Question

4. At the BRICS summit held in Gauteng in July 2018, China signed several agreements on investments in South Africa amounting to R210.8 billion (US $14.7 billion). Critically evaluate how this impacts on the macroeconomic objectives of the South African economy.

1. For each of the following scenarios, explain the reason for the price change as indicated. Use diagrams to motivate your answer.

1.1 The price of peaches decreases during its heaviest months of consumption

1.2 The price of beachfront cottages increase during peak/festive season

Answer 1

The BRICS an acronym for Brazil, Russia, India, China, and South Africa is an association for the five major emerging economies of the world which were founded in 2006 and formed in 2009 (South Africa added in 2010). When a country invests in makes sizeable investments in another country, as China is making in South Africa (SA), the two countries become highly intertwined both politically and economically. There are numerous advantages and disadvantages of such sizeable investments from China in SA.

Five core economic objectives are:

1. Economic Growth

2. Full Employment

3. Price Stability

4. Income Equality

5. Balance of Payments Equilibrium

With regards to the traditional macroeconomic objectives, a foreign direct investment or an FDI is like achieve economic growth, at first from the FDI itself, then later from the multiplier effect that the investment generates, therefore the value of increased national income tends to be greater than the initial amount of the investment. Secondly, investments create jobs, this increases the rate of employment and pushes the economy towards full employment levels. This increase in the rate of employment is likely to cause the standard of living to increase along with cost of living and therefore driving up the price levels (this is the point where the SA government and central bank can intervene to ensure that price stability). As employment increases income equality is also expected to strengthen. The final macroeconomic objective is to achieve an equilibrium in balance of payments, as the goods and services are now produced domestically the need to import them vanishes, and this has a positive effect on net exports and the GDP and foreign investments benefit the capital account as they correspond an inflow of money (credit), therefore, FDIs also aid in the bolstering the condition of balance of payments.

To name of few negative effects, when a country (China) invests in another country (SA) the demand for the recipient countries currency increases, and this appreciates its currency against other countries currency. This appreciation will make the goods and services of the economy less competitive in the international market. This could have a negative effect on maintaining an equilibrium in the balance of payments. An investment from China is also likely generates SA's dependency on it with regards to generating output and will have restrictive space implementing monetary and fiscal policies, as they will have to make sure that their policies are in line with Chinas interest, this leads to evasion of full autonomy, therefore, full control over price stability is lost. Finally, holistically SA will highly depend on China to even meet its objectives of full employment, if China decides to relocate then SA could face mass unemployment.

1.1 (Refer to diagram 1.1) The price of peaches can fall during the highest months of consumption if the increase in supply due to a bumper crop, which means that if the increase in supply of peaches is higher (S1 -> S2) than the increase of demand (D1 -> D2) of peaches then the prices of peaches may fall even in months of highest consumption. The initial increase in the demand for peaches would increase the prices from Pe to P1, and if the supply increased in proportion to the increase in demand then the price would fall to Pe but since the increase in supply is higher than the increase in demand the prices fall below Pe to P2.

1.2 (Refer to diagram 1.2) The prices of beachfront cottages (called villa in the diagram) increase if the demand of the cottages increase. This is likely to happen that it is the festive season and the demand shifts from D1 to D2 which cause the prices to rise from Pe to P2 as a shortage of villas is created.