Gat Economics Nov 2006

7/30/2019 Gat Economics Nov 2006

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GAT ECONOMICS NOV 2006

Question 1

a) Wants are desires of people to obtain and use various goods and services which provide utility

or satisfaction. Wants are what human beings wish to desire to have. These wants are

unlimited. In Economics, however, not all wishes and desires are classified as wants. For

example, the desire to be on the surface of the sun is not an economic want as at now.

b) 1. Wants are unlimited in number as one want is satisfied another takes its place. For example,

the satisfaction of the want of an apartment creates new wants for furnishing.

2. Wants differ in importance some are more urgent than others. Generally, the most important

wants are called basic wants or necessities and include food, clothing and shelter. These are thefirst to be satisfied, followed by the less important wants.

3. Wants change over time due to factors such as income changes, tastes, diets, fashion and

climate.

4. Resources, or the means to satisfy wants, are relatively scarce and have alternative uses.

c) Land , a productive resource is all the natural resources, all gifts of nature such as arable

land , forests, mineral and oil deposit and water resources.

Capital is all manufactures aids to production, that is all, tools, machinery, equipment, and

factory, storage facilities, transportation and distribution facilities used in producing goods and

getting them to the ultimate consumer.

Labour is a catchall word that refers to all the physical and mental talents of men and women

available and usable in the production of goods and services. Examples of labour services are

the services of lecturers, office clerks, dentists football players etc.

- Entrepreneurship T his factor of production cloud be referred to as the factor that gives

birth to any productive activity. Some of the duties of the entrepreneur are the entrepreneur

takes the initiative in combining the resources of land, labour and capital to produce a good


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or a service: the entrepreneur makes basic business-poly decisions which set the course and

the direction of a business enterprise: the entrepreneur is the innovator etc.

d) At any point in time, the human beings are faced with many wants which are unlimited.

However, the economic resources to satisfy these wants are limited. This implies that man is

confronted with the problem of unlimited wants and limited economic resources giving birth to

the basic economic problem scarcity or resources in the face of unlimited wants. Relativescarcity of economic resources is therefore, the fundamental economic problem ( the imbalance

between resources and wants) .

Question 2

a.

b. The equilibrium price and quantity are 5,500 and 450 kilos respectively

c. i. Excess supply of 500 kilos (AB)ii. Excess demand of 700 kilos (ZY)

d. i. Depict in diagram as D1 (decrease in demand)

ii. The new equilibrium price and quantity are 4,000 and 300 kilos respectively.

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iii. The decrease in demand to D1 created surplus at the equilibrium price of 5,500. In the

face of the surplus, price begins to fall quantity demanded and supplied declined along D1 and

S0 until the new equilibrium price and quantity are attained.

Question 3

a. A change in price changes quantity supplied of a commodity not supply. Kofis statement

is false.

b. If the demand for a commodity is elastic, it means a given percentage fall in price will lead

to a greater percentage increase in quantity demanded. Total expenditure on the commodity

increases. Amas statement is valid.

c. Substitutes are commodities that serve nearly the same purpose. If the price of commodity

A increases its quantity demanded will fall. Since commodities A and B are substitutes the

demand for commodity B will increase. Kwames statement is true.

d. Inferior goods per se are not exceptions to the law of demand. Giffen goods are the only

exception to the law of demand. Belindas statement is wrong.

e. The demand curve for a firm is a perfectly market is horizontal and parallel to the quantity

axis because the individual firm is a price taker. However, the demand curve for the market

is negatively sloped. This is because for the whole market to sell more of its output price

must fall. Daniels statement is false.

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Question 4

The expenditure approach involves totaling expenditure by individuals, firms and the state on goods

and services, be they consumption or investment goods.

Symbolically, GDE C + I + G + (X-M) .

where:

C = Personal consumption expenditure is made up of expenditure by households ondurable and non-durable goods and services. For example, household expenditure

on plantain, cars shoes, etc.

I = Gross Private Domestic Investment, i.e. business fixed investment

e.g. plant and machinery, all construction such as business and residential

buildings and changes in inventory.

G = government Purchases of final Goods and services consist of central

government expenditure on defence, wages and salaries of government

employees and other expenditure on and by local authority. However,

it excludes all government transfer payments because such outlays do

not reflect any current production.

(X-M) = net exports:- these consist of exports of goods and services minus

imports of goods and services.

C + I + G = Total domestic Expenditure at market price (TDE M)

TDE M + (X M) = Gross domestic Expenditure at market price (GDE M)

GDE M + P = GNE M

GNE M Depreciation NNE M

NNE M indirect taxes + subsidies = NNE at factor cost

NNE at factor cost = National Income

b. 1. A good deal of the estimates of private consumption relies on population. In addition, the

reliability of the estimates depends on regular household surveys that may be a very expensive

venture.

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2. Difficulties in estimating exports and imports values: Under invoicing and over invoicing of

imports and exports makes it extremely difficult to determine the actual value of net exports.

This problem tends to grossly understate or overstate the national income statistics.

3. Multiple counting: This occurs when a unit of expenditure is counted more than once. To

eliminate this, only expenditure on final output is counted. For example, we count theexpenditure on shoes and not on the shoemakers expenditure on leather because this will mean

multiple counting.

Question 5

a)

Real

GDP(Y)

Taxes Yd

Y-T

C S

Y-C

I G AE

C+I+G

430 20 410 412 -8-2 20 10 442450 20 430 428 2 20 10 458470 20 450 444 6 20 10 474490 20 470 460 10 20 10 490510 20 490 476 14 20 10 506530 20 510 492 18 20 10 522

C = 16 = 0.8

b) The marginal propensity to consume (mpc) is Yd 20

c) If the mpc is 0.8 then income induced consumption for GDP = 430 is (0.8)430 = 344. But totalconsumption at GDP = 430 is 412. The autonomous consumption is 412 344 = 68.

d) The equilibrium GDP is 490

e) In this economy the injection are (I + G) and the leakages are (S + T). In equilibrium I = 20, G

= 10, T = 20 and S = 10. Therefore, I + G = S + T in equilibrium.

f) Government Budget = taxes revenue (20) government Expenditure (10) = 10

Question 6

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a. Commercial banks are business enterprises, often joint stock companies that make a living

profit out of handling money and other valuables. They are profit-making institutions and are

committed to their shareholders who must be paid dividends. The main sources of income

available to Commercial Banks are interest on loans, discounting bills of exchange,

commission charged on current account, returns on investments, e.g. securities and industrial

enterprises and other charges made on customers.

A Central Bank is the bank at the apex of the banking system of a country. It is a government

bank, which aims at controlling the level of activities in the economy through the monetary

system. The Central bank is charged with the responsibility of issuing and redeeming of the

countrys currency. The primary aim of a Central Bank is not to maximize profit.

b.

1. Accepting of deposits: Accepting of deposits from customers is, in fact, the most fundamental

function of commercial banks. The accounts that customers can keep with commercial banksmay be divided into two broad categories viz. current account and deposit account. Deposit

Account is further divided into Saving Account and Fixed or Time Deposit.

2. Lending money to customers: This is the most important function of commercial banks and

may be done in three main ways.

a. Loans advanced to the Customers:

b. Leading by Overdraft:

c. Lending by Discounting Bills of Exchange

3. They act as agents to their customers: Commercial Banks act as agents for their customers in

the sale and purchase of stocks and shares. They are also willing to advise their customers on

their choice of investments and make periodic payments, such as the transfer of monthly

allowances, subscriptions etc.

4. Investing in the Economy: Commercial Banks, at times, invest directly, either in partnership or

alone, in the economy. In Ghana, commercial banks investments can be seen in sectors likeagriculture, industry, etc.

5. Foreign Trade financiers: They see to the necessary transfer of foreign currencies for their

customers and are prepared to guarantee payments via letters of credit for them.

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6. They act as trustees and executors: The large commercial banks have departments through

which they undertake responsibility for trustee work, particularly in connection with the

administration of the estates of deceased persons.

c.

1. Banking for the Government: The Central banks looks after the central governments account.

In addition, it may extend to the government straight forward loans. The central bank also

keeps the gold and foreign exchange reserves of the country.

2. Managing the National Debt: This involves issuing new blocks of securities on behalf of the

government, repaying maturing securities and paying interest to bond holders.

3. Controlling the Issue of Notes: The central bank is the only bank responsible for issuing a

nations currency (notes and coins). A special department of the bank, the Issue Department,

undertakes this work. Its main job is to print and release notes into the economy with referenceto the laws relating to note issue and the needs of the country. The Issue Department also deals

with putting coins into circulation. It is also the duty of the central bank to redeem worn out

notes if the need arises.

4. Regulating the Volume of Money supply or Credit: The central bank is responsible for

maintaining economic stability i.e. avoiding the dangers of inflation and recession and

maintaining employment at the disposal of the central bank for this purpose will be discussed

under monetary policies.

5. Acting as the Bankers Bank: The central bank is also the bankers bank. It holds the reserves

of the various commercial banks, so that a transfer of the necessary amounts from one account

to another may be affected between them.

6. Lender of Last Resort: the central bank acts as the lender of last resort to the money market

and the government. If the commercial banks are faced liquidity problems, the central bank

lends to them as the last resort.

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Question 7

a. Is a tax imposed on the incomes or the earnings of a person or a corporate body and is paid

directly to the government through public authorities such as the Internal Revenue Service or

the local authority in Ghana. Usually each individuals tax liability is assessed separately.

People who pay direct taxes cannot shift the incidence or burden of payment to some other

individuals e.g. \personal Income Tax, Property Tax and Company Tax, Gift Tax

b.

1. It is progressive. Progressive taxation enables people to pay taxes based on their incomes. In a

progressive tax system, higher income earners pay relatively more tax than lower income

earnings. Progressive taxes are the best way of ensuring a fair distribution of income.

2. As a fiscal measure, it is useful as it affects spending directly. Income taxes reduce disposable

income and can therefore be used as a means of manipulating the level of aggregate demand,which may have a stabilizing effect on incomes, prices and balance of payments.

3. Direct taxes are certain. It is possible to estimate the expected revenue from a direct tax.

Direct taxes are also convenient to the taxpayer because most direct taxes are collected at

source. This makes direct taxes usually cheap and economical to collect.

c.

1. Direct taxes could be disincentive to effort, disincentive to enterprise and discourages savings

by individuals. Direct taxes imposed on consumers would reduce their disposable incomes. If

consumers maintain their levels of consumption their ability to save would reduce. Higher

direct taxes levied on business enterprises may also be disincentive to enterprises affecting their

propensity to save and reinvest.

2. Direct taxes are normally politically unpopular and may create industrial or political unrest.

These taxes affect disposable incomes directly and in economies in which people are barely

surviving on their salaries and wages an increase in direct taxes for example, personal income

tax may be socio-economically damaging.

3. Direct taxes are easily evaded as compared to indirect taxes via falsification of earned income

records either by individuals or firms.

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Gat Economics Nov 2006