WAEC SSCE - Economics - 1995 (Essay)

Meaning. Inflation is a persistent and appreciable rise in the general price level, which reduces the purchasing power of money. Its effects on the economy are mixed but mainly harmful.

Harmful effects.

• Fall in purchasing power: the same amount of money buys fewer goods, so real income falls.
• Hardship for fixed-income earners: salary earners, pensioners and landlords on fixed rents suffer because their incomes do not rise with prices.
• Discourages saving: the real value of savings falls, so people are reluctant to save, reducing funds for investment.
• Redistribution of income: debtors gain and creditors lose, because loans are repaid in money of lower value; speculators and traders holding goods gain.
• Balance-of-payments problems: home-produced goods become dearer, so exports fall and imports rise, worsening the trade balance.
• Uncertainty: unpredictable prices discourage long-term investment and planning.

Possible favourable effect. A mild, creeping inflation can encourage producers, because rising prices raise profit expectations and may stimulate output and employment in the short run.

a. Meaning of a tax. A tax is a compulsory payment imposed by government on individuals and firms to raise revenue and achieve economic objectives, for which the taxpayer receives no direct or equivalent benefit in return.

b. The various tax systems. These describe how the tax rate changes as income (the tax base) changes.

• Progressive tax: the rate of tax rises as income rises, so higher earners pay a larger proportion of their income (for example, personal income tax with rising bands).
• Proportional tax: the rate of tax is constant at every level of income, so everyone pays the same percentage regardless of how much they earn.
• Regressive tax: the rate of tax falls as income rises, so the tax takes a larger proportion of the income of the poor than of the rich (many indirect taxes work this way in effect).

(a) Equilibrium occurs where quantity demanded equals quantity supplied. From the schedule this is at a price of 7, where \(Q_d=Q_s=300\) units. At this price the plans of buyers and sellers exactly match, so there is neither shortage nor surplus.

(b) Excess demand occurs at prices below 7, where \(Q_d>Q_s\):

• At price 5: \(500-60=440\) units of excess demand.
• At price 6: \(400-150=250\) units of excess demand.

(c) Excess supply occurs at prices above 7, where \(Q_s>Q_d\):

• At price 8: \(400-250=150\) units of excess supply.
• At price 9: \(500-150=350\) units of excess supply.
• At price 10: \(600-50=550\) units of excess supply.

(d) The supplier is willing to sell most at the highest price, 10, where he is willing to supply 600 units. This reflects the law of supply, that a higher price encourages a larger quantity supplied.

The compilation of National Income Accounts in Nigeria faces several problems:

• Inadequate and unreliable data: statistics are scarce, incomplete or inaccurate.
• Large subsistence sector: much output (for example food grown and consumed at home) is not sold in the market, so it is hard to value.
• Illiteracy: many producers keep no records and cannot supply accurate figures.
• Problem of double counting: difficulty in separating final goods from intermediate goods can lead to values being counted more than once.
• Large informal sector: many small traders and artisans are outside official records.
• Shortage of trained personnel: too few qualified statisticians to gather and process the data.
• Problem of transfer payments: deciding what to include or exclude (pensions, gifts) is difficult.
• Income earned abroad and by foreigners: hard to measure accurately.

a. Meaning of supply. The supply of a commodity is the quantity of that commodity which producers are willing and able to offer for sale at a given price over a given period of time. It is not merely the stock in existence, but the amount actually offered for sale at each price.

b. Factors that can change the supply of beans.

• Price of beans: a higher price encourages farmers to supply more, a lower price less.
• Cost of production: higher costs of seeds, fertiliser, labour or transport reduce supply.
• Weather and climate: good rainfall and favourable weather raise output, while drought, flood, pests or disease reduce it.
• State of technology: improved farming methods and equipment increase the quantity that can be supplied.
• Government policy: subsidies and low taxes raise supply, while heavy taxes reduce it.
• Prices of other crops: if maize becomes more profitable, farmers may switch land from beans, reducing bean supply.
• Number of farmers: more producers entering bean farming increases total supply.

Government takes part in business enterprise for the following reasons:

• To provide essential goods and services: utilities such as water, electricity and public transport that the citizens need but the private sector may neglect.
• To provide services too costly for private investors: projects requiring very heavy capital, such as railways, refineries and steel plants, are often beyond private means.
• To prevent exploitation by private monopolies: government provides some services itself to ensure fair prices and protect consumers.
• To create employment: public enterprises provide jobs and help reduce unemployment.
• To generate revenue: profitable state enterprises add to government income.

(Other valid reasons: to ensure even development across regions, and to control strategic industries important to national security.)

The Economic Community of West African States (ECOWAS) is a regional economic grouping. If it functions efficiently, it can hasten the economic growth of member states in the following ways:

• Creation of a larger market: the removal of trade barriers among members widens the market for each country's goods, encouraging greater production.
• Free movement of factors: free movement of goods, labour and capital allows resources to flow to where they are most productive.
• Economies of scale: firms produce for the whole region, lower their average costs and become more competitive.
• Industrialisation: the larger market and joint projects encourage the establishment of more industries.
• Increased intra-regional trade: members trade more among themselves, reducing dependence on countries outside the region.
• Joint development projects: members pool resources for roads, power and other infrastructure that single countries could not afford.
• Greater bargaining power: acting together, members negotiate better terms in world trade and attract more investment.

West African countries are described as under-developed because they show the typical features of poverty and low economic advancement:

• Low per-capita income: average income per person is low, so living standards are poor.
• Over-dependence on agriculture and primary products: economies rely heavily on the export of raw materials with little processing.
• Low level of savings and investment: because incomes are low, capital formation is small.
• Widespread illiteracy: low levels of education and skill limit productivity.
• Low level of technology: production relies on crude, out-of-date methods.
• High rate of population growth: rapid population increase outstrips output and strains resources.
• High unemployment and underemployment.
• Poor infrastructure: inadequate roads, power, water and communications.
• Dependence on foreign aid and external loans.

a. Definition of tariffs. Tariffs are taxes or duties imposed by a government on goods that cross its national boundary, chiefly on imports (and sometimes on exports). They raise the price of the affected goods.

b. Reasons for imposing tariffs.

• To raise government revenue: import and export duties are an important source of income.
• To protect infant industries: tariffs make imports dearer, giving young home industries room to grow.
• To prevent dumping: they discourage foreign firms from selling goods below cost in the home market.
• To correct a balance-of-payments deficit: tariffs reduce imports and so save foreign exchange.
• To protect employment: by discouraging imports, they safeguard jobs in local industries.
• For retaliation: a country may impose tariffs in response to tariffs placed on its own goods.