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SECTION A

(a).Countries should only export if they have an absolute advantage in producing a good. N

 The argument that countries should only export if they have absolute advantage is not true. A country‘s absolute value is an indication of its ability to produce certain goods and services at a low cost. I disagree with this concept citing that even countries that do not have absolute advantage can do well on exporting. A country can apply its comparative advantage that is, exploring the most effective ways it can produce goods and services at lower costs than others can and exporting them. This implies that a country has to recognize its specialization and fully exploit it. In doing so the country is bound to benefit from the international trade. The figure below shows the relationship between absolute values and the imports and exports.

(b).There is only one way of calculating national income. N

The statement “there is only one way of calculating national income” is false. There is more than one way of calculating national income. It can be done using the production method, the income method or expenditure method.  The production method gives the national income by summing the value of the final product and the original product. The income method arrives at the national income by summing the factors of production (that is Gross National Income=Wages+ Profits+ Rent + Interests). The expenditure method gives the national income by summing the total expenditures incurred in the nation (Private consumption expenditure, government expenditure, private investment expenditure and the net income).

(c).To stimulate economic growth, the UK government should keep interests rates low. Y

To stimulate the economic growth, the UK government should keep its interests rates low. Low interest rates encourage high investments rates. The consumer and business spending are alternatively increased by the low interest rates and these result into an increased national income. The incomes of the future are high as a result of the stock that comes from the high investment rates. The low interest rates also help the government to keep its debts low. This will help to reduce the government borrowing which is on the increase and has shot up to over three percent. UK government should therefore keep its interests as low as possible.

(d).The only cause of unemployment is when the real wage is set above the equilibrium wage. Y

The real wages set above the equilibrium fact is the only cause of unemployment. On setting the real wages high, there are few opportunities created for employment. The job seekers cannot find jobs since the money that could cater for their employment is already in use in paying another employee. All other factors kept constant, when the cost of production of a single factor is increased, the factor requirement is reduced.  Basing on the figure below, we can deduce that setting the real wage above the equilibrium wage will lead to some individuals lacking jobs. This is attributed to the fact that firms not willing to reduce the real wage as they think that efforts will decline. Those with the same qualifications are therefore left jobless.

W* - the equilibrium wage

ND – labor demand

NS – labor supply

(e).Protectionist trade policies are bad for the world economy. Y

The protectionist trade policies are bad for the world economy. From its definition, protectionism controls trade between the involved states by using various methods like tariffs on imported goods and services, restrictive quotas and other regulations that the government put across to protect the domestic products from lacking or having a reduced market. It hinders the entrance of some goods and services into a country and therefore promotes exploitation by the local businessmen of that nation. Secondly, the policies when employed cause civil wars among the states involved. Members of one state might attempt to overrule the rules set by the counterpart nation leading into the comrades engaging them on a war. This is both long term and short term affect the economy of a country. This situation took place among the European countries in the 17th and 18th centuries. The states army engaged each other in warfare the caused more destructions and in the long run affected the states economies.

 The free trade policies introduce more jobs into the market thereby enhancing the economy of the member states. Moreover, the free trade improves the living conditions of members of the engaging countries.  This is achieved through the competitions which advocate for high production mechanisms, high pay rates which in turn allow more citizens to engage in improving the country’s economy and the world’s economy as a whole.

The existence of the protectionist policies discourage the deployment of new industries thereby affecting the overall industrial output and resulting into less economic growth.

Finally, the policies limit people from equal access of various opportunities and products.

SECTION B

(a).What is inflation? What factors cause inflation?

Inflation is the continued rise in the general price level of goods and services over a specific time. The causes of inflation can be generalized as: demand-pull inflation: whenever the demands for goods and services exceed the supply available, prices tend to rise and cost-pull inflation: a rise in the cost of production is always reflected in the price of the final product. The detailed causes of inflation are as discussed in the next paragraphs.

An increase in the money supply if is not accompanied by an equivalent increase in the production of goods and services. The money loses its value and the goods and services are bought at increased prices.

An increase in the communities total spending normally leads to greater demand for the economy output and thereby pushing prices upwards. The demand in turn leads to an alternative increase in the price levels.

Calamities like floods, droughts, abnormal industrial unrest among other reasons may lead to reduction in the supply of goods and services. The goods available are therefore sold at high prices and this is a potential cause of inflation.

The hoarding practices that cause shortage of goods and services. The price levels rise as a result of the shortages and consequently causing inflation.

 A rise in wages and other factors of production costs. Increase in the general prices of the raw materials lead to an alternative increase in the production costs. On bearing costly production, companies and manufacturers raise their prices for the final products which are felt by the customers in terms of inflation.

Speculation that prices of goods and services may raise in the future make consumers to demand more than can be produced. Due to this demand, the producers of these goods and services raise their prices.

(b).Why inflation is considered a serious problem in economics. Is it always bad thing for the economy?

Inflation has serious effects o the economy of a country and should be avoided as much as this may cost. Others benefit from it while the major economic activities are negatively affected. To start with, the consumers of products are forced to pay an extra amount for the goods and service they buy. Secondly, wage earners are not able to sustain themselves with the wages they get from working. This means that inflation lowers the real wages. Nonetheless, during the inflation period, there is great trading and manufacturing activities thus the employees gain the continuity of their jobs and more jobs are created. Creditors loose to the debtors since money they receive has a reduced purchasing power. On the other hand, debtors gain from parting with less than they could pay before.

Inflation has some positive effects on few individuals. However, these effects are temporary. To start with, businessmen that is, traders and manufacturers gain. The costs they incur (wages, rents and interests among others), which are fixed by contract do not rise immediately as the prices rise. Since the income goes up, they gain. Inflation in respect to this idea causes stimulation of production and trade. Considering this, inflation could be good for some reasons.

Inflation in the long run stumbles the economic activities of a country and therefore should never be allowed into an economy.

The first figure above shows the concept of demand-pull inflation while the second elaborates the cost push inflation.

(c).What are the possible cures of high inflation rates?

Inflation can be controlled using various methods. In the evaluation of the method to use, the economic state should be considered. The factors causing the inflation should be taken into consideration. Due to the different causes, there are different methods for different causes. These methods are the ones I discuss below:

The government can introduce a high taxation scheme that covers the salaries of all the employees. This method reduces the purchasing power of the citizens thereby controlling the demand and consequently preventing the price rise.

It can as well encourage the citizens to save. By applying this technique, the current demand is reduced and in so doing controlling price hiking.

The government through the central bank can enforce monetary policies to discourage borrowing by increasing the lending rates. Less borrowing will mean that less money is available in the economy thus reduced demand.

The central bank can as well authorize the commercial banks to tighten their lending belts; less money is advanced to the public implying less demand for goods and services hence reduced or rather no inflation.

The government spends a lot of the income on the development of its infrastructure. Most of this is got through lending from the international banking system. Reducing these activities and introducing better methods minimize inflation. The government can do this by imposing restrictions on spending by the local authorities.

The last method that can be used is the price control. This is initiated by the government through the introduction of laws that restrict the prices of goods and services to a certain value.  In this way, the producers work to the set standards ensuring that they neither overproduce nor under produce and neither sell at higher prices or at lower prices.

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