HC1072
Economics and International Trade
Final Assessment
Assessment Weight: 50 total marks
Instructions:
- All questions must be answered by using the answer boxes provided in this paper.
- Completed answers must be submitted to Blackboard by the published due date and time.
Please ensure you follow the submission instructions at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of knowledge of the key topics covered in this unit.
Define, discuss and provide examples for each of the following:
ANSWER a): ** Answer box will enlarge as you type
Like the name implies, substitute products are those that are viewed as alternatives to each other by the customer, i.e. they may be substituted for one another while consumption. These products are equally capable of gratifying human desires.
When two things are created using comparable technology or comprise the same component, perform the same function, and are priced similarly, they are referred to be substitutes. Increases in the cost of a product result in a rise in the amount requested of its alternatives in this situation.
For instance, if the price of airline tickets increases, the overall number of railway ticket purchases would increase.
Complementary Items are defined as goods that be utilised or consumed simultaneously in order to fulfil a certain need. This signifies that all these commodities are required in tandem to accomplish the task. Whenever the cost of a specific commodity changes, it reacts in the opposite direction to the demand for the secondary commodity that is related with a primary commodity. For instance, A price rise on the computer will result in a fall in sales for a software bundle.
ANSWER b):
When people’s incomes are poor, they often buy inferior things. They are often the least expensive solutions for addressing a consumer’s demands, making them suitable for customers that do not have a great deal of money. Typically, they are the lowest-quality items available, acquired only for budgetary reasons.
Consumers that persistently maintain a lower income level are more likely to buy substandard items on a regular basis, if not exclusively. When those who earn more money in the normal course of events encounter a loss of income, they would resort to buying lesser things out of need till their income increases. Furniture, clothes, and vehicles are all examples of items that belong within this category.
Whenever an individual’s income increases, he or she usually quits purchasing lesser things in favour of more expensive ones. These things are often more expensive than lesser goods and are of superior quality. When customers have the funds to afford ordinary products, they will prefer them over inferior things.When given the choice between a regular good and a substandard one, persons with adequate income will often choose the usual item. When persons with a low income get more funds, like a bonus, raise, or a win (by lottery or casinos, for example), they might pamper themselves by buying standard products.
ANSWER c):
Microeconomics is concerned with the behaviour of individual economic actors such as homes, employees, and enterprises. It encompasses both demand and supply n specific marketplaces and customer behaviour on an individual level.Macroeconomics examines the economy in its whole. It is concerned with broad topics like as growth, inflation, unemployment, and the current account deficit. Microeconomics as well as macroeconomics are not distinct disciplines but rather complimentary viewpoints on the economy as a whole.
ANSWER:
Elasticity of demand quantifies how responsive demand is to variations in characteristics known as drivers of demand; such elements includes the price of the items, the consumer level of income, as well as the availability of substitutes. Economic changes have such a major influence on demand if it is elastic. Due to the fact that price fluctuations are often employed to determine elasticity, “elasticity of demand” may also be alluded to as “price elasticity of demand.”
Inelastic demand occurs when a change in the price or another variable of a commodity has little effect on demand. In other terms, demand for the items is insensitive to price fluctuations or other external influences and is hence static or inelastic. While there might be some minor variations in demand, these are likely to be insignificant in comparison to the total demand owing to the structure of consumption.
Question 2 (10 marks)
“A key role of central banks is to conduct monetary policy to achieve price stability (low and stable inflation) and to help manage economic fluctuations.”
- Discuss this statement by defining monetary policy. (3 marks)
ANSWER a):
Monetary policy appears to be the process of managing an economy’s supply of money and the channels via which new money is supplied. The purpose of a central bank’s money supply regulation is to influence macroeconomic variables like inflation, the speed of consumption, economical growth, and general liquidity.
The above phrase implies that central banks implement monetary policy through modifying the money supply, most often via open market activities. Central banks are responsible for a country’s monetary policies and money supply regulation, and are often saddled with the obligation of guaranteeing low inflation and steady GDP growth. On the macroeconomic levels, central banks use interest rate regulation or asset purchases to maintain the expense of borrowing and lending inside an economy within bounds.
- Identify the tools used to implement monetary policy. (3 marks)
ANSWER b):
The following instruments are used to manage the policy:
a). Interest rates: As element of the contractionary monetary policy, banks raise the interest rate (discount rate). Whenever this rate is increased, commercial banks have been discouraged from borrowing from the central bank due to the increased cost of borrowing. This decreases the money flow. It has also been an effect on firms’ borrowing capabilities, since commercial banks demand higher interest rates. Economic development is hindered and investments are discouraged.
b). Open Market Operations: The Central Bank conducts OMOs in which it has the authority to sell assets (in case it wants to tighten monetary policy). When securities are put on the marketplace, the economy’s money supply is diminished as individuals utilise their existing cash to purchase the securities.
c). Reserve Requirements: This refers to the mandatory reserve (a portion of commercial banks’ deposits) that commercial banks must hold with Central Bank or in their very own vault. If indeed the Reserve Requirement is raised, commercial banks are forced to hold a higher portion of their deposits with Central Bank, which they cannot refinance, so reducing the money supply.
- State and explain at least 2 limitations when the central bank implements monetary policy. (4 marks)
ANSWER c):
Two limitations are:
1. In actuality, monetary policy is being allocated a secondary role within the economic growth process. Monetary policy has not given a predominating role. The Reserve Bank’s function is rather minimal. The Reserve Bank is intended to ensure that economic progress does not stall due to a lack of enough cash.
2. The presence of black money within the economy imposes constraints on the operation of monetary policy. Due to the fact that lenders and borrowers keep their operations secret, black money has not documented. As a result, the demand and supply for money do not remain consistent with the monetary policy objectives.
Question 3 (7 marks)
The table below shows economic information for a hypothetical economy with a flexible
exchange rate.
| 2017 | 2018 | |
| CPI | 100 | 115 |
| Labour force (’000) | 11000 | 11360 |
| Full-time employed (’000) | 7250 | 7920 |
| Part-time employed (’000) | 3200 | 3400 |
| Net foreign debt ($ billion) | 900 | 1000 |
| Net foreign liabilities ($ billion) | 1050 | 1053 |
- With reference to the table, calculate the unemployment rate in 2017 and 2018. Show all working. (1.5 marks x 2 = 3 marks)
ANSWER a):
For year 2017,
Total labour force = 11000
Employed people = Full-time + Part-time
= 7250 + 3200
= 10450
Unemployed people = Total labour force – Employed people
= 11000 – 10450
= 550
Unemployment rate = Unemployed people / labour force
= 550 / 11000
= 0.05 per cent
For year 2018,
Total labour force = 11360
Employed people = Full-time + Part-time
= 7920 + 3400
= 11320
Unemployed people = Total labour force – Employed people
= 11360 – 11320
= 40
Unemployment rate = Unemployed people / labour force
= 40 / 11360
= 0.0035 per cent
- Explain 2 types of unemployment that we discussed in class. (2 x 2 marks = 4 marks)
ANSWER b):
The two sorts of unemployment that are described are as follows:
1. Unemployment on a cyclical basis
Cyclical unemployment seems to be a result of the economic cycle’s contraction phase. That is when demands for products and services declines precipitously. keynesian or Cyclical unemployment, sometimes referred to as supply deficient unemployment, happens whenever the economy’s aggregate demand is insufficient. This is due to the fact that during a business cycle slump, salaries do not decrease to a equilibrium rate. It compels firms to lay off significant numbers of employees in order to save money. Cyclical unemployment exacerbates the problem. Unemployed employees have lesser money to spend on the products or services they require. This reduces demand even more. Government action, within the form of expanding monetary and fiscal policies, is necessary to halt downward spiral.
2. Unemployment Due to Structural Factors
Structural unemployment occurs when the economy undergoes changes that result in a mismatch amongst the talents employees possess and the capabilities employers need. A good illustration of it is an industry’s decision to replace equipment operators with robots. Workers must now learn to handle the machines that have taken their jobs. Those who do not learn will either risk long-term structural unemployment or will need retraining for alternative occupations. A prolonged recession often results in structural unemployment. If people remain jobless for an extended period of time, their abilities are likely towards becoming obsolete. They might remain jobless even whenever the economy improves unless they are ready and able to accept a lower-level, inexperienced employment. When this occurs, structural unemployment results in an increase in natural unemployment.
Question 4 (7 marks)
However the alliance said in a statement that “the meeting remains in session,” meaning they can “make immediate adjustments” should the current market conditions shift.
In what was a hotly anticipated meeting, the energy alliance convened via videoconference to determine whether to stick with its plan to release more oil into the market or to restrain supply amid fears over the omicron Covid-19 variant. Other issues on the table included a U.S.-led release of strategic reserves from crude-importing nations and Iran’s possible re-entry into oil markets.”
- Identify the market structure where OPEC operates. (2 marks)
ANSWER a):
OPEC relates to the oil/petroleum exporting business. The petroleum exporting sector is oligopolistic in nature. OPEC seems to be an organization of oil exporting nations; it is an instance of a corporate cartel, which occurs under oligopoly. As a result, the optimal market structure becomes oligopoly. The rationale for this is that OPEC operates in a small industry with few rivals, yet these competitors, notably Iran, control a significant portion of the market. That’s one of a primary characteristics of oligopoly — a small number of enterprises with a large market share.
- Discuss extensively 2 features of that market structure. (2.5 x 2 = 5 marks)
ANSWER b):
The oligopoly oil market structure has the following characteristics:
1. The oligopoly market’s companies are mutually reliant on one another. They are incapable of acting independently. An oligopolistic corporation will respond in accordance with its expectations of how rivals would react. In other terms, if Company A anticipates that Company X will decrease its rates, Company A will do the same. If Nike makes a choice, it must consider the response of its competitors. When deciding its pricing and production levels, a business takes the actions and reactions of other companies into account. For instance, if Nike seeks to grow its market share by lowering the price of its goods, it should also contemplate the response of Adidas and Puma, who may do the similar thing to raise their market share.
2. This market structure imposes entry obstacles due to the high operational expenses associated with this sector. Existing businesses benefit from economies of scale due to their massive scale manufacturing, but new enterprises must spend enormous startup costs. For instance, OPEC is highly established, and if a new business wishes to compete against them, they must face enormous entry costs due to OPEC’s and its rivals’ market dominance. Brand awareness and economy of scale serve as a deterrent to entrance for new businesses.
Question 5 (11 marks)
Using the data in the table below, to complete the tasks for this question.
| Data for 2019 (Base Year) | Data for 2020 | |||
| Quantity | Price | Quantity | Price | |
| Potato | 600 | 2.50 | 680 | 3.00 |
| Rice | 840 | 2.00 | 800 | 2.80 |
| Computers | 500 | 850 | 450 | 950 |
| Cars | 300 | 15,000 | 200 | 18,000 |
- Calculate Nominal GDP for 2019 and 2020. (2 marks) Show your workings.
ANSWER a):
Nominal GDP = Current price x Current quantity
Nominal GDP (2019) = 600 x 2.50 + 840 x 2.00 + 500 x 850 + 300 x 15000
= 1500 + 1680 + 425000 + 4500000
= $ 4,928,180
Nominal GDP (2020) = 680 x 3.00 + 800 x 2.80 + 450 x 950 + 200 x 18000
= 2040 + 2240 + 427500 + 3600000
= $ 4, 031,780
- Calculate Real GDP for 2019 and 2020. (2 marks) Show your workings.
ANSWER b):
Real GDP (2019) = 600 x 2.50 + 840 x 2.00 + 500 x 850 + 300 x 15000
= 1500 + 1680 + 425000 + 4500000
= $ 4,928,180
Real GDP (2020) = 680 x 2.50 + 800 x 2.00 + 450 x 850 + 200 x 15000
= 1700 + 1600 + 382500 + 3000000
= $ 3,385,800
- Calculate the GDP Deflator. (2 marks) Show your workings.
ANSWER c):
GDP deflator = (Nominal GDP / Real GDP) x 100
= (4,031,780 / 3,385800) x 100
= 119.08
- Identify 2 possible exclusions to GDP and discuss why they have to be excluded.
(2.5 x 2 = 5 marks)
ANSWER:
Two possible exclusions to GDP are:
1). Sales of items manufactured outside of our country’s boundaries.
2). Used-goods sales.
Essentially, for anything to be included within the the GDP, it must be generated. It must be something which is not utilised to make another product. It must be manufactured in the United States and not elsewhere, and it must also be lawful.
Question 6 (7 marks)
- Discuss the role of foreign exchange in international trade. (3 marks)
ANSWER a):
Foreign exchange (FX) marketplaces enable worldwide trade by allowing businesses to swap currencies for the purpose of importing and exporting services and goods. Additionally, the markets offer currencies for the foreign investment, the acquisition of financial products, and currency traders seeking to benefit from short-terms currency value swings. Additionally, several governments maintain foreign currency reserve to hedge against currency exchange rate volatility. The bulk of currencies’ value, also referred to as an rate of exchange, is determined by the market. Exchanging countries may be as straightforward as exchanging one currency to another within a local bank. Additionally, it may entail currency trading on foreign exchange market. For instance, a trader may gamble on a central bank easing or tightening monetary policy and then on one currency strengthening against another.
- “Foreign exchange is determined based on demand and supply for a specific currency.” Explain and discuss this statement based on the economic principles learned in class.
(4 marks)
ANSWER b):
Through its impact on the supply or demand for the foreign exchange, a balance of trade has an effect on the currency exchange rates. Whenever a country’s commerce balance does not goes to zero is, which means whenever exports exceed imports—there is proportionally greater demand or supply for the country’s currency, affecting the currency’s value on the international market. The need for currencies is determined by the demand for the country’s exports and by currency speculators seeking to benefit from the currency value movements. A currency’s supply is influenced by a domestic demand for imported goods.
These relative prices are determined by currency demand, which would be controlled by commerce. When a nation exports greater than it imports, there has been a strong demand for its commodities and, therefore, for its currencies. Supply and demand economics dictates that whenever demand exceeds supply, prices increase as well as the currency gains in value. In comparison, if a nation buys greater than it exports, there has been less demands for its currencies, and hence prices should fall. Currencies depreciates or loses its value.
END OF FINAL ASSESSMENT
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