Elasticities
①price elasticity of demand (PED): measure of responsiveness of quantity demanded of a good/service to change in price
②elastic demand: change in price of good/service cause proportionately larger change in quantity demanded
③inelastic demand: charge in price of good/service cause proportionately smaller change in quantity demanded
④cross elasticity of demand (XED): measure of responsiveness of demand for good/service to change in price of related good.
⑤substitute good: good that can be used instead of each other. (eg. butter/ margarine). Have positive cross elasticity of demand.
⑥complement good: good used together (eg. DVD player/ DVD discs). Negative cross elasticity of demand.
⑦income elasticity of demand (YED): measure of responsiveness of demand for good to change in income
⑧normal good: positive income elasticity of demand (Income ↑ demand ↓)
⑨inferior good: have negative income elasticity of demand. (income ↑ demand ↓)
⑩price elasticity of supply (PES): measure of responsiveness of quantity supplied of good/service to change in price
⑪indirect tax: expenditure tax on good/service. Indirect tax shown on supply & demand diagram as upward shift in supply curve. Vertical distance between 2 supply corves represent amount of tax
⑫specific tax: shown as parallel shift
⑬ad valorem tax: shown as divergent shift

Market Failure:
①market failure: failure of markets to produce at socially efficient level of output.
②positive externalities: beneficial effects enjoyed by 3rd party when good/service produced/consumed
③negative externalities: bad effects which 3rd party suffer when good/service produced/consumed
④public goods: goods/services would not provide all by market. Non-rivalry & non-diminishability (eg. flood barriers)
⑤merit goods: good/services as beneficial for people. Would under-provided by market & under-consumed (eg. education/health care)
⑥demerit goods: good/service harmful to people. Would over-provide by market & over-consumed (eg. cigarettes/ alcohol)

It has a population which are below the poverty line, which is 15,958.434 % per $1 trillion of GD, ranked 24th out of 135.

Its current account balance, as of a 2010 estimate, is

ranked 96th, out of 181.

In terms of agriculture, Zambia is able to provide corn, sorghum, rice, peanuts, sunflower seed, vegetables, flowers, tobacco, cotton, sugarcane, cassava; cattle, goats, pigs, poultry, milk, eggs, hides; coffee. For Industries that drive its economy, it has copper mining and processing, construction, foodstuffs, beverages, chemicals, textiles, fertilizer, horticulture.

Its has, according to a 2007 estimate, 1.935 million individuals that are apart of the labor force, 80% of which is devoted to agriculture.

The commodities that Eritrea exports include livestock, sorghum, textiles, food, small manufactures. Thus, any change in the price of “food” will greatly affect the exporting and agricultural industries.

“Zambia experienced a bumper harvest in 2007, which helped to boost GDP and agricultural exports and contain inflation. Although poverty continues to be significant problem in Zambia, its economy has strengthened, featuring single-digit inflation, a relatively stable currency, decreasing interest rates, and increasing levels of trade.”

According to a 2010 estimate, Eritrea spends 1,720,000,000 $ on exports, and $3,611,000,000.00 on imports (ranked 116th of 185), likely resulting in a current account deficit.

Youtube Clip about Zambia’s economy

• Different factor endowments – some economies are rich in natural resources while others have relatively little. Trade enables economies to specialise in the export of some resources and earn revenue to pay for imports of other goods.
• Increased welfare – specialisation (where countries have a comparative advantage – see the next section for more detail on this) and trade allow countries to gain a higher level of consumption than they would do domestically and this leads to increased welfare and higher living standards.
• To gain economies of scale – with specialisation and production on a larger scale than may be possible domestically, a country may be able to gain more economies of scale. This will lead to lower average costs and benefit consumers through lower prices.
• Diversity of choice – trade enables us to access goods and services that we may not be able to produce ourselves. What would be an example in your country ofgoods that you can only get through trade?
• Political / historical reasons – some trade takes place for political and other reasons relating to history and tradition, though this is generally diminishing in importance.
• Increased competition – increased global competition may help to spur domestic productivity improvements and give domestic firms a better incentive to innovate and improve their products. This will benefit consumers.
• Trade may be an ‘engine for growth’ – increased trade may help to spur greater domestic economic growth and drive further improvements inliving standards.

• 

b) Given the benefits of trade, evaluate the economic arguments in favour protectionism

Protectionism (protecting against imports) has arisen in various forms. These include:

Tariffs

A tariff is a tax on imports, which can either be specific (so much per unit of sale) or ad valorem (a percentage of the price of the product). Tariffs reduce supply and raise the price of imports. This gives domestic equivalents a comparative advantage. As such, tariffs are distorting the market forces and may prevent consumers from gaining the benefit of all the advantages of international specialisation and trade. The impact of a tariff is shown in Figure 1 below.

Figure 1 Impact of a tariff

The tariff has the effect of shifting the world supply curve vertically upwards by the amount of the tariff. The level of imports will fall from QaQd to QbQc. The government will also raise revenue, shown by the blue shaded area. The level of domestic production will increase from 0Qa to 0Qb.

Quotas

Quotas have the effect of restricting the maximum amount of imports allowed into an economy. Once again, they reduce the amount of imports entering an economy and increase the equilibrium price within the market. The government receives no revenue from a quota, as it does with a tariff, unless it can set up a system of licences.

Exchange controls

The government could limit the amount of foreign currency available for paying for imports. These are not allowed amongst member states of the European Union (EU), for example, and have become more difficult to sustain in a world of highly mobile capital.

Export subsidies

Export subsidies allow exporters to supply the market with more product than the natural equilibrium would have allowed. Foreign consumers will enjoy increased economic welfare as the price of their purchases fall. Domestic employees might enjoy more wages and job security. But taxpayers are footing the bill for this. Domestic firms might divert trade into exports and ignore the home market. This could lead to increases in domestic prices.

The impact of a subsidy is shown in Figure 2. The supply curve is shifted vertically downwards by the amount of the subsidy and this leads to a lower equilibrium price and a higher quantity being traded.

Figure 2 The effect of a subsidy

These ‘expenditure-switching’ polices are normally not allowed under membership conditions of both the WTO and EU.

Voluntary export restraints (VER’s)

Some quotas are voluntarily agreed between countries. This happened on a significant number of occasions with Japanese firms (e.g. cars, televisions, videos) during the 1990s. Where the quotas have been agreed, they are known as Voluntary Export Restraints (VER’s). In fact over 200 VER’s were in force in the early 1990s. So why did the firms agree to these restrictions voluntarily? Well, the answers to this are varied. Often it may have been because they felt it would help avoid more punitive restrictions, but sometimes it was in their interests. Where the Japanese firms had a significant cost advantage over the domestic producers, the voluntary quotas meant that they could charge significantly higher prices. The higher margins they earned more than made up for the restricted number they sold and profitability was maintained or improved.

Other protectionist measures

Countries can also use a range of other protectionist measures to restrict imports. These might include:

• Administrative obstacles – countries can set administrative hurdles. For example, they may require significant levels of paperwork and then deal with these processes slowly making it difficult for importers to compete on a level playing field with other firms.
• Health and safety standards – countries may set onerously high health and safety standards for goods that are imported, once again making life difficult for importers.
• Environmental standards – countries can set high environmental standards that they know only domestic firms are likely to be able to achieve, once again making life difficult for importers.
  

Causes of Australia’s Current Account Deficit
Posted on December 2, 2010 by kanamaeeconblog

Australia’s current-accountdeficitincreased in three months in September. In the second quarter, the shortfall on goods, services, and investment went up from $5.41 billion Australian$ to 7.83 billion Australian$ ($7.55 billion).

Exports dropped from July to September and the Australian currency increased 15 percent over this period. This was the second-biggest quarterly gain of $74.5 billion (second quarter), as the demand for minerals such as iron ore increased. The main cause and the reason why Australia is through deficit is because Australia has to borrow from overseas to pay for imported goods and services, and to finance investments which are not covered by local savings.
Though, Australia’s GDP rose 0.5 percent in the past three months from September, when it increased 1.2 percent. The net-income deficit (the remaining income of a firm after adding total revenue) widened from 11.5 billion Australian$ to 13.2 billion Australian $ during the third quarter. Goods & services trade balance had a 6.6 billion Australian$ surplus in the earlier quarter but then 5.8 billion Australian$ surplus in the third quarter.

In order to improve Australia’s Current Account, it can follow two policies including: Expenditure-switching policies and Expenditure-reducing policies. The Expenditure-switching policy is the policy to have people purchase more domestic goods than imported goods. It can be done by imposing tariffs or using protectionism. The Expenditure-reducing policy is the policy that reduces the level of imports, in order to reduce the domestic expenditure. Deflationary monetary and fiscal policies can be used to reduce, and it includes an increase on tax, decrease on government expenditure, or increase in interest rates. So if Australia takes any of these policies, then it may have a chance to improve their Current Account.

Overall, this article can be evaluated using stakeholders. The major stakeholder who is influenced by this reduction in tariffs, is Korea. Consumers of Korea will be positively affected, since consumer can purchase cheaper. And producers of Korea is positively affected, since they overall produce cheaper goods than European countries, which leads to having more imports and less exports, which makes them have more benefit. More benefit than the European countries, since European countries would likely import cheaper goods or services. More people would demand goods and services from Korea rather than the European countries. That is why the Italian automakers are afraid that Korean imports would take over their industry. Also Korea expects an increase of “250,000 jobs,” which decreases the unemployment rate. The European producers, would be negatively affected because people would not want to demand for expensive goods or services and rather get cheaper ones.

2)Thoughts about Free Trade vs. Protectionism

1. factor endowments: factors of production which a country has in order to produce goods and services.
2. specialization:  it is when a country or a nation, specializes in production of goods and services. They have a comparative advantage in production, and then trade to achieve goods and services (which are not what they specialize).

Free trade & protectionism

1. free trade: an international trade amongst countries/nations, with no barriers or protectionism (tariffs/quotas/subsidies.
2. tariff: a certain tax imposed on imports to protect and defend domestic industries from foreign competitions to raise revenue for the government.
3. quota: is a barrier on imports, and it sets a limit on quantity or value of imports that can be imported to a country.
4. subsidy: extra money which is paid from the government, to a firm, in order to encourage the output and to give the firm more advantage over foreign firms.
5. Voluntary Export Restraint (VER): is an agreement which is voluntary, of exporting country and of importing country. Both countries limit their volume of trade of a certain product/ products.
6. infant industry argument:  is an argument that new industries should be defended or protected from foreign competition until the industries are big enough to compete with international markets.
7. dumping: sell good in another country at a price lower than normal or lower than normal unit cost of production.
8. Anti-dumping: is a law or the legislation to protect an economy from imports of a good with the price which is below the unit cost or production.

Economic integration and the World Trade Organization (WTO)

1. free trade are (FTA) : is when agreement is made amongst nations/countries, where both of them agree upon trade between members of the group. This trade can also happen outside the free trade area.
2. customs union: an agreement amongst countries/nations, where both of them can trade among themselves and adopt common external barriers against any other country.
3. common market: is a type of customs union, with common policies on product regulation, free movement of goods, services, labour, and capital.
4. World Trade Organization: an organization where it have rules for global trading and determine disputes amongst member countries. It also sets negotiations with problems such as reduction of trade barriers between member countries.

Balance of payments and balance of payments problems

1. balance of payments: stored records of transactions amongst citizens of one country with citizens of other countries of a given time.
2. balance of trade: is how much the revenue is receiving from exports of tangible goods except the expenditure from exports of tangible goods over a given time.
3. invisible balance: is how much the revenue receive from exports of services except the expenditure on imports of services over a given time.
4. current account: is how much flow of funds by trade in goods and services with net investment income flows and net transfers of money. (The net investment income flows include: profit, interest, and dividends. The net investment transfers of money include: foreign aids, grants, and remittances).
5. capital account: is measure of how much buying and selling benefits between countries. The assets/benefits are sometimes divided to show those which represent ownership, and those which represent lending.
6. current account surplus: is when revenue from export of good and services and income flows are greater than expenditure on imports of goods and services and income flows.
7. current account deficit: is when revenue from export goods and services and income flows are less than expenditure on imports of goods and services and income flows.
8. expenditure-switching policies: are policies put in effect, by the government, which makes an attempt to change expenditure of domestic consumers away from imports and more towards the domestically produced goods and services.
9. expenditure-reducing policies: policies put in effect by the government, which made an attempt to decrease expenditure in economy. It includes expenditure on imports.

Exchange rates and terms of trade

1. exchange rate: value of 1 currency (ex. 1 $ = 84.0901446 ¥)
2. fixed exchange rate: value of currency fixed to another currency/ average value of selection of currencies/to some other commodity (ex. gold)
3. floating exchange rate: value of 1 currency is determined by demand for/supply of the currency on foreign exchange market.
4. depreciation: a decrease in value of 1 currency in terms of a different currency in the system called the floating exchange rate system.
5. appreciation: increase in value of 1 currency in terms of a different currency in the floating exchange rate system.
6. devaluation: decrease in value of currency in fixed exchange system
7. revaluation: increase in value of currency in fixed exchange rate system
8. Deteriorating terms of trade/ adverse terms of trade: average price of exports decrease relative to average price of imports.
9. Elasticity of demand for exports: measure of responsiveness of quantity demanded of exports when a change in relative price of exports happen.
10. Elasticity of demand for imports: measure of responsiveness of quantity demanded of imports when there is change in relative price of imports.