P3 2025 Flashcards
(10 cards)
Discuss how the concept of absolute advantage may lead to growth in Kenya. Use numerical or diagramatic analysis (12)
Absolute adv = where a country can produce more goods/services than another country. If Kenya has an absolute advantage, they should specialise as can tap into greater economies of scale and can bulk buy fertiliser= decreases cost per unit= decreased price they charge for cutflowers= more price competitive= increased exports= AD shifts out= also injection= positive multiplier effect= multiplier diagram= economic growth increases from y1 to y3
Eval
- Countries in EU may still buy from netherlands so specialising in cut flowers for kenya may not make sense and transportation costs may be higher as kenya is far
- If kenya sell flowers to supermarkets eg tesco , then tesco may exert high degree of monopsony power = lower export earnings
Micro and macro effect of croatia joining eurozone or an country joining monetary union (25)
MACRO
One macro effect of croatia joining eurozone is higher economic growth. It becomes attractive for TNCs to set up as would want to relocate to eurozone as can avoid common external tariff =
TNCs setting up= export = higher export earnings= AD out= positive multiplier effect = MULTIPLIER DIAGRAM
Eval
Loss of monetary independence as only one central bank is set for all members = central bank cant cater needs to all countries
Home ownership in greece is 75% while germany is 45% so even when central bank adjust IR, impact is not uniform as alot of people have mortgages so if IR increase
more people in greece likely to have tracker mortgage so their IR likely to rise more so their AD likely to shift in far more than Germany
One micro effect is higher profits for croatian firms due to croatian firms finding it easier to trade as don’t need to worry about unfavourable exchange rates impacting their profit margins
Easier to plan ahead= more certainty and confidence= investment in capital machinery= increased productivity. Also no transactions costs asdont need to convert currency = variable cost falls= MC and AC falls for firms = price falls so allocative efficiency increases= increases sales from q1 to q2= costs fall. Also at pmax demand is elastic= when price falls from p1 to p2 will result in a more than proportionate increase in demand for their products= higher revenue for firms = higher profits = can invest in new tech eg self driving cars= increases dynamic efficeincy
EVAL
Croatian firms become dependent on main trading parters so eg if
Main trading partner doing bad eg recevission then lower incomes in those countries so less demand for croatian good= MR and AR shifts in
Croatia has strong tourism sector = YED is elastic so if incomes fall in other countries = more than proportional decrease in demand for products= businesses may shut down
Evaluate micro and micro effect of uk decision to leave EU (25)
Micro
One micro effect is lower profits for british firms as now have to pay tariff and dont have free movement of labour so now labour is geographically immobile= struggle to get high quality talent to come into economy also
many workers leaving = skill shortages = supply shift left for workers from s1 to s2 causing higher wages
Supply of labour shift in from s1 to s2= wages increase = increase variable costs = MC and AC increase= prices charge to consumers increase=s decrease allocative efficiency= at pmax its elastic so rise in prices results in a more than proportionate decrease in demand = lower revenue for firms = decrease profits= some firms may shut down
EVAL
Despite not being to trade as much, certain sectors eg financial sectors may not be affected as much eg PED for financial sectors is likely to be inelastic as even with tariff = uk has strong comparative advantage for financial services , so may not be affected as much, other industries eg fishing may be more affected or supermarkets
May be temporary as gov may invest into education and training to have less skill shourtages
MACRO
Macro effect is lower living standards in the UK. TNCs may leave= job losses=
Also the british pound fell over by 10% to a 30 year low against the US dolar after the uk voted to leave the EU= depreciation = british firms imports large amount of raw materials from abroad and now that pound depreciated= mor expensive to import raw materials =increased COP= SRAS shifts inwards = cost- push inflation= living standards fall
EVAL
Temporary negative effects as , in LR uk may negotiate trade deals with those outside of EU = patterns of trade may shift to outside of EU so in long run not big deal
Tarrifs placed was lower on uk than eu from america = cost adv to export to america than eu frims
Examine the likely effect on the profitability of indonesian rice farmers of the governments increased investment in dams. Use cost and rev diragrmam (8)
Higher profits = application= more efficient= variable costs fall= MC and AC fall= increase profits
EVAL
-Profits may not rise because of maybe other costs rising
- infrastructure= time lag
EValuate macro and micro effect of decreasing interest rates in Kenya (25)
Macro
-Low IR= increase consumption and decrease savings= increased investment
-hot money outflow = ppl sell kenyan shilings= supply of shilling shift out = shilling depreciates=kenyan economy becomes more price competitive= increased exports eg can export more tea as other currencies can buy more shillings while imports fall as shilling doesnt buy as much in global market= current account improves= exports complement of AD so AD shifts out = exports also an injection into CFOY= positive multiplier effect = increased economic growth
EVal
Marshal lerner says fro there to be an mprovmesnt in current account following a depreciation marshal lerner must be satisfied were avengers usm of price elasticies of exports and imports need to be inelastic
J curve
MICRO
One micro effect is higher profits for kenyan firms . Lor IR = decrease savings and lower rate of return= increased consumption as cost of borrowing falls= increased demadn for goods and services= MR and AR shift outwards= higher profits = increase output = prices rises= costs alls as better placed to tap into economies of scale eg purchasing = can bulk buy raw mats= operating closer to MES= more productively efficient= increased profits= invest in new tech= increases dynamic efficiency
EVAL
No guarantee central banks will reduce interest rates so consumption may ot increase so profits may not go up
Access reasons why market rigging was possible amongst the banks (12)
Firm needs to be an oligopoly as easier to coordinate when handful or large firms and have enough of market share so by restricting output it raises price
One reason why it may have been possible is because they operate within an oligopoly so big players can influence supply of products so supply shift in causing prices to rise
Anoter point is PED is because PED needs to be inelastic as if elastic and raise prices there will be a more than proportionate decrease in demand = decreased revenue
Eg firms can only take out loan from bank so demand is inelastic as lack of choice is less than proportionate decrease in demand for banks in cartel= higher revenues = makes sense to collude
EVAL
- prisoners dilemma- cartels tend to break down in the long run and incentive to undercut and incentive to whistleblow to get immunity whilst rivals get huge fines
Evaluate the micro and macro effects of an increase in protectionism in USA (25)
Micro
One effect is higher profits for domestic firms . Domestic subsidy= AC and MC fall
= decrease prices= increase output = increase profits
EVAL
-retaliation -other countries may relatialte my imposing tariffs on them= increase varibale costs so may offset subsidy
MACRO
- can help improve current account , tariff = lower imports
- tariff diagram
- imports fell from m1 to m2
Extension in supply and contraction in demand as consumers cant afford to buy as much
EVAL
-Consumer surplus fell by ABCD as good is now more expensive
More expensive to import steel for manufacturing = SRAS shift in= standards of living fall
Evalueate the micor and macro effets of significant increases in the minimum wage. (25)
MICRO
-Profitability fo firms will fall increased variable costs as AC and MC will increase
- Labour intensive firms may be impacted more and so may shut down
EVAL
- productivity may go up as opportunity of losing job is greater so more likely to hit targets as worrying that you will lose jobs so variable costs may fall
MACRO
- protects workers= reduces income inequality = protects vunerable workers as workers payed better salary= can afford basic necessities= improves living standards.
- Lorenz curve shift in as inequality falls= gini coefficient falls
EVAL
Firms may hire less workers as minimum wage is higher = unemployment rises= structural unemployment as workers may be replaced by machinery so living standards may actually fall
Increase in minimum wage showing increased unemployment
EXCHNAGE RATES - floating
-Increases wages = increased income s= import more= sell currency = supply increases= currency depreciates
High interest rates= buy pound s= demand out= currency appreciates
High inflation in uk= less demand for goods and less price competitive= less demand fro pounds= demand shift in= pound depreciates
Examine factors which might have cause the depreciation ghanas currency the cedi (10)
One factor is increased salaries= buy more imports = sell cedi and buy other foreign reserves- supply shift out= currency depreciates
Another is inflation =goods less attractive in global market = less demand for proudcts= less demand for export= less demand for currency = demand shift in = depreciates
EVAL
-Depends on MPM - marginal propensi ty to import
- may not be price competitive but may be quality competitive so may be fine
-depends on inflation of of other main trading partners if other are higher ppl may still by Ghanain goods
