ECS1601/202/1/2016

Tutorial Letter 202/1/2016

Economics I

ECS1601
Semester 1
Department of Economics

IMPORTANT INFORMATION:
This tutorial letter contains important information
about the module.

CONTENTS

Page

General ...........................................................................................................................................3

Solutions to Assignment 02: first semester ...................................................................................... 3

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GENERAL

Dear Student
This tutorial letter contains the correct answers to Assignment 02, which was included in Tutorial Letter
101/3/2016.
The assignment was another valuable opportunity to learn and to carry on with your preparation for the
examination. The next very important step is to work through this tutorial letter and to study each
explanation carefully. If your answer was incorrect, you must know why to avoid making the same
mistake in the examination. If you answered correctly, make sure that you understood the question and
not merely guessed the correct answer. The examination will include multiple-choice questions (MCQs)
and written questions. Please make sure that you understand all the work.
Remember, only with hard work can we be successful.
Best wishes

Your lecturers

SOLUTIONS TO ASSIGNMENT 02: FIRST SEMESTER (UNIQUE NUMBER 817644)

The correct options are as follows:

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

3
3
2
2
3
4
1
3
3
4

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

2
4
2
3
1
3
2
3
1
2

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

4
3
4
2
1
4
3
4
1
3

Explanations
1.

The correct option is [3].

Study figure 15-2 on page 277 in the textbook. The government provides public goods and
services to both households and firms. For example, firms use public roads when they transport
goods, and household waste and rubbish are collected by municipalities. In return, both firms and
households pay taxes to the government.

2.

The correct option is [3].

On page 29 of your module online (MO), the three broad functions of the government are given as
the allocative function (the governments role to correct market failures), the distribution function
(the governments role to redistribute income more fairly) and the stabilisation function (the
governments action to ensure a stable economic environment).

3.

The correct option is [2].

The ways in which a government can influence the market is explained on pages 286 and 287 of
the textbook. Changing the repo rate is not the responsibility of the government, but of the central
bank. Therefore, the repo rate is not an instrument available to the government to influence the
economy.

4.

The correct option is [2].

Rent seeking is an example of government failure, as it refers to households, firms or other entities
that aim to empower themselves at the cost of the society as a whole (for example, when unions
demand higher wages but workers are not offering anything in return, or if companies fix the price
of a product and consumers pay a higher price for the same product). Therefore, options [1], [3]
and [4] are correct. The question asks you to select the incorrect option, therefore [2] is the answer
to this question. Rent does no refer to the rent you pay for housing, as suggested by option [2], but
to the income received from factors of production. Study page 288 in the textbook.

5.

The correct option is [3].

Nationalisation refers to the transfer of ownership from a private enterprise to the government. It is
important that the enterprise is first under private ownership and then transferred to government
ownership; therefore Eskom is not an example of a nationalised entity as it has not been in private
ownership before. Privatisation, not nationalisation, tends to increase foreign direct investment.
Refer to pages 288 and 289 in the textbook.

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6.

The correct option is [4].

Expansionary fiscal policy means that the government aims to boost aggregate demand; they can
do this either by increasing government expenditure (G) or decreasing tax, in which case
households will have more disposable income and consumer expenditure (C) will increase. An
increase in government expenditure (the amount the government spends) or a decrease in tax
(which is the income of the government) will potentially cause a budget deficit. Refer to section
15.8 on page 290 in the textbook. A decrease in the interest rate is an example of an expansionary
monetary policy therefore option [3] is not correct.

7.

The correct option is [1].

The government finances their expenditure with income from taxes, borrowed funds and income
from government-owned property. Refer to section 15.10 on page 292 in the textbook.

8.

The correct option is [3].

The quote refers to taxes and social spending, which are two instruments used by the government
and not the central bank This is therefore an example of fiscal policy and not of monetary policy.
The gap between the richest and the poorest of South Africa narrowed after the taxes and social
spending had been implemented. In this particular example, the governments aim was therefore to
redistribute income. Refer to page 291 in the textbook.

9.

The correct option is [3].

Vertical equity states that people in different levels of society should pay different levels of taxes. It
is not equitable if a poor person pays a larger percentage of his income to taxes than a richer
person. In the World Bank article, the rich are taxed more in order to redistribute income. Refer to
page 294 in the textbook.

10.

The correct option is [4].

VAT is an example of a general tax because it is levied on most goods and services, and not only
on selective goods and services such as a selective tax. VAT is an example of an indirect tax,
because consumers pay VAT indirectly when buying goods and services. Direct taxes are levied
directly, for example on the income of a person. VAT is an example of a regressive tax, because
the poor pays a greater percentage of their income as VAT than the rich. This is due to the fact that
a great percentage of the poors income goes to buying goods and services. Refer to pages 294
and 295 in the textbook.

11.

The correct option is [2].

Countries can also benefit from trade, even if they do not have an absolute advantage in the
production of a good. If a country has a comparative advantage in the production of a good, they
should specialise in producing that good and trade with another country. Refer to section 16.2 on
pages 301 and 302 in the textbook.

12.

The correct option is [4].

Country 1 produces 1 600 kg apples, which is less than the 9 000 kg apples that country 2
produces; therefore country 2 has an absolute advantage in producing apples. Refer to pages 301
and 302 in the textbook.

13.

The correct option is [2].

If you want to know which country has the comparative advantage in producing beef, you have to
take the opportunity cost (in terms of apples) into account. Country 1 has to give up 25 apples
(1600/64) to produce a kilogram of beef. Country 2 has to give up 30 apples (9000/300) to produce
a kilogram of beef. Thus, country 1 has a comparative advantage in the production of beef
because they have the smallest opportunity cost in terms of apples. Refer to pages 301 and 302 in
the textbook.

14.

The correct option is [3].

The current account records all imports and exports. Imports have a negative effect on the current
account because money flows out of the economy. Therefore, if the current account is in surplus,
then the value of imports has to be more than the value of exports. Refer to page 250 in the
textbook.

15.

The correct option is [1].

All exports of a country are recorded in the current account. Refer to page 250 in the textbook.

16.

The correct option is [3].

The South African rand depreciated from R11,53 to R12,02 against the dollar, meaning the dollar
appreciated against the rand. Refer to section 16.4, pages 304 and 305 in the textbook.

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17.

The correct option is [2].

If the supply for dollars shifts to the right, then the equilibrium exchange rate will be lower (less
rands to buy one dollar), meaning that the rand has appreciated. Simultaneously, the amount of
dollars traded daily will increase. Try to draw this exchange market. Refer to table 16-1 on page
308 in the textbook.

18.

The correct option is [3].

If China starts producing cheaper goods than the United States, more people will import from
China instead of from the USA, causing the demand for dollars to decrease. If the gold price
increases, the supply of dollars will increase. If more South African tourists visit the United States,
the demand for dollars will increase, causing the shift shown in the graph. If American tourists are
scared to visit South Africa owing to a crime wave, the supply of dollars will decrease. Refer to
table 16-1 on page 308 in the textbook.

19.

The correct option is [1].

If the central bank supplies more dollars to the market, the supply of dollars will shift to the right
and the rand will appreciate. Carefully study figure 16-4 on page 309. If the central bank supplies
less USD to the market, the supply of dollars will shift to the left and the rand would depreciate. If
the central bank supplies more ZAR to the market, the supply curves of ZAR would shift to the right
and the rand will depreciate. If the domestic interest rate decreases, foreign investors will rather
invest elsewhere as they may be able to earn higher interest there, and the supply of the USD will
therefore decrease, illustrated by a leftward shift of the supply of dollars curve and thus a
depreciation of the rand. However, an increase in the interest rate level may result in lessening the
effect of a depreciating rand.

20.

The correct option is [2].

The macroeconomic objectives are economic growth, full employment, price stability, balance of
payments stability and equitable distribution of income. Achieving a budget surplus is not a
macroeconomic objective. Refer to page 234 in the textbook.

21.

The correct option is [4].

The old or second-hand bicycle will not be included in the GDP as it was not produced in that
specific year. Imported goods are not included in the GDP as they have not been produced within
the borders of the country. Paint to make art is not a final good the art is a final good that is
included in the GDP. If the intermediary good, the paint, is also included, then that would be double
counting. Even though Amy sold the shoes she made to an American, it would be part of the GDP
because she made it locally. Refer to section 13.2 on pages 235 to 238 in the textbook.

22.

The correct option is [3].

Nominal GDP is calculated by using the price and quantity of a specific year. Real GDP is
calculated by using the price of the base year (2013) times the quantity of each good produced.
For example:
2015 = (8 170) + (17 102) + (10 250) = 5594
The real GDP uses constant prices (prices of the base year):
2015 = (5 170) + (12 102) + (8 250) = 4074
Refer to section 13.2 on page 239 in the textbook.

23.

The correct option is [4].

GDP at market prices taxes on products + subsidies on products GDP at basic prices.
Thus:
$500 $25 + $10 = $485

Refer to page 238 in the textbook.

24.

The correct option is [2].

Gross domestic product is the value of all final goods and services produced in a country in a given
year. This means that imports are not produced in a particular country and therefore not included in
the GDP, while exports are consumed in a foreign country though they are locally produced. GDP
therefore excludes imports and includes exports. Gross domestic expenditure is the total spending
on goods and services in a country; that includes imports (produced in another country but bought
locally) and excludes exports (produced locally but bought in another country).
Therefore
If
then
Simplify
Thus,
Refer to page 243 in the textbook.

= + + + and = + + .

<

+++ < ++

<0
<

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25.

The correct option is [1].

The GNI of Ghana refers to the income of all Ghanaian nationals living in Ghana and abroad.
Therefore, the GNI of Ghana equals the GDP of Ghana minus the income of all foreigners living in
Ghana plus the income of Ghanaians living abroad. Becca is a Ghanaian, so her income will be
included in the GNI of Ghana, although she is not currently working in Ghana, she is working in
Nigeria. Therefore, she is not currently contributing to the GDP of Ghana. Refer to section 13.3 on
pages 241 and 242 in the textbook.

26.

The correct option is [4].

The labour force includes everybody older than 16 and younger than 65 (working age) that are
able and willing to work. A child of 15 is too young to work and therefore not part of the labour
force. The housewife is not looking for formal employment and the terminally ill is not able to work.
Refer to page 244 in the textbook

27.

The correct option is [3].

The consumer price index (CPI) is derived from the value of the typical basket of goods and
services consumed by the average South African. The increase in the price of this basket is an
indication of inflation. Refer to page 246 in the textbook.

28.

The correct option is [4].

The cost of an average basket in 2015 can be calculated as follows:
2015 = (10 30) + (5 50) = 300 + 250 = 550
Refer to box 13-5 on pages 247 and 248 in the textbook.

29.

The correct option is [1].

2015 =

2015
100
2014
=

165
100
150
= 110

Refer to box 13-5 on pages 247 and 248 in the textbook.

30.

The correct option is [3].

First you should see that some of the inequality is expressed in Gini coefficient and others are in
Gini index. In order to compare them, you have to change all of them to either Gini coefficients or
Gini indexes. To get everything in terms of the Gini index, the Gini coefficients of Brazil and South
Africa have to be multiplied by 100. In order to get everything in terms of the Gini coefficient, the
Gini indexes of India and China have to be divided by 100. The country with the highest Gini value
is the most unequal. Refer to the textbook on pages 253 and 254.

**** ***** ****

Please contact any of the first-year lecturers if you experience problems with these explanations. We will
gladly assist you. We wish you success.

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