Download Question 1 Inflation and high unemployment rate are regarded as

Question 1
Inflation and high unemployment rate are regarded as serious economic problem by many
economist and government.
a. Define the term 'inflation” and explain how it can be calculated. (5)
Inflation is the persistent rise in the general price level of a country. (1 point)
Calculation of Inflation:
The formula for calculating the Inflation Rate looks like this:
((B - A)/A)*100
Where "A" is the consumer price index (CPI) of the reference year and "B" is the CPI of
the ending year.
So if exactly one year ago the Consumer Price Index was 178 and today the CPI is 185,
then the calculations would look like this:
((185-178)/178)*100
or
(7/178)*100
or
0.0393*100
which equals 3.93% inflation over the sample year.
(4 points for calculating inflation rate)
b. Discuss why governments try to keep inflation low. (7)
- Loss of purchasing power
- Uncertainty makes planning difficult
- Investments may be lowered
- Unemployment as rising prices (due to rising cost of production) will lower labour
competitiveness.
- lost of export competitiveness leading to negative balance of payment.
- lower income, students and lenders will be most affected by inflation and could have
serious consequences on government.
(Any three. 2 points each)
c. Explain how different types of unemployment arise and discuss the most serious type of
unemployment. (8)
- Cyclical - During an economic recession, there is little demand for goods and service.
- Frictional - Workers change jobs and need time to look for a new one. New graduates.
- Structural - Arise owing to the long term changes in the structure of the economy as
entire industries close down because of the lack of demand for the goods or services
they produce. Many workers are made unemployable owing to redundant skills.
- Seasonal - Owing to the seasons like in summer people vacation more and employment
in the tourist and hotel industry rises.
- Technological Advance - Switching from Labour to Capital intensive production.
(Any three. 2 points each)
Either
Technological - Complete replacement of humans in some case as the more sophisticated
the product the more capital intensive the manufacturing process.
Structural - Whole industries are closed down owing to eg.sunset industries or redundant
skills.
(2 marks)
Question 2
In 2005, Namibia entered into trade agreements with France, Italy and Austria. These
countries would provide capital and technology in order to broaden the manufacturing
industry in Namibia and increase its trade and investment in industries which are labour
intensive.
a. Explain the meaning of the term “investment” and “labour intensive” (4 marks)
Investment - expenditure on capital equipment.
Labour-intensive - high proporiton of labour involved in the production of goods in
comparison to other factors of production like land and capital.
(2 marks each)
b. Discuss the difference between free trade and trade agreement. (6 marks)
Free trade - no limitation on trade between countries. eg. Sing-US FTA
Trade Agreement - involve either a restriction of trade with some countries or preferential
treatment. It can involve two countries reducing tariffs on each other’s goods, or perhaps
reducing bureaucracy by simplifying import/export procedures. eg. ASEAN
(3 marks each. 2 for explanation and 1 for example)
c. Some economic writers suggest that a country should conserve its resources. What do
they mean by this? (4 marks)
Recognize conservation of resources as keeping some resource back so that they would
be available for future use (1 mark)
If countries use their resources to quickly, then they might deplete their resource too fast
and maybe a setback to potential economic growth in the future.
Using the PPC, we can illustrate the movement of the PPC even further if we use it to
spend on capital goods instead of consumption goods to illustrate this (4 marks)
d. Discuss the benefits that trade agreements might bring to Namibia. (6 marks)
Any 3 possible benefits:
- positive effect on Namibia’s balance of payment,
- Greater earnings allowing greater investments in capital and technology which would be
likely to increase productivity and output in manufacturing industry leading to a greater
degree of economic growth and development and an improvement in the standards of
living and quality of life.
- increase employment.
( 2 marks each)
Question 3
Owing to economic growth, China's middle class in now moving up to enjoy the fruits of it labour
in the last 2 decades.
(a) With the aid of a diagram, explain how demand for traveling will change in China? (4
points).
With economic growth, the incomes of the chinese middle class will increase. Increase in
income will cause the demand curve for traveling to shift to the right. (1 mark)
-
Explanation must be in accordance with the diagram. Mention must be made that with the demand
curve shifting from D1 to D2, output or quantity demand for travelling has increased from q1 to q2.
(If not mentioned then 2 marks will be deducted) ( 4 marks)
(b) Knowing that the the income of middle income people in China has increased, suggest 3 things
that an airline can do to capture more passengers business. (6 marks)
Increase the number of seats in the plane
Increase the number of destinations
Buy more planes
Provide better quality service (in the area of food, inflight entertainment and better trained
air-crew)
(Any three. 2 marks each)
(c) Explain how advertisement allows airlines to charge higher prices for tickets (4)
Advetisment benefits the airlines in 2 ways
Provides the public with information of the many destiantions and service the airline offers.
Creates brand loyalty. This makes the demand curve for the airline more price inelastic
thereby allowing airline to increase price without suffering too significant a reduction in the
demand for their services.
(2 marks each)
(d) Chinese plane builders have built a super jumbo airliner that uses the latest technology to
conserve fuel as well as to reach further. Explain with diagram how this would impact the potential
for traveling in China. (6 marks)
Technology brings down the cost of production of services that the airlines provide.
Referring to the diagram above. This will cause the supply curve to shift the rightwards
from S2 to S1 giving rise to an increase in airline service from Q2 to Q3.
(2 marks for diagram and 2 marks for explanation)
On the whole, this will increase the potential supply of flights to other parts of China as the
planes can now fly further and plus the cost saving from more efficiently running the
aircraft, owing to the new technology, this will only encourage the middle income use flying
more not only for holidays but also for businesses
Question 4
The relationship between USA and China is increasingly negative as the balance of payment
between the US and China keeps ballooning in favor of the Chinese in the last decade.
(a) Explain what could possibly have led to the deficit in the US balance of payment against China?
(4 marks)
Cheaper Chinese exports (current account)
Massive US government interest payments on borrowings to the Chinese through the
financial account) for investing in US government issues treasury bonds.
Movement of hot money out of the US into China to invest in Chinese assets, for better
returns on investment.
(any two of 3. 2 marks each)
(b) What can the US do to reduce this balance of payment deficit without resorting to
protectionism? (6 marks)
Supply side policies - Increase productivity by providing training for labour.
Invest in technology
Lower minimum wages
Make US companies more competitive and efficient.
Subsidizing production
(any three of 4. 2 marks each)
(c) Explain 2 ways that the US could undertake to protect employment in its industries that are
under threat by imports. (4 marks)
Protectionist policies
Subsidies
Tariffs
Quota
Embargo
(any two of 4. 2 marks each)
(d) Using a diagram, explain how reducing the minimum wage would make US made goods more
competitive as exports.(6 marks)
From the above diagram it can be seen that with minimum wage (W1) set above equilibrium, (W0)
this would make US labour wage high. As labour is a factor of production and and input into most
production process, this would make US goods uncompetitive.
Governments may legislate to remove minimum wage and allow wages to come to a natural
equilibrium thereby lowering the cost of a factor of production thereby making US produced goods
cheaper.
(2 marks for diagram, 2 marks for explanation according to diagram, 2 marks for how the minimum
wage can be lowered by government)
Question 5
(a) Define what is progressive and regressive taxes. Give examples to support your answer (4
marks)
- A progressive tax is one whereby the proportion of income taken in taxation rises when income
rises.
- A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount
subject to taxation increases.
(2 marks each)
(b) What reasons are there for government to impose taxes (6 marks)
To increase tax revenue to spend on infrastructure
To redistribute income
To reduce consumption of a demerit good
To reduce imports into a country so as to improve the country’s BOP.
(any three of 4. 2 marks each)
(c) Using a diagram, explain how government can use a subsidy to promote the consumption of a
good or service that promotes positive externality. (6 marks)
By providing a subsidy to the the producer, this reduces the cost of production. This effectively
shifts the supply curve rightwards causing the marginal personal cost (MPC) to converge with the
marginal social cost (MSC). In so doing, consumption of the positive externality increase from Q1
to Q2.
(2 point for the diagram. 4 points for explanation and using the diagram to explain how subsidy
increases quantity demanded of the merit good)
(d) Apart from taxing the use of fossil fuels so as to reduce the use of private cars on the road, what
else can the government do to reduce the reliance on fossil fuel? (4 marks)
- Increase the public transport in number of Buses/MRT trains and/or increase its
frequency
- Promote the use of hybrid vehicles
- Promote research on alternative fuels
- Build more roads so that public transport is accessible.
(all 4. 1 mark each)
Question 6
(a) With a diagram, explain how a government can promote economic growth during a
recession (6 marks).
- Expansionary Fiscal and Monetary policy (2 mark)
Explain Expansionary Montery Policy - Government spending and lowering of taxes (2
marks)
Explain Expansionary Fiscal Policy - Increase of money supply and lowering of interest
rates.(2 marks)
(b) Explain how economic growth can give rise to inflationary pressure (4 marks)
Inflation is defined as the persistent rise in the general price level in a country. (1 mark). With
economic growth, the incomes of consumer increases and they will demand for more goods and
services.
To meet this increase in demand, businesses will have to increase their production and this will give
rise to competition for factors of production. Scarce resources and factors of production will then be
come increasingly more expensive. Business will have to increase the prices of their goods and
services to cover the cost of more expensive factors of production. This gives rise to inflation in a
country.
(c) A country is facing less and less demand for its goods for export owing to a change in taste an
preference on a global scale. Discuss 2 supply side policies the government can use to soften the
impact of job loss in its exports industry. (6 marks)
-Decrease the tax rate (fiscal policy) so that firms can have more funds to reinvest into new
businesses that are more current to consumer taste and preference.
-Provide training to labour which was made redundant by the change in taste and preference so that
they can be re-employed in new industries.
-Increase the competition between firms as competition reduces prices and pushes firms to be more
allocative efficient in the use of resource.
- Provide some form of unemployment or wage supplement to tied over the period of
unemployment so that they can eventually find new jobs.
(any three of 4. 2 marks each)
(d) A country decides to depreciate its currency to promote exports. What consideration must the
government make before considering such a move (4 marks).
- That its exports are price elastic in demand - (see Marshal Lerner condition)
-The amount of external debt (depreciation would mean that they would have to pay higher interest
payments on debt)
Is the country reliant on imports of raw material to manufacture goods (like metal, oil, nickel etc). If
so then it would become more expanse to produce giving rise to cost push inflation.Question 7
a. Explain how a monopolist is able to maintain its dominance over the market. (6 points)
- It is the sole provider of a good or service. This could possibly be due to lisense given to
them to operate by the government.
- It is a very big corporation endowed with huge resources and able to undertake production
of goods or service on a very large scale.
- The barrier to entry in this market is very high as the fixed cost is very high. (eg. MRT
service provider needs to invest in trains and control stations which cost millions of dollars)
- Monopolist is able to enjoy tremendous economies of scale owing to its hugh scale of production.
(any three of 4. 2 marks each)
b. Explain the disadvantage of monopoly power on the consumer (6 points)
- The monopolist will cut back on production just so that he can increase the price of his goods
service.
- Because he has no competitor, this may give way to complacency and wasteful spending with
could well give rise to X-inefficiency which will cost the final price of the goods and service
provided to rise.
- There may not be much product variation nor choice. Product quality may consistently not be
very high.
- The customer service experience may not be so personalized as the monopolist is profit focused.
(any three of 4. 2 marks each)
c. Name two characteristics of a perfect competition market. (2 marks)
- There are many buyers and sellers.
- Perfect information.
- Product or service is undifferentiated (same product sole by all sellers)
(any two. 1 mark each)
d. In what ways is the perfect competition market beneficial to the consumer. (6)
- the pc market is allocates resources under free market conditions and as such it is efficient in
the use of resources (achieving allocative efficiency).
- because the pc market exist under free market conditions (and free from any interference of
government and monopoly power) it is allocative efficient, the product will exist at a market
equilibrium whereby p = mc, ie. at the lowest point of the average cost curve and therefore at the
lowest cost.
(3 points each)