WAEC SSCE - Economics - 2005 (Essay)

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Role of development banks in the economic development of West African countries:

• Provision of long- and medium-term finance: They supply the long-term capital needed to establish and expand industries, agriculture and other projects that commercial banks are unwilling to finance.
• Financing of priority sectors: They channel funds into key development areas such as manufacturing, agriculture, housing and infrastructure, promoting balanced growth.
• Promotion of industrialisation and diversification: By funding new industries they help reduce dependence on a few primary exports and create a more diversified economy.
• Provision of technical and managerial advice: They carry out feasibility studies and give advisory services that improve the success rate of the projects they finance.
• Mobilisation of domestic and foreign capital: They raise savings at home and attract foreign investment and aid for development purposes.
• Encouragement of entrepreneurship and employment: By financing new ventures, including small and medium enterprises, they create jobs and develop indigenous entrepreneurs.
• Equity participation: They sometimes take up shares in enterprises, sharing risk and strengthening the capital base of firms.

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The three columns are linked by \( \text{Income per day} = \text{Wage rate} \times \text{Hours worked} \). We rearrange this to fill the gaps.

(a) Hours worked \( = \dfrac{\text{Income}}{\text{Wage rate}} \):

• (i) At \$10 per hour: \( 10 \div 10 = 1 \) hour.
• (ii) At \$20 per hour: \( 60 \div 20 = 3 \) hours.
• (iii) At \$30 per hour: \( 150 \div 30 = 5 \) hours.

(b) Income per day \( = \text{Wage rate} \times \text{Hours} \):

• (i) At \$40: \( 40 \times 6 = \$240 \).
• (ii) At \$50: \( 50 \times 4 = \$200 \).
• (iii) At \$60: \( 60 \times 3 = \$180 \).

Completed table

Wage rate ($/hour)	Hours worked/day	Income/day ($)
10	1	10
20	3	60
30	5	150
40	6	240
50	4	200
60	3	180

(c)(i) The wage rate of \$40 per hour attracts the highest earnings, \$240 per day.

(c)(ii) The data give a backward-bending (regressive) supply curve of labour.

(c)(iii) Up to \$40 per hour, higher wages induce the worker to offer more hours (1, 3, 5, 6), so supply slopes upward. Beyond \$40, further wage increases cause hours to fall (6, 4, 3): the worker now feels rich enough to buy more leisure, so the income effect outweighs the substitution effect and the curve bends backward on itself.

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Four ways industrial development can promote agricultural productivity:

• Supply of farm inputs and machinery: Industries produce fertilisers, improved seeds, pesticides, tractors and other implements that raise crop and livestock yields.
• Provision of a market for agricultural raw materials: Agro-based industries (food processing, textiles, breweries) buy farm produce, giving farmers a steady, profitable outlet that encourages them to produce more.
• Processing and reduction of wastage: Processing and storage industries (canning, milling, refrigeration) preserve produce, reduce post-harvest losses and add value, raising farmers' incomes.
• Provision of infrastructure and employment/income: Industrial growth develops roads, power and credit facilities that serve agriculture, and the incomes earned in industry raise demand for food while some earnings are reinvested in farming. (Research and improved packaging by industries also improve quality and reduce spoilage.)

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(a) Public company versus public corporation:

Public company (public limited company)	Public corporation (statutory corporation)
A private-sector business owned by shareholders who buy its shares, which are freely transferable on the stock exchange.	A state-owned enterprise set up by government to provide essential goods or services.
Formed by registration under the Companies Act (memorandum and articles of association).	Established by a special Act of Parliament (statute) which defines its powers.
Its main aim is to make profit for the shareholders.	Its main aim is public service/welfare rather than maximum profit.
Capital is raised through the sale of shares and debentures to the public.	Capital is provided mainly by government from public funds.

(b) Problems of public corporations:

• Inefficiency and bureaucracy: Red tape and lack of the profit motive lead to waste and poor service.
• Political interference: Government appoints board members and dictates policy, often on political rather than economic grounds.
• Inadequate funding and heavy losses: Reliance on government subventions and frequent losses starve them of capital.
• Corruption and mismanagement: Embezzlement, over-staffing and poor management reduce productivity, and monopoly status removes the pressure to improve.

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(a) Trade by barter is the direct exchange of goods and services for other goods and services without the use of money. One person gives what he has in exchange for what he needs directly from another person, for example exchanging yams for cloth.

(b) Problems posed by trade by barter:

• Lack of double coincidence of wants: Exchange occurs only when each party has exactly what the other wants and wants exactly what the other has, which is difficult to achieve.
• Indivisibility of some goods: Goods such as a cow or a house cannot be split into small units to match the value of what is wanted in exchange.
• Absence of a common measure of value: There is no single yardstick for expressing the worth of goods, making it hard to fix rates of exchange.
• Difficulty in storing value: Wealth held as goods (especially perishables) deteriorates and cannot be stored for the future.
• Difficulty in deferred/future payments: Lending and repayment are hard because of disputes over the quality and quantity of goods to be returned later. (Bulkiness and problems of transporting goods for exchange are additional difficulties.)

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(a) A balance of payments deficit exists when a country's total payments to other countries (for imports of goods and services, and capital outflows) exceed its total receipts from them (from exports and capital inflows) over a given period. In other words, the country's foreign expenditure is greater than its foreign earnings, so it is a net debtor for that period, usually shown as an overall (or current-account) deficit financed by drawing on reserves or borrowing.

(b) Four measures to reduce a balance of payments deficit:

• Reduce imports: Impose or raise tariffs, quotas and import restrictions, and promote import-substitution industries and local production.
• Promote exports: Give incentives such as export subsidies, better quality and diversification of exports to earn more foreign exchange.
• Devaluation of the currency: Lowering the external value of the currency makes exports cheaper and imports dearer, improving the balance (provided demand is sufficiently elastic).
• Deflationary (contractionary) policies: Reduce domestic demand and incomes through higher taxes and reduced government spending or tighter money, cutting the demand for imports. (Exchange control and borrowing from abroad or the IMF can also help in the short run.)

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From the diagram, the demand curve DD cuts the original supply curve SS at the initial equilibrium of quantity \(30\) tonnes and price \(\$100\) per tonne. When supply shifts to \(S_1S_1\), the new equilibrium is at quantity \(40\) tonnes and price \(\$40\) per tonne. All working below uses these read-off values.

(a)(i) Total revenue at the initial equilibrium

Total revenue is price multiplied by quantity sold, \(TR = P \times Q\).

\[TR = \$100 \times 30 = \$3{,}000\]

The farmer earns \(\$3{,}000\) at the initial equilibrium.

(a)(ii) Total revenue after supply shifts to \(S_1S_1\)

\[TR_1 = \$40 \times 40 = \$1{,}600\]

After the shift the farmer earns \(\$1{,}600\).

(b) Change in total revenue when price falls from \(\$100\) to \(\$40\) per tonne

\[\Delta TR = TR_1 - TR = \$1{,}600 - \$3{,}000 = -\$1{,}400\]

Total revenue falls by \(\$1{,}400\). Notice that although more maize is now sold (\(40\) tonnes instead of \(30\)), revenue still drops. This happens because the price cut of \(60\%\) is far larger in proportion than the rise in quantity, which is the tell-tale sign of an inelastic demand, confirmed below.

(c)(i) Price elasticity of demand for maize

Elasticity is measured along the demand curve DD, using the two price-quantity points it passes through: \((P=100,\ Q=30)\) and \((P=40,\ Q=40)\). Taking the first point as the base:

\[E_d = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}} = \frac{\Delta Q / Q_1}{\Delta P / P_1}\]\[\Delta Q = 40 - 30 = 10, \qquad \Delta P = 40 - 100 = -60\]\[E_d = \frac{10/30}{-60/100} = \frac{0.3333}{-0.6} = -0.56\]

Ignoring the negative sign (which merely reflects the downward-sloping demand curve), \(|E_d| \approx \mathbf{0.56}\).

(c)(ii) Interpretation

Since \(|E_d| = 0.56 < 1\), the demand for maize is price inelastic. A \(1\%\) change in price brings about only about a \(0.56\%\) change in quantity demanded, so buyers are not very responsive to price changes. This is typical of a food staple like maize, and it explains the paradox in part (b): cutting the price shrinks the farmer's total revenue rather than raising it.

(d) Two reasons for the shift of supply from SS to \(S_1S_1\)

The curve shifts outward to the right, meaning more is supplied, so the causes are factors that make production easier or cheaper:

1. Favourable weather / good rainfall during the growing season, giving a larger harvest at every price.
2. A fall in the cost of production (for example cheaper fertiliser, seeds or fuel) or a government subsidy to maize farmers, both of which raise the quantity farmers are willing to supply. Improved technology or high-yield seed varieties would have the same effect.

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(a) Capital goods are man-made goods that are not wanted for their own sake but are used to produce other goods and services. They are producer goods such as machinery, tools, factory buildings, equipment and raw materials. Unlike consumer goods, they satisfy wants indirectly by aiding further production.

(b) Problems associated with the distribution of goods:

• Poor transport network: Bad roads, few railways and inadequate transport raise costs and delay the movement of goods from producers to consumers, and cause spoilage of perishables.
• Inadequate storage and warehousing facilities: Lack of good storage leads to wastage, hoarding and seasonal scarcity.
• Too many middlemen: A long chain of intermediaries widens the gap between producer and consumer prices and increases the final price paid by consumers.
• Inadequate market information and communication: Producers and buyers lack information on prices and supply, leading to gluts in one area and scarcity in another.
• Insufficient capital and hoarding/adulteration: Distributors may lack funds to hold stock, and dishonest practices such as hoarding to create artificial scarcity distort distribution. (Insecurity and multiple taxes on the roads also hamper distribution.)

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(a) Taxation is the compulsory levy imposed by government on the incomes, profits, property, goods and services of individuals and firms, without a direct quid pro quo, in order to raise revenue and achieve certain economic and social objectives.

(b) Four ways government can use taxation to improve the economy:

• To raise revenue for public expenditure: Tax proceeds finance roads, schools, hospitals, security and other development projects that improve the economy.
• To redistribute income: Progressive taxes on the rich, used to fund services and transfers for the poor, reduce inequality in the distribution of income.
• To control inflation and regulate demand: Raising taxes reduces disposable income and aggregate demand, curbing inflation; lowering taxes stimulates demand during a slump.
• To protect infant industries and correct balance of payments: High import duties discourage imports, protect local industries and improve the balance of payments; taxes can also discourage harmful goods (e.g. heavy duties on tobacco) and encourage desired activities through tax reliefs.

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(a) Two differences between monopoly and perfect competition:

Monopoly	Perfect competition
There is only one seller (a single firm) supplying the whole market.	There are very many sellers, each supplying a tiny share of the market.
The firm is a price maker; it can influence price by varying output.	The firm is a price taker; it accepts the market price.
There are strong barriers to entry, so no new firms enter.	There is free entry into and exit from the industry.
The product has no close substitutes.	Products are homogeneous (identical).

(Any two of the above pairs are acceptable.)

(b) Four entry barriers that can prevent the emergence of competitive firms:

• Legal barriers: Patents, licences, copyrights or sole government franchise reserve production to one firm.
• Control of an essential raw material or resource: One firm owning the key input can shut out rivals.
• High capital/set-up costs and economies of scale: Large minimum investment and cost advantages of existing large firms discourage new entrants.
• Ownership of superior technology or exclusive knowledge (technical barriers), or aggressive strategies such as predatory pricing and strong brand loyalty that make entry unprofitable.

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(a) Net migration is the difference between the number of people entering a country or area (immigrants/in-migrants) and the number leaving it (emigrants/out-migrants) over a given period. When in-migration exceeds out-migration the net migration is positive (net gain of population); when out-migration exceeds in-migration it is negative (net loss).

(b) Four economic effects of rural-to-urban migration:

• Reduced agricultural output in rural areas: The movement of able-bodied youths to the towns leaves farming to the aged, lowering food production and rural incomes.
• Urban unemployment and underemployment: Migrants often exceed the jobs available in the towns, raising urban unemployment and encouraging the growth of the informal sector.
• Pressure on urban infrastructure and social services: Overcrowding strains housing, water, electricity, transport and health facilities, leading to slums and higher living costs.
• Supply of labour and skills to industry, but rising social costs: Towns gain cheap labour for industry and commerce, yet also suffer congestion, crime and pollution. (Rural areas may benefit from remittances sent home by migrants.)

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(a) Personal income versus national income: Personal income is the total income actually received by an individual or household within a given period from all sources, including wages, rent, interest, profit and transfer payments such as pensions and gifts. National income is the total money value of all final goods and services produced by the residents of a country, plus net income from abroad, within a given period (usually one year). Thus personal income refers to one person/household, while national income is the aggregate income of the whole nation; national income excludes transfer payments (which are not payment for current production), whereas personal income includes them.

(b) Four uses of national income data:

• To measure the standard of living: Real national income per head (per-capita income) indicates the average welfare of the people and changes in it over time.
• For comparison between countries: It allows comparison of the size, structure and growth of different economies.
• To measure economic growth and performance: Changes in real national income from year to year show whether the economy is growing or declining.
• As a guide to government planning and policy: The figures reveal the contribution of each sector and guide the framing of economic policy and development plans. (They also help in the distribution of income and in determining a country's ability to pay international contributions.)