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NAME _______________________________ FORM ____________ 2.2 TEACHER ______________________________________________ Approx time spent revising for this exam ___________ I made revision notes for this exam (circle) YES NO MARKING SCHEDULE 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 1E 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 2 3 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) 3 4 (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) 4 5 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 $14.3 billion for the year ended September 2007 according to Statistics New Zealand. (c) Explain why the current account balance in the New Zealand Balance of Payments is usually in deficit. (D) Current account is what New Zealand saves minus what we spend or invest. Deficit is when the balance is below zero. (E) Because NZ is a net borrower; we borrow to fund the purchase of imports and investment. / foreign investment in NZ is significantly more than NZ investment overseas (recorded in financial account) so net outflows of international investment income are large (international investment income balance) so the current account is always negative (well since 1973 when we last had a current account surplus! it was a great year 1973 by the way… best ski season at Ruapehu ever) (R) For the year ended Dec 2007, The CA deficit was 13.8 Billion. Ae = reason for deficit described (idea) or Me = Accurate explanation (including idea of imports/investment income outflows being larger than export receipts idea) E = one Mc from Question 2 and one Me from Question 3 International Trade 2008, 90795. (2.2) 5 6 QUESTION FOUR International milk prices have increased by almost 50% in the last two years. Being price takers, New Zealand farmers are happy to accept rising world prices for all dairy products. Price ($ 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 6 7 (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) 7