TUTORIAL 1

QUESTION 1

Economics is the study of how society manages its scarce resources in order to
satisfy its wants efficiently, that is, it is the study of how society maximizes its
welfare/utility given its resource constraint.

QUESTION 2

Microeconomics Macroeconomics

Study smaller scope of economic Study bigger scope of economic activity.

activity.

Examines the functioning of individual Focuses on the determinants of total

industries and behaviour of individual national output and aggregate decision
decision making units. making.

Deals with household income. Deals with the national income.

Focuses on the factors that influence Focuses on the determinants of

the production of a particular product national output.
and the behaviour of individual
industries.

Analyses the general price level.

QUESTION 3

i. land is the physical place where economic activity takes place. In our
lemonade stand example, it could be the patch of lawn in front of your house.
However, land also includes all the natural resources found on it.
ii. Labor represents all of the people that are available to transform resources
into goods or services that can be purchased. This factor is somewhat flexible
since different people can be allocated to produce different things. Nobody
has to produce everything themselves.
iii. Capital is short for capital goods.These are man-made objects like
machinery, equipment, and chemicals, that are used in production. That's
what differentiates them from consumer goods.
iv. Entrepreneurship is the drive to develop an idea into a business. An
entrepreneur combines the other three factors of production to add to supply.
The most successful are innovative risk-takers.

QUESTION 4

Scarcity is when the available economic resources are insufficient to produce all the
goods and services required to satisfy all human wants.

A want refers to man’s desire to possess/consume goods and services. Man’s wants
are unlimited, but the resources available in the world is insufficient to produce all the
goods and services to satisfy all of man’s wants

QUESTION 5

What to produce: Economic resources have alternative uses, that is, they can be
used to produce different types of goods and services. However, because there is
insufficient resources to produce all the goods and services that man wants, there is
a need to decide what goods and services to produce. The goods and services to
be produced must be those that are most desired by society, i.e. those goods
and services which will provide the maximum utility/satisfaction. For example, land
can be used either to grow vegetables, fruits, paddy, oil palm, rubber etc. Society
need to decide which crops are to be produced. If society thinks that paddy will
provide the maximum satisfaction, then it will decide to produce paddy with the land
available.

How much to produce: How much of a good or service to produce will be

dependent on the amount desired to be consumed by society. When more of a
good or service is produced, less of other goods or services can be produced since
less resources will be available for their production. Continuing the above example,
society will produce the quantity of paddy which it desires to consume.

How to produce: The method of production must be the one that is most
efficient, it will result in the lowest cost. This means that the method of production
selected must take into account the available technology, the availability of
resources and the cost of the resources. In the above example, society will choose
the method of producing paddy which involve the lowest cost.
 TUTORIAL 2

QUESTION 1

Both individual and market demand are governed by the Law of Demand. The law
states that as price rises, quantity demanded decreases and as price falls,
quantity demanded increases ceteris paribus. The Law of Demand implies that
there is a negative relationship between price and the quantity demanded.

QUESTION 2

 Change in quantity demanded

A change in the price will result in a change in the quantity demanded. An increase
in the price leads to a decrease in the quantity demanded. A decreases in the price
leads to an increase in the quantity demanded. The demand curve do not shift when
there is a change in the quantity demanded.

Price

P1 B

A
P0

C
P2
Qty
demanded
Q1 Q0 Q2
 P0 is the original price. If the price increases from P0 to P1, total quantity demanded
decreases from Q0 to Q1. This involves an upward movement along the demand
curve from point A to point B. This movement is known as contraction of demand.

On the other hand, if the price decreases from P0 to P2, total quantity demanded
increases from Q0 to Q2. This involves a downward movement along the demand
curve from point A to point C. This movement is known as expansion of demand.

 Change in demand

A change in the other determinants of demand lead to a change in demand. A

change in demand will cause the demand curve to shift. An increase in demand will
cause the demand curve to shift to the right while a decrease in demand will cause
the demand curve to shift to the left.

Price

D1
Qty
demanded
D0
Q0 Q1

Fig 2.1 Increase in demand

Demand curve shifts to the right from Q0 D0 to Q1D1. There is an increase in demand
Price
 Price

D0
Qty
demanded
Q2 Q0 D2

Fig 2.2 Decrease in demand

Demand curve shifts to the left from Q0 D0 to Q2D2. There is an decrease in demand.

QUESTION 3

Income

An increase in consumer’s income normally cause an increase in demand

while a decrease in income cause a decrease in demand.

Taste:

Change in consumers’ taste may cause either an increase or decrease in

demand. For example, the change in consumer’ preference for local fruits will
cause the demand for local fruits to increase and the demand for imported
fruits to decrease.
Prices of related goods

1. Substitutes-Two goods are said to be substitutes if an increase in the price

of one good leads to an increase in the demand of the other good. Eg cola
and pepsi

2. Complementary goods-Two goods are said to be complementary goods if

an increase in the price of a good leads to a fall in the quantity demanded
of the other good. Eg Petrol and Cars

Expectations of future prices:

When consumers expect future prices to decline, demand will decrease;

when they expect future price to increase, demand will increase. For example,
consumers expect the price of houses in the future to increase. They will
increase their demand for houses now in order that they will not have to pay
the higher prices in the future.

QUESTION 4

Substitutes: The larger the number of substitutes available, the more elastic
demand will be. For example, the demand for soft drinks, which have many
substitutes, will be more elastic than the demand for sugar, which have almost no
substitutes.

Budget: The larger the proportion of income spent on the good, the more elastic
the demand will be. For example, the demand for cars will be more elastic than the
demand for pens because consumers spent a larger proportion of their budget on
cars compared to pens.

Time period: The longer the time period, the more elastic the demand will be. This
is because the longer the time period, the better consumers can adjust to an initial
price change. For example, when the price of petrol increased, consumers will not
be able to decrease their demand of petrol very much initially. Over a longer period,
they will be better able to reduce their demand.
Nature of good: Luxury goods are more price elastic than necessities. For
example, the demand for holidays will be more elastic than the demand for food.

QUESTION 5

The Law of Supply states that quantity of a good/service supplied will increase as
price increase, there is a positive relationship between the quantity supplied and
price.

QUESTION 6

 A change in quantity supplied refers to a movement along the same

supply curve. It occurs when there is a change in price.

Price (RM)

SS

Quantity Supplied

An upward movement along the supply curve from point A to point C is known as
expansion of supply

A down ward movement along the supply curve from point A to point B is known as
contraction of supply
Change in supply

 A change in supply occurs when the supply curve shifts. It occurs when
a determinant of supply other than price changes. An increase in
supply means that the supply curve shifts to the right; a decrease in
supply means the supply curve shifts to the left.

Price (RM)
SS

Quantity Supplied (Units)

Increase in Supply

Price (RM)
SS

Quantity Supplied
(Units)
Decrease in Supply
QUESTION 7

Cost of Production : When the cost of production increase, the supply will decrease
and vice versa.

Number of producers/ firms

An increase in the number of producers will cause an increase in total output

produced. In general, the larger the number of firms producing a particular good/
service, the larger the supply of that good/service will be.

Technological Change :An improvement in the technology for production of a good

will increase its supply.

Firm’s expectation of future price change :When firms expect future price to
increase, they will reduce the current supply in order to sell the good at a higher
price in the future.

QUESTION 8

Time : In the short-run, supply is relatively inelastic compared to the long-run. In the
long-run, firms can fully adjust their supply to changes in price.

Nature of the Goods :The time taken to produce a good determined its elasticity.
Goods which require a long production period (gestation period) such as agricultural
products are relatively inelastic.

Cost of production : Goods which require a small change in production cost to

bring about a change in supply will have higher elasticity of supply.

Feasibility of storage :Goods which require that have lower storage costs have
higher elasticity of supply.
 TUTORIAL 3

a. An increase in supply
and demand remains
constant

b. An increase in demand
which is greater than a
decrease in supply

c. An increase in demand
equals to a decrease in
supply

d. An decline in demand
and supply remain
constant
QUESTION 2

A price ceiling occurs when the government puts a legal limit on how high the price
of a product can be. In order for a price ceiling to be effective, it must be set below
the natural market equilibrium.

QUESTION 3

Price floor are known as the minimum price regulations that has be set by the
government. Government are able to impose minimum price regulations so that the
price does not fall down. A price floor is the lowest legal price a commodity can be
sold at. Price floors are used by the government to prevent prices from being too
low. The most common price floor is the minimum wage--the minimum price that can
be payed for labor. Price floors are also used often in agriculture to try to protect
farmer
 TUTORIAL 4

QUESTION 1

a.

b. average fixed cost (AFC) is the fixed costs of production (FC) divided by the
quantity (Q) of output produced. Fixed costs are those costs that must be
incurred in fixed quantity regardless of the level of output produced.
c. marginal cost is the change in the opportunity cost that arises when the
quantity produced is incremented by one unit, that is, it is the cost of
producing one more unit of a good.

d. average variable cost (AVC) is a firm's variable costs (labour, electricity, etc.)
divided by the quantity of output produced. Variable costs are those costs
which vary with the output.
QUESTION 2

Short run production Long run production

 fixed input  no fixed input
 variable input  all input are variable
 subject to Law of Return to
scale
Examples:
 fixed input
inputs which quantities are difficult to
be adjusted according to output. Eg,
machine, land
 variable input
input which quantities are easily
adjusted according to the output. Eg,
workers, raw materials

QUESTION 3

Stage 1
Stage one is the period of most growth in a company's production. In this
period, each additional variable input will produce more products. This
signifies an increasing marginal return; the investment on the variable input
outweighs the cost of producing an additional product at an increasing rate.
As an example, if one employee produces five cans by himself, two
employees may produce 15 cans between the two of them. All three curves
are increasing and positive in this stage.

Stage 2
Stage two is the period where marginal returns start to decrease. Each
additional variable input will still produce additional units but at a decreasing
rate. This is because of the law of diminishing returns: Output steadily
decreases on each additional unit of variable input, holding all other inputs
fixed. For example, if a previous employee added nine more cans to
production, the next employee may only add eight more cans to production.
The total product curve is still rising in this stage, while the average and
marginal curves both start to drop.

Stage 3
In stage three, marginal returns start to become negative. Adding more
variable inputs becomes counterproductive; an additional source of labor will
lessen overall production. For example, hiring an additional employee to
produce cans will actually result in fewer cans produced overall. This may be
due to factors such as labor capacity and efficiency limitations. In this stage,
the total product curve starts to trend down, the average product curve
continues its descent and the marginal curve becomes negative.

QUESTION 4

4 cause of diseconomics of scale:

Poor communication
As the business expands communicating between different departments and
along the chain of command becomes more difficult. There are more layers in
the hierarchy that can distort a message and wider spans of control for
managers. This may result in workers having less clear instructions from
management about what they are supposed to do when.

Lack of motivation
Workers can often feel more isolated and less appreciated in a larger
business and so their loyalty and motivation may diminish. It is harder for
managers to stay in day-to-day contact with workers and build up a good
team environment and sense of belonging.

Loss of direction and co-ordination

It is harder to ensure that all workers are working for the same overall goal as
the business grows. It is more difficult for managers to supervise their
subordinates and check that everyone is working together effectively, as the
spans of control have widened. A manager may be forced to delegate more
tasks, which while often motivating for his subordinates, leaves the manager
less in control.

Economics of scale

Technology
Modern technology allows companies to automate production processes and
reduce errors resulting from human labor. Computers, business software,
production robots, and the Internet are a few technological items companies
use to develop an economy of scale. Companies also use technology to
develop specific production techniques that may give them a competitive
advantage over other companies. Increased production efficiency from
business technology allows companies to reduce infrastructure expenses.
Reduced expenses means companies have more cash to spend on
operational expansion.

Efficient Capital
Capital is financial resources available to companies for expanding or
improving their operations. Economies of scale may be achieved through
effectively using a mix of debt and equity financing. Creating positive cash
flows through profitable operations is another important factor of economies of
scale. Companies with higher amounts of available cash can operate better
because they focus less on generating cash and more on using available
cash balances to improve operations.

Trained Labor
Experienced or specially-trained labor improves a company’s production
process because employees are more capable of completing complex tasks.
While specially-trained labor may be costlier than untrained labor, the benefits
of improved operations outweigh the costs. Trained labor may be able to
complete more tasks with fewer workers. This saves cash and lowers a
significant portion of product costs. Companies hiring a large number of
trained labor may also reduce this workforce for competitors, who must
employ untrained workers for their company. Efficient workers improve
economies of scale by producing more goods in less time and may be able to
offer suggestions to improve production methods.

Cheaper Materials
Larger companies may be able to negotiate better material prices from
vendors and suppliers. They are able to accomplish this by purchasing a
higher volume of goods for their operations, which lowers the cost of materials
used during the production process. Purchasing lower quality materials
usually does not increase a company’s economy of scale. Lower quality
goods will produce an item that consumers may find inferior to other products.
This results in a diseconomy of scale because management decisions have
negatively affected the production process.
 TUTORIAL 5

QUESTION 1

Perfectly Monopoly Monopolistic Oligopoly

Competition competition
 large number of  one seller  large number of  few numbers
buyers and and one large sellers but large in size
sellers of buyers  differentiated  Homogenous or
 homogenous or  product has products differentiated
identical product no close  free entry and product
 free entry and substitutes exit  Mutual
exit  price maker  non price independence
 non- price  restriction on competition  Barriers to entry
competition the entry of  selling cost
new firm

QUESTION 2

Types of Long run Short run

profit
Perfectly
competition
Monopoly

Monopolisti
c
competition

Oligopoly

QUESTION 3

 Economies of scale - Cost advantages raise the stakes in a market, which can
deter and delay entrants into the market. This makes scale economies an
antitrust barrier to entry, but they can also be ancillary.[1] Cost advantages can
 sometimes be quickly reversed by advances in technology. For example, the
development of personal computers has allowed small companies to make
use of database and communications technology which was once extremely
expensive and only available to large corporations.

 Network effect - When a good or service has a value that increases on

average for every additional customer, this exerts a similar antitrust and
ancillary barrier to that of economies of scale.[1]

 Government regulations - A rule of order having the force of law, prescribed

by a superior or competent authority, relating to the actions of those under the
authority's control. Requirements for licenses and permits may raise the
investment needed to enter a market, creating an antitrust barrier to entry.

 Advertising - Incumbent firms can seek to make it difficult for new competitors
by spending heavily on advertising that new firms would find more difficult to
afford or unable to staff and or undertake. This is known as the market power
theory of advertising.[7] Here, established firms' use of advertising creates a
consumer perceived difference in its brand from other brands to a degree that
consumers see its brand as a slightly different product.[7] Since the brand is
seen as a slightly different product, products from existing or potential
competitors cannot be perfectly substituted in place of the established firm's
brand.[7] This makes it hard for new competitors to gain consumer
acceptance.
 TUTORIAL 6

QUESTION 1

1. Full employment - The country wishes to be as efficient as possible, and thus

to have the maximum number of workers part of the work force under
employment. An unemployment rate of 4–5% is considered full employment.

2. Low and sustained Inflation - A low rate of inflation around 2% helps spenders
and investors plan their spending appropriately. The 2% target helps keep
countries away from deflation (negative inflation where prices fall) and and
away from high levels of inflation where uncertainty leads to economic
downfall.

3. Distribution of income - A government aims for as equal a distribution of

income as possible, as that gives signs of a well-to-do economy where
everyone is well off, and no sections of the economy are better off than the
other.

4. Economic Growth - Economic growth in terms of increasing GDP year after

year. The quantity of the factors of production could be increasing or the
quality of the factors of production could be increasing, or both could be
increasing at the same time to help achieve this economic growth.

5. Balance of Payments - A government aims to import around the same value

of the goods it exports. This helps the country earn foreign currency, as well
as provide a more diversified product choice for the citizens of the country. A
country aims to neither be in a surplus (exports more than imports) nor in a
deficit (imports more than exports).
 TUTORIAL 7

QUESTION 1

The circular flow model in four sector economy provides a realistic picture of the
circular flow in an economy. Four sector model studies the circular flow in an open
economy which comprises of household sector, business sector, government sector,
and foreign sector.

Foreign sector has an important role in the economy. When the domestic business
firms export goods and services to the foreign markets, injections are made into the
circular flow model. On the other hand, when the domestic households, firms or the
government imports something from the foreign sector, leakage occurs in the circular
flow model.

The circular flow of income in four sector economy can be explained with the flowing
diagram:

From the view point of circular flow of income, each sector has dual roles to play in
the economy; while a sector receives certain payments from other sectors, it pays
back to those sectors as well.
QUESTION 2

1. Lack of statistical data :-

In the less developing countries, the accurate figures about the various sectors of
economy are not available due to this we are unable to estimate the real national
income of the country.

2. Lack of staff :-
There is a shortage of trained staff which may collect the statistics about the national
product.

3. Public co-operation :-
Public is also not ready to provide the correct figures about the income due to the
fear of income tax.

4. No account :-
Some people do not keep any proper account about their business income, so their
income is not included in the national income.

QUESTION 3

1: Standard of living comparison

National income data helps us compare the standard of living people in different
countries to the people living in the same country at different times .

2. Economic performance over time

National income estimates are given to measure the performance of an economy
over time by comparing the national income of one time period to that of another .
The national income tells us whether the economic performance of a nation is
growing , stagnant or declining . In Malaysia , the national income has been steadily
improving over time .

3. National planning
National income statistics are a very important tool for the government to formulate
its short term and long term economic planning . The government cannot formulate
any economic planning without knowledge of the trends in national income ..
4. Sectoral contribution
There are three main sectors in the malaysian economy . The primary sector
consists of agriculture , fishing and mining . The secondary sector consists of
manufacturing and construction . Finally the teriary sector comprises services like
government services ; electricity gas and water ; transport , storage and
communication ; and finance , insurance . real estate and business services .

5. Economic policy
National income statistics are an oimportant tool in macroeconomic policy and
analysis . national income estimates are the most comprehjensive measures of
aggregates economic activity in an economy. With national income estimeastes ,
future economic policies for development of a nation can be formulated .
 TUTORIAL 8

QUESTION 1

i. Tax: A tax is a compulsory levy imposed by a public authority against which

tax payers cannot claim anything. It is not imposed as a penalty for only legal
offence. The essence of a tax, as distinguished from other charges by the
government, is the absence of a direct quid pro quo (i.e., exchange of favour)
between the tax payer and the public authority.
ii. Rates: Rates refer to local taxation, i.e., taxation levied by (or for) local rather
than central government. Normally rates are proportional to the estimated
rentable value of business and domestic properties. Rates are often criticised
as being unrelated to income.

QUESTION 2

i. Recurrent expenditure on goods and services is expenditure, which does

not result in the creation or acquisition of fixed assets (new or second-hand).
It consists mainly of expenditure on wages, salaries and supplements,
purchases of goods and services and consumption of fixed capital
(depreciation).
ii. Capital expenditures or capex are the amounts spent for tangible assets that
will be used for more than one year in the operations of a business. Capital
expenditures can be thought of as the amounts spent to acquire or improve a
company's fixed assets. Some examples include the purchase of machinery,
equipment, furniture, building improvements, computer information systems,
and leasehold improvements.

QUESTION 3

i. The main function of taxation is the fiscal one. It is through fiscality that taxes
play their role in the formation of the state budget necessary for the realization
of national and holistic state programmes. The fiscal function provides for the
achievement of the main social goal of taxation — the formation of the state’s
financial resources necessary for executing the role of the latter (defense,
social, environmental protection, etc.)
 ii. The allocation function of taxation expresses their essence as a special
centralized instrument of allocation relations and consists of the social income
redistribution among various groups of citizens: from wealthy to deprived
ones, which ultimately provides for the assurance of the social stability of the
population.
iii. The regulatory function of taxation was initiated as soon as the state started
to take active part in the economic set-up of the society. This function is
aimed at achieving specific goals of the taxation policy through the taxation
mechanism.
iv. The controlling function of taxation — through taxation, the state controls the
financial-economic activity of juridical and natural persons. This also
contributes to controlling the sources of income and the directions of
spending.

QUESTION 4

i. This figure illustrates a progressive tax. The relationship is between the

tax base (income) and the tax paid. If a tax is progressive, the effective
tax rate increases as a person’s income goes up. In other words, as
the income of wealthier resident’s increases, the tax required of them
increases too.

ii. A proportional tax is an income tax system where the same percentage
of tax is levied from all taxpayers, regardless of their income.
A proportional tax applies the same tax rate across low-, middle- and
high-income taxpayers.
 iii. A regressive tax is a tax imposed in such a manner that the tax rate
decreases as the amount subject to taxation increases. "Regressive"
describes a distribution effect on income or expenditure, referring to the
way the rate progresses from high to low, so that the average tax rate
exceeds the marginal tax rate.

QUESTION 5

Fiscal policy is the means by which a government adjusts its spending levels
and tax rates to monitor and influence a nation's economy. It is the sister
strategy to monetary policy through which a central bank influences a nation's
money supply.

QUESTION 6

Monetary policy like the central bank or currency board, controls the supply
of money, often targeting an inflation rate or interest rateto ensure price
stability and general trust in the currency.
 TUTORIAL 9

QUESTION 1

a. Inflation is the rate at which the general level of prices for goods and services
is rising and, consequently, the purchasing power of currency is falling.

b.
i. Demand-pull inflation is asserted to arise when aggregate demand in
an economy outpaces aggregate supply. It involves inflation rising as
real gross domestic product rises and unemployment falls, as the
economy moves along the Phillips curve.

ii. Cost push inflation is inflation caused by an increase in prices of

inputs like labour, raw material, etc. The increased price of the factors
of production leads to a decreased supply of these goods.

QUESTION 2

a. Unemployment is a phenomenon that occurs when a person who is actively

searching for employment is unable to find work. Unemployment is often used
as a measure of the health of the economy.
 b.

Cyclical Unemployment
Over time, the economy experiences many ups and downs. That's what we
call cyclical unemployment because it goes in cycles. Cyclical unemployment
occurs because of these cycles. When the economy enters a recession, many of the
jobs lost are considered cyclical unemployment.
For example, during the Great Depression, the unemployment rate surged as high
as 25%. That means one out of four people were willing and able to work, but could
not find work! Most of this unemployment was considered cyclical unemployment.
Eventually, unemployment came down again. As you can see, at least part of
unemployment can be explained by looking at the cycles, or the ups and downs of
the economy.

Frictional Unemployment
Frictional unemployment occurs because of the normal turnover in the labor
market and the time it takes for workers to find new jobs. Throughout the course of
the year in the labor market, some workers change jobs. When they do, it takes time
to match up potential employees with new employers. Even if there are enough
workers to satisfy every job opening, it takes time for workers to learn about these
new job opportunities, and for them to be considered, interviewed and hired.
When Cindy graduates from college, she begins looking for work. Let's say it takes
her four months to land a new job. During this time, she is frictionally unemployed.

Structural Unemployment
Let's talk about structural unemployment, which occurs because of an absence of
demand for a certain type of worker. This typically happens when there are
mismatches between the skills employers want and the skills workers have. Major
advances in technology, as well as finding lower costs of labor overseas, lead to this
type of unemployment.

QUESTION 3

1.Loss of income: Unemployment normally results in a loss of income. The majority

of the unemployed experience a decline in their living standards and are worse off
out of work. This leads to a decline in spending power and the rise of falling into debt
problems. The unemployed for example may find it difficult to keep up with their
mortgage repayments.

2.Negative multiplier effects: The closure of a local factory with the loss of
hundreds of jobs can have a large negative multiplier effect on both the local and
regional economy. One person’s spending is another’s income so to lose well-paid
jobs can lead to a drop in demand for local services, downward pressure on house
prices and ‘second-round employment effects’ for businesses supplying the factor or
plant that closed down.

3.Loss of national output: Unemployment involves a loss of potential national

output (i.e. GDP operating well below potential) and is a waste of scarce resources.
If some people choose to leave the labour market permanently because they have
lost the motivation to search for work, this can have a negative effect on long run
aggregate supply and thereby damage the economy’s growth potential. Some
economists call this the “hysteresis effect”. When unemployment is high there will be
an increase in spare capacity - in other words the output gap will become
negative and this can have deflationary forces on prices, profits and output.

4.Fiscal costs: The government loses out because of a fall in tax revenues and
higher spending on welfare payments for families with people out of work. The result
can be an increase in the budget deficit which then increases the risk that the
government will have to raise taxation or scale back plans for public spending on
public and merit goods. The problems facing the UK government at the moment are
closely linked to the surge in unemployment.
 TUTORIAL 10

QUESTION 1

International trade is the exchange of capital, goods,

and services across international borders or territories. It is the exchange of goods
and services among nations of the world.

1) Greater Variety of Goods Available for Consumption:

International trade brings in different varieties of a particular product from different

destinations. This gives consumers a wider array of choices which will not only
improve their quality of life but as a whole it will help the country grow.

2) Efficient Allocation and Better Utilization of Resources:

ADVERTISEMENTS:

Efficient allocation and better utilization of resources since countries tend to produce
goods in which they have a comparative advantage. When countries produce
through comparative advantage, wasteful duplication of resources is prevented. It
helps save the environment from harmful gases being leaked into the atmosphere
and also provides countries with a better marketing power.

3) Promotes Efficiency in Production:

International trade promotes efficiency in production as countries will try to adopt

better methods of production to keep costs down in order to remain competitive.
Countries that can produce a product at me lowest possible cost will be able to gain
larger share in the market.

Therefore an incentive to produce efficiently arises. This will help to increase the
standards of the product and consumers will have a good quality product to
consume.

4) More Employment:

More employment could be generated as the market for the countries’ goods widens
through trade. International trade helps generate more employment through the
establishment of newer industries to cater to the demands of various countries. This
will help countries to bring-down their unemployment rates.
QUESTION 2

In economics, protectionism is the economic policy of restraining trade between

states through methods such as tariffs on imported goods, restrictive quotas, and a
variety of other government regulations.

Four reasons for implementation of protectionism

a. Protecting the infant industry. This is the most traditional excuse & is often
used by developing countries. They claim that they have many sunrise
industries with great potential to be transformed into international business.
b. Protecting jobs. At any given time in an economy, there will also be some
industries which are declining (sunset industries). Normally firms in this
industry have reached maturity stage but yet inefficient
c. Revenue. In many developing countries, it is quite difficult to earn sufficient
revenue from income tax & corporation tax. This is because, the level of
unemployment is usually high & there are very few large firms around.
d. National security. Some governments admit that although they may not
have comparative advantage in the production of a good, protectionist
measures must be maintained to ensure their survival.