Question

QUESTION ONE a. Distinguish between the following economic concepts with illustrations: (i) A tariff and a quota (4 marks) (ii) An ad valorem tax and a specific tax (4 marks) b. Explain any four (4) restrictions on international trade. (12 marks) c. Explain any four (4) fiscal measures that a country can take to solve the problem of persistent balance of payments deficit? (12 marks) d. Explain four (4) disadvantages of this method of estimating national income? (8 marks)

SECTION A (40 marks): Answer ALL Questions in inis section. QUESTION ONE a. Distinguish between the following economic concepts with illustrations: (1) A tariff and a quota (4 marks) (ii) An ad valorem tax and a specific tax (4 marks) b. Explain any four (4) restrictions on international trade. (12 marks) c. Explain any four (4) fiscal measures that a country can take to solve the problem of persistent balance of payments deficit? (12 marks) d. Explain four (4) disadvantages of this method of estimating national income? (8 marks) (Total: 40 marks) Activat Go to L.A. this cortion

Answer 1

Part a

Tariffs and Quotas

• Tariffs are taxes on imported goods, quotas are limit on quantity of goods that can be imported.
• Tariff earn revenue & increase GDP,quota neutralizes GDP.
• Tariff revenue brings gains, quotas are beneficial for traders in foreign countries.
• Quotas tend to cause a bigger fall in economic welfare because the government don’t gain any tax revenue, that you get with tariffs.

Tariff Example

To discourage the purchase of Italian leather handbags, the U.S. government could introduce a tariff of 50%.

Quota Example

The Organization of Petroleum Exporting Countries sets a production quota for crude oil in order to "maintain" the price of crude oil in world markets.

Ad valorem tax and Specific Tax

Specific tax is a tax which has a fixed value for all quantity supplied. On the contrary, ad valorem taxes are percentage taxes that are imposed for every quantity supplied. The most common ad valorem tax examples include property taxes on real estate, sales tax on consumer goods, and VAT on the value added to a final product or service. Ad valorem taxes comprise one of the primary sources of revenue for state, county, and municipal governments. A specific tax is effective at reducing demand. For example, cigarette tax has steadily contributed to reducing cigarette consumption in past few decades.

Part b

Four Types of International Trade Restrictions are:

Tariffs. These put tax on internationally traded goods. The main aim us to protect the domestic industry from Competition. The money received from the tariff is collected by the domestic government.

Quotas. Quotas refer to Quantity limit placed on an import. Putting a quota on a good creates a shortage, which causes the price of the good to rise and allows domestic producers to raise their prices and to expand their production.

Embargo. An embargo stops exports or imports of a product or group of products to or from another country. Sometimes all trade with a country is stopped, usually for political reasons.

Import and Export Licenses. Some countries require import or export licenses. When domestic importers of foreign goods are required to get licenses, imports can be restricted by not issuing many licenses. Export licenses have been used to restrict trade with certain countries or to keep domestic prices on agricultural products from rising.

Part c

A Balance of Payment deficit occurs when the total international receipts of a nation from abroad are less than its total international payments to abroad over a period of time.

Following Fiscal Measures can be adopted to correct BOP deficit:

Expenditure Reduction Policy i.e Contractionary Fiscal Policy.

Contractionary Fiscal policy aims at increasing taxes and lowering Government Spending. As a result there is reduction in AD, which reduces general price level especially if the country is near full employment level of income and thus improves the price comptitiveness of exports.This makes exports cheaper and imports relatively more expensive compared to domestic goods. Assuming demand for exports and imports is price elastic, a rise in export earnings and a fall in import expenditure will reduce the balance of trade and current account deficit. Assuming bop is in deficit initially and there is no impact on other components of bop, this results in a reduction in bop deficit and an improvement in overall bop position in the long run.

Contractionary monetary policy.

Higher interest rates will lead to short term capital inflows as foreign residents will want to earn the higher interest income from their funds, this leads to a reduction in capital and financial account deficit. Assuming balance of payments is initially in deficit and there is no impact on the other components of balance of payments, this results in a reduction in bop deficit and thus improvement in overall bop position in the long run

Expenditure switching policy

This policy is implemented to switch expenditure of domestic consumers away from imports towards domestically produced goods.

Exchange rate policy

If the currency is under managed float exchange rate system, central bank can choose to depreciate currency.This will make exports cheaper in terms of foreign currency and imports more expensive in terms of domestic currency.

Part d

Note: * It is not specified which method disadvantages are to be listed.