1.A good is said to be non-rivalrous in nature if consumption of the good by one person does not reduces the ability of other persons to consume it. For example, air, defence services of a nation, public parks, street lights etc.  

2.Potential GDP could be more, less orequal to actual GDP. Neither potential GDP calculate inflation. Potential GDP is the output an economy can produce at full employment.

Option D is correct.

3.

DETERMINING EXCHANGE RATES

• A flexible and floating exchange rate is where the market force of supply and demand determine the exchange rate.
• A fixed exchange rate is where the government determines the exchange rate for a period of time based on the value of another country's currency such as the US dollar.
• A managed exchange rate is where the government intervenes in the market to influence the exchange rate or set the role for short periods such as a day or week.

When a currency depreciates, the prices of domestically-produced goods decline relative to international prices. The exporting firms become more competitive and exports increase. If the growth of exports is significant, then production and employment also expand and the entire economy accelerates.

How does depreciation affect economic growth?

A depreciation increases the cost of imports so there will be an increase in cost-push inflation. A depreciation makes exports more competitive – without any effort. In the long-term, this may reduce incentives for firms to cut costs, and could lead to declining productivity and rising prices

in case of south africa

Given that South Africa operates within a flexible exchange rate regime, the value of the rand, like any commodity, is determined by the market forces of supply and demand. The demand for a currency relative to the supply will determine its value in relation to another currency.

Theoretically, the demand for a floating currency – and hence its value – changes continually based on a multitude of factors. In the case of the rand, its current weakness can be attributed to a myriad of structural problems facing the local economy.

The main determinants of a currency’s value include demand for a country’s goods and services. This is closely linked to the growth and national income of its main trading partners.

Equally important is the domestic interest rate. If it is high it is likely to attract foreign capital, causing the exchange rate to strengthen. But high inflation can wipe out the benefit of high interest rates to foreign investors.

Additional factors serve to drive the currency down.

These include a current account deficit. The current account deficit gets bigger when a country spends more on foreign trade than it is earning and has to borrow capital from foreign sources to make up the difference.

This implies that a country requires more foreign currency than it is getting through sales of exports, and it supplies more of its own currency than foreigners demand for its products. This excess demand for foreign currency leads to depreciation in the value of a currency.

Factors such as political instability and poor economic performance can reduce investor confidence. This inevitably forces foreign investors to seek out stable countries with strong economic performance. Thus, a country that is perceived to have positive attributes will attract investment away from countries perceived to have more political and economic risk.

There is a further complication to currency movements. The buying and selling of currencies is no longer driven only by the need to facilitate trade but also by the demand for currencies as financial assets. This means that currencies are bought and sold like any other asset. Decisions by traders – to buy or sell a currency – can have a marked effect.

IMPLICATIONS OF WEAK RAND (CURRENCY OF SOUTH AFRICA)

The weak rand has a number of implications for the country’s growth prospect. Firstly, the weakening currency carries the risk of pushing up inflation because imported goods are more expensive. This means that the South African Reserve Bank faces a difficult decision. It can keep interest rates low but then faces even higher inflation. This will only devalue the rand further.

If the central bank takes more aggressive action by raising interest rates, it risks stifling growth in an economy that is only growing at 1.5%.

The rand’s weakening could not have come at a worse time for South Africa. The country is suffering from the worst droughtsince 1992 which has increased food costs and pushed the farming industry into recession. The price of white corn, a staple food in southern Africa, has more than doubled on the South African Futures Exchange in the past year.

With large parts of the economy already in recession, coupled with worsening debt levels and the threat of credit-rating downgrades, it looks like the economy will contract. This implies that Finance Minister Pravin Gordhan has limited room to boost spending.

The weak rand will also see the cost of imported goods for consumers rise. In addition, while the rest of the world benefits from record low oil prices, the country’s weaker currency means it will not able to take full advantage of this and may face higher fuel prices in the near future.

CONCLUSION

A depreciation in the exchange rate will not help competitiveness unless it is a ‘real’ depreciation – i.e. the currency must lose value at a greater rate than relative prices are rising domestically. This is another way of saying that the depreciation must not be offset by higher inflation in South Africa relative to trading partners. Provided this condition holds – i.e. the rate of inflation in South Africa relative to that in trading partners is not greater than the rate of depreciation – goods will technically become more competitive in the markets of trading partners.

The breakdown in the relationship between the exchange rate and our exports is but one indication that South Africa’s economic engine is broken. A concerted effort is now required to fix it, one indication of which will be that at some point in the future our export industries will again become sensitive to the competitiveness boosts of exchange rate depreciation.