ECO600 Official Examination: Economics for Business and Finance Assessment Answer

Section 1:

1 (i). The Indonesian government can introduce domestic support policies like

•  the price floor for the producers in the domestic market and 
• provide some other domestic subsidy to the manufacturers of textile and leather footwear products, like tax reliefs, easy loans, etc.

(ii). The policies will ensure that the sellers receive a minimum price for their products in the domestic market. The price is usually above the free-market equilibrium price   and hence increases the profit of the sellers. The subsidies helps in decreasing the cost of production and increase the domestic production. This will result in surplus at lower price which can be sold in the international market at competitive prices. As the imported goods will become expensive the domestic goods will become cheaper to the consumers. 

(iii). The implementing of these polices will result in reduced international trade opportunities for the non-protected and developing countries where the government subsidies are not available to the producers. Since the government is putting no restrictions on import but supporting domestic industries, there is no need to worry.

2 (i). The trade balance chart of Indonesia for last 25 years shows an increasing trend over the long run. However there has been decline in the trade balance in recent years as compared from 2000’s.

(ii). The decrease in interest rate will

•  make holding money less attractive and investment more attractive. 
• will not attract the foreign funds and depreciate the currency against the US currency. 
• The exports will become more attractive.

3. Indonesia export products are low complexity products mainly being the agriculture and minerals. However the research shows that if the exports product are more complex, they grow faster. 

(i) The export sectors whose complexity can be improved are:

•  paper which is used for graphic purposes, 
• synthetic rubber, 
• motor cars, engines, 
• Electrical equipment like compressor, fans, electric shavers, integrated circuits, etc.

The products are already exported by the country and the country has the knowhow. They comprise the export basket of the country but are in very less percentage as compared to other less complex products.

(ii). These sectors can be improved in terms of complexity and value addition by

•  More research and development in these sectors by the producers 
• The government providing assistance and subsidies to these sectors
• Announcement of easy export policies for these products. 
• The government can also place tariff on import of these products so that the domestic market is motivated.

Section 2

1. Effect of Covid 19 pandemic and lockdown on Australian GDP is as follows:

• Consumption ( C)- The household spending on goods and service has reduced due to less movement of people and uncertainty of jobs. This is resulting in people to save more. The spending is only on essential products. 
• Investment (I)-  Investment in new houses and spending by firms in new business ventures is reduced. Due to reduced sales and demand the businesses are trying to maintain the existing infrastructure and avoid taking up new investments
• Government purchase (G) – the federal spending on goods and services has increased as the government is more inclined in upgrading the medical facilities and providing basic facilities to the needy and poor people affected by lockdown.
• Net Exports (NX)-  The net exports has become almost zero. There is almost no imports and exports due to lockdown. Only essential products are traded.

2. Three main types of unemployment caused by Covid-19 lockdown are:

• Field operations: Due to social distancing and restricted movements, the field jobs are affected most by the lockdown. Thus the sales executives and marketing people are rendered jobless.
• Hotel/accommodation/ rental hiring of real estate are other types of jobs affected badly by the lockdown.
• Food services are also affected very badly due to the lockdown resulting in loss of jobs in the industry.  

3. (i) AD and AS diagram to show the shift due to Covid- 19 pandemic lockdown:                                                   

Real GDP

The average Demand (AD) has shifted to left (From AD ₁ to AD₂ as the demand has decreased and the investments has reduced.  The aggregate supply curve (AS) has shifted to right (from AS ₁ to AS₂).The goods and labor is now available at cheaper rates. Thus for the same cost the goods produced are more and hence supply is higher. The increase in supply and decrease in demand leads to lower price level

(ii). From the diagram it is observed that the AD decreases due to fall in investments. There is loss of sales to the firms. The workers lose their jobs or have salary cuts. This further leads to decrease in demand of goods and services. The recession is recorded.

Due to recession, the workers are ready to work at lower salaries, the cost of inputs is reduced and hence the AS curve shifts to right. There are more goods produced at lower costs. The supply of goods and services increases.

It can be observed that the equilibrium is maintained at the same level of the GDP though at lower price level. 

4. The cost of bread at the start of the year  = $4

Inflation rate = 1.43%

Price at the end of the year = $4+ 1.43% of $4 

                        = $4+ 0.0572 = $4.0572

The price of the bread loaf at the end of the year 2020 will be $4.0572

Section 3

• In order to develop the economy of the Cambodia, the country needs to make some structural changes to boost the development. Some of these changes can be to improve the supply side of the country, the government should focus on-
• Improving the education system of the county and introduce skill based education to make the adults employable.
• labor market reforms should be bought into place to ensure minimum wages to the workers and their welfare
• Incentives and tax rebates for technological research and development organization to promote technological improvements. 
• Infrastructure development and urbanization of the country.

These measures will not only make the people of the country competent and able to produce goods and services but will also motivate them to  produce better goods and services which can be exported. Two ways in which the development in the country can be started within the present functionalities are: 

a. One way of starting is to produce organic products. The country has large forest areas and agriculture is a dominant occupation. This can be used for organic farming. The education and techniques of organic farming can be incorporated in the skill development plan of the country. The deterioration in environment has increased the demand of organic produce significantly.

This can be done by introducing   development plans by the government like the industrial growth plans were started by Korean government to give its economy the boost. However the Cambodian government will face the internal barrier in implementing this due to the higher percentage of uneducated population. Therefore skill development plans as carried out in India are important in Cambodia too.

Making the presence of its products in the international market is another eternal barrier. This can be overcome by standardizing the products and following quality standards.

b. Improving the infrastructure of the country and urbanization is another way to boost the tourism industry of the country. The development of roads, transport and better hospitality industry will help in attracting tourists from rich countries like US and other European nations. The increase in tourism will increase the flow of foreign currency in the country and boost the economy.

However, the infrastructure development will need lots of funds which might be difficult for the government to acquire. It will also need labor extensively which the uneducated and idle people f the country might not like. 

Section 4

1. (i). The Pakistan government should implement expansionary fiscal policy. This would mean increasing government purchases or decreasing taxes. The government should follow both. 

• The large population in the country is low income and unemployed. The decrease in taxes like the GST rate and sales tax will increase the spending power of the people as the goods will be cheaper. This will bring money in circulation. Demand for goods will increase and hence the production will increase. This will help in reducing the unemployment. The GDP of the country will also increase. 
• The increase in government spending will improve the infrastructure and transport facility in the country. This will again help the manufacturers provide goods domestically at cheaper rates which is affordable by more people. The demand will increase and the cycle will start to rotate.
• Education and training can be the best supply side policy (SSP) for the government. It will not only improve the ability of the people to work but also reduce unemployment and improve the domestic production.

(ii). The limitation of the policy is the high government debt. And increasing GDP to debt ratio. This will make it difficult for the government to spend and that too with lower tax rates.

2. 

(i) the country’s central bank will try to decrease the official interest rates. This will be make savings and holding of money less dearer. As the result there will be more spending and money will come in circulation with increased spending and investment. Lower interest rates will make borrowings cheaper and encourage investment by firms.

(ii). The central bank will reduce the interest rates by increasing the money supply. This is done by purchasing the securities. When the Central Bank buys the securities, the seller’s money is collected and deposited in the checking account. This money is given out on loans increasing the money supply.

(iii). The effect of the above action will be as follows:

(a) Consumer spending and business investment will increase. The interest rate will be lower so the will prefer to spend the money rather than saving it. Also the loans and borrowings will be available at lower rates, this will encourage business investment. 

 (b) GDP growth will increase. Business Investment will increase the production and consumer spending will increase the demand. There will be increase in GDP of the country. 

 (c) Unemployment will decrease. The increase in business investment and production will need more man power. Jobs will be created and unemployment will reduce. 

(d) Inflation will increase. As the earnings and spending of the people will increase the purchasing power of money will decrease gradually and inflation will increase.