GCE Economics 1989 past questions and answers

Scarcity means the resources available to satisfy our many wants are limited.

A demand schedule is a table of prices and the quantities demanded at each price.

In barter each trader must find someone who has what he wants and wants what he has – the double coincidence of wants – which is very hard.

A slow, steady rise in prices of a few per cent a year is called creeping inflation.

In economics a market need not be a place; it is any arrangement that brings buyers and sellers into contact (phone, internet, agents).

Narrow money supply is currency (notes and coins) held by the public plus demand deposits in banks.

Cooperative thrift societies lend to their own members, not to companies; the other options are normal company finance.

A table arranges data in rows (across) and columns (down).

Stability in value is a desirable quality of money, not one of its functions.

National income is measured by the output (value added), income and expenditure methods; there is no 'depreciation method'.

Physical goods that can be seen and recorded at the ports are visible items; being exports, they are visible exports.

The value of money is what it can buy, which moves opposite to the general price level.

Total cost = 500 + 1,500 = N2,000. Average cost = 2,000 ÷ 50 = N40.

Rent must be paid whatever the level of output, so it is a fixed cost.

A competitive firm's supply curve is its rising marginal cost curve, so a higher price is needed to cover the higher cost of extra output.

A public company can invite the general public to buy its shares, e.g. on the stock exchange.

Labour, power, raw materials, nearness to similar firms and markets all affect location; the people's language does not.

Commercial banks settle their cheque claims on each other through accounts at the Central Bank, which acts as the clearing house.

The sole owner takes decisions alone and quickly, so he can use his own initiative; the other options are disadvantages or false.

Poor transport, storage, credit, hoarding and smuggling all hinder distribution; government participation is meant to help it.

Creditors are repaid in money that buys less than when they lent it, so they lose during inflation.

Each middleman adds his profit, so goods reach the consumer at a higher price.

The usual chain of distribution is producer → wholesaler → retailer → consumer.

Vertical mobility is a change of grade or rank (e.g. promotion) in the same line of work.

A retailer buys a large quantity from the wholesaler and breaks it into small units for consumers.

Population changes through births, deaths and migration, not through the amount of money in circulation.

The amount paid per unit of time worked is the wage rate.

Production is complete only when goods reach the consumer who needs them; distribution does that.

Dividing a population by gender is its sex distribution.

Wages are set by demand for and supply of labour; jobs with a scarce supply of workers (because of training, risk etc.) pay more.

Legal tender is money whose acceptance for debts is backed by law, such as the notes and coins issued by the central bank.

By the marginal productivity theory, an employer pays a worker up to the value of what the last worker adds to output.

Inflation helps debtors and owners of real assets and hurts creditors and fixed-income earners, redistributing income arbitrarily.

A limited market means firms cannot sell more output, so it discourages industrial growth.

An industry is a firm or group of firms producing similar goods or services.

A debenture is a loan to the company, so its holder earns fixed interest.

Because the monopolist faces the downward-sloping market demand curve, if he fixes price the market decides quantity, and if he fixes output the market decides price.

Crude oil is priced in US dollars on the world market.

(a)(i) Q = 60 − 30/3 = 60 − 10 = 50 units
(ii) Q = 60 − 210/3 = 60 − 70 = −10 units
(iii) Q = 60 − 0 = 60 units
(b) A negative quantity is impossible: at N210 nobody buys, so quantity demanded is zero. The function only holds for prices up to N180 (where Q = 0); the price is too high for the market.
(c)(i) P = 180 − 3(0) = N180
(ii) P = 180 − 3(60) = N0
(iii) P = 180 − 3(59) = 180 − 177 = N3

Substitute carefully and say what a negative answer means.

Angle = (group ÷ total) × 360°
Under 20: 20.90/55 × 360 = 136.8°
20 – 29: 13.75/55 × 360 = 90°
30 – 59: 12.10/55 × 360 = 79.2°
60 and above: 8.25/55 × 360 = 54°
Check: 136.8 + 90 + 79.2 + 54 = 360°
Draw a circle, measure the sectors with a protractor, label each sector (and its angle) and give the chart a title and key.

Marks go to correct angles and a neat, labelled chart.

Basic economic problems of every society:
1. What to produce (and in what quantities): limited resources mean the society must choose which goods to make.
2. How to produce: choice of technique – labour-intensive or capital-intensive – and how to combine factors efficiently.
3. For whom to produce: how output is distributed among the people.
4. Efficient use of resources: avoiding waste and unemployment of resources.
5. Economic growth: how to raise productive capacity over time.
Related ideas: scarcity forces choice, choice needs a scale of preference, and every choice has an opportunity cost.

Explain each problem, not just name it.

Mode: the value that occurs most often (has the highest frequency) in a set of data. E.g. in 2, 3, 3, 5, 3, 7 the mode is 3.
Suitable when: we want the most common or typical item (e.g. the most popular shoe size or price); data are non-numerical (qualitative); there are extreme values that would distort the mean; a quick estimate is needed.
Disadvantages: a set may have no mode or more than one mode; it ignores the other values; not useful for further mathematical work; may be unrepresentative with small samples; unstable when data change.

Define with an example, then uses, then disadvantages.

Devaluation: an official reduction by government of the value of its currency in terms of other currencies (e.g. from N1 = $1 to N2 = $1). Exports become cheaper to foreigners and imports dearer at home.
Conditions for success:
1. Demand for the country's exports must be elastic, so export earnings rise.
2. Demand for imports must be elastic, so spending on imports falls.
3. The sum of the two elasticities should exceed one (Marshall-Lerner condition).
4. Supply of exports must be elastic so that extra demand can be met.
5. Trading partners must not retaliate by devaluing too.
6. Domestic inflation must be controlled so that the price advantage is not lost.
7. Local substitutes for imports should be available.

The elasticity conditions are the key points.

Functions to the manufacturer: buys in bulk and pays promptly; stores goods (warehousing), saving space; bears risks of price changes and damage; finances production by advance payment; gives market information; advertises products.
Functions to the retailer: breaks bulk into smaller quantities; gives credit; supplies a variety of goods from many producers; delivers goods; gives advice on new products.
Functions to consumers: stabilises prices and ensures steady supply by holding stocks; processes, grades, packages goods.
Discussion: critics say wholesalers raise prices and hoard, but their services make distribution efficient.

Group functions by who benefits.

Measures:
1. Commodity (marketing) boards to buy export crops at guaranteed prices.
2. Guaranteed minimum prices for farmers.
3. Building of roads (feeder roads) to link farms with markets.
4. Storage facilities and silos to reduce waste.
5. Encouraging cooperative marketing societies.
6. Grading and standardisation of produce for export.
7. Agricultural credit (e.g. Nigerian Agricultural Bank) and extension services.
8. Market information and research, export promotion.

Outline several measures briefly.

(a) A development plan is a government document setting out targets for the economy over a period (e.g. 5 years), the projects to be carried out, their cost, and how they will be financed and carried out.
(b) Ways of financing:
1. Taxation (direct and indirect taxes).
2. Revenue from petroleum and other exports.
3. Internal borrowing: treasury bills, development stocks, loans from the central bank.
4. External loans from the World Bank, IMF, AfDB, foreign governments.
5. Foreign aid and grants.
6. Foreign direct investment.
7. Profits of public enterprises and sale of government assets.
8. Deficit financing (printing money) – inflationary.
9. Domestic savings mobilised through banks.

Define clearly, then explain each source.

Reasons:
1. To protect infant industries from foreign competition.
2. To correct a balance of payments deficit by reducing imports.
3. To raise government revenue through tariffs.
4. To protect domestic employment.
5. To prevent dumping.
6. To keep out harmful goods (dangerous drugs, unsafe products).
7. To conserve foreign exchange.
8. For security and strategic reasons (self-sufficiency in food, arms).
9. For political reasons or retaliation against other countries.
10. To protect cultural values and reduce dependence on foreign goods.

Explain at least five reasons.

Principles (canons) of taxation:
1. Equity: tax according to ability to pay.
2. Certainty: the amount, time and method of payment should be clear.
3. Convenience: collected at a time and in a way convenient to the taxpayer.
4. Economy: cost of collection should be small compared with yield.
5. Flexibility, simplicity and productivity (it should yield adequate revenue).
Reasons why Nigerians are taxed:
1. To raise revenue for government expenditure.
2. To redistribute income and reduce inequality.
3. To control inflation (reduce spending).
4. To discourage consumption of harmful goods.
5. To protect local industries (import duties).
6. To correct balance of payments deficits.
7. To encourage civic responsibility.

Two parts: canons, then reasons.