Applied Economics: Country & Industry Case Analyses
Section A: Ecuador’s Oil Analysis
Question 1: Economic Concepts for Ecuador
(a) Price Elasticity of Supply (PES)
The Price Elasticity of Supply (PES) is calculated as 0.16$. This indicates that the supply of Ecuador’s oil is relatively inelastic.
(b) Fundamental Economic Questions
The fundamental economic questions addressed are: What to produce? and How to produce?
(c) Opportunity Cost of Sunshine
Sunshine has no opportunity cost because it is a free and abundant resource. It is not scarce and does not require the sacrifice of other goods or services to be utilized.
(d) Impact of Reduced Oil Demand
The economic impacts include:
- Decrease in Export Revenue: The demand for Ecuador’s oil exports fell significantly, leading to a substantial reduction in export revenue. This decline negatively impacted the overall economy.
- Decrease in Government Spending: The reduction in government spending further contributed to the economic downturn. With less government expenditure, there was a decrease in public sector investment and consumption, leading to a decline in the country’s output.
(e) Benefits of Road Infrastructure
Investing in road infrastructure can stimulate the economy through:
- Improving Infrastructure: Better roads enhance transportation efficiency, reducing costs and time for businesses. This improvement facilitates the movement of goods and services, boosting economic activities.
- Creating Jobs: Road construction generates employment opportunities, both directly in construction and indirectly in related industries. Increased employment leads to higher income and consumption, stimulating economic growth.
- Encouraging Investment: Improved infrastructure attracts both domestic and foreign investments. Businesses are more likely to invest in areas with good transportation networks, leading to increased economic activities and growth.
(f) GDP Per Head and Car Ownership Correlation
There is a positive correlation between GDP per head and car ownership. As GDP per head increases, the disposable income of individuals rises, making it more affordable for them to purchase cars. This relationship is evident in the data provided, where countries with higher GDP per head (like Switzerland and New Zealand) have higher car ownership rates compared to countries with lower GDP per head (like Senegal). Higher income levels enable individuals to afford not only the purchase of cars but also associated costs such as maintenance, fuel, and insurance.
(g) Factors Affecting Textile Firm Profits
Several factors influenced the profits of textile firms:
- Improved Infrastructure: The construction of more roads improved transportation, reducing costs and increasing efficiency for textile firms.
- Increased Scale of Production: Firms were able to increase their production scale despite strong competition from foreign firms. This likely led to higher revenues.
- Stable Wages: Wages in the textile industry did not rise significantly, helping maintain lower production costs and potentially higher profit margins.
However, strong competition from foreign firms could have limited the extent of profit increases. The overall impact on profits would depend on the balance between increased revenues from higher production and competitive pressures on pricing.
(h) Effects of Emigration on Ecuador
Emigration can have several effects on Ecuador:
Benefits:
- Remittances: Many emigrants send money back home to their families, providing financial support and boosting the local economy. These remittances can improve living standards and increase consumption.
- Skill Development: Workers gain new skills and experiences abroad, which can be beneficial if they return to Ecuador. These skills can enhance the productivity and competitiveness of the domestic labor market.
Drawbacks:
- Brain Drain: The emigration of skilled workers can lead to a shortage of talent in the domestic labor market, potentially hindering economic development.
- Social Impact: Families may be separated, leading to social and emotional challenges. The loss of human capital can also affect community cohesion and social stability.
Section B: Washington State Apples Market
Question 2: Apple Market Economics
(a) Market Disequilibrium Definition
Market disequilibrium occurs when the quantity demanded does not equal the quantity supplied at the current price, leading to either excess supply (surplus) or excess demand (shortage).
(b) Opportunity Cost for Apple Farmers
Opportunity cost is the value of the next best alternative foregone when making a decision. For a farmer, the opportunity cost of growing apples is the income they could have earned from growing another crop (e.g., pears, cherries). If the potential profit from apples is higher than other crops, the farmer will likely choose to grow apples. This decision is influenced by factors such as market prices, production costs, and the farmer’s assessment of risks and returns.
(c) Benefits of Creating Employment
Creating employment offers significant economic benefits:
- Generating Employment: It provides jobs, reducing unemployment and supplying income to a larger number of people.
- Utilizing Human Resources: It makes use of the available labor force, especially in countries with high population growth. This utilization can lead to increased productivity and economic growth.
- Increasing Income: Employment opportunities increase household income, boosting consumption and demand for goods and services, which can stimulate further economic activity.
(d) Effects of Competition on Consumers
Competition generally benefits consumers in several ways:
- Lower Prices: Competition often drives prices down, making goods and services more affordable.
- Better Quality: Firms strive to improve product quality to attract and retain customers.
- Variety: Consumers have more choices due to multiple firms offering different products and services.
However, there can be drawbacks:
- Market Failures: Intense competition might lead to negative externalities, such as environmental damage or poor working conditions, if not regulated.
- Short-Term Focus: Firms may prioritize short-term profits over long-term sustainability, potentially underinvesting in innovation or quality.
Economic Principles and Applications
Question 3: Taxes, MNCs, and Labor Markets
(a) Indirect Tax Definition and Example
An indirect tax is a tax imposed on goods and services rather than directly on income or profits. It is typically collected by an intermediary (like a retailer) from the person who bears the ultimate economic burden (the consumer). An example is Value Added Tax (VAT), added at each stage of production and distribution.
(b) Benefits of MNCs to Home Countries
Multinational corporations (MNCs) can benefit their home countries through:
- Repatriation of Profits: MNCs often send profits earned abroad back to their home countries. These funds contribute to the home economy via investments, dividends, or taxes.
- Employment Opportunities: MNCs create jobs in their home countries, especially in high-skilled areas like management, research, and development, enhancing the workforce’s skill level.
(c) Productivity Increase and Unemployment
An increase in productivity can affect unemployment differently over time:
- Short-Term: Higher productivity might initially lead to job losses as fewer workers are needed for the same output, causing temporary unemployment.
- Long-Term: Increased productivity often drives economic growth, creating new industries and job opportunities. It can also lead to higher wages, boosting consumer spending and demand, ultimately potentially reducing unemployment.
(d) Unemployment Rate Decrease and Poverty
A decrease in a country’s unemployment rate can reduce poverty by increasing household income and improving living standards. More employed people mean more households earning income, which directly alleviates poverty. Employment provides financial stability and access to better living conditions, healthcare, and education. However, the impact depends on the quality of jobs created. If new jobs are low-paying or insecure, the reduction in poverty may be limited.
Question 4: Poland Toothpaste Market Analysis
(a) Factors Affecting Price Elasticity of Demand
Two key factors influencing the price elasticity of demand (PED) are:
- Availability of Substitutes: The more substitutes available, the more elastic the demand. Consumers can easily switch if a product’s price rises.
- Necessity vs. Luxury: Necessities (e.g., basic food, medicine) tend to have inelastic demand as consumers need them regardless of price. Luxuries have more elastic demand as consumers can forgo them if prices increase.
(b) Benefits of Horizontal Mergers
A horizontal merger (between firms in the same industry and stage of production) can offer benefits like:
- Economies of Scale: Merging can lead to lower average costs as production volume increases, improving efficiency and profitability.
- Increased Market Power: The merged firm gains a larger market share, potentially allowing it to influence prices and reduce competitive pressure, leading to higher profits.
(c) Impact of Population Increase on Demand
An increase in population would lead to an increase in the demand for toothpaste. On a demand and supply diagram, this is shown as:
- Shift in Demand Curve: The demand curve shifts to the right (e.g., from D1 to D2). This indicates a higher quantity demanded at every price level.
(d) Effect of Dentist Wage Increase on Employment
An increase in dentists’ wages could potentially increase the number of dentists employed by making the profession more attractive, thus increasing the supply of trained dentists. Higher wages might also reduce turnover. However, limitations exist: the capacity of training institutions might restrict the number of new dentists, and employment also depends on the demand for dental services. If demand doesn’t rise, higher wages alone might not increase employment significantly. The overall impact balances the supply of dentists and the demand for their services.
Morocco Fishing Industry Economic Impact
Question 1: Morocco’s Fishing Sector
(a) Fishing Industry GDP Contribution Calculation
To calculate the contribution of the fishing industry to Morocco’s GDP in 2017:
- Morocco’s GDP in 2017 = $109 billion
- Fishing industry contribution = 2% of GDP
- Contribution = 0.02 * $109 billion = $2.18 billion
Thus, the fishing industry contributed $2.18 billion to Morocco’s GDP in 2017.
(b) Key Economic Contributions
The fishing industry contributes significantly through Economic Growth and Employment.
(c) Impact of Global Fish Demand Increase
An increase in global demand for fish would likely lead to higher exports of Moroccan fish products. Increased exports generate more revenue, improving Morocco’s trade balance (potentially reducing a trade deficit). Since exports are a credit on the current account, higher exports relative to imports help strengthen the current account position.
(d) Fishing Industry and Poverty Links
The fishing industry can be linked to poverty in several ways:
- Low Wages: Many fishermen earn low incomes due to fluctuating fish prices and seasonal work, making it hard to maintain stable livelihoods.
- Unemployment and Overfishing: Overfishing can deplete fish stocks, leading to smaller catches, reduced job opportunities, and consequently, increased poverty among fishing communities.
(e) Primary Sector Growth and GDP Per Head
While an increase in the primary sector’s (like fishing) contribution to GDP might raise national income, GDP per head does not always increase proportionally. If population growth outpaces GDP growth, GDP per head might stagnate or even fall. Furthermore, heavy reliance on the primary sector, often characterized by low productivity growth and price volatility, can limit long-term economic development and sustained improvements in income per capita.
(f) Role of Fishing Regulation in Growth
Regulating fishing helps ensure the sustainability of fish stocks by preventing overfishing. This secures the long-term availability of the resource, allowing the fishing industry to contribute consistently to economic growth. Regulations like quotas, closed seasons, and marine protected areas promote environmental health while preserving employment and income. Sustainable fishing ensures future generations can benefit, supporting continuous economic activity.
(g) Analysis of Fishing Subsidies
Arguments for subsidies:
- Increased Production: Financial aid helps fishermen acquire better equipment, boosting productivity and fish supply.
- Employment Growth: More efficient fishing can support jobs and improve incomes in coastal communities.
- Export Revenue Growth: A more competitive industry can increase exports, improving the trade balance.
Arguments against subsidies:
- Overfishing Risks: Subsidies might encourage excessive fishing efforts, leading to stock depletion and long-term ecological harm.
- Opportunity Cost: Government funds used for subsidies have an opportunity cost; they could potentially be better spent on other priorities like education or healthcare.
Conclusion: The effectiveness of subsidies hinges on careful management to avoid overfishing while achieving desired economic benefits.
(h) Impact of Reduced Trade Protection
Reducing trade protection (e.g., tariffs) on trade with other African countries could have mixed effects for Morocco:
Benefits:
- Increased Market Access: Moroccan products could gain easier entry into new African markets, boosting exports and trade revenue.
- Economic Integration: Stronger trade ties can foster regional economic growth and cooperation.
Drawbacks:
- Increased Competition: Domestic industries might face tougher competition from imports, potentially harming local firms’ profitability and survival.
- Potential Trade Deficit Worsening: If imports rise more significantly than exports following liberalization, Morocco’s trade balance could worsen.
Conclusion: The net impact depends on the competitiveness of Moroccan industries and their ability to capitalize on new export opportunities versus withstand import competition.
Section B: Canadian Economic Issues
Question 3: Unemployment in Canada
(a) Structural Unemployment Definition
Structural unemployment arises from mismatches between the skills workers possess and the skills demanded by employers, often due to technological changes, shifts in industry structure (e.g., decline of manufacturing), or geographical factors.
(b) Causes of Low Economic Productivity
Two potential causes of low economic productivity include:
- Lack of Investment in Capital Goods: Insufficient business investment in modern machinery, technology, and infrastructure can hinder workers’ ability to produce efficiently.
- Low Skill Levels Among Workers: A workforce lacking adequate education, training, or relevant skills may struggle to perform tasks efficiently, lowering overall productivity.
(c) Fiscal Policy Impact on Cyclical Unemployment
Expansionary fiscal policy can reduce cyclical unemployment (unemployment caused by economic downturns):
- Increased Government Spending: Spending on infrastructure, healthcare, or education creates jobs directly and indirectly, boosting income and consumer spending.
- Tax Cuts: Reducing taxes increases disposable income for individuals and profits for firms, encouraging spending and investment.
Both actions increase aggregate demand, prompting firms to expand production and hire more workers.
(d) Effects of Competition on Workers
Competition among firms can have both positive and negative effects on workers:
Advantages:
- Higher Wages and Better Conditions: Firms competing for skilled labor may offer better compensation packages and working environments to attract and retain talent.
- Skill Development: Workers might benefit from enhanced training opportunities as firms invest in human capital to improve efficiency and competitiveness.
Disadvantages:
- Job Insecurity: Intense competitive pressure to cut costs could lead firms to downsize, automate jobs, or outsource, increasing job insecurity.
- Wage Pressure: In highly competitive markets with low profit margins, firms might suppress wages or reduce benefits to remain viable.
Conclusion: The impact of competition on workers is mixed. While it can drive improvements in wages and skills, excessive cost-cutting pressures can negatively affect job security and compensation, depending on market dynamics and firm strategies.
Development, Savings, and Healthcare Economics
Question 5: Smartphones and Economic Development
(a) Economic Development Definition
Economic development refers to the sustained improvement in the economic and social well-being of a country’s population. It encompasses not just GDP growth, but also factors like higher incomes, better education and healthcare access, improved infrastructure, reduced poverty, and increased life expectancy.
(b) Reasons for Lower Rural School Attendance
Children in rural areas may have lower school attendance rates due to factors such as:
- Lack of Access to Schools: Fewer schools may exist in rural areas, often requiring long travel times, which can deter attendance, especially for younger children.
- Lower Household Incomes: Rural families may struggle to afford costs associated with schooling (fees, uniforms, supplies). Children might leave school early to work and contribute to family income.
(c) Price Inelasticity and Firm Revenue
When demand for a product is price-inelastic (PED < 1), firms can increase the price and expect a proportionally smaller decrease in quantity demanded, leading to an increase in total revenue (TR = Price x Quantity). This often applies to essential goods (like basic food or medicine) or goods with few substitutes. Firms selling such products face less competitive pressure on pricing.
(d) Economic Effects of Increased Savings
An increase in the overall savings rate in an economy can have several effects:
Benefits:
- More Investment Capital: Higher savings provide banks and financial institutions with more funds to lend, potentially lowering interest rates and encouraging business investment in capital goods, fostering long-term economic growth.
- Financial Stability: Households with greater savings are better equipped to handle financial shocks (like job loss), reducing reliance on social safety nets during economic downturns.
Drawbacks:
- Lower Consumer Spending (Paradox of Thrift): If households collectively save significantly more, consumer spending decreases. This reduction in aggregate demand can slow down economic activity in the short term.
- Reduced Business Revenue: Lower consumer spending translates to lower sales for businesses, potentially leading to production cuts, layoffs, and increased unemployment.
Conclusion: While savings are crucial for investment and individual financial security, excessive saving at the expense of consumption can dampen short-term economic growth. A balance between saving and spending is generally considered optimal for sustained economic health.
Question 4: Global Healthcare Spending Analysis
(a) Investment Definition in Economics
In economics, investment refers to expenditure on capital goods – assets used to produce other goods and services in the future. This includes spending on machinery, equipment, buildings (factories, offices), infrastructure (roads, communication networks), and technology. Investment is a key driver of economic growth and productivity improvements.
(b) Factors Causing Decrease in Demand
Demand for a product can decrease due to various factors, including:
- Decrease in Consumer Income: For normal goods, a fall in disposable income leads consumers to buy less.
- Change in Consumer Preferences: Shifts in tastes, trends, or negative information about a product can cause consumers to prefer alternatives, reducing demand.
(c) Investment in Education/Healthcare and PPC
Increased investment in education and healthcare enhances a nation’s human capital (the skills, knowledge, and health of its workforce). A more skilled and healthier workforce is more productive. This increased productive capacity shifts the Production Possibility Curve (PPC) outwards, signifying economic growth and the ability to produce more goods and services.
(d) Private vs. Public Sector Healthcare Comparison
Both private and public sectors play roles in healthcare provision, each with potential benefits:
Benefits of Private Sector Healthcare:
- Potential for Higher Efficiency: Driven by profit motives, private providers may innovate and operate more efficiently to attract patients and reduce costs.
- Often Shorter Waiting Times: Competition and focus on service can lead to quicker access to appointments and treatments compared to potentially overburdened public systems.
Benefits of Public Sector Healthcare:
- Equity and Affordability: Government-funded systems aim to provide universal access to healthcare regardless of income, reducing health inequalities.
- Focus on Public Welfare: Public systems can prioritize preventative care and long-term population health outcomes over profit maximization.
Conclusion: The optimal mix depends on a country’s specific context, values, and economic conditions. Many countries utilize a mixed system, leveraging the strengths of both sectors – public provision for essential, universal services and private options for specialized or faster care.