Explain two factors which might cause economic growth.
Evaluate the view that the benefits of economic growth will always outweigh the costs.
Explain how aggregate demand might be affected by an increase in interest rates.
Discuss whether the use of fiscal policy is the most effective way to bring an economy out of a recession.
Japan–European Union Economic Partnership Agreement (JEEPA)
In July 2017, the Japan–European Union Economic Partnership Agreement (JEEPA) was announced and it may come into force in 2019. Jointly, Japan and the European Union (EU) currently account for 28 % of global gross domestic product (GDP). The trade agreement could raise the EU’s exports to Japan by 34 % and Japan’s exports to the EU by 29 %. Economists say that this trade agreement marks a determined effort to combat rising protectionism and sends a powerful signal that cooperation, not trade protection, is the way to tackle global challenges.
The largest benefit to Japan will be for Japanese car manufacturers, as Europe will gradually lower tariffs from 10 % on Japanese cars. Car tariffs are a big concern for Japanese car manufacturers, who struggle to compete with South Korean car manufacturers. South Korean cars are sold to the EU tariff-free thanks to a free trade agreement signed in 2011. Within Europe, car manufacturers are one of the largest sources of jobs. Car manufacturers in the EU are concerned that cutting tariffs on car imports from Japan may lead to a large increase of Japanese cars into the European market.
The trade agreement will also resolve non-tariff barriers, such as technical requirements and regulations. More importantly, however, the EU and Japan will make their environmental and safety standards on cars the same, which will make trade easier.
Japanese politicians have been defending their relatively inefficient farmers for a long time. Now, Japan will lower tariffs on European meat, dairy products and wine, cutting 85 % of the tariffs on food products coming into Japan. This includes removing the current 30 % tariff on some European cheeses, such as cheddar and gouda cheese. However, imported camembert cheese will face a quota. This may be because Japan produces some camembert cheese.
JEEPA is particularly alarming for United States (US) beef and pork farmers because Japan has been the biggest export market for US beef and the second biggest export market for US pork. Any preferential tariff that EU farmers receive will make it much tougher for American farmers to sell meat in Japan.
With this trade agreement, the EU and Japan are trying to promote the values of economic cooperation and environmental conservation, which are both important for long-term economic growth and sustainability. However, JEEPA faces significant challenges because it will have to be passed by the Japanese Parliament, the European Parliament and European national governments. There is no guarantee that all governments will agree to the economic partnership.
[Source: adapted from The Japan-EU Trade Agreement: Pushing Back Against Protectionism, http://globalriskinsights.com,
15 July 2017; Japan-EU trade agreement may hurt U.S. meat producers, by Katherine Hyunjung Lee, Jul 12, 2017, Medill
News Service, https://dc.medill.northwestern.edu; and A new trade deal between the EU and Japan, The Economist (London,
England), Jul 8th 2017, https://www.economist.com/finance-and-economics/2017/07/08/a-new-trade-deal-between-the-eu-andjapan.
© The Economist Newspaper Limited, London, July 8th 2017]
Define the term quota indicated in bold in the text (paragraph [4]).
Define the term sustainability indicated in bold in the text (paragraph [6]).
Using an AD/AS diagram, explain the impact of the trade agreement between Japan and the EU (JEEPA) on Japan’s economic growth (paragraph [1]).
Using an international trade diagram, explain the likely impact of Japan “removing the current 30 % tariff” on the level of cheddar cheese imports. (paragraph [4]).
Using information from the text/data and your knowledge of economics, evaluate the possible consequences of the trade agreement between Japan and the EU (JEEPA).
The following diagram illustrates the market for bananas in Country A. D and S represent the domestic demand and supply for bananas, while bananas can be imported at the current world price of $3 per kg.
The government of Country A decides to impose a quota on banana imports of 150 000kg per month.
The demand and supply functions for the currency of Country A (the dollar ($)) are given by:
Qd = 1900 - 18P
Qs = 580 + 12P
where Qd is the quantity of dollars demanded per month, Qs is the quantity of dollars supplied per month and P is the price of the dollar, measured in yen (¥).
The following table provides selected items of the balance of payments for Country A in 2015.
Table 1
Assuming that there are no restrictions on the importing of bananas into Country A:
State the quantity of bananas which will be purchased each month in Country
Assuming that there are no restrictions on the importing of bananas into Country A:
Calculate the monthly expenditure on bananas imported into Country
Assuming that there are no restrictions on the importing of bananas into Country A:
Calculate the domestic producer surplus.
Identify the price which would be paid by consumers in Country A per kg of bananas following the imposition of the quota.
Identify the quantity of bananas which would be purchased in Country A per month following the imposition of the quota.
Calculate the change in revenue earned by domestic producers of bananas in Country A as a result of the quota.
With reference to the diagram, explain why the welfare loss from the imposition of the quota is likely to be greater than the welfare loss resulting from a tariff of $2 per kg.
Outline the reason why a fall in the price of the dollar should lead to an increase in the quantity of dollars demanded.
Assume that the dollar/yen exchange rate is in equilibrium. Using the functions, calculate the cost, in dollars, of a motorbike which costs ¥552 640.
Using examples from Table 1, outline the difference between debit items and credit items in the balance of payments.
Calculate the current account balance from the data given in Table 1.
Explain two implications of a rising current account surplus.
Current account deficit poses a challenge to Pakistan’s economy
The president of Pakistan has expressed his concern at the significant increase in Pakistan’s current account deficit. The current account deficit grew to US4.86 billion in 2015/16. The deficit was caused by rising imports and falling exports. The increasing current account deficit may result in Pakistan having to request a new International Monetary Fund (IMF) loan to fund the deficit. To avoid this, the president is proposing that the importing of luxury, non-essential items needs to be reduced.
The governor of Pakistan’s central bank agreed with the president’s concern. He said that the “rapidly growing current account deficit is the biggest challenge facing the country’s economy”. He agreed that the problem is made worse because many non-essential imports are being purchased, which requires borrowing from abroad. However, he stressed that while rising non-essential imports are a problem, “32 % of imports are capital goods” and are necessary for the continued growth of small to medium enterprises (SMEs), agriculture, housing and construction.
Central bank advisors have also recommended depreciating the rupee (Pakistan’s currency) to reduce the trade deficit. The value of the rupee is currently controlled through a managed exchange rate system. It has been suggested that the rupee is overvalued by as much as 20 %. However, the central bank governor claims that a “depreciation has a number of negative effects”.
In 2016, Pakistan’s economic growth reached 5.3 %, its highest point for 10 years. The government has estimated that it will be 6 % in 2017. According to the central bank governor, loans to SMEs are currently only 7 to 8 % of all loans to businesses in Pakistan. He believes that if loans to SMEs were increased to 15 to 17 % of all loans to businesses in Pakistan, there would be even higher economic growth.
Along with the current account deficit, fiscal policy decisions have also led to a significant budget deficit. The budget deficit increased in 2016, resulting in greater public debt. The central bank recommends the government’s debt to be limited to 60 % of gross domestic product (GDP).
[Source: adapted from Current account deficit may lead to IMF loan: FPCCI chairperson, https://www.thenews.com.pk/
print/226102-Current-account-deficit-may-lead-to-IMF-loan-FPCCI-chairperson and Current account deficit poses biggest
challenge to economy: SBP, https://www.thenews.com.pk/print/225481-Current-account-deficit-poses-biggest-challenge-toeconomy-
SBP. Copyright © The News International, Karachi, Pakistan.]
List two functions of the central bank (paragraph [2]).
Define the term fiscal policy indicated in bold in the text (paragraph [5]).
Using an exchange rate diagram, explain how the central bank might depreciate the value of the rupee(paragraph [3]).
Explain the difference between a current account deficit and a budget deficit (paragraph [5]).
Using information from the text/data and your knowledge of economics, discuss the effects of the increasing current account deficit on Pakistan’s economy.
Explain how changes in price work to reallocate resources in a market.
Discuss the view that the overuse of common access resources is best addressed by government.
Using the Keynesian AD/AS diagram, explain why an economy may be in equilibrium at any level of real output.
Evaluate the view that increased investment is the most important factor in achieving a faster rate of economic growth.
Country X and Country Y are capable of producing both apples and bananas. Assume a two-country, two-product model.
Country Y has absolute advantage in the production of both apples and bananas, and comparative advantage in the production of bananas.
The market for oranges in Country Z is illustrated on Figure 5.
Figure 5
The domestic demand and supply for oranges are given by the functions
Qd = 300 − 100_P_
Qs = − 60 + 60_P_
where P is the price of oranges in dollars per kilogram ($ per kg), Qd is the quantity of oranges demanded (thousands of kg per month) and Qs is the quantity of oranges supplied (thousands of kg per month). The world price of oranges is $2 per kg.
Due to increased awareness of the possible health benefits of vitamin C, the demand for oranges in Country Z increases by 60 000 per month at each price.
Tanya is a currency speculator. She buys and sells currencies with the intention of making gains as a result of changes in the exchange values of currencies. Currently, she is holding US$300 000, but she expects that in the next few months the euro (EU€) (the currency of the eurozone) will appreciate against the US dollar (US$).
At present, EU€1 = US$1.20.
Tanya exchanges her US$ for EU€.
The EU€ depreciates by 10 % against the US$. Fearing further depreciation of the EU€, Tanya exchanges her EU€ for US$.
Sketch and label a diagram to illustrate comparative advantage between Country X and Country Y on Figure 4.
Figure 4
Outline the reason why Country X should specialize in the production of apples and Country Y should specialize in the production of bananas.
Outline one reason why it might not be in a country’s best interests to specialize according to the principle of comparative advantage.
Calculate the change in expenditure on imported oranges as a result of the increase in demand.
Calculate the change in consumer surplus in Country Z as a result of the increase in demand for oranges.
Calculate the change in social (community) surplus as a result of the increase in demand for oranges.
State one administrative barrier that Country Z could use in order to restrict imports.
Explain two possible economic consequences for the eurozone if the euro appreciates.
Calculate the quantity of EU€ she will receive for her US$300 000.
Calculate, in US$, the loss made by Tanya as a result of these transactions.
Explain two reasons why a government might prefer a floating exchange rate system for its currency.
Study the following extract and answer the questions that follow. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Australia and Japan 1 In 2018, Australia signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)*. The agreement creates the third largest free trade area in the world, covers nearly 500 million people and is worth more than US70 billion, but some industries would be negatively affected. 3 Japanese farmers are worried about the increase in imported food from Australia. Furthermore, the Japanese government is concerned about the effects of the CPTPP on Japan's food self-sufficiency—Japan relies on other countries for over 60% of its food. In response to these concerns the Japanese government has offered support for domestic farmers to diversify production into other crops. The government also plans to subsidize the rice farmers through the initial phase of lowering trade barriers. 4 The agreement is said to be worth more than US$37 billion to Australian agricultural exports. It is hoped that CPTPP and the falling value of the Australian dollar will help Australia to reduce its current account deficit, but some economists have argued that this can take a long time. According to some estimations, the short-run price elasticity of demand (PED) for Australian exports is 0.2 and the short-run PED for imports in Australia is 0.4. However, the long-run PED for Australian exports is 1.1 and the long-run PED for imports in Australia is 1.3. 5 There have also been concerns about the CPTPP from trade unions in Australia. They argue that it deregulates the labour markets and gives corporations from other countries an ability to take legal action against governments for implementing laws that raise wages or protect the environment, if the foreign corporation can prove that the law hurt their commercial interests. One university lecturer said that the future costs to the taxpayer could be significant if foreign companies take the Australian government to court. 6 The trade agreement would allow workers from other countries to work in Australia without employers being required to check if Australian citizens are available to fill the jobs before the migrant workers are employed. It is estimated this may risk 39000 jobs in Australia. Furthermore, environmental activists have expressed concerns that the negative environmental and social effects of the agreement have not been well considered. This may lead to conflicts with Australia's commitment to the United Nations' Sustainable Development Goals. * The CPTPP includes eleven member countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
Define the term free trade area indicated in bold in the text (paragraph 1).
Define the term quotas indicated in bold in the text (paragraph 2).
Using price elasticity of demand (PED) data from the text and the J-curve effect, explain the most likely impact of "the falling value of the Australian dollar" on Australia's current account (paragraph 4).
Using an international trade diagram, explain how "increased quotas for the export of rice to Japan" will affect the price of rice in Japan (paragraph 2).
Using information from the text/data and your knowledge of economics, evaluate the view that free trade is beneficial to Japan's economy.
Microeconomics
Explain why merit goods tend to be under-provided in a free market.
Evaluate the use of carbon taxes to reduce threats to sustainability.