Download Answers 2008 Exam

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2.2
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Level 2 Economics, 2008
AS 90795 Describe international trade and its causes
and effects using economic models
Practice credits: Four
You are advised to spend 40 minutes answering the questions in this booklet.
Check there are six pages in this booklet.
You should answer all the questions in this booklet.
This booklet must be handed to your teacher at the end of the examination
(D) Define/describe key economic terms in question
(E) Explain how or why
(R) Relate/refer to the context of the question
Achievement
Achievement with Merit
1  AC
1  AE
6 other A or M
1  MC
1  ME
1 other M
7 other A or M
Achievement with
Excellence
1  MC
1  ME
2 other MC or ME
1E
6 other A or M or E
Codes
The suffix C in A C and M C refers to causes.
The suffix E in A E and M E refers to effects.
© Douceinator Exams 2008.
All rights reserved. No part of this publication may be reproduced by any means (including transmission by carrier pigeon,
yak or unauthorised smoke signals) or stored in brown paper bags without prior permission.
2
QUESTION ONE
International trade is a vital part of the New Zealand economy. Goods and
services are imported and exported between NZ and our trading partners.
Transactions are recorded in the Balance of Payments.
(ai)
Name the four countries where most of our imports (by value) come from.
Australia, Japan, United States and China
(aii)
Identify a specific example of one of the four most important services exported from New
Zealand.
NZ Tourism, NZ airline, NZ consultant (eg lawyer,
accountant), NZ
A = correct
(aiii)
Which balance within the current account in the Balance of Payments would
transactions for exported services be recorded?
Balance on services/invisibles balance
(bi)
A = ai and aii
aiii correct
Identify a specific example of one of the most important finished goods imported into
New Zealand.
EG Pineapples, Cars, Clothing, Films, Itunes
songs, ipods, rice, petrol etc
(bii)
Which balance within the current account in the Balance of Payments would
transactions for imported goods be recorded?
Balance on goods/visibles balance
International Trade 2008, 90795. (2.2)
A = bi and bii
correct
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QUESTION TWO
Straight line production possibility frontiers can be used to show absolute
advantage.
GRAPH ONE Country A
Feijoas
(kg)
GRAPH TWO Country B
Feijoas
(kg)
100
40
20
50
Fireworks (boxes)
(a)
State the country that has an absolute advantage in producing (i) fireworks and (ii) feijoas.
Fireworks
(b)
Fireworks (boxes)
Country B
Feijoas
Country A
Ac = Both
correct
Refer to the two graphs above to explain which country should specialise in feijoa
production and trade their surplus for fireworks.
(D) Comparative advantage is the idea that a country should specialise in the product
. where they have the lowest opportunity cost of producing.
(E) Because in country A the opp cost of feijoas is (100 or 20 fireworks) 0.2 fireworks. In
. country B the opp cost of feijoas is (40 or 50 fireworks) 1.25 fireworks. Country A .
. should specialise in feijoa production
(R) Country A has the lowest opportunity cost (loses 0.2 fireworks per feijoa kg) where
. as country B loses 1.25 fireworks per kg of feijoas.
Ac = Correct country (Country A)
or Mc = Correct country and valid explanation using opp cost
(c)
Describe the link between specialisation and resource use.
When countries specialise to benefit from their comparative advantage, resource use is
more efficient and allows both countries to consumer outside their production
possibilities / Countries specilaise to benefit from their factor endowments
Ae = correct idea
International Trade 2008, 90795. (2.2)
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(d)
With reference to GRAPH ONE (above), explain why a country A needs to trade to take
advantage of their comparative advantage.
(D) Comparative advantage is when a country has a lower relative opportunity cost of
. producing a good over another country
(E) Because countries specialise in one good only, they need to sell the surplus
. production (exports) to earn revenue (export receipts) to purchase (import
payments) good/s they do not now produce
(R) Country A has a CA in Feijoas but if they also want fireworks (and to consume
. outside their PPC) they will have to trade their surplus feijoas to buy fireworks.
Ae = comparative advantage idea described
or Me = Accurate explanation (including idea of specialisation requires importing
products they do not produce)
International Trade 2008, 90795. (2.2)
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QUESTION THREE
(a)
i
ii
iii
iv
v
(b)
State the main balance in the current account of the Balance of Payments that each
transaction below would be recorded in.
Transaction
New Zealand government donates
earthquake relief funds to China
New release dvd movies imported from
USA
New Zealander receives rental payment
on Melbourne rental property
Telecom pays an Austrian Legal firm
John Key downloads music from itunes
store (www.itunes.co.au)
Major balance within the current account
Balance on current transfers
Balance on goods/visibles
Balance on international investment
income
Balance on services/invisibles
A = 4/5 correct
Balance on goods/visibles
M = 5/5 correct
Identify the balance in the Balance of Payments where migrant transfer transactions
would be recorded.
Capital account
Ae = correct
The current account deficit for the year ended December 2007
was $13.8 billion compared with $14.3 billion for the year
ended September 2007 according to Statistics New Zealand.
(c)
Explain why the current account balance in the New Zealand Balance of Payments is
usually in deficit.
(D) Current account is what New Zealand saves minus what we spend or invest. Deficit
is when the balance is below zero.
(E) Because NZ is a net borrower; we borrow to fund the purchase of imports and
investment. / foreign investment in NZ is significantly more than NZ investment
overseas (recorded in financial account) so net outflows of international investment
income are large (international investment income balance) so the current account is
always negative (well since 1973 when we last had a current account surplus! it was a
great year 1973 by the way… best ski season at Ruapehu ever)
(R) For the year ended Dec 2007, The CA deficit was 13.8 Billion.
Ae = reason for deficit described (idea)
or Me = Accurate explanation (including idea of imports/investment income outflows
being larger than export receipts idea)
E = one Mc from Question 2 and one Me from Question 3
International Trade 2008, 90795. (2.2)
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QUESTION FOUR
International milk prices have increased by almost 50% in the last two years. Being price
takers, New Zealand farmers are happy to accept rising world prices for all dairy products.
Price
($ per L)
GRAPH THREE
Market for milk
NZs
4
exports 1
WP1
3
exports
NZp
2
World price
NZd
1
DC NZq
Quantity
(ooo) litres
Use labels and dotted lines on GRAPH THREE above to show;
(ai)
The domestic equilibrium price (NZp) and equilibrium quantity (NZq) for milk (with trade).
Ac = ai and aii
(aii)
The quantity of milk exported (label as exports).
(bi)
Show an increase in the world price of 50% (WP1) and label the new quantity of exports
(label as exports 1).
Me = bi and bii
(bii)
Label the new domestic consumption (DC) of milk following the 50% increase in the world
price.
(c)
Describe why the rise in the world price of milk caused domestic quantity demanded to
change.
correct
correct
Because more milk will be exported, less will be available in New Zealand. At the reduced
quantity, the price is higher (as read off NZd curve). Law of demand, -Quantity demanded
drops as price rises
Ae = correct idea
(d)
State a possible reason for an increase in world price for milk.
EG Increased global demand (eg from China), droughts in main milk
producing countries, worldwide preferences to healthy products like milk
Ac =correct idea
International Trade 2008, 90795. (2.2)
Ae = correct
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(e)
Explain the effect that the increase in the world price for milk will have on New Zealand
dairy farmers and other firms in the New Zealand dairy industry.
(D) World price = average price in rest of world. Dairy industry is all firms associated
with milk production
Dairy Farmers:
(E) Because the world price has increased, export revenues have increased, so farmers
are making higher profits. Farms will increase in capital value, Farmers will be able to
repay loans, increase investment etc.
Other firms in the NZ dairy industry:
(E) Because the world price has increased, farmers profits increase, so associated firms
also have an increase in sales (eg new utes, more farm sales, fertiliser etc) so
associated firms profits increase as well. May increase employment and industry may
grow in size and output as more resources are switched into this industry as it
becomes relatively more profitable.
(R). As world milk prices increase, exports increase and profits increase so the industry
grows
Me = valid explanation including 1 effect on farmers and 1 on industry
(f)
State the likely impact of the increase in world milk prices on the size of the
New Zealand dairy industry.
Dairy industry should grow in size are new firms are attracted by the higher profits
Ae = correct idea
(g)
Explain the likely impact of an increase in dairy industry export receipts on inflation.
(D) Export receipts = revenue from selling NZ dairy products overseas. Inflation =
increase in the general level of prices
(E) Because dairy farmers are earning more revenue, profits increase, farm spending
increases (eg employ more staff, buy new capital goods, increase investment borrowing
etc) this has a flow on effect throughout associated industries. Aggegate demand
increases (C and I increase) so demand pull inflation pressure can cause an increase in
the general level of prices. / Injections into the economy increase, causing an increase
in the money supply so inflation occurs (QTOM idea)
(R) Dairy farmers spend more. This causes demand pull inflation
Me = valid explanation including reason how inflation occurs
E = 2 × Ac and 2 × Me from Question 4
International Trade 2008, 90795. (2.2)
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