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May/June 2011Section A:
QUESTION 1
1. Three measures used to measure inequality of distribution of income.
Lorenz curve
Gini coefficient
Quantile ratio
2. Three flows associated with the government in the circular flow model
Government spending,
Taxes
Transfer payments
3. Main sources of economic growth viewed from demand side
There has to be an adequate and growing demand for goods and services
produced in a country. Main sources are:
Domestic demand (it is always possible to increase domestic demand
by increasing government spending),
Exports (international trade is an important factor in economic
growth. An increase in exports raises the growth rate and also relieves
the balance of payments constraint,
Import substitution (another growth strategy linked to BOP is to
reduce imports by manufacturing previously imported goods
domestically)
4. Define Gross Domestic Product (GDP)
GDP: is the total value of all final goods and services produced within
the boundaries of a country in a particular period (usually one year).
Most important barometer of the performance of the economy. Aka
GVA – gross value added
3 methods of calculating GDP:
o production method (value added)
o expenditure method – (final good and services)
o income method – (incomes of the FOP)
5. Define Inflation
Inflation is defined as a continuous and considerable rise in prices in
general.
6. Name the four lags associated with the implementation of monetary
policy.
Recognition lag – lag between changes in economic activity and
recognition or realization that the changes have occurred.
The decision lag – ministers and officials from different departments
have to meet to discuss matters and this takes time.
Implementation lag – once decisions have been made it takes time to
implement these decisions.
Impact lag – a further period lapses before they actually affect
economic behaviour.
,7. Name four basic properties an “item” must have in order to serve
satisfactorily as money
Those "things" that worked best tended to have four basic
characteristics:
(1) durability,
(2) divisibility,
(3) transportability, and
(4) noncounterfeitability.
8. List four arguments for the trade barriers
Balance of payments –
Dumping – occurs when a firms sells its product in a foreign market at
a lower than in the domestic market or at a lower price than in other
export markets.
Export subsidies
Infant industries
Employment
Government revenue
National security
Arguments against trade barriers:
Retaliation by trade partners
Welfare cost to society
Inefficiency
9. Explain the difference between a stock variable and a flow variable. Give
an example of each
Stock has no time dimension and can only be measured at a specific
moment – i.e. Shopkeeper takes stock of all goods in store at that
particular time. (Example: Assets, Wealth, Liabilities)
Flow has a time dimension and can only be measured over a period.
Shopkeeper calculates sales, profit, losses over a period (Example:
Income, Profit, Loss)
Stocks can only change as a result of flows
, QUESTION 2
1. Diagram: Illustrate the impact of specific excise tax on cigarettes on
equilibrium price and quantity. (Label diagram)
The figure represents the introduction of an excise tax of R1,00 on
cigarettes. The equilibrium price per packet before the introduction of the
excise tax on cigarettes is R4,00.
Tax incidence: who really pays the tax
When govt impose a specific tax (R4) on cigarette → S shifts up by R4
Tax is shared by 3 groups of people:
o Consumer: R12 → R14.40 per packet
o Supplier: R12 → R10,40 per packet
- Since profit of firm is affected → owners / shareholders profits ↓
- Employees suffer : Q ↓ → employment ↓
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