WAEC SSCE - Economics - 1994 (Essay)

Maelezo ya Majibu

(a) Capital market. The capital market is the market for the buying and selling of long-term securities, that is, financial instruments with a maturity of more than one year, such as shares, debentures, bonds and government stocks. It provides long-term funds to firms and governments and is made up of a primary market (where new securities are first issued) and a secondary market (where existing securities are resold), together with institutions such as the stock exchange, development banks, insurance companies and issuing houses.

(b) How the capital market differs from the stock exchange. The stock exchange is only part of the capital market. The stock exchange is the organised secondary market where existing (already issued) securities are bought and sold. The capital market is wider: it includes the stock exchange plus the primary market for new issues and the other institutions that supply long-term funds. In short, every stock exchange is part of the capital market, but the capital market is much more than the stock exchange.

(c) Advantages of the capital market:

• It mobilises long-term savings and channels them into productive investment.
• It provides long-term capital for firms and governments to finance expansion and development projects.
• The secondary market gives securities liquidity, so investors can sell when they need cash, which encourages people to invest.
• It encourages the saving and investment habit and widens share ownership.
• It provides a channel for privatisation and for attracting foreign investment.

Examination takeaway: the key distinction in (b) is scope, the stock exchange handles existing long-term securities, while the capital market covers new issues as well and the whole set of long-term-fund institutions.

Maelezo ya Majibu

(a) National debt. The national (public) debt is the total amount of money owed by the government of a country to its creditors, both at home and abroad, at a given point in time. It arises when the government repeatedly spends more than it receives in revenue and borrows to cover the deficits; the accumulated borrowing, together with the interest owed on it, forms the national debt.

It has two parts: the internal debt (owed to individuals, banks and institutions within the country) and the external debt (owed to foreign governments and institutions such as the World Bank).

(b) Four instruments of government borrowing in Nigeria:

1. Treasury bills short-term instruments (usually 91 days) sold to raise funds for a few months.
2. Treasury certificates medium-term instruments running for one to two years.
3. Federal Government development stocks (bonds) long-term securities used to raise money for development projects.
4. Ways and Means advances short-term borrowing by the government from the Central Bank to meet temporary cash shortfalls.

Examination takeaway: in part (b) name the actual instruments (bills, certificates, bonds, advances), not the general sources such as "the public" or "foreign countries".

Maelezo ya Majibu

We treat ages 17 to 60 as the working population and the rest (0 to 16 and above 60) as the dependent population (in thousands).

(a) Percentage increase in the working population, 1955 to 1960:

\[ \frac{140-80}{80}\times100 = \frac{60}{80}\times100 = 75\% \]

(b) Ratio of dependent to working population in 1955:

\[ 165 : 80 = 33 : 16 \approx 2.06 : 1 \]

(c) Ratio of dependent to working population in 1960:

\[ 160 : 140 = 8 : 7 \approx 1.14 : 1 \]

(d) The dependency ratio has decreased, falling from about 2.06 : 1 in 1955 to about 1.14 : 1 in 1960. Fewer dependants are now supported by each working person, because the working-age group grew sharply (up 75%) while the dependent group stayed roughly the same.

Maelezo ya Majibu

Primary production means the extractive activities that draw raw materials directly from nature, such as farming, mining, fishing and lumbering. Most West African economies earn the bulk of their income from a few unprocessed primary exports (cocoa, groundnut, crude oil, timber). This narrow dependence creates several economic problems.

• Price instability and unstable income. Prices of primary commodities fluctuate sharply on the world market because both demand and supply are inelastic. A poor harvest or a global glut swings export earnings wildly, making national income and government revenue unpredictable and planning difficult.
• Unfavourable terms of trade. The prices of primary exports tend to rise slowly (or fall) while the prices of the manufactured goods these countries import keep rising. A given quantity of exports therefore buys fewer imports over time, transferring real income abroad.
• Low income elasticity of demand. As world incomes rise, demand for foodstuffs and raw materials grows only slowly, so export earnings do not expand as fast as the country's need for imports.
• Balance of payments problems. Because export receipts are small and unstable while imports of manufactures and capital goods keep growing, these economies frequently run current-account deficits and pile up external debt.
• Low value added and slow industrial growth. Selling raw materials rather than finished goods means the value that would have been created by processing is captured abroad, so manufacturing, technology and skilled employment remain underdeveloped.
• Vulnerability to nature and to foreign control. Output depends on weather, pests and disease, and the volume and price are largely determined by foreign buyers, leaving the economy exposed and dependent.
• Unemployment and underemployment. Primary activities are seasonal, so labour is idle in the off-season, and mechanised mining employs few people.

Examination takeaway: group your points around price instability, unfavourable terms of trade, balance of payments strain and weak industrialisation, and explain why each follows from selling unprocessed primary goods rather than simply listing them.

Maelezo ya Majibu

This statement describes how a free market reaches equilibrium. The equilibrium price is the price at which the quantity that buyers wish to buy exactly equals the quantity that sellers wish to sell. Price tends to settle at this level because, whenever it is above or below equilibrium, market forces automatically push it back.

When price is above the equilibrium level: quantity supplied exceeds quantity demanded, so there is a surplus (excess supply). Sellers are left with unsold goods, so they compete by lowering their prices to clear stock. As the price falls, quantity supplied falls and quantity demanded rises, and the surplus shrinks. The price keeps falling until supply again equals demand.

When price is below the equilibrium level: quantity demanded exceeds quantity supplied, so there is a shortage (excess demand). Buyers compete for the limited goods and bid the price up. As the price rises, quantity demanded falls and quantity supplied rises, and the shortage shrinks. The price keeps rising until supply again equals demand.

Only at the equilibrium price is there neither surplus nor shortage, so there is no pressure for the price to change; the market is said to clear. This self-correcting behaviour of demand and supply is why economists say price tends towards the level which equates supply with demand. We can summarise it as:

• Price above equilibrium \(\Rightarrow\) surplus \(\Rightarrow\) price falls.
• Price below equilibrium \(\Rightarrow\) shortage \(\Rightarrow\) price rises.
• Price at equilibrium \(\Rightarrow\) quantity demanded \(=\) quantity supplied \(\Rightarrow\) price stable.

Graphically, equilibrium is the point where the demand curve and the supply curve cross; away from that point the gap between the curves creates the surplus or shortage that drives the price back towards it.

Maelezo ya Majibu

The International Monetary Fund (IMF) is a specialised agency of the United Nations set up in 1944 (Bretton Woods) to promote international monetary cooperation and orderly exchange arrangements. Its main functions are:

• Correcting balance of payments disequilibrium. It grants short-term and medium-term loans to member countries facing temporary balance of payments deficits, so that they can meet their international obligations without resorting to harmful trade restrictions.
• Promoting exchange-rate stability. It works to keep member currencies' exchange rates orderly and to discourage competitive devaluations that disrupt trade.
• Promoting international monetary cooperation. It provides a forum where member countries consult and collaborate on international monetary problems.
• Expanding world trade. By helping members settle payments and by encouraging the removal of exchange restrictions, it promotes the balanced growth of international trade, which raises income and employment.
• Providing international liquidity. It acts as a pool (reservoir) of members' currencies and creates Special Drawing Rights (SDRs) to supplement world reserves.
• Giving technical assistance and advice. It offers members expert advice on fiscal, monetary and exchange policy and carries out surveillance of their economies.

Examination takeaway: anchor your answer on the IMF's central purpose (curing balance of payments problems and keeping exchange rates stable) and separate it clearly from the World Bank, which finances long-term development projects.

Maelezo ya Majibu

Both are joint-stock companies formed by registration (incorporation) under the Companies Act, so they share several features before we look at their differences.

Similarities. Each is an incorporated body with a separate legal personality from its owners; the shareholders enjoy limited liability (they lose only what they invested); each has perpetual succession (it continues despite death of members); each is owned by shareholders but run by a board of directors.

Differences.

Examination takeaway: a "compare and contrast" answer must give both the shared features and the point-by-point differences on the same characteristic (membership vs membership, shares vs shares); a table earns marks cleanly.

Maelezo ya Majibu

(a) Main features of the Malthusian theory of population. Thomas Malthus (1798) argued that:

• Population, when unchecked, grows in a geometric progression (1, 2, 4, 8, 16 ...), roughly doubling every 25 years.
• The means of subsistence (food) can grow only in an arithmetic progression (1, 2, 3, 4, 5 ...) because land is fixed and subject to diminishing returns.
• Population therefore tends to outrun the food supply, pushing living standards down to subsistence level.
• The imbalance is corrected by positive checks that raise the death rate (famine, disease, war) and preventive checks that lower the birth rate (moral restraint, late marriage, celibacy).

(b) Developments that make the theory less relevant today.

• Agricultural revolution. Improved seeds, fertilisers, irrigation and mechanisation (the Green Revolution) have raised food output far faster than arithmetically, disproving the fixed-food assumption.
• Birth control. Modern contraception and family-planning programmes now limit births, something Malthus (who allowed only moral restraint) did not foresee.
• Opening of new lands and international trade. Countries can import food and settle new regions, so a nation's population is no longer tied to its own land.
• Industrialisation and rising incomes. Economic growth has raised living standards, and the demographic transition shows that richer, educated societies choose smaller families, so birth rates fall as income rises.
• Improved transport and medicine. Food can be moved quickly to shortage areas, and better health has changed the pattern of the positive checks.

Examination takeaway: note that the theory is not wholly dead. It still describes some poor, high-birth-rate economies, so a balanced answer says why technology, trade and birth control weakened its general validity.

Maelezo ya Majibu

(a) Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to a change in its price. It is given by \( E_d = \dfrac{\%\,\text{change in quantity demanded}}{\%\,\text{change in price}} \).

(b)(i) Elasticity of demand when price rises from N10.00 to N11.00. Quantity demanded falls from 1000 to 950.

\[ \%\,\Delta Q_d = \frac{950-1000}{1000}\times100 = -5\% \qquad \%\,\Delta P = \frac{11-10}{10}\times100 = 10\% \]

\[ E_d = \frac{5}{10} = 0.5 \]

(b)(ii) Since \( E_d = 0.5 < 1 \), the demand is inelastic.

(b)(iii) Elasticity of supply when price falls from N10.00 to N9.00. Quantity supplied falls from 1000 to 850.

\[ \%\,\Delta Q_s = \frac{850-1000}{1000}\times100 = -15\% \qquad \%\,\Delta P = \frac{9-10}{10}\times100 = -10\% \]

\[ E_s = \frac{15}{10} = 1.5 \]

(b)(iv) Since \( E_s = 1.5 > 1 \), the supply is elastic.

Maelezo ya Majibu

Money is anything that is generally acceptable as a medium of exchange and in the final settlement of debts. Its acceptability, rather than the material it is made of, is what makes it money.

Characteristics (qualities) of good money:

• General acceptability. It must be freely accepted by everyone in exchange for goods and services; this is the most important quality.
• Durability. It should last long and not wear out or perish quickly, so it can circulate repeatedly.
• Portability. It should be easy to carry about, so that large value can be moved without difficulty.
• Divisibility. It must be capable of being divided into smaller units without losing value, so it can pay for both cheap and costly items.
• Homogeneity (uniformity). Units of the same denomination must be identical in quality and value.
• Relative scarcity. It must be limited in supply; if it were too plentiful it would lose value.
• Stability of value. Its purchasing power should not change too sharply, so that people trust it as a store of value.
• Recognisability (cognisability). It should be easy to identify and difficult to forge.

Examination takeaway: define money by its function (general acceptability as a medium of exchange), then list the qualities and add one line explaining why each quality matters, rather than naming them bare.