G.C.E. (A/L) Support Seminar - 201421 - Economics - I

Guide for the Answer

QuestionNo.

AnswerNo.

QuestionNo.

AnswerNo.

1 5 26 2

2 3 27 5

3 4 28 2

4 1 29 5

5 3 30 2

6 3 31 2

7 3 32 4

8 3 33 3

9 5 34 1

10 4 35 2

11 1 36 5

12 4 37 4

13 5 38 1

14 3 39 4

15 2 40 5

16 3 41 2

17 3 42 4

18 5 43 5

19 2 44 4

20 4 45 1

21 1 46 1

22 3 47 2

23 3 48 4

24 4 49 3

25 3 50 5

Marks 2 ‹ 50 } 100

[See page 2

01' (i)

Criteria Economic systemi. Decision making and decision coordinat-

ing mechanism• Marketeconomicsystem

• Commandsystem

• Traditionalsystemii. Thenatureofpropertyownership • Capitalistsystem

• Socialistsystemiii. Thenatureofincentives • Traditionalsystem

• Commandsystem• Marketsystem

(ii) • Inatraditionaleconomicsystem,theoutputisdistributedinaccordancewiththedirectionsoftheleader/s,togetherwithtraditionsandcultures.

• Inacommandsystem,theoutputisdistributedbythedirectionsofthecentralplanningauthoritytomaximizethesocialwelfare.

• Amarket economy the distribution of income in a factormarket, rations and distributes theoutput. (03marks)

(iii)

PPC1 PPC20

Agriculturalgoods

Industrialgoods

- Due to the decrease in the factor requirement, the productivity increases and as a result theproductionpossibilitiesfrontierpivotstotherightonlyfromtheaxisthatshowstheoutputofindustrialgoods.

For the graph (02 marks)Fortheexplanation(02marks)

(iv) • Basiceconomicproblemsaresolvedbyusingbothpricemechanismandthecentralplanofthegovernment. • Boththeprivatesectorandgovernmentsectorownfactors. • Bothprivateenterprisesandpublicenterprisesexist. • Theprivatesectorprioritizes theprofitmotivewhereas thepublicsectorconsiders thesocialwelfare,

employmentcreations,politicalobjectivesetc. (03marks)

(v) Itistruetosaythatmostofthecountriesthatpreviouslyfollowedsocialistcommandsystemmovedtocapitalistmarketsystem.

Thefollowingwerethemainreasonsforthesocialistsystemtofail. • Bureaucraticcontrol • Limitedeconomicfreedom • Environmentaldegradation • Misplacedincentives (04marks)

G.C.E. (A/L) Support Seminar - 201421 - Economics - II

Guide for the Answer

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(06 marks)

[See page 3

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02. (i) Theinverserelationshipthatexistsbetweenthepriceofacertainproductandquantitydemandedof that product during a given period of time while all other determinants of demand are heldconstant. (02marks

(ii) • Giffengoods • Whenthequalityisdescribedbytheprice • Whenpeopleshowtheirsocialstatuswiththeprice (02marks)

(iii)a) Essentials b) Luxuries c) Substitutes d) Complements (04marks)

(iv)Qd=600-10P Qs=10P

SD

¹ ¹ ¹ ¹ ¹ ¹

-

-

-

-

-

-

30

20

10

0 100 200 300 400 500 600

40

50

60

Minimumprice

Price

Quantity (forequilibrium;02marks,Graphisnotcompulsory)

(02 maks) Qd = Qs 600-10P = 10P -10P-10P = -600 -20P = -600 -20 -20

P = 30 Qd = 600-10P Qd = 600-10×30 Qd = 300 (02 maks)

(ii) Consumersurplus Rs.50×100=Rs.5000

Businessrevenue Rs.50×500=Rs.25000 (02 maks)

[See page 4

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(iii) Beforethepricefloor }Rs.30‹300 } Rs.9000 } Rs.4500

2 2

Afterpricefloor }Rs.10‹100 } Rs.1000 } Rs.500

2 2

Thechangeinconsumersurplus }^500-4500& } -4000 (02 marks)

iv. Beforethepricefloor }Rs.30‹300 } Rs.9000 } Rs.4500

2 2

Afterpricefloor }Rs.50‹500 } Rs.25000} Rs.12500

2 2

Thechangeinproducersurplus }^12500-4500&} Rs.8000 (02 marks)

v. Thecostincurredbythegovernment}Rs.50‹400}Rs.20000 (02 marks)

vi. Deadweightloss

Thechangeineconomicsurplus }^Rs.8000-Rs.4000&

}Rs.4000

Thecostofthegovernment }Rs.20000

Deadweightloss }Rs.^4000-20000&

}Rs.16000 (02 marks)

^Totalmarks2x6=12&

03. (i) Short run production process Whentheemploymentofthevariablefactorsisincreasedwithagivenamountoffixedfactors,

afteracertainpoint,boththeaverageandmarginalproductivitydiminish.Wecallthisthelawofdiminishingmarginalreturns. (02marks)

Long run production process Whenafirmchangesallofitsfactors,thescaleofthebusinesswillchangeanditwouldcause

thereturnstoscale. (02marks)

(ii) Short run average variable cost Initially theSRAVCdecreasesandafter reachingacertainminimumpoint, it increases.This

iscausedbythelawofdiminishingreturnstothevariablefactor.Astheaverageandmarginalreturnsincrease,theAVCdecreasesandviceversa. (02marks)

Long run average variable cost In the long run initially, theLRACgraduallydecreasesand then itwill increase.During the

decreasingpartoftheLRAC,thereturnswillincreaseandviceversa. (02marks)

(iii) Monopoly firm • Downwardslopingdemandcurve • Imperfectinformationisthemainreason • Pricediscrimination (02marks)

Perfectly competitive firm

• Perfectlyelasticdemandcurve • Perfectinformation,homogenousproducts,unlimitednumberoffirms • Pricetakingbehaviour (02marks)

[See page 5

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(iv)

AR=MR

AVCATC

P

Q

MC

0

Price

Quantity

(02marksforthegraph)

HereatPprice,thetotalrevenuecancoverthetotalvariablecost.Therethetotalfixedcostisthemaximumloss.Althoughthefirmisshutdownthefirmexperiencesthetotalfixedcostanditisthetotalfixedcost.Ifthepricefallsbelowthe“P”price,thefirmwillshutdown.(02marks)

(v)

Monopolistic competition Monopoly• Alargenumberofsuppliers• Freeexitandfreeentry• Differentiatedproduct• Advertisingexists.

• Onlyonesupplier• Barriersforentry

• Specialanduniqueproduct• Advertisingdon’texist

(04 marks)

04'^i& Thevalueofgovernmentservicesisvaluedatthecostofproduction.

Forthatinnationalincomeaccountingthefollowingitemsareconsidered. • Expensesongoodsandservices • Wagesandsalariestoemployees • Provisionsforcapitaldepreciation (03marks)

^ii&1. Netexports = Grossdomesticproduct–Grossdomesticexpenditure = 1200–1800 =-600 (01mark)

2. Disposablegrossnationalincome =GDP+Netforeignfactorincome+netforeigncurrenttransfers =1200–800+900 =1300 (01mark)

3. Grossdomesticsavings=GDP–Totalconsumption =1200–600 =600 (02mark)

4. Nationalsavings=DNI–Totalconsumption =1300–600 =700 (01mark)

[See page 6

5. Currentaccountbalance=NX+NFFI+NFCT =–600–800+900 =-500 (01mark)

‹100}1000

‹100

6.Realgrossdomesticproduct = 1200

120

Economicgrowthrate = (RealGDPofthecurrentyear–RealGDPofthepreviousyear) RealGDPofthepreviousyear = (1000-900) 900

= 11'1] (02 marks)

‹100

(iii) Ú Secondhandsales Ú Intermediateproducts Ú Transferpayments Ú Purelyfinancialtransactions (03marks)

(iv)• Valueaddediscalculatedbydeductingthevaluesofintermediateproductspurchasedfromotherproducers from the selling price.This value addition comprises of the factor incomes (rent,salary,interest,profit)

• Theincomeapproachalsoconsidersthefactorincomesmentionedabove. • Thereforebothofthesemethodsconsiderthefactorincomes. (03marks)

(v) • RealGrossNationalproductistheGNPcalculatedatconstantpricewhereonlyrealeffectsofthechangeinoutputisproducedwithoutconsideringtheinflationaryeffect.

• RealNationalIncomeistheGNPadjustedtotheimpactoftermsoftrade. • ThereforethedifferencebetweentheRealGNPandRealNationalIncomeistheimpactofterms

oftrade. • RNI=RealGNP+Exportpurchasingpower–Exportvalueatconstantprice (03marks)

05. (i) • The relationship between the change in personal consumption to the change in disposableincome.

MPC=ΔC ΔYd (01mark)

• Therelationshipbetweenthechangeinsavingstothechangeindisposableincome

MPS=ΔS ΔYd (01 mark)

• Inasimpleeconomy,thesumofbothMPCandMPSequals1.

C+S=Yd

ΔCΔYd

ΔSΔYd

ΔYdΔYd

+ =

MPC+MPS=1 (02 marks)

(ii) Theequilibriumlevelofnationalincomeisthesituationwherethelevelofoutputdoesn’thaveanytendencyeithertoincreaseordecrease. (02marks)

Therearetwoconditions 1) Actualoutput = Plannedaggregateexpenditure Y = E Y = C+I+G (01marks)

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[See page 7

2) Withdrawals = injections W = J S+T = I+G (01marks)

(iii)

•

•

•

•

Aggregateexpenditure

Income

•

Y1

Y=E

Y2 Y3

C

DE

E

A

B

•

O AtY1levelofoutput,Y<E,Thereisashortageofstocks,andasaresultthelevelofoutputwillexpand. AtY3levelofoutput,Y>E,Thereisasurplusofstocks,andasaresultthelevelofoutputwillcontract. AtY2levelofoutput,Y=E,Thereisn’tanyunplannedstocks,andasaresultthelevelofoutputwill

remain constant. (04 marks)

(iv)a) Y=E Y=C+I+G Y=180+0.8yd+120+160 Y=180+0.8(Y-100)+120+160 Y=460+0.8y - 80 Y=380+0.8y Y-0.8y=380 0.2 y=380

y=

3800.2

y=1900 Or W=J S+T=I+G -180+0.2yd+100=120+160 -180+0.2(y - t)+100=280 -180+0.2(y-100)+100=280 -100+0.2y=280 0.2 y=380 y=1900 (02marks)

b) Taxmultiplier Governmentspendingmultiplier

KT=

- 4

-b1-b

- 0.8(1 - 0.8)

- 0.8 0.2

KT=

5

11-b 1 1 - 0.8

10.2

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(02 marks)[See page 8

(v)

•

Aggregateexpenditure

Income Y1

Y=E

YF

A

(E)

(Y)

B•

E2EfE1

•

O (02 marks) mQr®Kfiajdkshqla;siu;=,s;ksuejqïuÜgu

• InflationarygapisshownbyA-Bgap.(01marks) • UnemploymentgapisshownbyY1-Yfgap.(01mark)

06. (i) • Mediumofexchange • Standardofmeasuringvalue • Storeofvalue • Methodofmakingdeferredpayments (04marks)

(ii) (a) Excessreservesofthebank =200-(1800x10/100) =200-180 =20 (02marks) (b) Thebalancesheetofthebank

Liabilities AssetsDeposits 1820 Reserves200

Loans1620

1820 1820 (02 marks)

(Forthecorrectvalueofdeposits;01mark) (Forthecorrectvalueofloans;(01mark)

(c) Theadjustedbalancesheetofthebank

Liabilities AssetsDeposits 1800Reserves180 Loans1620

1800 1800

(Forthecorrectvalueofdeposits;01mark) (Forthecorrectvalueofloans;(01mark) (02 marks)

(iii)(a) - Currencyheldbythegeneralpublic - Currencyheldbycommercialbank - Demanddepositsheldbycommercialbankswiththecentralbank - Depositsheldbygovernmentinstitutionswiththecentralbank (02marks)

b) Usuallythevalueofthemoneymultipliermustatleastbe1.Itisbecausethemoneysupplymustcontainatleastthemonetarybase.Whenmoneyiscreated,themoneysupplywouldexceedthemonetarybaseandasaresult,themoneymultipliermustbegreaterthan1.

(02 marks)

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[See page 9

(iv) • Decreasingtheinterestrate • Decreasingthestatutoryreserveration • Purchasingsecuritiesfromthereverserepomarket (03marks)

(v) Whentheinputpricesincreasetheaggregatesupplycurveshiftstotherightandwecallthis“costpushinflation”.Thefollowingreasonswillaffectit.

• Increaseinthewagerateduetothepressuresofthetradeunions • Expansionofprofitmarginsbybusinesses • Increaseinthecostduetosupplyshocks (03marks)

07' (i) Themethodthatisusedbythegovernmenttoobtaintheassistanceandcontributionoftheprivatesector tosuccessfullyprovideinfrastructurefacilitiesandotherpublicservicesis termedas“PPP(PublicPrivatePartnership)”.ThiscanbeseeninBOT,BOO,BOOTetc. (02marks)

The advantages of PPP 1. Canlimitgovernmentborrowings 2. Improvementinefficiency 3. Improvementinqualityandproductivityofprojectsandservices 4. Abilitytoobtainimprovedtechnology (02marks)

(ii) 1. Reducingthedisparitiesinincomeandwealth 2. Managingresourcesefficiently 3. Decreasingtheconsumptionoftheproductsthathaveahighersocialconsumption 4. Managingaggregatedemand 5. Influencingaggregatesupply 6. MinimizingBOPproblems (04marks)

(iii)Currentexpenditure 1. Expenditureongoodsandservices 2. Interestpayments 3. Currenttransferpayments (02 marks)

Capitalexpenditure 1. Acquisitionofrealassets 2. Capitaltransfers 3. Netlending (04 marks)

(iv)a) Currentaccountbalance =-3500 b) Overallbalance =-9000 c) Balanceoftheprimaryaccount =-8500 d) Governmentconsumption =15000

a) Currentaccountbalance =totalrevenue –recurrentexpenses b) Overallbalance = totalrevenue›grants–totalexpenditure c) Primaryaccountbalance= totalrevenue›grants–totalexpenditureexcludinggovernment interestpayments d) Publicconsumption = currentexpenses–(interestpayments+currenttransfers)

(04 marks)

(v)ÚTheabilitytohonourcurrentandfuturedebtobligationsofthegovernmentwithouthavinganyneedofchangingtheconditionsandadjustments. (02marks)

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[See page 10

Ú Toevaluatethistheindexthatisusedis“governmentdebtservicingindex”.

Debtservicingindex= debtrepaymentsandinterest

GrossDomesticProductŸ100

ÚRecent trends 2010}14'6]

2011}13'7]

2012}13'4] (02 marks)

08. (i) a) Theabsoluteadvantageisconcernedwiththeproductthatisproducedwiththeleastrelativecostof resources. In thatwither theproductwith the lowercostorhigherefficiencywillbespecialized.

Incontrast,comparativeadvantageisconcernedwiththeproductwiththeleastopportunitycostofproduction.Heretheproductthathastheleastopportunitycostisselectedtospecialize.

(03 marks)

b) (1) Perfectfactormobility (2) Constantreturntoscale (3) Noexternalitiesofproductionorconsumption (4)Costoftransportisnotconsidered

(02 marks)

(ii) a) • Protectinginfantindustries • Diversifyingtheproductstogainstability • Preventingdumpingpractices • Promotingemployment • Nationaldefences • MinimizingBOPcrises

(02 marks

b) • Imposingquotas • Providingincentivesorsubsidiesfordomesticproduction • Controllingforeignexchange • Limitsforexportsandimports • Tradebarriers • Settingadministrativeandtechnicalbarriers (02marks)

(iii) Portfolioinvestmentmeanstheforeigninvestmentsinshares,bonds,debentures,moneymarketdebtsecuritiesandfinancialderivatives. (01marks)

ForeignDirectinvestmentsmeantheforeigninvestmentsmadeindomesticbusinessesforlastinginterests. (01 marks)

WithFDI,acountrygetshumancapital,technologyandmanagementfromforeignsector.Thiswouldfurtherpromotedomesticemployment,forwardandbackwardlinkagesinindustriesbypromotingeconomicgrowth. (02marks)

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[See page 11

(iii) 1. Promotingtraditionalexports 2. Establishingexportpromotionzones 3. Exportdiversification 4. Tradeagreementswithothercountries 5. Promotingimportsubstitutionindustries 6. Devaluatingthedomesticcurrency 7. Controlling domestic inflation and improving domestic competitiveness in the foreign

markets 8. Discouragingnon-essentialimports (03marks)

(v) • AsSriLankaisconsideredasalowermiddleincomeearningcountry,theabilitytotakesoftloanswillmoveawaytohard/commercialloans

• Commercial loans will increase due to the concessionary loans provided by bilateral tradeagreementsandEUROunion

• Obtaininglongtermdebtfinancingsuchaswithyearmaturityperiodthroughtheinternationalfinancialmarket

• Increaseininterestexpensesduetothehigherorientationofshorttermdebtfinancing(04 marks)

09. (i) a) • Sacrificingthecurrentconsumption • Environmentaldegradation

• Inflation • Disparitiesinincomedistribution (03marks)

b) - Economicdevelopmentisanevolutionaryprocess. Thechangesinquantitative,qualitativeandstructuralchangescanbecollectivelyconsidered

aseconomicdevelopment. (02marks)

- Thefollowingchangesmustoccurwhenacountrydevelops. - Promotingindustrialization - Decreaseintherelativecontributionoftheagriculturalsector - Changeininternationaltradepattern - Improvementinresourceproductivity - Modernization (02marks)

(ii) - Humanpoverty refers to the situationofdeprivationofopportunities toobtain and sustain ahappyandhealthystandardoflivingduetothelossofselffreedom,selfesteemandrespect.

(02 marks)

- Humandevelopmentistheprocessthatpromotesopportunitiesandapproachforasuccessfulstandardoflivingwithlongevityandotherhealthyandcivilizedhumanlife. (01marks)

According to theabovedescription itcanbenoted that themovementfrompoorstandardoflivingtohigherstandardoflivingcanbeconsideredashumandevelopment.Thefollowingarethe main criteria.

• Itemsthatareneededforagoodlife • Health • Security • Freedomtochoose • Socialcontacts (01marks)

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[See page 12

(iii) (a) - Longevity(health) - Knowledge(education) - Higherstandardofliving (03marks)

(b) - Health - Education - Standardofliving (03marks)

(iv)(a) - Developingruralroads - Ruralelectricitydevelopment - Improvingirrigation - PromotingITfacilitiesinruralsector - Roadnetwork,portsandaviationservicespromotion - DiviNegumaprogramme - Regionaldevelopmentprojects(UthuruWasanthaya,pubudamuwellassa,nagenahiranavodaya) (03 marks)

10. (i) Prosperityindex (01marks) Year Prosperity Index 2011 62'5

2012 66'8 (02 marks)

(ii) - IncreasingGDPtoUS$185 - Decreasingtheemploymentrateto3% - Decreasingthepovertylevelto2% (03marks)

(iii)- MakingtheglobalattitudesontheimageofSriLanka - Makingdiversifiedextensivemarketstocoverthefieldsthatwouldattractforeigntourists - Constructinghotelstofulfiltheincreaseddemandoftourists - Improvingtheinformalsectorrelatedtotourismindustry - Developingandmaintainingthelocationsoftouristattraction - Promotingrailway,highwayandairwaytransport - Traininglabourforcetotreatcustomers (04marks)

(iv)Higherperformancehasbeenattained.

- TheMillenniumDevelopmentGoals(MDG)thatweresetintheyear2000,mustbeattainedinyear2015.Eradicationofextremepovertywasoneofthegoals.

- SriLankahasattainedthatgoalbytheyear2013.

YearPovertyheadcountindex

2002 22'7

2006$7 15'2

2009$10 8'9 (04 marks)

(v)TherearefourobjectivesofDiviNegumaprogramme. (i) Improvingfamilynutrition (ii) Decreasingthedailycostoflivingoffamily (iii)Ensuringfoodsafetyoffamily (iv)Generatingadditionalincomesourcesforfamilies (02marks)

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[See page 13

The method of implementation

Stage1 : “Isurumath Nivahanak – Asirimath Mawubimak” Making one million economichouseholdunits

Stage2 : Makingbenefits to2.1economichouseholdunitsbyprovidingvegetable, fruitsandothercommercialseeds

Stage3 : Making200divinegumaentrepreneurialcentresbygivingbenefitsto2.5householdunitsbygivinglivestock,storingandsmallscalericemanufacturingcentres

Stage4 : Providingseeds,fruits,flowers,herbalplantsPeoplewhohave¼and2½acreslandswerepromotedtostartcommercialplantation

Therewere5millionbeneficiariesandthetotalcostwasRs.5.9billion. In year 2013, the Divi NegumaAct was approved and a national level regulatory

frameworkwasset.

Formingthe“DiviNegumadepartment”bycombiningSamurdhiauthority,Southerndevelopmentauthorityandetc (04marks)

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