WAEC SSCE - Economics - 2009 (Essay)

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The Economic Community of West African States (ECOWAS) was established in 1975 (Treaty of Lagos) to promote co-operation and integration among West African countries. Five of its objectives are:

1. Promotion of trade among member states. ECOWAS aims to remove trade barriers such as tariffs and quotas between members so as to create a large single West African market and increase intra-regional trade.
2. Free movement of persons, goods, capital, and services. It seeks to allow citizens, goods, and factors of production to move freely across member states, including the right of residence and establishment.
3. Harmonisation of economic policies. It aims to co-ordinate and harmonise the economic, industrial, agricultural, monetary, and fiscal policies of member states, including working towards a common currency.
4. Joint development of infrastructure and resources. It promotes the joint development of transport, communications, energy, and other infrastructure, and the shared exploitation of the region's natural resources.
5. Raising the standard of living and promoting economic development. Its overall aim is to accelerate the economic growth and development of the region and improve the welfare and standard of living of its peoples.

(Other acceptable objectives: maintenance of peace, security, and stability in the region; promotion of industrial and agricultural development; and fostering closer relations and unity among member states.)

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(a) Distinguishing the cost concepts.

• (i) Fixed cost vs variable cost. Fixed cost is a cost that does not change with the level of output in the short run; it is incurred even when output is zero (for example rent, insurance, salaries of permanent staff). Variable cost is a cost that changes directly with the level of output, rising as output rises and falling as it falls (for example raw materials, wages of casual labour, fuel).
• (ii) Real cost vs money cost. Real cost is the cost of producing a good measured in terms of the effort, sacrifice, and other goods forgone to produce it (an opportunity-cost idea). Money cost is the actual amount of money spent by the firm on the factors of production used to produce the good.
• (iii) Implicit cost vs explicit cost. Implicit cost is the value of the owner's own resources used in the business for which no actual money payment is made (for example the rent forgone on the owner's own building or the salary he could have earned elsewhere). Explicit cost is the actual money payment made to outsiders for factors and inputs (for example wages, purchases of raw materials, rent paid).

(b)(i) Recommendation when average cost is greater than price. When \( AC > P \), the firm is making a loss on each unit. In the short run the firm should continue to produce provided the price is still above average variable cost, so that it can cover its variable costs and part of its fixed costs; if the price is below average variable cost, it should shut down. In the long run, if the loss persists, it should close down and leave the industry.

(b)(ii) Reason. Fixed costs must be paid whether or not the firm produces. As long as price covers average variable cost and leaves something towards fixed cost, producing gives a smaller loss than closing (which would mean losing the whole of the fixed cost), so it pays to keep operating in the short run.

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(a) Chain of distribution for manufactured consumer goods. This is the route a good follows from where it is made to the final user. The usual chain is:

Manufacturer (producer) → Wholesaler → Retailer → Consumer.

The manufacturer makes the goods, sells them in bulk to the wholesaler, who breaks the bulk and supplies smaller quantities to retailers, who then sell in the smallest quantities to final consumers. (In some cases an agent or middleman links the manufacturer and the wholesaler.)

(b)(i) Functions of the wholesaler.

• Buying in bulk and breaking bulk. He buys large quantities from manufacturers and sells them in smaller quantities to retailers.
• Storage (warehousing). He holds stocks of goods until they are needed, thereby relieving both the manufacturer and the retailer of the burden of storage.
• Bearing risk. He carries the risks of price changes, deterioration, and loss while the goods are in his possession.
• Providing finance. By paying the manufacturer promptly and often granting credit to retailers, he finances part of the chain.
• Transportation and preparation. He moves goods from the factory and may grade, pack, and brand them for the retailer.

(b)(ii) Functions of the retailer.

• Selling in small quantities. He breaks the wholesaler's bulk further and sells to consumers in the small amounts they can afford.
• Bringing goods near the consumer. By operating shops in convenient locations, he makes goods readily available to final buyers.
• Providing variety and information. He stocks a range of goods so consumers can choose, and advises them on the qualities and uses of products.
• Granting credit and after-sales service. He may sell on credit and offer services such as delivery and repairs.
• Holding small stocks and advising producers. He keeps ready stock for immediate sale and passes consumers' preferences back up the chain.

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(a) Effects of fixing a price away from equilibrium. Equilibrium price is where the demand and supply curves intersect, so quantity demanded equals quantity supplied.

(i) Price fixed above the equilibrium price (a minimum price or price floor). At a price higher than equilibrium, quantity supplied exceeds quantity demanded, so a surplus (excess supply) results. Producers offer more than consumers are willing to buy, leaving unsold goods. Governments often set such a floor to protect producers (for example a guaranteed minimum price for farmers), and may have to buy up the surplus. On a demand-and-supply diagram, the controlled price is drawn as a horizontal line above the equilibrium, and the horizontal gap between the supply and demand curves at that price measures the surplus.

(ii) Price fixed below the equilibrium price (a maximum price or price ceiling). At a price lower than equilibrium, quantity demanded exceeds quantity supplied, so a shortage (excess demand) results. Governments set such a ceiling to help consumers buy essential goods cheaply, but the shortage often leads to rationing, queues, hoarding, and a black market. On the diagram, the controlled price is a horizontal line below the equilibrium, and the horizontal gap between the demand and supply curves at that price measures the shortage.

(b)(i) Abnormal demand. Abnormal (or exceptional) demand is a situation in which more of a good is bought as its price rises and less is bought as its price falls, contrary to the ordinary law of demand. The demand curve for such a good slopes upward from left to right.

(b)(ii) Two reasons for its occurrence.

• Giffen goods. These are inferior staple goods (for example a cheap staple food) on which poor consumers spend a large part of their income; when the price rises they become poorer in real terms and buy even more of the cheap staple, cutting out dearer substitutes.
• Goods of ostentation (Veblen/prestige goods) and expectation of further price changes. For prestige goods (for example diamonds), a higher price raises their appeal, so more is demanded; also, if buyers expect prices to keep rising, they buy more now despite the higher price.

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(a)(i) Devaluation. Devaluation is a deliberate reduction in the official (external) value of a country's currency in relation to other currencies (or gold) by the government or monetary authority, under a fixed exchange-rate system. It makes the country's exports cheaper and its imports dearer.

(a)(ii) Depreciation of currency. Depreciation is a fall in the external value of a country's currency brought about by the free forces of demand and supply in the foreign-exchange market, under a floating (flexible) exchange-rate system, rather than by a government decision. The key difference is that devaluation is a deliberate act of the authorities under a fixed rate, while depreciation happens automatically through market forces under a floating rate.

(b) Three measures to correct a balance of payments deficit. A deficit means the country's total payments to abroad exceed its total receipts from abroad.

1. Devaluation of the currency. Reducing the external value of the currency makes exports cheaper and imports dearer, so exports rise, imports fall, and the deficit narrows.
2. Import restrictions. Imposing tariffs, quotas, or an outright ban on non-essential imports reduces the amount spent abroad and improves the balance.
3. Deflationary (contractionary) policy. Reducing domestic demand through higher taxes, reduced government spending, and higher interest rates lowers spending on imports and frees goods for export. (Other valid measures: export promotion and diversification, exchange control, and seeking foreign loans or aid.)

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(a) Definition of labour. Labour is any physical or mental human effort directed towards the production of goods and services in return for a reward (wages or salary). As a factor of production, it refers to the human effort, skill, and ability used in production, and its reward is wages.

(b) Four factors that affect the efficiency of labour. Efficiency of labour is the ability of a worker to produce a large quantity of good-quality output within a given time.

1. Education and training. A well-educated, well-trained, and skilled worker performs tasks faster and better, so improved education and vocational training raise labour efficiency.
2. Level of technology and quality of equipment. Workers who use modern, efficient machines and tools produce more and better output than those using crude or obsolete equipment.
3. Health and welfare of the worker. Healthy, well-fed workers with good medical care and housing are stronger and more productive, whereas sick or poorly fed workers are less efficient.
4. Wages, incentives, and conditions of work. Adequate and prompt wages, bonuses, promotion prospects, and good working conditions motivate workers to put in more effort, raising efficiency; poor pay and conditions lower it. (Other valid factors: managerial and organisational ability, job security, and the natural ability and attitude of the worker.)

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(a) Capital market. A capital market is a market for the buying and selling of long-term financial securities, that is, funds and instruments that mature in more than one year. It brings together those who have surplus long-term funds (lenders and investors) and those who need long-term funds (governments and firms) for investment. Its institutions include the stock exchange, development banks, insurance companies, and issuing houses.

(b) Three instruments used in the capital market.

1. Shares (equities). A share is a unit of the ownership capital of a company. A shareholder is part-owner of the company and receives a share of profit called a dividend. Ordinary shares carry voting rights but variable dividends, while preference shares carry a fixed rate of dividend paid before ordinary shares but usually no voting rights.
2. Debentures (bonds/loan stock). A debenture is a written acknowledgement of a long-term loan to a company. The holder is a creditor, not an owner, and receives a fixed rate of interest whether or not the company makes a profit; the loan is repaid on maturity, and it may be secured on the company's assets.
3. Government stocks (development or government bonds). These are long-term securities issued by government to borrow from the public for development projects. They carry a fixed rate of interest and are repaid at a stated future date, and they are regarded as very safe investments.

(Other acceptable instruments include mortgages and treasury certificates of longer maturity.)

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(a) Direct tax versus indirect tax.

• Direct tax is a tax levied directly on the income or property of individuals and firms, where the person taxed also bears the burden and cannot easily shift it to another. The impact and the incidence fall on the same person. Examples: personal income tax (PAYE), company (corporate) tax, capital gains tax, and property tax.
• Indirect tax is a tax levied on goods and services, where the tax is collected from one person (for example the trader) but its burden can be shifted to another (the final consumer) through higher prices. The impact and the incidence fall on different persons. Examples: import and export duties (customs duties), excise duties, value added tax (VAT), and sales tax.

In short, a direct tax is paid on what you earn or own and cannot be shifted, while an indirect tax is paid on what you spend and its burden can be passed on.

(b) Four problems of tax collection in a West African country.

1. Widespread tax evasion and avoidance. Many taxpayers deliberately understate their incomes or fail to pay, and self-employed people whose incomes are hard to assess escape the net.
2. Inadequate and dishonest tax personnel. Shortage of trained, honest tax officials, together with corruption and collusion, leads to under-assessment and loss of revenue.
3. Absence of proper records and a large informal sector. Poor record-keeping, illiteracy, and a large number of small, unregistered businesses make it difficult to determine and collect the correct tax.
4. Poor administration and taxpayer resistance. Weak machinery for assessment and collection, a low tax culture, and public resentment (especially where taxes seem high or benefits are not seen) make collection difficult. (Other valid points: high cost of collection and inaccurate population/income data.)

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OPEC is an intergovernmental cartel of major crude-oil exporting nations formed in 1960 to co-ordinate and unify the petroleum policies of its members. Its continued existence rests on the shared economic interests that a single producer, acting alone, cannot secure. Five reasons are:

1. To stabilise crude-oil prices. Oil demand is price-inelastic in the short run, so uncontrolled competition among exporters would cause violent price swings. By co-ordinating supply, OPEC smooths prices and protects members from ruinous price collapses.
2. To regulate output through production quotas. Members share the world market by agreeing on how much each may produce. Restricting total supply keeps prices at a remunerative level and prevents a glut that would depress revenue.
3. To secure fair and stable revenue for member states. Most members are developing, mono-cultural economies that depend heavily on oil earnings to finance national budgets and development plans; OPEC helps guarantee a steady and adequate income stream.
4. To present a united bargaining front against powerful buyers. Acting collectively gives members far greater negotiating strength against the large multinational oil companies and consuming nations than any single country would have alone.
5. To protect the long-term value of an exhaustible resource and share technical information. Members co-operate to conserve a wasting asset, ensure a steady supply to consumers, and exchange technical, geological and market expertise for mutual benefit.

Examination reminder: frame each reason around a collective economic gain that individual action could not achieve, since that co-operative logic is the reason the cartel survives.

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(a) Why scarcity is a fundamental problem in Economics. Scarcity means that human wants are unlimited while the resources (land, labour, capital, and enterprise) available to satisfy them are limited. Because resources are limited relative to wants, society cannot produce everything everyone desires, so it is forced to make choices about how to use those scarce resources. This act of choosing gives rise to opportunity cost (the next best alternative given up) and to the three basic questions of what, how, and for whom to produce. Since every other economic decision flows from this need to allocate limited resources among competing unlimited wants, scarcity is the fundamental problem that Economics exists to study.

(b) Economics as a science and a social science.

• (i) A science. Economics is a science because it uses a systematic method of study: it observes economic facts, forms hypotheses, tests them, and derives laws and theories (for example the law of demand) that can be used to predict behaviour.
• (ii) A social science. It is a social science because it studies the behaviour of human beings in society, specifically how people and groups make choices in producing, distributing, and consuming wealth, rather than studying non-living matter.

(c) How governments solve the problem of scarcity. Government cannot abolish scarcity, but it can manage it by allocating resources more efficiently. Ways include:

1. Setting priorities through planning and budgeting. Government decides which needs are most urgent and directs resources to them.
2. Increasing the supply of resources. Through education and training it improves labour, and through investment it increases capital and develops natural resources.
3. Encouraging efficient use of resources. By improving technology and reducing waste, more output is obtained from the same resources.
4. Controlling and rationing. Through price controls, taxation, subsidies, and rationing, government influences how scarce goods are shared.
5. Encouraging production and imports. Incentives to producers and importation of scarce goods increase the quantity available to satisfy wants.

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The natural growth rate per '000 is the birth rate minus the death rate: \( \text{NGR} = \text{Birth rate} - \text{Death rate} \). We rearrange this to find each missing value.

(a) Missing values

• L (1971 NGR) \( = 45 - 32 = \mathbf{13} \).
• P (1972 death rate): \( 39 - P = 12.50 \Rightarrow P = 39 - 12.50 = \mathbf{26.50} \).
• Q (1973 NGR) \( = 26 - 22 = \mathbf{4} \).
• R (1974 birth rate): \( R - 22.50 = 4.50 \Rightarrow R = 22.50 + 4.50 = \mathbf{27} \).
• S (1975 NGR) \( = 26.50 - 22.50 = \mathbf{4} \).
• T (1976 death rate): \( 20.50 - T = 3.00 \Rightarrow T = 20.50 - 3.00 = \mathbf{17.50} \).

(b) Bar chart. On the horizontal axis mark the years 1971 to 1976 with equal spacing; on the vertical axis mark the natural growth rate from 0 to about 14 (scale, for example, 1 cm to 2 units). Draw one vertical bar of equal width for each year with heights 13.00, 12.50, 4.00, 4.50, 4.00 and 3.00 respectively. Leave equal gaps between the bars and title the chart "Natural growth rate of country N, 1971 to 1976". The bars show a sharp drop after 1972.

(c) Three reasons for changes in the birth rate:

• The level of education and awareness of family planning and contraception.
• Cultural and religious beliefs and attitudes toward large families.
• The average age of marriage and the number of women in paid employment, which affects how many children couples have.

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The twenty incomes (in \$00) are: 30, 20, 50, 40, 60, 40, 40, 50, 20, 60, 80, 40, 20, 20, 70, 40, 70, 30, 40, 80. Their total is \( \sum x = 900 \) (in \$00), that is \$90,000.

(a)(i) Mean income. \[ \bar{x} = \frac{\sum x}{n} = \frac{900}{20} = 45\;(\$00) = \$4{,}500 \]

(a)(ii) Modal income. Arranging the values by frequency, the income 40 (\$4,000) occurs six times, more than any other, so the mode = \$4,000.

(a)(iii) Median income. Arranging in order: 20, 20, 20, 20, 30, 30, 40, 40, 40, 40, 40, 40, 50, 50, 60, 60, 70, 70, 80, 80. With 20 items, the median is the average of the 10th and 11th values, both 40, so the median = \$4,000.

(b) Range. \[ \text{Range} = \text{highest} - \text{lowest} = 80 - 20 = 60\;(\$00) = \$6,000 \]

(c)(i) Flat tax of 7% on all households. Total income \( = \$90,000 \). \[ \text{Tax} = 7\% \times 90{,}000 = \frac{7}{100}\times 90{,}000 = \$6{,}300 \]

(c)(ii) Flat tax of 15% on households earning \$4,000 and above. Households below \$4,000 are those earning \$2,000 (four households) and \$3,000 (two households), a total of \( 4(20) + 2(30) = 80 + 60 = 140 \) (\$00) = \$14,000, which is exempt. Taxable income \( = 900 - 140 = 760 \) (\$00) = \$76,000. \[ \text{Tax} = 15\% \times 76{,}000 = \frac{15}{100}\times 76{,}000 = \$11{,}400 \]