South Africa: Sink or Swim

South Africa is currently suffering from a high rate of unemployment making it difficult for the economy to grow. Forecasted growth rates have already been downscaled as the largest economy in Africa is struggling to meet targets. The countries main contributor to GDP can be identified as consumer spending and this is why the persistent unemployment is having a considerable effect on growth forecasts.

Key Terms:

Unemployment – “Those out of work, actively seeking work at the current wage rate”

GDP/Growth – Measured by the output of an economy (gross domestic product)

Consumer Spending – Spending on retail goods, energy consumption, transportation, housing costs, and other areas where disposable income is spent.

Due to the high levels of unemployment it can be noted that there is a decline in aggregate demand within the economy. Colen Garrow states that the retail sector is weakening and there is going to be pressure overall as there is a lack of demand. It can be noted that to an extent the South African economy is contracting as there has been increased inflation as a result of a cost-push and fall in aggregate demand (shown below).

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The shift for aggregate demand from AD to AD1 is a result of the rise in unemployment, the people have less spending power and therefore there is an overall decrease in consumer demand. The shift of aggregate supply is a result of the tightening credit environment as firms struggle to meet their costs. The red rectangle represents the inflationary response in the economy as a result of the shift in aggregate supply. So as a whole the South African economy has retracted as output has significantly decreased (resulting in forecasts for future growth to decline) and there has been an inflationary response, as the price level has increased.

There is also the factor of unemployment which is 24.9% falling from the peak during Q4 of 2012 at 25.5%.This is shown simply below with a demand and supply relationship of labour in South Africa.

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Currently in the market labour is only being demanded at the point of LD but the supply is at LS. This surplus of labour is the current unemployment. With so many out of work and seeking work it is clear that economy is not working to full capacity. If a production possibility frontier for the economy was shown it would be operating within the curve. This further explains the economies inability to have substantial growth.

Consumer spending has radically decreased, making it difficult for the economy to grow and therefore attempt to combat the unemployment. This is realised by the fact that private sector demand for credit dropped from 10.09% to 8.64%. This is why the retail sector is struggling, as the unemployment and inflation has led to the decline of demand.

The unemployment in South Africa can be seen as a combination of structural and cyclical unemployment. Mining has been one of the major consumers of labour in the region, and recent closing of mines and movement by companies to other African regions for mining has meant a structural change in labour demand. The cyclical unemployment is a result of the struggling economy, as different firms reduce the amount of people they employ to meet the higher costs of production.

In the short run the economy is not likely to recover, growth is a must if the government aims to combat the high rate of unemployment. It is essential to restore consumer confidence in the economy, and also enable people to obtain credit more easily as to restore the aggregate demand of the economy.

In the long run for the economy to attempt to maintain growth, eliminating unemployment is essential to attempt to get the economy working back at a point of the PPF. However this could lead to an inflationary response in the form of a demand pull, and the government will need to begin considering how to reduce already increasing inflation as a result of increasing production costs.

Currently in the South African economy the rate of unemployment is pulling it down, in this situation there are no winners within the country. Exports may become more favourable as the inflation will weaken the South African Rand, but make investing in South Africa unlikely. To solve the unemployment in South Africa is difficult as a result of its cyclical and structural qualities; the first step would be to create more job opportunities. However, it is also essential that a greater majority of people achieve education and training whether it is academic or vocational to help improve employability prospects.

Expected growth by 2014 is forecasted at around 3.4% which is still considerable in comparison to some countries in the EU. There is still risk though investing within the country and the government must do more to encourage foreign investment and begin a round of serious structural investment such as roads to create jobs and spur on growth.

There is the potential for South Africa to climb out of the current situation, and unemployment stands at the centre of it. The country is still Africa’s biggest economy and will continue to be so if it can achieve consistency with its currency and sustained growth.

Introduction to Macroeconomics

Four Main Economics Goals of an Economy:

  1. Stable Rate of Economic Growth
  2. Low Unemployment
  3. Low & Stable Inflation (standard target of 2%-4%)
  4. Satisfactory Balance of Payments

Other Pursuable Goals of an Economy:

  1. Environmental Sustainability
  2. Economic Equality

Growth:

  • Commonly Measured by Gross Domestic Product (GDP)
  • Measure the Output of the Economy (value)

Unemployment:

  • Commonly Measured by Claimant Count & Labour Force Survey (ILO)
  • “Those out of work, actively seeking work at the current wage rate”
  • Labour Force Survey is thorough and usually reveals higher numbers of unemployment
  • Claimant Count is problematic as not everyone is eligible for unemployment benefits

Inflation:

  • Commonly Measured by the Price of a “Basket of Goods”
    • i.e. Consumer Price Index (CPI) or Retail Price Index (RPI)
    • Inflation: Increase in the Average Price Level of an Economy

Balance of Payments:

  • Referring to the accounts of an economy, national scale balance sheet
  • There are Credits which are considered as Injection (e.g. exports or factor earnings)
  • There are Debits which are considered as Leakage (e.g. imports or factor payments)

Monopoly – Theory of The Firm

Monopoly Abnormal profit

The above diagram represents the existence of a monopoly, due to the abnormal profit shown. The firm operating at this point is profit maximizing, and abnormal profit means that they have more profit than they need to break-even at the point of normal profit.

Through this graph it can be noted that the firm is not a maximum productive efficiency, as the condition for a firm to at maximum productive efficiency would be to produce at the lowest point of average total cost.  It can be noted that the firm is operating just above the lowest point of average total cost. The reason this represents maximum productive efficiency is because all of the costs of the firm are being met by revenue generated by the sold products.

Furthermore, the firm is not operating at the point of maximum allocative efficiency. This can be identified through the fact that the price at the point of profit maximization is not equal to marginal cost. This lack of allocative efficiency represents a type of market failure (in this case the existence of monopoly), this is shown by the dead-weight loss which is the highlighted triangle in the graph.

Theory of The Firm – Profit Maximization

Marginal revenue displays the added revenue from each product sold, the reason the line has a negative gradient is the factor that as there is a greater quantity supplied there is a lower price, as the product is less scarce. When marginal revenue crosses the x-axis in a graph it can be noted that every product produced from that point on-wards takes away from revenue.
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Through the understanding of the nature of marginal revenue, we can produce a model curve for a firm’s total revenue. It can be noted that the x-intercept of the marginal revenue graph represents the point at which the total revenue graph is at the peak.

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Marginal cost displays the added cost from each product sold due to the factors of production being employed such as labour, materials, etc. Marginal cost represents all of the variable costs of the firm, and how there is an increase in cost when more is produced. However, average total cost allows us to see what the firm should actually pay for production.

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Average total cost involves the average variable and fixed costs. The curve displayed above is of the average total cost in the short term. The curve is in a negative gradient as long as marginal costs do not exceed the average total cost, the initial negative gradient can be explained as average fixed costs declines as quantity produced increase, as factors such as the factory are becoming more efficient. The reason the gradient increases is because of the greater increase in marginal cost whereas average fixed cost does not radically change to counteract. This is further explained by the law of diminishing marginal returns.

The understanding of average total cost allows us to use the profit maximization point of marginal cost and marginal revenue graph to analyse what the total revenue is and what the total cost is, enabling the actual portion of profit from production.

There are two examples below, the first one display’s firms operating at point of profit making, and the second an example of loss making. Notice the distinct difference between them as the gradient of average revenue or the position of average total cost. As there are a variety of factors present in the positioning and gradients of each curve and line, it is important to look at what are the points to look at for profit maximization The average revenue line is used as it represents the demand curve, and the average total cost curve is used as it represents the operating costs of the term when a given quantity is supplied. This allows revenue to be worked out through price x quantity, where the quantity at profit maximization meets the average revenue line and average total cost curve.

Graphs to be edited

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The Future of Shale Gas

The Rise of “Unconventional” Gas

Shale gas is a form of natural gas that can be found in shale rock formations which are in abundance around North America, China, Argentina and North Africa. The controversial method of releasing shale gas has started to gain global recognition and may be what is needed to reignite the oil & gas industry.  Currently the largest producers of shale gas are Canada and the United States. Shale gas has begun to gain ground against importation of LNG (Liquefied Natural Gas) and oil, as governments have seen it as an opportunity to become energy self-sufficient and reduce imports. The rise of shale gas as a substitute for LNG has had an effect on the price of gas, and the relationship between supplier and consumer.

Analysis:

Gas prices based on the Henry Hub Natural Gas Front Month Futures reached a peak of $13.50 in 2008 the highest price of gas witnessed since 2005. With the then emerging market of shale gas and the economic crisis, gas prices reached had reached new lows and began to average at a lower price between 2008 and 2010 of $6-7. The developments of new shale fracking technology, government subsidies and guarantees have pushed the price of natural gas in 2012 into the region of $3.00-3.50. This has had a serious impact on the supply &  demand relationship as there has been a major shift in supply.

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As noted in the graph above there is a radical shift in the position of the supply curve, this is because the determinants of supply have changed making it easier to supply natural gas and the factor that there is another method of obtaining natural gas (shale gas). It is important to note how there would not be a surplus in this example of the United States as it is easy to decrease the amount of natural gas imported. It is also within the interest of the country politically to become self-sufficient, and develop a prospering economic sector. It is speculated that by 2035 the United States will be in a position to begin exporting natural gas, whereas countries such as Japan are still wholly reliant on imports of both gas and oil.

There is no major change in the demand of gas, as there is still the use of oil and coal for energy production and fuel. In time there may be an increase in demand as noted in the article as it will become more affordable to produce cars and public transport driven by natural gas as well as focusing energy production through more abundant natural gas. Another factor identified in the article that is restricting the increase of demand are the negative connotations that the public currently hold towards the shale fracking process, that it harms the environment through the contamination of water supply and causes minor earth tremors.

There is also the factor of the cross elasticity of demand, as shale gas is a substitute for imported LNG. If the price of obtaining LNG through imports increases, then there will be a greater demand of shale natural gas as it easier to obtain and does not rely on importation, therefore an inelastic relationship.

Picture2Evaluation:

The shale gas industry can still be seen as an emerging market, solid foundations have been built in the Northern American market. This now poses a problem to gas exporters as Europe has had to depend upon them for natural gas for the past decade such as Gazprom who are likely to lose market share. The fracking process can also be applied to the extraction of oil from shale formations. This may have an effect on the price of oil around the world, and will bring into question the economic security of countries dependent on oil exports. There is the issue of the environmental impact of the fracking process, and issues surrounding this such as noise pollution and the possible water contamination due to the chemicals used in the fracking process. As the switchover from oil to gas is made, the price of gas will eventually increase due to increased demand. The article states that $90 Billion worth of investment is being injected into the industry as a result of the Shale Gas boom in the USA; this makes it clear that governments are willing to circumnavigate the surrounding issues.