Economics - Advanced National Examination Paper 2 - 2016

2016 – ECONOMICS PAPER 2

SECTION A
1.
(a).
Define national income.

National income is a measure of the total monetary value of the flow of final goods and
services arising from productive activities of a nation in any one year. Although
monetary value is used, economics is concerned with real things.
(b).
Describe five determinants of the size of national income.

Determinants of the size of national income

Available stock of natural resources: Availability of large stocks of natural resources
such as minerals, water sources, soils, favourable weather conditions recipitates the
growth of national income while low stocks of natural resources leads to low production
and consequently to low national income.
Stock of capital goods: The size of national income depends on the size of capital
goods such as factories, machines, infrastructures, etc. If they are available in large
quantities a country will experience faster growth of the national income unlike when the
nation in facing shortage of capital goods.
Level of technology: The size of national income depends on the level of technology a
country has achieved; if the country’s production is done by using advanced technology
output will be large as well as the national income.
Terms of trade: This is the ratio of the price index of exports and price index of imports.
If the price index of a country’s exports is greater than the price index of imports, the
national income will grow since more income will be received through exports unlike
when the terms of trade are unfavourable.
Human resources available: National income also depends on the available skilled
and unskilled labour, managerial capacity, efficiency and the number of entrepreneurs.
Government policies and actions: The growth of national income depends on good
economic policies which are formulated by the government in order to stimulate more
people to invest in productive activities. For example, giving tax-holiday to investors who
invest in selected industries or reach a certain level of capital injection.
Political situation: When there is political stability in a country investors are confident
to invest their capital as they have assurance of getting returns on their businesses and
thus national income increases.
(c).
Explain four uses of the national income statistics.

National income statistics are used for different purposes by the government as
explained below:-
Preparation of national budget: Estimates of national income are very important
because they are used as a basis for the formulation of the national budget by the
government; i.e. the government uses the national income statistics to estimate it’s
revenue and expenditure for the current year. Likewise, the government uses national
income data to formulate national plans and policies.
Identification of economic problems: Through national income data, economic
problems such as unemployment, inflation, unfavourable balance of payments, etc. are
identified.
Decision making: National income statistics can be used by the government to make
decisions concerned with allocation of resources in different alternative uses. It means,
by knowing the national income, the government is able to decide how much to allocate
it’s resources in different sectors of the economy and provision of social services. Also
national income statistics enable the government to estimate the revenue and
expenditure in a given financial year.
Assessment of the performance of each sector of the economy: National income
statistics can be used to show the performance of each sector of the economy to the
national income by examining the contributions of each sector i.e. by using national
income data we can know the contribution of agriculture, industries and mining sectors,
etc. Basing on this fact, the government can make decisions on which sectors to be
given priorities and assistance.
Distribution of national income: National income statistics shows the distribution of
national income to various factors of production. From the national income data, we can
know how much each factor of production is rewarded.
Identification of national income growth rate: National income statistics are used to
show the growth rate of the national economy by comparing the GNPs of different
years. For example, if the GNP of Tanzania in 2013 was Tsh 100, Millions and the GNP
in 2014 was Tsh 130 Millions it means that the GNP has grown by 30 Millions which is
equal to 30%.
2.
(a).
What is VAT?

VAT is the acronym for value added tax. This is a types of tax which is imposed on each
stage of production, exchange and distribution. For example, when a television set is
designed and made by a company the manufacturer is charged VAT on all of the
supplies he purchases to manufacture it. Once the tv-set reaches the shelf, the
consumer who purchases it must pay the applicable VAT.
(b).
Explain four advantages and six disadvantages of VAT.
SHOW ANSWER
(c).
“Tax incidence does not always fall on the consumer.” Giving four points substantiate
this contention.
Tax incidence means the burden that is borne by the tax payer. It is a term used for the
division of a tax burden between a buyer and a seller. Tax incidence does not always
fall on the consumer for the following reasons:-
Tax on goods with elastic demand: These are goods for which a change in price
brings about a vast change in the quantity demanded. When tax is imposed, price
increases by the amount of tax resulting in a large decrease in the quantity demanded.
The tax burden therefore falls heavily on the producers because of large decrease in
the quantity demanded by the consumers.
Corporate income tax: Generally, corporations competing in a competitive market are
price takers, so the prices that they can charge are determined by the market. Hence,
corporations selling products or services in a competitive market place generally bear
the burden of the income taxes.
Property taxes: The tax incidence of property taxes will generally fall on the owners of
property, especially since property taxes are usually assessed annually. However, the
tax incidence will depend on tax rates of surrounding tax districts.
Tax burden could be evenly split: The tax burden in some cases could be evenly split
between the consumer and the producer. For example, if a government puts 100/= tax
on each packet of cigarette, the legal incidence is on the cigarette smoker but the local
market may have many sellers and be highly competitive. This means that retailers,
fearing that they will lose sales, may decide to put up the price by only 500/= and pay
the balance of Tsh 500 to the government themselves. In this case, the economic
incidence is shared because both are worse off.
3.
(a).
Define:
(i) Externalities
(ii) Transboundary externality

(i) Externality refers to costs or benefits of an economic activity experienced by

unrelated third parties. Pollution emitted by a factory that spoils the surrounding
environment and affects the health of nearby residents is an example of a negative
externality. The effects of a well reeducated labour force on the productivity of a
company are examples of positive externalities.
(ii) Trans boundary externality refers to an externality or consequence of an economic
activity that originates in one country but, by crossing the border, it can cause effects to
the environment of another country.
(b).
Explain eight methods which can be used to control environmental pollution in a
country.

Environmental pollution is the contamination of the environment by introduction of

substances that can cause damage, harm or discomfort to humans or other living
species.
Below are several ways to control environmental pollutions in a nation.
Strict law enforcement against environment pollution: The government must make
laws which punish those people who pollute our environment. For example, those who
own industries which emit toxic smoke and spill chemicals to the environment have to
be punished by paying huge amounts of money so as to discourage them from polluting
the environment.
Use of alternative sources of energy such as solar power: Considering that solar
radiation is recently at a climatic peak, it is possible to reap power from the sun using
solar panel systems. These range from home systems to larger scale systems powering
entire communities and cities.
Education: People should be educated on the importance of conserving the
environment. This education can be provided through the mass media and introducing
conservation courses in schools. The government and other organizations concerned
with environmental conservation of water resources should involve local communities so
as to get maximum cooperation in their endeavours.
Controlled use of agro-chemicals: Farmers should be educated on the correct use of
agro-chemicals. Also, agricultural activities should not be carried out in areas close to
water bodies since agro-chemical may harm living organisms such as fishes and water
plants.
Recycling of products: People should be advised to recycle wastes instead of
dumping them or littering them in the environment. Apart from recycling, re-use of some
of the materials could come in handy.
Afforestation and reforestation: Afforestation refers to the act of planting trees on a
land that has scanty or no vegetation. Reforestation refer to planting of vegetation on an
area whose natural vegetation has become scanty or cleared by man.
Rehabilitation of exhausted lands: This involves reclaiming abandoned land such as
mines and re-using the land for other economic activities. Land rehabilitation can
include levelling up of a heap of rock, replacement of the top soil with a fertile one, filling
up holes and planting trees in exhausted areas.
Quotas on pollution: The government should put a limit on the amount of pollution to
be introduced in the environment. This method is applied to those whose activities
necessarily lead to pollution.
4.
(a).
“Tanzania foreign exchange system is the liberalized foreign exchange regime.” Justify
this statement by giving five points.

A liberalized foreign exchange regime refers to a system that has an exchange rate
which is determined by forces of demand and supply. Tanzania foreign exchange
system is a liberalized forex regime. The following are the justifications of the
statement:-
- The system does not necessitate financial institutional arrangement, for example, the
World Bank, I.M.F etc. for borrowing and lending to curb the short term equilibrium
balance of payment.
- The price of the domestic currency (TZS) is free against the foreign currencies as it is
determined by the market forces of demand and supply.
- The existence of price fluctuations justifies the liberalized forex regime in Tanzania.
The floating foreign exchange programmes subjects the Tanzania shilling to
fluctuations.
- Tanzania’s economy is liberalized: A liberalized foreign exchange regime works well
under a liberalized economy, therefore this further justifies the statement.
(b).
Describe the roles played by the following types of financial institutions existing in
Tanzania:
(i) Central bank
(ii) Commercial banks
(iii) Specialized banks
(iv) Cooperative banks

(i) Central bank: The primary role of a central bank is to control the nation’s money
supply (monetary policy) through active duties such as managing interest rate, setting
the reserve requirement, and acting as lender of last resort to the banking sector during
times of bank insolvency or financial crisis.
(ii) Commercial banks: They provide financial services to the general public and
businesses ensuring economic and social stability and sustainable growth of the
economy.
(iii) Specialized banks: They finance specialized economic and social activities such as
agricultural activities, mining, production of goods, etc.
(iv) Savings Banks: They assemble capital from the community, conserve the idle
wealth and having aggregated it into sizable funds, lends it to business enterprises.
(v) Cooperative banks: They hold deposits, provide loans and other financial services
to cooperatives and members organizations.
5.
“Private crop buyers play a significant role in the Tanzanian economy.” Critically discuss
this contention showing five advantages and five disadvantages of private crop buyers
in the Tanzania economy.

Private crop buyers are individuals or business firms which have been registered by
the government to purchase cash crops directly from the peasants.
The following are advantages of private crop buyers
Cash transactions: Private crop buyers have been buying crops on cash basis unlike
cooperatives which usually buy on credit basis.
No delay in purchasing and payments: Delay in purchasing and payment to peasant
is reduced, peasants sell their crops on time and payments are usually done on the
spot.
Less bureaucracy in buying crops: Existence of private crop buyers has reduced the
bureaucracy in buying crops. Since they buy directly from the peasants there in
increased efficiency in the purchasing process.
Reducing financial burden to the government: The government is relieved of the
burden of providing subsidies to the co-operatives. Therefore, private crop buyers are a
blessing in disguise to the Tanzania government.
Healthy competition: Private crop buyers trigger a healthy competition in crop buying
which leads to increase in the prices of the crops that are bought.
Disadvantages of private crops buyers
Instability of income: Private crop buyers sometimes lead to unstable income among
the peasant when they purchase from them even in small quantities which earns some
peasants little money.
Weakening peasant’s bargaining power: An individual peasant alone cannot
influence the price of his cash crops and hence he sells his crops at low price.
Less quality of cash crops: Competition in the buying of crops has in some cases led
to a drop in the quality of crops since peasants might be enticed to sell crops
prematurely in order to make quick money.
Social evils: Private crop buyers have created an urge of making quick money among
the residents of rural areas; this has led to increase in theft of crops in some areas.
Unfair price control: In some areas, private buyers attempt forming joint ventures in
order to control the prices and therefore they purchase crops at low prices because they
have power over the price.
SECTION B
6.
“Price of agricultural products fluctuates more than the price of manufactured goods.
“Give six arguments to support the statement and provide four measures which can be
taken to arrest the situation.

Price fluctuations are changes in price in form of “ups” and “downs” over a period of
time. Prices of agricultural products are unstable in that they fluctuate more than the
prices of manufactured goods because of the following reasons:-
Natural factors: These include weather, pests and diseases which reduce the volume
of output. With favourable natural conditions, output increases leading to fall in prices.
Unfavourable natural factors lead to a fall in output and increase in prices.
Perishability of agricultural products: Many agricultural products have to be sold
immediately after harvest and consequently leads to a fall in their prices during
harvesting time. Usually before harvest, the prices are high due to little supply.
Gestation period: Once a given amount of seeds are planted, it is quite difficult to
increase supply. The price within the short run will tend to be high. In the long run, the
price will tend to be low since the quantity supplied would have increased.
Farmers ignorance: Planning amongst farmers and peasants is difficult. They are
ignorant about the relationship between outputs, gestation period and the price for their
products. As a result they cannot control the volume of their products to be sold so that
they get the right price.
Inadequate storage facilities: Most of the farmers in Tanzania have no storage
facilities. Due to this, they are forced to supply all their products to the market at once.
By so doing the supply of agricultural products increase in the market and hence prices
fall.
Changes in cost of production: When production costs increase, prices of agricultural
products will rise as well. When the cost of production decreases the price of the
products will also decrease.
The following are the measures which can be taken to control price fluctuations of
agricultural products
Improvement of infrastructures: Road and railway transport and communication in
general have to be improved in order to facilitate marketing of agricultural products and
timely transportation of inputs like fertilizers, seeds, pesticides, etc.
Establishment of farmers banks: The government and other stakeholders should
establish bank departments that will customize financial services to suit farmers. These
will help farmers to make important decisions and take actions with ease when they
have such services as loans.
Provision of financial assistance to peasants: The government and other non-
governmental organizations have to assist by providing credits and subsidies in order to
enable them to buy farm inputs. For example, they can use such credits to buy
fertilizers, tractors, pesticides, etc.
Mechanized agriculture: The farmers have to be advised to change their perception of
their agricultural activities. They have to use modern techniques and equipment in their
activities for example, using tractors for cultivation of land instead of the hand hoe.
Provisions of Education and training: The government through the ministry of
agriculture has to provide education and training to the peasants on better methods of
farming. Also they should often be informed about the market situation.
7.
(a).
Examine five problems facing the new East African Community.

The treaty of establishing the new East African Community was signed in Arusha,
Tanzania on 30th November 1999 and came into force on 7th July 2000 with the goal of
widening and deepening cooperation among the partner states in economic, political,
education, science and technology, defence and security, health, judicial and legal
system.
The following are the problems facing the new East African Community:
Weak private sector: In regions of East African, the private sector is incapable of
utilizing the resources available and establishing large trade relationship.
Fewer goods to exchange and low volume of trade: This is due to the fact that all
the East African countries produce similar agricultural products and have a low level of
industrial development.
Political instability: Within the individual countries, there are frequent conflicts and
wars. This endangers the co-operation objective of moving towards the same direction.
For example, in Uganda there are frequent wars between the government and rebel
armies.
Poor transport and communication networks: The misery of this problem is that, it
discourages the economic activities and interaction between one member state and
another.
Loss of revenue: EAC has led to the loss of revenue in terms of custom duties to
member countries due to the removal of tariffs on the goods across the borders and
thus revenue to the governments of member countries decreases.
Differences in currencies: Each country in the East Africa Community has its own
currency. This situation creates hardships to businessmen when transacting with clients
or suppliers in member countries.
(b).
Devise any five tentative measures which are likely to solve the problems facing the
new East African Community.

Measures likely to be taken to solve the problems facing the new East African
Community:-
Improvement of infrastructures: For a better interaction among the member states,
be it socially or economically, there has to be an improvement of transport and
communications systems. These will enable swift movement of goods, people and
information across the region.
Ensuring availability of sufficient electric power in member countries: Since most
of the production and service delivery activities heavily rely on electricity for sustainable
engagement in production and trade member countries should ensure that electricity is
available throughout the year.
Commitment of leaders: The presidents of each country should understand and
pursue the mission and vision of EAC with commitment and dedication to its course.
Increasing infrastructural connectivity with neighbouring countries: Roads,
railway lines and communication networks should be advanced and extended so that
they can efficiently serve nearby countries. This will facilitate fast and efficient flow of
goods and services across the region and to neighbouring countries.
Ensuring peace and political stability: Peace and political stability are the basics of
doing business in any place. EAC member states should do their best to mitigate
conflicts and ensure peaceful power transitions so as to encourage economic activities
in the region.
Encouragement of regional trade and investments: Governments should encourage
their citizens to explore and harness the opportunities available in member countries
such as business skills, branding, retail trade and service delivery. If regional trade
rises, so does the community become stronger.
Encouragement of production of differentiated products: Member countries should
be encouraged to produce commodities of their comparative advantages in order to
keep the exchange activities among the nations sustained. This will also increase
production, efficiency and specialization among members.
Removal of barriers to trade: Member countries should agree to remove all forms of
barriers to trade in order to encourage exchange of goods and services within the
region. This will keep prices of goods and services from member countries low and so
give them advantage over countries out of the region.
Creation of a customs union: By creating a customs union among members and
reducing trade barriers, goods and services from member countries will sell more
across and outside of the region and so lead to trade creation.
Joint investments and projects: Member countries should work together and open
joint projects in member countries. These joint projects will inspire and encourage the
citizens to uphold values of unity and cooperation with each member’s citizens.
8.
(a).
Briefly explain what is economic development.

Economic Development is the quantitative and qualitative improvement in the

economy of any society/country associated with the increase in the gross national
product and improvement in the welfare of the people.
(b).
Asses four determinants of economic growth.

Economic growth is the quantitative increase in a country’s productive capacity/output.

This means, it is the increase in the volume of goods and services produced in an
economy.
Availability of natural resources: If a country has enough natural resources such as
arable land, minerals and a favourable climate, and they are well utilized, it can achieve
economic growth whereas if the country is not gifted with natural resources, economic
growth will be hard to achieve.
Size of labour force available: Labour force greatly contributes in the production of
goods and services which is a major factor in increasing economic growth. If the country
has a large labour force it can increase the size of its national output, and so achieve
economic growth fast.
Availability of capital: If a country has a large stock of capital goods such as
machinery, buildings, infrastructures and other factors of production it can use them
efficiently and easily achieve economic growth.
Political and social situation: Economic growth of a country depends on its political
and social stability because investments and economic production require peace and
security to be maintained and sustainable.
Entrepreneur situation: The growth of investments and thus ultimate growth of the
economy depends much on the number of efficient entrepreneurs. The greater the
number, the greater is the rate of conversion of natural resources and labour to useful
output
Government policies: Economic growth in a particular country depends on the
favourable policies to the investors and entrepreneurs that are formulated by the
government. For example, the tax exemptions for newly established enterprises
motivate more people to invest in the country and hence high economic growth.
(c).
Evaluate five indicators of a developing country.

Several indicators are used to determine whether a country is developing or developed.

The following are some of the indicators of a developing country:-
Low per capita income: The levels of income per capita in developing countries are
comparatively very low when compared with those of developed countries. Countries
with medium income economies are also sometimes classified as developing countries
(in accordance to the World Bank classification).
Heavily dependent on the agricultural sector: A large proportion of developing
countries’ labour force is engaged in agriculture which produces both for subsistence
and trade, while in developed countries many people are employed in industrial sectors.
Low level of agricultural productivity: Due to a general lack of co-operating factors of
production such as capital, agricultural productivity in developing countries is low and
marked by predominance of subsistence agriculture.
Dependence on a narrow range of products: Many developing countries depend on
a few products, usually primary products to generate much of their export revenues. As
a result, these economies are vulnerable to changes in international economic
conditions for these products and so their incomes often fluctuate from one year to
another.
Inadequate infrastructure: Developing countries often lack adequate infrastructure
such as roads, railways and sewage systems as compared to developed countries such
as USA, England, Germany, Japan, etc.
Inadequate social services: The provision of social services such as health and
education is limited to few areas. This contributes to lower levels of life expectancy in
these countries.
Low capital-labour ratios: Developing countries often have low capital-labour ratios
which limits their ability to use modern production methods. As a result they experience
low levels of productivity in sectors such as agriculture and industry and contribute to
vicious circle of poverty.
9.
“Planning is a powerful instrument in maintaining economic stability in the country.”
Provide five arguments to justify this statement.

Planning is the deliberate attempt by the government or its institutions to make the best
use of the country’s resources with the objective of maximizing the economic welfare of
its citizens within a given time.
The following arguments justify that planning is a powerful instrument in maintaining
economic stability in the country:-
The inefficiency of markets argument: Economies are often dual and when left to
operate without intervention through planning there will be an inefficient allocation of
resources. This is due to the fact that the subsistence sector will exist alongside the
modern monetary sector, commodity and factor markets will be badly organized and
distorted prices will give signals that are a poor reflection of real costs to society.
Market failure argument: Economic efficiency implies Optimal allocation which may
not coincide with social desires. For example there is a trade-off between efficiency and
equity. Failure of the market is assumed to lead to gross disparities between social and
private valuations of alternative investment projects.
Foreign aid argument: Formulation of detailed development plans with specific
sectoral output targets and carefully designed investment projects has always been a
necessary condition for the receipt of bilateral and multilateral foreign aid. This is in
order to persuade donors that the money will be used as an essential ingredient in a
well conceived and internally consistent plan of action.
Resource mobilization and allocation argument: Economic planning is assumed to
help modify the restraining influence of limited resources by recognizing the existence of
particular constraints and by choosing and coordinating investment projects so as to
channel these scarce factors into their most productive outlets.
The attitudinal or psychological arguments: Development planning helps to rally
people behind their government irrespective of their class, race, caste, religious or tribal
differences in a national campaign to eliminate poverty, improve, social services and
welfare.
10.
(a).
Differentiate a current account from a capital account.

Current Account Capital Account

Records transactions of purchases and sales

Records export and import of goods and
of foreign assets and liabilities during a
services as well as unilateral transfers
particular year.

Considers goods and services currently being Concerned with payments of debts and
produced. The credits and debits of foreign claims, regardless of the time period. The
exchange due to these transactions are also balance of capital account includes all
recorded in the balance of current account. items reflecting changes in stock.
(b).
Giving seven reasons show that international trade is vital to the domestic economy.

Economic growth is the quantitative increase in the national output, that is, it is an
increase in the volume of goods and services produced in an economy. The following
are the determinants of economic growth:-
Availability of natural resources: If a country has enough natural resources such as
arable land, minerals and a favourable climate, and they are well utilized, it can achieve
economic growth whereas if the country is not gifted with natural resources, economic
growth will be hard to achieve.
Size of labour force available: Labour force greatly contributes in the production of
goods and services which is a major factor in increasing economic growth. If the country
has a large labour force it can increase the size of its national output, and so achieve
economic growth fast.
Availability of capital: If a country has a large stock of capital goods such as
machinery, buildings, infrastructures and other factors of production it can use them
efficiently and easily achieve economic growth.
Political and social situation: Economic growth of a country depends on its political
and social stability because investments and economic production require peace and
security to be maintained and sustainable.
Entrepreneur situation: The growth of investments and thus ultimate growth of the
economy depends much on the number of efficient entrepreneurs. The greater the
number, the greater is the rate of conversion of natural resources and labour to useful
output
Government policies: Economic growth in a particular country depends on the
favourable policies to the investors and entrepreneurs that are formulated by the
government. For example, the tax exemptions for newly established enterprises
motivate more people to invest in the country and hence high economic growth.