ECS1601_Questions AND ANSWERS

Section A: QUESTION 1 1. Three measures used to measure inequality of distribution of income.  Lorenz curve  Gini coefficient  Quantile ratio 2. Three flows associated with the government in the circular flow model  Government spending,  Taxes  Transfer payments 3. Main sources of economic growth viewed from demand side There has to be an adequate and growing demand for goods and services produced in a country. Main sources are:  Domestic demand (it is always possible to increase domestic demand by increasing government spending),  Exports (international trade is an important factor in economic growth. An increase in exports raises the growth rate and also relieves the balance of payments constraint,  Import substitution (another growth strategy linked to BOP is to reduce imports by manufacturing previously imported goods domestically) 4. Define Gross Domestic Product (GDP)  GDP: is the total value of all final goods and services produced within the boundaries of a country in a particular period (usually one year). Most important barometer of the performance of the economy. Aka GVA – gross value added  3 methods of calculating GDP: o production method (value added) o expenditure method – (final good and services) o income method – (incomes of the FOP) 5. Define Inflation  Inflation is defined as a continuous and considerable rise in prices in general. 6. Name the four lags associated with the implementation of monetary policy.  Recognition lag – lag between changes in economic activity and recognition or realization that the changes have occurred.  The decision lag – ministers and officials from different departments have to meet to discuss matters and this takes time.  Implementation lag – once decisions have been made it takes time to implement these decisions.  Impact lag – a further period lapses before they actually affect economic behaviour. 7. Name four basic properties an “item” must have in order to serve satisfactorily as money Those "things" that worked best tended to have four basic characteristics: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability. 8. List four arguments for the trade barriers  Balance of payments –  Dumping – occurs when a firms sells its product in a foreign market at a lower than in the domestic market or at a lower price than in other export markets.  Export subsidies  Infant industries  Employment  Government revenue  National security Arguments against trade barriers:  Retaliation by trade partners  Welfare cost to society  Inefficiency 9. Explain the difference between a stock variable and a flow variable. Give an example of each  Stock has no time dimension and can only be measured at a specific moment – i.e. Shopkeeper takes stock of all goods in store at that particular time. (Example: Assets, Wealth, Liabilities)  Flow has a time dimension and can only be measured over a period. Shopkeeper calculates sales, profit, losses over a period (Example: Income, Profit, Loss)  Stocks can only change as a result of flows