) to waste  produced.
• Emission charges are used when the government sets a price per unit of pollution.  

Levying environmental taxes 

• Environmental taxes are taxes imposed on the output of goods that generate external  environmental costs (pollution).
• When environmental taxes are levied it ensures that practices that are harmful to the  environment are reduced.
• The government can use the income generated through environmental taxes to plough  back into environmental issues.
• In South Africa, carbon tax is levied on carbon dioxide emissions from industrial  process, fuel burning and vehicle tyres.
• The rate of environmental tax should be equal to the marginal external cost 

Paying environmental subsidies 

• Environmental subsidies refer to the payment made by the government to businesses  to reduce activities that negatively affect the environment.
• Subsidies are granted to; 
  • encourage businesses to develop new technologies or equipment such as LED  light bulbs and solar geysers.
  • promote production of environmentally-friendly substitutes such as reusable  shopping bags and rechargeable batteries.
  • encourage recycling waste material such as bottles and cans.
  • encourage businesses to use environmentally-friendly sources of energy such as  solar and wind.
• Environmental subsidies can be recovered from the levying of taxation.  

Issuing marketable permits  

• Marketable permits are licenses that are sold by the government to businesses which  allow them to pollute to a certain degree.
• The government decides on a maximum desired level of pollution in a particular area.
• When businesses managed to reduce pollution below their maximum allocated quota,  they can sell the remaining part to other businesses that pollute more than their  allocated quotas.
• In South Africa, marketable permits are granted by the Department of Mineral  Resources and Energy.  

Command and Control (CAC) 

• CAC refers to regulations set by the government to enforce environmental limits and  standards.
• The government enforces policy by setting maximum levels of the emission of  pollution.
• The Department of Environmental Affairs assigns inspectors to monitor the  environmental activities of businesses and impose fines if the legal limits are not  adhered to.
• Most developed countries have regulations that control air and water pollution.
• There are 3 approaches in CAC systems:
  • Quantity standards: These focus on the amount of pollution emitted.
  • Quality standards: These focus on the environmental impact of the pollution  emitted.
  • Social impact standards: These focus on the effect on people of the pollution  emitted.  

Voluntary agreements 

• Voluntary agreements refer to formal and informal arrangements, rather than imposing  regulations, between the government and businesses to reduce pollution.
• The government may conclude agreements with businesses on a voluntary basis to  cut pollution.
• These agreements often work well because businesses are empowered to negotiate  arrangements that suit their own circumstances and create better platform for  planning.
• This ensures commitment by businesses as they uphold to agreements that they have  negotiated since they are directly involved. 

Education 

• This refers to methods used to create awareness and change people’s attitudes  towards the environment.
• Education is used to try to change people’s attitudes towards the environment.
• When the society is made aware of environmental issues and how their actions impact  on the environment, it will ensure that better decisions are made.
• When children are educated to be conscious of the effects of their actions on the  environment, they will become more environmentally aware and empowered adults.
• Innovative approaches have been tried in the developing countries to educate people.  e.g. setting up community wildlife reserves.