WAEC SSCE - Economics - 2015 (Essay)

(a) Four objectives of a price control policy:

• To protect consumers. A maximum price prevents sellers from charging excessive prices for essential goods, so that low-income people can afford them.
• To protect producers. A minimum price (price floor) guarantees producers, such as farmers, a fair return and protects them from ruinously low prices.
• To check inflation. Fixing prices of key goods helps to hold down the general price level during periods of rising prices.
• To ensure availability and fair distribution of essential goods. Price control aims to keep necessities within reach and to prevent hoarding and profiteering.

(b) Four effects of a maximum price control policy. A maximum (ceiling) price fixed below the equilibrium price makes quantity demanded exceed quantity supplied, and this produces:

• Shortage (excess demand). At the low fixed price consumers want more than producers are willing to supply, so goods become scarce.
• Emergence of a black market. Because of the shortage, some goods are sold secretly above the legal price.
• Hoarding and rationing. Sellers hoard scarce goods, and the government or sellers must ration the limited supply, often causing long queues.
• Fall in quality and smuggling. Producers may cut quality or divert goods to areas or countries where they can be sold at higher prices.

Examination takeaway: remember that a maximum price only "bites" when it is set below equilibrium, which is exactly why it causes shortages, black markets and hoarding.

(a) Trade union. A trade union is a voluntary association of workers formed to protect and promote the economic, social and welfare interests of its members and to improve their conditions of work through collective action.

(b) Four functions of trade unions:

• Collective bargaining for better wages. The union negotiates with employers on behalf of all members for higher pay and allowances, giving workers more strength than they would have singly.
• Improving conditions of service. It presses for better working conditions, hours, leave, safety and job security.
• Protecting members. It defends members against unfair dismissal, victimisation and exploitation, and represents them in disputes with employers.
• Providing welfare and education. It offers welfare benefits and training, and educates members on their rights and responsibilities.

(c) Two weapons used by trade unions:

• Strike action. Members withdraw their labour (stop work) until the employer meets their demands.
• Picketing. Members stand at the workplace entrance to discourage others from working or from doing business with the employer during a dispute.

Examination takeaway: separate the functions (what a union does routinely for members) from the weapons (pressure tactics such as strike, picketing, go-slow and work-to-rule used to force concessions).

(a) Disposable income is income after tax: \( \text{Disposable income} = \text{Income} - \text{Tax}, \) where \( \text{Tax} = \text{Tax rate} \times \text{Income} \).

(b) The system used is regressive taxation.

(c) Reasons. Under a regressive tax the tax rate falls as income rises. Here the highest earner (Doctor, \$8,000) pays the lowest rate (10%), while the lowest earner (Civil servant, \$5,000) pays the highest rate (18%). The tax therefore takes a larger proportion of a poor person's income than of a rich person's, which is the defining feature of a regressive tax.

(d) Diagram. Plot income on the horizontal axis and the average tax rate on the vertical axis. A regressive tax curve slopes downward from left to right: as income increases, the tax rate declines (from 18% at \$5,000 down to 10% at \$8,000). This contrasts with a progressive tax, whose curve would slope upward. The downward slope visually shows the burden shifting onto lower income earners.

(a) Meaning of protective tariff. A protective tariff is a tax or duty imposed on imported goods mainly to raise their prices so that they become more expensive than locally produced goods. Its chief aim is not revenue but to shield domestic industries from foreign competition.

(b) Four reasons in favour of a protective tariff.

1. Protection of infant industries. Newly established local industries are too weak to compete with large, efficient foreign firms, so the tariff gives them time to grow and become efficient.
2. Protection of employment. By reducing imports and encouraging local production, the tariff helps to preserve and create jobs in domestic industries.
3. Correction of balance of payments deficit. The tariff discourages imports, reduces foreign exchange spending, and so helps to improve an unfavourable balance of payments.
4. Prevention of dumping. It stops foreign producers from selling goods below cost in the home market to destroy local industries.

(Other valid reasons include protection of strategic or defence industries and raising government revenue.)

(c) Two reasons against a protective tariff.

• It raises prices for consumers. By making imports dearer and shielding inefficient local firms, tariffs force consumers to pay higher prices for a narrower range of goods.
• It encourages inefficiency and can provoke retaliation. Protected firms have little incentive to cut costs or improve quality, and trading partners may impose counter-tariffs that reduce the country's own exports.

(a) Infant industries. Infant industries are newly established industries that are still young, small and not yet strong or efficient enough to compete on equal terms with older, well-established foreign firms that enjoy economies of scale and experience.

(b) Four reasons for protecting infant industries:

• To allow them to grow. Protection (through tariffs or quotas on rival imports) gives the young industry time to expand, gain experience and become efficient before facing full foreign competition.
• To achieve economies of scale. A protected home market lets the industry increase output and lower its unit costs until it can compete.
• To create and protect employment. Shielding the industry preserves the jobs it provides and allows it to employ more workers.
• To diversify the economy and save foreign exchange. Building local industry reduces dependence on imports and on a few primary exports, and saves the foreign exchange spent on imported manufactures.

(c) Three ways industries can be financed in West Africa:

• Bank loans. Funds obtained from commercial banks and development banks (such as industrial development banks).
• The capital market. Raising long-term funds by issuing shares and debentures to the public.
• Government assistance and personal savings. Government subsidies, grants and loans, together with owners' personal savings and ploughed-back (retained) profits.

Examination takeaway: tie the reasons for protection to the industry being young (it needs time to reach efficient scale), and in (c) name genuine sources of finance, not general activities.

(a) Meaning of deflation. Deflation is a sustained fall in the general price level of goods and services in an economy over a period of time. It is the opposite of inflation, and it usually means that the purchasing power of money is rising while the volume of money in active circulation, output, or demand is falling.

(b) Three positive effects of deflation.

1. Higher purchasing power of money. As prices fall, the same amount of money buys more goods and services, so real income and the standard of living of people on fixed incomes improve.
2. Encouragement of saving. Because the value of money rises over time, holding money becomes rewarding, so people are encouraged to save.
3. Redistribution in favour of creditors and fixed-income earners. Lenders, pensioners, and salary earners gain because the money they receive later is worth more than when the debt was contracted or the salary was fixed.

(Other acceptable points include cheaper exports if domestic prices fall relative to foreign prices, and reduced cost of living.)

(c) How inflation affects three functions of money. Inflation is a persistent rise in the general price level, so it erodes the value of money and disturbs the jobs money is meant to do.

• Medium of exchange. When inflation is severe, people lose confidence in money and become unwilling to accept it in exchange for goods. Trade may drift back towards barter or towards foreign currency, so money performs the exchange function poorly.
• Store of value. Money kept as savings loses value as prices rise, so it can no longer store purchasing power over time. People switch to holding goods, land, or foreign currency instead.
• Standard of deferred payment. Because the real value of money falls, lenders are repaid in money worth less than they lent, so credit and long-term contracts become risky and lending is discouraged. (Inflation also weakens the unit of account function, since constantly changing prices make money an unreliable measuring rod of value.)

Examination takeaway: tie each effect back to the change in the value of money, since that is the single idea the examiner is testing across all three functions.

The graph gives a flat total fixed cost line at \(TFC = \$40\) and a total cost curve TC whose plotted points can be read off as follows:

(a)(i) Variable cost at outputs 2, 4 and 6

Variable cost is what is left of total cost after the fixed cost is removed, \(TVC = TC - TFC\):

(a)(ii) Average total cost at outputs 2 and 3

Average total cost spreads total cost over the units produced, \(ATC = \dfrac{TC}{Q}\):

(a)(iii) Marginal cost at outputs 4 and 6

Marginal cost is the extra cost of producing one more unit, \(MC = \dfrac{\Delta TC}{\Delta Q}\). Here each step is one unit, so it is the rise in TC from the previous output:

(b) Profit or loss when the product sells at \(\$40\) per unit

Profit is total revenue minus total cost, where \(TR = P \times Q\) and \(P = \$40\).

(i) 2 units

The firm makes a loss of \(\$20\), because at such a low output the \(\$40\) fixed cost is spread over too few units.

(ii) 4 units

The firm now makes a profit of \(\$20\). Raising output has turned the loss into a profit because total revenue rises faster than total cost once the fixed cost is shared over more units.

(a) Balance of payments disequilibrium. Balance of payments disequilibrium is a situation in which a country's total autonomous receipts from abroad are not equal to its total autonomous payments abroad over a period, so that the balance of payments does not balance on its own but shows a persistent surplus or a persistent deficit.

(b) Two types of balance of payments disequilibrium:

• Surplus (favourable) disequilibrium. Total receipts from abroad exceed total payments abroad, so the country earns more foreign exchange than it spends and reserves rise.
• Deficit (unfavourable or adverse) disequilibrium. Total payments abroad exceed total receipts, so the country spends more foreign exchange than it earns, draining its reserves and forcing it to borrow.

(c) Four reasons most West African countries face balance of payments problems:

• Heavy dependence on imports. They import large quantities of manufactured, capital and even food items, so payments abroad are large.
• Reliance on a few primary exports with unstable prices. Export earnings depend on a small number of raw materials whose world prices are low and fluctuate, so receipts are small and unsteady.
• Heavy external debt servicing. Large repayments of principal and interest on foreign loans drain foreign exchange.
• Spending on invisible imports and capital flight. Payments for foreign services (shipping, insurance, technical services) and the movement of capital abroad worsen the deficit.

Examination takeaway: the root of most West African deficits is structural, importing costly manufactures while exporting a few cheap, unstable primary goods; state each reason and show how it widens the gap between payments and receipts.