Economics - Advanced National Examination Paper 2 - 2009

2009 – ECONOMICS PAPER 2

SECTION A
1.
(a).
What do you understand by natural rate of population increase?

Natural rate of population increase is the increase in the number of people in a given
locality in a given period of time due to forces of birth and death only OR It is the
difference between crude birth rate and crude death rate.
Natural rate of population = CBR – CDR
(b).
Why should governments spend money on population studies?

Governments spend money on population studies because of the following reasons:-

 It gives the total population figure which is very important in planning purposes such as
planning for provision of various basic social services like education and health, food
imports, etc.
 It helps in establishing population growth rate which is used to make future projections.
The population growth rate should always be less than growth rate of national income so
as to improve per capita income, hence development.
 It shows distribution of population in age groups which helps the government to plan for
schools, hospitals, production and employment.
 It shows geographical distribution of population, this facilitates the government in the
allocation of resources and construction of infrastructures.
 It shows population quality according to skills which helps the government in manpower
planning.
 It shows the distribution of citizens and non citizens. This helps to regulate the activities
of non-citizens in the country.
 Preparations to reap the benefit that can be brought by population changes and confront
hazards of population changes.
 To control immigration and emigration.
2.
(a).
Explain the purpose of the trade cycle theory.

Purpose of the trade cycle theory

Trade cycle refers to fluctuations in the level of economic activities over a period of
time OR It is the tendency of the economy of a country or business activities in a
country to fluctuate from one period to another.
Fluctuations in the level of economic activity in an economy can be observed by
examining annual changes in the real national income (or real output) over a long period
of time (years).
The purpose of trade cycle theory is to explain and show the causes and behaviour
of periodic fluctuations in economic activities over time and to advocate policies
to stabilize the economy.
Major purposes of trade cycle theory include:-
 To provide possible reasons for the causes of trade cycle.
 To provide possible approaches to stabilize the level of economic activities.
 To explain the behaviour of the economy.
 To explain the phases of the level of economic activities in a country (slump, recovery,
boom and recession).
(b).
Draw a diagram to illustrate the trade cycle and explain what it depicts.

Trade cycle (fluctuation in economic activity)

The diagram depicts fluctuations in the level of economic activity over a period of
time.
The fluctuations are illustrated in phases of a trade cycle. There are four main phases to
a typical trade cycle, namely Slump, Recovery, Boom and Recession (deflation).
Slump – The phase of a trade cycle in which aggregate demand is low relative to full
employment output. It is a period in which there is decline in the level of economic
activities. It has the following features:-
 High demand deficient.
 Unemployment of both labour and capital.
 A low level of both consumption and investment.
 Low production.
 Low levels of incomes.
Recovery – This is a period in which the economy starts to improve, expansion after a
recession. In this phase, aggregate demand is increasing and business expectation is
improving. It is characterized by;
 Rising consumer demand
 Rising investment demand
 Expansion of output levels
 Falling rate of unemployment
 Income levels increase
 Standard of living starts to rise
Boom – A period when the economy is at the highest level. In this phase the aggregate
demand is close to full employment output, with firms working at full capacity, inflation
may increase. It is generally characterized by:
 High level of investment
 Low level of unemployment
 High level of consumer demand
 Stable prices
 High level of output
 Firms work at full capacity earning high profits.
Recession (Deflation) – The period in which aggregate demand starts to decline and
business confidence declines also. It is characterized by decline in economic activities.
It is characterized by:-
 Demands for both firms and households start to fall.
 Firms’ profits dwindle.
 Output and employment levels are reduced.
 Businessmen, once again become pessimistic about the future level of demand.
3.
(a).
Use the following information to answer the questions that follow:
GDP at factor cost: Shs. 25.08 billion.
Net national income (NNP): Shs. 22.94 billion.
Factor income to non-residents: Shs. 2.00 billion.
Indirect taxes: Shs. 3.75 billion.
Subsidies: Shs. 0.53 billion.

Calculate:
(i) Net indirect taxes
(ii) GNP factor costs.

(i) Net indirect tax = Indirect tax – subsidies

= 3.75 – 0.53
= 3.22 billions
(ii) GNP(fc) = GDP(fc) + Net factor income from abroad
= 25.08 – 2.00
= 23.08 billions
(b).
(i) What is an open economy?
(ii) Explain why growth in an open economy is liable to instability.
(i) An open economy refers to an economy which interacts with other nations in trade
and in other economic dealings.
The national income of an open economy includes net earnings from the foreign sector,
i.e.
GNP = C + I + G + (X - M)
Where: GNP = Gross National Product.
C = Consumption by households and firms.
I = Investment by firms and government.
G = Government expenditure.
(X – M) = Net factor earning from abroad.
(ii) Growth in an open economy is liable to instability because of the following reasons:-
 Since there is importation, macroeconomic problems such as inflation from other
countries can easily attack the country’s economy.
 Market failure, especially of the country’s exports, leads to serious instability in the
economy because open economies have large foreign sectors (export sector).
 Foreign sector exposes a country to world economic crises. For instance, the recent
world financial crisis has affected many countries simply because the majority are open
economies.
 Most open economies advocate for liberalized/floating exchange rate system. This leads
to frequent fluctuations in the value of the currency of the country in question.
4.
Critically analyze the Tanzania government policy on liberalization of the financial
institutions.

Tanzania government policy on liberalization of the financial institutions

Liberalization of the financial institutions is the changing or transformation of their
ownership from government to private ownership.
In Tanzania liberalization of financial institutions started in 1991 when a new legislation
or liberalization was passed. The liberalization was preferred due to the following
reasons:-
The need to increase efficiency in the operation of banking services: Since the
private sector aims at profit maximization, efficiency is something important. It is
attained through the use of new and advanced facilities and machines e.g. computers.
Increase in the number of financial institutions especially banks in the
country: Liberalization led to an increase in the number of these banks due to the fact
that the base of ownership is widened compared to the period of public ownership.
The need for foreign capital injection in our economy: Liberalization allows the
inflow of foreign capital which stimulates the economy and increases efficiency and
productivity.
Creating employment opportunities: The private financial institutions (banks) offer
employment directly to those working in them and indirectly through the businesses they
finance.
Reduction of the burden to the government to provide financial services and
subsidies: Due to this relief the government remains as a regulatory body.
Increasing competition and innovation in the sector: After liberalization of financial
institutions competition came about due to emergence of a big number of institutions
offering similar services. This forces them to offer quality services and to be innovative.
However, the government policy on liberalization of the financial institutions has some
shortcomings such as:-
Interest rates on borrowing have remained high: This is due to dominance of the
banking system by some few large banks, which set such discouraging rates of interest
due to their monopoly position.
Most of the financial institutions have remained in towns: This is because, private
investors are unwilling to go to rural areas for fear of making losses due to lack of
enough customers with collaterals. The government should have planned for
establishment of financial institutions in the rural areas.
Moreover, the agricultural sector has been neglected. Most of the banks under
liberalization are skeptical about extending loans to the agricultural sector due to fear of
risks. Under the public sector/planned economy the agricultural sector was enjoying a
lot of loans from the public owned financial institutions e.g. the Co-operative and Rural
Development Bank (CRDB).
5.
(a).
Write the formula for:
(i) Laspeyre’s index.
(ii) Paarche’s index.
(b).
What is the utility of the price index in an economy?
SECTION B
6.
(a).
Explain the multiplier theory and the acceleration principle.

Multiplier theory and the acceleration principle

Multipliers are measures of the relationship between changes in the equilibrium
national income and the autonomous change in the factor that brings it
about. OR Multiplier can be defined as the rate at which national income changes due
to change in any of the determinants of national income such as investment.
There are several types of multipliers such as investment multipliers, government
multipliers, and import and export multipliers and tax multipliers.
The multiplier theory explains the changes in income resulting from changes in
investment; that is, the rate of change of investment is directly proportional to the
change in income level i.e. When the level of investment increases, the national income
increases also due to the influence of change in investment.
Multiplier is given by the formula below:

Where: MPC = Marginal Propensity to Consume

Multiplier is usually denoted by letter k

On the other hand Acceleration principle states that there is direct relationship
between the rate of change in stock of capital and the output level. The stock of capital
means investment size and output level refers to the level of national income. Here the
direct causation is from the change in output level to change in investment level.
When income increases due to multiplier effect, it indicates an increase in the demand
of goods and services and increase in demand for goods and services induces
businessmen to invest more. Thus a rise in income leads to a further induced increase
in investment and this is referred to as acceleration principle.
Accelerator is given by the formula:

(b).
(i) Explain MPC.
(ii) If MPS = 0.3y – 25(s) and the level of investment is given by I = 0.2y, find the
equilibrium level of income y.

(i) Marginal Propensity to Consume (MPC) is the change in consumption brought

about by a change in income OR
It is the ratio between change in consumption and change in total income i.e. extra
consumption due to extra income.
Formula:

Where: MPC = Marginal propensity to consume.

∆C = Change in consumption
∆Y = Change in income
(ii) Given: MPS = 0.3Y – 25; I = 0.2Y; Y = C + S
Y = C + I; C + S = C + I
S = I (Equilibrium)
0.3Y – 25 = 0.2Y
0.1Y = 25
Y = 25/0.1
Y = 250
The equilibrium level of income is 250.
7.
Outline the fundamental principles and objectives of the East African Community.
The fundamental principles and objectives of the East African Community
The origin of East African Community (EAC) goes back to 1923 when the East
African Governors’ Conference was founded. In 1961 the East African Common
Services Organization was established and in 1967 the treaty was ratified leading to the
formation of the East African Community. Due to different political philosophies,
perception of disproportionate sharing of benefits accruing from economic integration,
the EAC collapsed in 1977.
In 1999, November, 30th, the East African heads of state re-established the East African
co-operation with the following objectives:
(i) The attainment of sustainable growth and development of the partner states by
promotion of more balanced and harmonious development.
(ii) To strengthen co-operation on the agreed upon areas that would lead to equitable
economic development, and hence, raise the standard of living and improve quality of
life.
(iii) To promote sustainable utilization of the natural resources of the partner states and
take measures that would protect the natural environment.
(iv) To consolidate the long standing political, economic, social, cultural and traditional
ties and associations between the people of the partner states.
(v) To mainstream gender in its entire endeavours and the enhancement of the role of
women in cultural, social, political, economic and technological development.
(vi) To promote peace, security and stability within the region and good neighbourliness
among the partner states.
(vii) The enhancement of partnerships within the private sector and civil society in order
to achieve sustainable social-economic and political development.
8.
Explain why co-operative societies have failed to monopolize markets in Tanzania.

Reasons as to why co-operative societies have failed to monopolize markets in

Tanzania
Co-operative society refers to an association of people who come together voluntarily
with some common economic and social interests to achieve certain objectives.
We have various categories of co-operative societies. They are based on; membership
registration e.g. primary co-operatives, secondary co-operatives, national co-operatives
and international co-operatives.
Types of services they offer include marketing, savings mobilization, credit extension,
transportation, and farm production.
Co-operative societies have failed to monopolize markets in Tanzania due to the
following reasons:
(i) Government intervention: Sometimes co-operatives lose their independence when
the government interferes in some decisions such as pricing.
(ii) Insufficient and unskilled manpower: This reveals itself in the form of poor policy
formulation and implementation by co-operative societies.
(iii) Insufficient financial resources: Co-operatives have a weak financial base to the
extent that they fail even to meet their day to day obligations of paying farmers.
(iv) Lack of enough transportation facilities: This makes it difficult for co-operatives
to move agricultural products bought from farmers to the market.
(v) Low quality agricultural products: Peasantry production has been poor due to low
capital invested, lack of adequate extension services and education among peasants.
(vi) Unpaid debts: Some farmers have not been paid for their sold crops for quite long
a time. That is why private crop buyers have beaten down co-operatives.
(vii) Mismanagement of resources: This has been so serious due to corruption among
some co-operative leaders who misuse and embezzle funds.
In summary, co-operative societies in Tanzania have failed to monopolize markets in
Tanzania due to managerial, financial and political problems.
9.
Write short notes on the following:-
(a) General planning.
(b) Indicative planning.
(c) Imperative planning.
(d) Labour intensive technique.

(a) General planning: This is a type of planning in which all sectors of the economy are
taken into consideration and it is made by the central government, to meet the need of
the country/whole population. National annual budget is an example of general or
comprehensive planning.
It is divided into 3 periods
 Short term: It takes 6 months to 2 years.
 Medium term: It takes a duration of 2 to 7 years.
 Long term plans: It takes a long period of time for objectives to be achieved. It takes a
period of 15 to 20 years e.g. the Basic Industrialization Strategy (BIS).
(b) Indicative planning is planning with a large private sector since it indicates possible
development targets for private enterprises aiming at and forecasting the possible
expansion of both public and private sectors although it may sometimes appear as a
contradiction.
(c) Imperative planning is the process of organizing the available resources for the aim
of fulfilling certain goals and it is extremely important and needs to be done and dealt
with immediately.
(d) Labour intensive technique simply means the extensive use of manpower in
production processes rather than capital/machines. In a way it reduces unemployment
problem and is mostly applicable in developing nations.
Thus, the government should aim at lowering the relative price of labour to create
employment. Also this depends on the degree of substitutability between labour for
capital and capital for labour in various sectors of the economy
10.
(a).
What is NGO?

NGO is an acronym for Non-Governmental Organization. NGOs have become quite

prominent in the field of international development in recent decades. But the term NGO
encompasses a vast category of groups and organizations.
The World Bank, for example, defines NGOs as “private organizations that pursue
activities to relieve suffering, promote interests of the poor, protect the environment,
provide basic social services, or undertake community development third sector
organizations, and so on.
They encompass a wide variety of groups, ranging from corporate-funded think tanks to
community groups, grassroot activist groups, development and research organizations,
advocacy groups, operational, emergency/humanitarian, relief focused groups, and so
on.
NGOs assist the government in transforming the society economically, socially,
culturally and politically. They work in various areas that directly affect the society such
as education, research and development, agricultural development, human rights
protection, respect and promotion, etc.
Examples of NGOs are: Tanzania Gender Networking Programme (TGNP); Elimu ya
Uzazi na Malezi Bora Tanzania (UMATI); HakiElimu; Research on Poverty Alleviation
(REPOA); Economic and Social Research Foundation (ESRF); Pact-Tanzania; etc.
(b).
What are the roles of NGOs in a country?

In any country, NGOs play the following roles:

(i) Protection and promotion of human rights: This is done through democratization
and conflict resolution e.g. Hakielimu and Agenda 2000 in Tanzania.
(ii) Provision of care to orphans and street children: Most of such children have
found refuge in different stations established by NGOs.
(iii) Conducting researches: They range from social, economic and cultural
researches. The government usually uses the findings in planning and implementation
of policies.
(iv) Fighting cultural malpractices: Most NGOs oppose cultural elements that
suppress women and children, Examples are child labour, women beating, women
genital mutilation, etc.
(v) In the process of trade liberalization, new forms of competition are evolving in the
“NGO market”, with new entrants like companies, business networks, NGO networks
and social entrepreneurs blurring traditional boundaries. They have to pay more
attention to the whole area of branding and competitive positioning.
(vi) They sensitize the society in the war against chronic diseases such as HIV/AIDS,
malaria, tuberculosis and cholera. For instance, TACAIDS and “Clinton Initiative to fight
malaria in Tanzania”.
(vii) Aided by advances in information and communications technology, NGOs have
helped to focus attention on the social and environmental externalities of business
activity.
(viii) Building capacity for the rural people. The concern here is mainly enabling people
to exploit the natural resources for their development, through imparting entrepreneurial
skills, extension of loans/credit facilities, e.g. Pact-Tanzania.
(ix) Development and environmental NGOs for example, are more effective, and their
work can have more positive effects, because they work with the actual communities
and help to empower themselves. Working at the grassroots level helps to provide
assistance directly at the source.
(x) Universally popular NGOs, NGO-like organizations and CSOs play an increasingly
vital role in democratic and democratizing societies.
In summary, NGOs in any country form an important wing in the effort to transform the
society in terms of economic development and cultural civilization.