Economics Essay Samples

Question 1

Percentage increases in price = 2015 price-2014 price2014 price × 100%
Percentage increase in the price of food = 6-44 × 100%
= 50%
Percentage increase in the price of clothing = 20-1010 × 100%
= 100%

Percentage increase in CPI

Market basket cost for 2014 = (4 × 50) + (10 × 10) = $300
CPI for 2014 = 300300 × 100% = 100
Market basket cost for 2015 = (6 × 50) + (20 × 10) = $500
CPI for 2015 = 500300 × 100% = 166.67
% increase in CPI = CPI for 2015-CPI for 2014CPI for 2014 × 100%
= 166.67-100100 × 100%
= 66.67%

Question 2: Problems of using CPI as a measure of cost of living

Substitution bias: Consumers usually substitute commodities whose price increase with those whose prices remain unchanged or decrease. CPI does not consider substitution effects. It, therefore, overstates the cost of living by ignoring the substitution by the consumer.
Unmeasured quality changes: CPI looks at price changes but ignores some quality changes on commodities. It is not possible to measure all changes in the quality of products. A decline in quality results in a fall in the dollar value implying that the cost of living will increase even if prices do not change.
Introduction of new commodities: The CPI basket of goods is fixed. The introduction of new products will enhance the dollar value since the consumer has more options than before. CPI is misleading since it does not reflect the change in purchasing power resulting from new products.

Question 3

Value today = CPI for today CPI for 1914 × pay in 1914
= 17710 × 5
= $88.50

Question 4

TRUE. Countries are not at the same levels of economic development, population, total national income, among other economic variables. Therefore, standard of living and real GDP per person cannot be equal for all countries.

Question 5

Production function is an expression of the relationship between the quantity of output and inputs. A typical production function is expressed as follows:
Y = A. f(L, K, H, N)
Y represents the total output while L is the total units of labour. K is the quantity of physical output while H is the amount of human capital. A on the other hand, represents the available production technology/technological progress.

Question 6

Answer: a. A country’s most highly educated workers emigrate to rich countries.

Question 7

The argument indicates that the country does not have an efficient legal system. Transactions do not follow a structured legal framework and are based on trust. The effect of this is that such property cannot be transformed into capital. For instance, De Soto cannot sell the land to a foreign investor since he does not have the documents to prove his ownership. Such countries, therefore, have a lower standard of living since owners of property cannot maximize or get value from their property due to lack of relevant documents.

Question 8

If the government pursues policies to ensure surplus, the supply of loanable funds will increase. The supply curve for loanable funds will, therefore, shift outwards as shown in the above diagram. The policy to achieve this involves a reduction of government expenditure. A decrease in spending implies a decline in borrowing hence there will be more funds available for private investors in the market for loanable funds. In addition, the government can increase borrowing from the international market thus reducing the crowding-out effect in the domestic market for loanable funds.

Question 9

Assuming the market was initially at equilibrium with interest rate r0 and quantity of saving and investment at q0. A surplus budget will lead to a reduction in taxation. A decrease in tax will increase disposable income that in turns increases the amount of savings. The surplus budget will also cause a decline in government borrowing from the loanable funds market. The supply of funds will, therefore, increase if a surplus budget is successfully implemented. The supply curve for funds will shift outwards as shown below. This results in a fall in interest rate from r0 to r1 as shown below. The quantity of savings and investments will increase from q0 to q1. Investments will rise since it will be cheaper to obtain loans from the market due to lower interest rates.

Interest rates S1

S2
r0
r1

Demand

q0 q1 Quantity

Question 10

a) Treasury bond since it is less risky.
b) Corporate bonds since they have higher returns.

Question 11

First scenario
Total government revenue/taxes = $45 billion
Total government expenditure = Government expenditure + transfer payments
= $30 + $ 10 = $40
Surplus (deficit) = total revenue – total expenditure
= 45 – 40 = 5

There will be a surplus of $5 billion.

Second scenario
Surplus (deficit) = GDP + Taxes – (Transfer payments + consumption + Investments)
= 200 + 50 – (20 + 120 + 40)
= 250 – 180
=$70 billion

There will be a surplus of $70 billion.

Question 12
Workings:
Japan
Labour force = Employed + unemployed
= 62,510 + 3,500 = 66,010
Unemployment rate = UnemployedLabour force × 100% = 3,50066,010 × 100 = 5.302%
Labour force participation rate = Labour forceAdult population × 100% = 66,010109,474 × 100 = 60.30%

France

Adult population = Labour force Labour force participation rate = 26,8700.5741 = 46,804
Employed = Labour force – unemployed = 26,870 – 2,577 = 24,293
Unemployment rate = UnemployedLabour force × 100% = 2,57726,870 × 100 = 9.59%

Germany

Unemployed = unemployment rate × Labour force = 0.0969 × 39,591 = 3,836
Employed = Labour force – unemployed = 39,591 – 3,836 = 35,755
Labour-force participation rate = = Labour forceAdult population × 100% = 39,59170,159 × 100 = 56.43%

Question 13

Adult population = Employed + Unemployed + Not in labour force
= 156,024,000 + 4,765,000 + 84,420,000 = 245,209,000 people
Labour force = Population employed + Population unemployed
= 156,024,000 + 4,765,000 = 160,789,000 people
Labour-force participation rate = Labour forceAdult population × 100%
= 160,789,000245,209,000 × 100
= 65.57%
Unemployment rate = UnemployedLabour force × 100%
= 4,765,000160,789,000 × 100
= 2.964%