Name: Langton

Surname: Mutiziwa

Student Number: 79571069

Module 1:PRFM01N

Unique Number: 798576

Assignment number 01

Due Date: 13 April 2018

Question 1
Briefly discuss the main elements in the developments of South Africa’s trade policy.
Pay particular attention to post-1990 trade policy (i.e. trade policy after 1990).Answer
the questions in essay form. That is start with and introduction, literature review,
conclusion ending off with a reference.

Introduction
The rapid increase in international trade after 1990 was mainly a consequence of the
reduction of trade barriers . The South African economy improved trade-wise and
the government entered a number of trade agreements and joined trade blocs with
both developed and less developed economies such as SACU (South African
Customs Union), SADC (Southern African Development Community) and EU
(European Union). the south African economy sprouted and its trade policy passed
through a number of phases. throughout its quest to soften its policy with
neighbouring, and well developed nations it must be noted that the need to protect
trade.
Literature review
Before 1990, South African economy restricted imports by the imposition of formula
duties, a policy which encouraged merchants to buy inside the country. This strategy
paramount for the developing local industries, that is to protect them from foreign
monopolies and of course to avoid dumping of foreign products. Production and
employment ameliorated and reduction in poverty was noted within South African.
After a noticeable growth of industries, import substitution could no-longer be relied
upon and the solid alternative embroidered encouraging exports by the crafting of
export oriented trade policy . The succes of which, promoted exports.Generally,a
country must exports more products than it imports to attain a positive and
favourable balance of payments. The General Export Incentive Scheme (GEIS) was
launched in 1990 , the main aim of which was to promote exports through removal
of price disadvantages in international markets. The export incentive was a policy
aimed at promoting local industries buttressed and supported by the inward looking
protectionist policies like import substitution before 1990.
The South African economy wanted to boost it’s industries to follow suit of the
developed countries like United States of America which do not rely solely on
international trade . in these economically advanced countries the citizens look up to
local industries for employment and revenue generation as well. Developed
countries like the USA, Japan, Germany and the United Kingdom are self sustained,
they dont neccessarily rely on imports and exports in order to cater for the needs of
their citizens. Their local industries are capable to host employment and other nit
grits of their economies
. South African’s trade policy after 1990 was to a degree of openness to international
trade since some of the methods used like import substitution and inward looking
policies could no-longer sustain the economy. In order to achieve such a milestone
in the history of South Africa, there was also need for international financial
liberalization and trade liberalisation as well. All obstacles which made it expensive
to either import and export goods were removed for example tariff lines were
reduced from 12000 to 6420 during the year 2006.Tariff rates were also reduced
from 0%,5%,10%,15%,20%,30% by 2006.During 1994, a decision was reached to
abolish the General Export Incentive Scheme. Importing Surcharges for capital and
intermediate goods (e.g. flour, yarn) were also removed in the same year.
The South African economy migrated from the export oriented policy which
encouraged growth of local industries and capital growth hence looked at the world
as a potential market for its products. When the industries of South Africa shown
better signs of growth, the economy went on to remove all import trade barriers
except the implementation of antidumping duties legislation. When the price of a
commodity of good is far cheaper for outside countries than the price it was
supposed to be sold within the local market, this is called dumping. To prevent the
deepening of dumping, anti-dumping measures are put in place like what was done
in South Africa in 1994.All payments under the GEIS became taxable in 1995
reducing eligible products. The South African economy were in a process of
eliminating the GEIS since its utilization time had lapsed.
South Africa as a nation finally ventured into bilateral and multilateral agreements
with developed and less developed countries within the region as a way of improving
economic growth. The South African Development Community (SADC) is one of the
multilateral agreements which was signed by South Africa in 1996 with the aim of
improving economic growth and capital movement plus free trade within member
countries. The economy also signed several bilateral agreements with the
industrialized economies e.g. the USA system of generalized
preferences(GSP).Agricultural products and intermediate goods could be exported to
the USA free of duty hence the economic development of the country. The European
Union also offered the South African economy a free trade area (FTA) such that all
the exports from the country which are destined to the EU are duty free. As far as I
am concerned the change of trade policies within an economy will result in economic
growth at a faster pace trying to match both the global World and grow the South
African nation.

Conclusion
Question 2
‘Explain the difference between direct investment and portfolio investment and
provide example of each’
Introduction
DIRECT INVESTMENT AND PORTFOLIO INVESTMENTS ARE TWO DIFFERENT
ASPECTS UNDER THE FINANCIAL ACCOUNT A SUB ACCOUNT OF BALANCE
OF PAYMENT. BOTH INVOLVES THE MOVEMENT OF HUGE CAPITAL TO AND
FROM THE ECONOMY THROUGH INVESTMENT EITHER WITHIN OR OUTSIDE
THE COUNTRY
It is of great importance to note that both direct investment and portfolio investment
fall under the financial account of the balance of payment. The financial account is a
sub-account of the balance of payments and is one of the most important sub
account although its most involved in liabilities and assets as well as shares et
cetera.The balance of payment is one of the key indicators of a country’s economic
performance with the rest of the world whereby the inflow and outflow of capital are
recorded. The financial subaccount is very vital for every economy since it involves
the movement of huge capital to and from the economy through investment either
within or outside the country.
The difference between direct investment and portfolio investment giving
examples
Direct investment is the buying of shares of a foreign company. A shareholder
(majority) controls and has substantial influence in the management of a company .
the advantages of owning shares of foreign companies (direct investment ) is that
the profits and or the proceeds of the business are repatriated backto South African
economy. An example of direct investment is when a company called General
Motors South Africa buy 20% shares from Isuzu United Kingdom and their real
estate. This is a long-term since the shareholder have control and therefore the
South AFrican will be having significant control in a forein entity.
There will be a noticeable increase in liabilities of the South African economy through
the inflow of capital but when General Motors buy assets in South Africa, then an
outflow of cash is noted. Direct investment normally trade in physical assets for
example buildings, equipment than portfolio investment which deals with financial
assets for example stocks, bonds et cetera.
Portfolio investment is the investment in tradable financial assets of an enterprise
based at stock country by the foreign investors. According to
https://keydifferences.com.difference-between-fdi-and-fpi-html,portfolio investment is
a short-term trade of shares through financial gain not control over managerial
operations of the enterprise unlike direct investment. In direct investment, investors
venture into business through mergers and acquisitions in order to gain control on
the company unlike portfolio investment where they buy short term shares for
financial gain.
Portfolio investments are good for developing countries since they result in sudden
inflow of capital hence employment opportunities arise and also immediate economic
growth. Portfolio investment is disadvantageous when the government which met
financial gain of portfolio investment fail to meet the requirements of the foreign
investors, a huge outflow of cash occurs hence the shrinking of the economy. Is
difficult to pull out on direct investment because of the acquisitions and mergers
which results in long-term employment opportunities compared to portfolio
investment which is short-term. An example of portfolio investment is when a South
African businessman buys shares from a US based company manufacturing
jewellery.The businessman will not gain control of that company but only access
financial gain on a short-term basis.

Question 3
(3.1)Exchange rate is the number of units of one currency for example rand (ZAR)
that can be exchanged to the other unit of the other currency for example United
States Dollar (USD).

(3.1-a) Nominal bilateral exchange rate

a predetermined current exchange rate between two parties and / currencies. A
nominal bilateral exchange rate is a current foreign exchange rate based on two
currencies i.e. rand/US dollar. Nominal exchange rates doesn’t tell about the
purchasing power of currency therefore this is the domestic price of goods relative to
foreign goods for example rand/US Dollar. Nominal bilateral exchange rate is the
operating rate between two country currencies for example ZAR (South African
Rand) versus Botswana Pula (BWP). An illustration of the nominal bilateral
exchange rate is how South African rand do I get from a certain amount of United
States Dollars?
(3.1-b)Nominal effective exchange rate (NEER)
The nominal effective exchange rate (NEER) is an unadjusted weighted average rate
at which one country's currency exchanges for a basket of multiple foreign
currencies. In economics, the NEER is an indicator of a country's international
competitiveness in terms of the foreign exchange (forex) market. Forex traders
sometimes refer to the NEER as the trade-weighted currency index.The NEER only
describes relative value; it cannot definitively show whether a currency is strong or
gaining strength in real terms. It only describes whether a currency is weak or strong,
or weakening or strengthening, compared to foreign currencies. As with all exchange
rates, the NEER can help identify which currencies store value more or less
effectively. Exchange rates influence where international actors buy or sell goods.
NEER is used in economic studies and for policy analysis on international trade. It is
also used by forex traders who engage in currency arbitrage. The Federal Reserve
calculates three different NEER indices for the United States: the broad index, the
major currencies index and the other important trading partners (OITP) index.

(3.1-c)Real exchange rate (R.E.R)

Real exchange rates relates to nominal exchange rates and to prices of goods in
both countries e.g. South Africa and the United States Dollars of America. It also
reflects a number of foreign goods that can be obtained in exchange of one unit of
domestic good and is based on price indexes. The formula used to calculate real
exchange rate is=Nominal exchange rate x price divided by price of foreign goods.
The real exchange rate is the terms of trade since there is a ratio of the price level
abroad and the domestic price level where the foreign price level is converted into
domestic currency units via the current nominal exchange rate.
(3.2)How an exchange rate is determined using a figure and explanation

Rand/USD rate

0
Quantity of dollars in millions 180USD
300USD 350USD
An exchange rate is determined by the demand and supply of currency on the
foreign exchange market. As per the above diagram, the down sloping green-blue
line represents the demand curve. The up sloping line represents the supply of
United States dollars. The market clearing exchange rate is at the point of
equilibrium is where the demand and supply intersect. The higher the price of dollars
in rand terms the fewer the quantity of American goods will be imported into South
Africa since they are expensive. As an example the Rand to United States Dollar
rate changed from USD1.00 as ZAR9.00 to USD1.00 as to ZAR12.00, it means that
the united states dollar is now expensive together with the goods of American origin..
As per the above diagram, the equilibrium quantity is 180USD.Demand is the
number of USD dollars the people are willing to buy per unit of the rand.Supply is the
number of units of rands people are willing to sell per each unit of United States
dollars.

(3.3) The Consumer Price Index (CPI)

The Consumer Price Index is one of the methods of measuring the price levels of
the market based on a basket of consumer goods and services bought by
households. The market basket refers to main goods or commodities which are
purchased by households as necessities whereby a household cannot do/survive
without them for example mealie-meal or bread. Services may mean intangible
things like education and entertainment.The change in price level by the use of
indices can be used to measure the inflation rate by checking the variances each
and every year. As resembled to a population census, Consumer Price Index (CPI)
is one of the closely monitored inflation indicator of a country. Prices of a typical
basket of goods and services in the current year are compared to base year prices.
The method used to calculate CPI is as follows: CPI=Current Prices x by quantity
divided by base year prices x quantity. Basically the Consumer Price Index is a
measure of both the price level and the inflation rate of an economy which makes it a
very important indicator of a country’s inflation rate.
(3.4)Difference between appreciation and depreciation
In monetary terms, when a currency for example rand is said to have appreciated
value against another country’s currency, it will have gained value against that other
currency. When we say the currency for example Rand gained value against the
United States dollars, it means that the current nominal rate or the operating rate is
lower than the previous rate for example on 12/04/2018 the floating rate was ZAR 9
as to USD 1.00.On 13/04/2018 the rat is now ZAR6 as to USD1.00.In this case the
number of good (Rands) required to purchase one unit of United States dollars is
now low which reflects appreciation of the rand against the dollar.
On the other hand when we say the rand had lost value against another country’s
currency, for example the rate was ZAR 7 as to USD1.00 and today the rate is ZAR
10 as to USD1.00 this means that the rand had lost value against the United States
dollar. The number of units of rand required to purchase one unit of the United
States dollar are more than before therefore reflecting a depreciation of the currency.
(3.4-b)Difference between devaluation, overvaluation & undervaluation
Devaluation normally occurs when central banks for example the SARB put
measures in order for the currency to lose value especially under a fixed exchange
rate. According to http://economicswebinstitute.org/glossary/exchrate.htm a loss of
value usually forced by market or purposeful policy action is called devaluation.
Devaluation will sink direct investors in real estates and other assets due to loss of
value. Devaluation will strengthen local industries unlike overvaluation and
undervaluation which are aimed at coming up with the proper value of exchange
rates. Overvaluation and undervaluation are normally aimed at keeping the
exchange rate at an equilibrium especially when an economy run trade deficits or
surpluses. Trade deficits or surpluses normally happens when a country imports
more goods than exports or export more goods than imports therefore this results in
imbalances which economists would want to stabilize by a change in exchange
rates. According to http://internationalecon/Finance/Fch30-6.php,observers say”
country’s currency needs to depreciate by some percentage to eliminate a trade
deficit, or needs to appreciate to eliminate a trade surplus”. “When it is believed that
an appreciation of the currency is needed to balance trade, they say the currency is
undervalued”. On the other hand when it is believed that when a depreciation of the
currency is needed to balance trade they say the currency is overvalued.