1.What are characteristics of market economy? What are the limitations of it?
a/ Characteristics of market economy.
_ An economic system in which economic decisions and the pricing of goods and services are guided by the aggregate interactions of country citizens and businesses.
_ There is little government intervention in the economy.
_ The location of labor is determined under the market forces of supply and demand within the labor market. If the demand for a particular occupation increases, wage levels within that area are pushed up. This results in a greater proportion of workers shifting into that area of employment.
_ Individual businesses make decision on production process to ensure the maximum profit (of the business and themselves)
_ Distribution of total production within a market economy is determined predominantly by each individual’s income or purchasing power.
_ Economic functions are based on self interest, private initiative and freedom of choice.
_ Government intervention maintains law and other, defense and the provision of some essential services.
b/ The limitations of market economy.
_ The market system often results in market failure where insufficient amounts of socially required goods and services are produced. Under the profit orientated market system the provision of essential services such as education, health, law and order… would be inadequate to satisfy total social needs.a Requirement for government intervention.
_ Social costs remain unchecked
_ In order to protect both the environment and individuals, some form of government intervention is required to regulate and control these forms of business activity.
_ Uneven distribution of income with significant gap between high income earners and low income earners, class division. To ensure a more even distribution of total production within a predominantly market system, the government is required to adopt certain policies to redistribute income and hence redistribute individual purchasing power.
_ Income distribution initially can be changed through the adoption of minimum wage awards, price supports, subsidies tariffs.
2. Use the demand model to explain why price elasticity is not constant across the demand curve.
_ Price elasticity of demand measures the responsiveness of the quantity demanded to changes in price.
_ Price elasticity of demand will change of demand curve. Because
+ Price elasticity of demand is not the measure of the slope of the demand curve.
+ Flat slope demand curve need not imply an elastic demand for all price changes.
+ Steep slope demand curve need not imply inelastic demand for all price changes.
_ Elastic depends on percentage of changes (not absolute value) in quantity to price, elastic will varies over a relatively large range of price change. Elastic changes as the position on the curve changes.
3. Use the price mechanism to show how a system of price fixing can often result in wanted shortages or surpluses of particular product.
_ The law of demand describes the relationship between price and quantity demanded.
_ The law of state of demand states that:
+ as the market price rises, the total quantity demanded falls, and then a contraction of demand occurs.
+ as the market price falls, the total quantity demanded rises, and then an expansion do demand occurs.
_ Besides, changes in demand occur due to a change in factor, other than price. Factors which can bring about changes in demand are:
+ Changes in the price of substitutes
+ Changes in the price of complementary goods and services
+ Variations in the size and composition of the population
+ Changes in consumer and business expectations
+ Variations in social status or real income
+ The availability and cost of credit
+ Seasonal changes
+ Changes in diet, taste, technology, fashion, and so on.
_ Any change in the factors of demand other than price will result in a shift in the demand curve. If the factors of demand result in:
+ An increase in demand then the demand curve shifts to the right.
+ A decrease in demand then the demand curve shifts to the left
_ For example:
+ Increase in income is desire and ability to buy more, and then increase in quantity demanded at the same price level. And so, that is a reason may result in wanted shortages.
+ Winter season may result decrease in summer clothes demand. So, may result in wanted surpluses of summer product.
4. Give reasons to explain why many agricultural products have an elastic supply?
-Marketing boards of some agricultural products also use the theory of demand elasticity within their overall marketing operations. The demand of many agricultural products is inelastic on the domestic market. By restricting supply onto the market (by dumping produce, adopting quota restrictions to growers etc), the board can force up the market price. Because the demand is inelastic, the total quantity demanded falls less proportionately, resulting in greater total revenue to farm producers.
5. What do you expect concerning the shift in Vietnam production sectors (primary, secondary, tertiary, and quaternary sector) for the coming decades?
the primary sector:
-the primary sector involves industries which carry out production through the direct use of natural resources .it is often divided into 2 major categories: rural and non-rural
-rural primary industry includes agriculture, pastoral, fishing, forestry.
-non-rural primary industry involves mining and quarrying.
-while primary industries are of great importance to Vietnam, total employment within this area has declined markedly. This trend has been a result of primary production becoming far more capital intensive over recent years.
The secondary sector:
-the secondary sector is generally referred to as the manufacturing sector .secondary industries transfer or process raw materials or other manufactured components into “finished” products.(ex: building, motor, vehicle industries…)
-while secondary industries cater for a substantial proportion of employment within Vietnam, this proportion is declining.
The tertiary sector:
-the tertiary sector is generally referred to as the “services sector” tertiary industries provide services to both business and individuals with the range of services covering a very wide spectrum. (Ex: finance, public, administration…)
-increased productivity within the primary and secondary sectors has resulted in structural changes within the labor force.
The quaternary sector:
-The quaternary sector is a subset of the total services sector. Quaternary industries are based on services which generally involve the processing of information and knowledge.
-Employment levels within these industries have shown relatively high levels of growth.
6. Describe the characteristic of oligopoly market? Giving an example of an industry that have oligopoly market structure, and explain why.
_ The characteristics of an oligopoly are:
+ A few companies in the market
+ Homogenous or differentiated products
+ Existence of significant barriers to entry
+ Interdependence of product decision within the market.
_ These few companies dominate the market.
_ High level of competition a engage in non- price competition (advertising, product differentiation)
_ Differentiation through: changing product characteristics or condition of sales.
_ Decisions are made in relation to competitors’ reaction (interdependence).
_ High requirements for entrance, high risk to gain market share and blockage from existing companies.
7. Describe the nature of the following anti-competitive trade practices: price discrimination, collusion and effects of each.
_ The degree of market power a firm can exert depends on: level of competition, barriers to entry and degree of product differentiation.
_ In the pursuit of profits and security, firms will best serve their own interests if they are able to limit competition, increase their own market power and generally be in a position to control the market.
_ Restrictive trade practices involve nay activity which reduces the level of competition.
_ Restrictive trade practices are referred to those activities which preclude new entries, restrict consumer choice or are aimed at reducing the level of price competition. Such activities generate greater monopoly-type power and allow companies to manipulate the market and increase prices with little fear of competition.
_ Restrictive trade practices doesn’t have to be undesirable (non profit organization) since they promote concentration within the industry by restricting competition. This can result in higher prices, the production of lower quality goods and services, increased costs, reduced technological innovation and development and lower levels of business activity.
a/ Price discrimination:
_ Price discrimination occurs when the supplier of a good discriminates between different purchasers by offering preferential treatment (ex lower prices, higher discount,..).
_ Price discrimination can give the more favored firms a significant cost advantage. This can substantially damage those purchasers treated less favorably, thereby resulting in a lower degree of competition.
_ Collusion occurs when companies form agreements or arrangements which effectively reduces the degree of competition and allows the setting of higher prices.
_ Collusion takes 2 basic forms:
+ Collusive tendering: taken place when firms agree on a predetermined set of tenders on specific contracts. These agreements allow firms to collectively set higher tender prices and to share contracts without fear of competition. Collusive bidding at auctions results in buyers agreeing not to force up prices through competitive bidding.
_ Under market sharing agreements, firms divide up the total market and agree not to compete with each other in allocated territories. This practice gives firms an increased monopoly type power within their designated area.
8. Discuss the benefits and costs of the multinational companies in Vietnam
Multinational companies (MNCs) are not without benefits, which may be to the government, the economy, and the people or even to itself. For example: those large firms such as Coca cola, Pepsi, and International Business Machine (IBM)…
Some of the benefits of multinational companies are:
1. There is usually huge capital investment in major economic activities 2. The country enjoys varieties of products, services and facilities, brought to their door steps 3. There is creation of more jobs for the populace 4. The nation's pool of skills are best utilized and put to use effectively and efficiently 5. There is advancement in technology as these companies bring in state-of-the-art-technology for their businesses 6. The demand for training and retraining and advancement in the people's education becomes absolutely necessary. This will in turn help strengthen the economy of the nation 7. The living standard of the people is boosted 8. Friendliness between and among nations in trade i.e. it strengthen international relation 9. The balance of payments of nations in trade are improved on
More benefits came along with these people's theories and some are:
1. There is significant injection into the local economy in respect to investment 2. Best utilization of the country's natural resources 3. They help in strengthening domestic competition 4. They are good source of technological expertise 5. Expansion of market in the host country
Some costs of the multinational companies in Vietnam:
- The direct effect implies an immediate reduction of the capital cost.
-When the investment is financed by a borrowing of the affiliate, locally or to the parent company. The net financial cost is, in that way, equal to the proportion of interest payments that are not deductible from the tax base.
-On the other hand, if the depreciation for tax purpose is not immediate and if the financial aid is distributed on several stages, the cash flows have to be discounted. The discount rate is defined by the financial cost.
9. Comparing characteristics and functions between Unit trust and Credit Union.
a/ Credit Unions.
_ Credit unions are mutual non-profit financial institutions which provide a varied range of financial and personalized services to members with better interest rate.
_ Credit unions offer a full range of savings and investment accounts for their members. Credit unions also offer a variety of both long and short term investment accounts all offering competitive market interest rates.
_ Members deposit are credit unions main source of funds. Other funds are raised by borrowing from credit union associations and banks and also from the issue of promissory notes and other securities..
_ Credit unions offer a diversified range of borrowing options for their customers. Loans are available for such thing as housing, motor vehicles, consumer durables or debt reconstruction with finance also available for any other worthwhile purpose. Credit unions offer a pre-arranged line of credit ( ex credit card ) which allows the borrowing of any amount up to a predetermined credit limit.
_ Loans account for around 80% of the total assets. Credit union loans are generally restricted to members only and credit unions are prohibited from borrowing foreign currency.
_ Credit unions are also required to subscribe to a national emergency liquidity scheme. This scheme assists in the protection of depositors funds and promotes financial stability.
_ Under regulation of Australia financial institution commission (AFIC):
+ Applying capital adequacy ratio (8%)
+ Subscribe national emergency liquidity scheme.
+ Report to the authority.
+ Financial corporation Act: provide information and statistics to reserve bank and Australia Bureau of statistic Ò understand financial conditions and assisting in monetary policy making.
b/The unit trust.
_ The unit trust is a non-bank financial intermediary which works on the basic of pooling together amounts of funds from individual investors and then using this larger pool to finance other investments within the financial market.
_ A financial strength of the unit trust is that by investing relatively large amounts of funds, the unit trust is able to exert some degree of bargaining power over the price of potential investments: that is in areas such as shares, real estate or interest rates.
_ There are 2 types of unit trusts: listed and unlisted.
+ A listed unit trusts has its units quoted on the stock exchange, value depends on demand and supply.
+ An unlisted unit trust usually requires a minimum initial investment of $1000 with units generally having an initial face value of $1 each.
10. What is the role of Reserve Bank (Central Bank) in controlling the economic growth in Australia nowadays?
_ The broad objective of the reserve bank of Australia is to ensure that its powers are exercised in such a manner as will best contribute to:
+ The ability of the currency of Australia (in term of both domestic currency and exchange rate).
+ The maintenance of full employment in Australia.
+ The economic prosperity and welfare of the people of Australia.
_ The reserve bank of Australia is not a financial institution which provides the usual banking and other financial services to the general public. The reserve bank’s central role is effective monetary management and the promotion of an efficient and stable financial system which best complements the macroeconomic objectives of the Australia government.
11. What is “Credit creation process”? and how can it affect the economic development of a country?
_ All financial intermediaries are involved with the creation of credit process within the economy. Because financial intermediaries are profit motive organizations, any additional funds received through increased deposits will be directed into areas to gain profits.
_ Borrowers who undertake loans from the financial institutions do so to finance required expenditure. Consequently, institutional lending results in increased expenditure and the general of additional income.
_ Assuming there are no leakages within the system any addional income generated will either be saved or spent. Income saved will immediately find its way back into the financial institutions in the form of new deposits. Income respect will ultimately be saved at a later stage and this too will be directed back into the financial institution as deposit.
_ Although it may be take considerable time, any loan initially created by some new initial deposit will ultimately flow back into the financial intermediaries as further deposits. These deposits can be used to finance even more lending, creating a multiplier effect on deposit and loan generation.
_ Funds resulting from new deposits are not available for lending.
_ Other financial institutions not under legislation still voluntarily hold a proportion of their total funds in the form of cash or highly liquid assets to meet anticipated depositor requirements and to avoid any cash flow difficult.
_ The proportion of liquid assets held to total deposits is referred to as that institution’s reserves ratio or cash reserve ratio.
12. describe the 5 common forms of trade restrictions which can be imposed to protect domestic industries in Australia. Give example of each?
- Tariffs are a taxation levied on imported products. The imposition of a tariff raises the price of imported products, relative to domestic goods, thereby making the purchase of such imports less attractive.
- Since tariffs are form of taxation, the imposition of tariffs provides additional revenue to the government.
- Subsidies are payments made to domestic producers by the government. The payment of a subsidy enables domestic producers to offer their product at lower market prices.
- a quotas is a direct government control which places restrictions on the quantity of an imported product entering the country
- Because quota restrictions assure local producers of a guaranteed share of the domestic market, local companies are able to organize production plans with some degree of confidence. In addition, quota restrictions often result in delays and shortages of imported products to potential customers
- Embargoes prohibit the entry of an imported product by imposing a total ban on that product. The imposition of an embargo on an imported product removes any form of foreign competition and gives customers no option but to satisfy their demand from local production.
- Embargoes are applied for reasons other than the general protection of local producers.
5. Enforcing local content
- The policy of enforcing local content involves another form of protection or assistance to domestic producers. Under such a policy, only those imports constructed with a specified proportion of locally produced components are permitted to be sold on the domestic market.
- To satisfy the requirements of “local content” many foreign companies have set up subsidiary companies.
13. Define the term “current account deficit”. Describe at least 3 factors that influence CAD.
_ A current account deficit (CAD) occurs when total payment for imports, services, income and unrequited transfers exceed total receipts for exports, services, income and unrequited transfers.
_ The size of CDA and level of foreign debt are inter-related. Any deficit on current account is financed through the capital inflow of funds and generally this includes higher levels of overseas borrowing.
_ Spending more on imports and on interest payments to overseas than it receives on exports and other receipts from overseas.
_ Total domestic saving is insufficient to finance total domestic investment. This “saving investment balance approach” implies that to reduce both the level of foreign debt and the size of the CAD.
* 3 factors that influence CAD.
_ The level of economic growth.
+ In periods of rapid economic growth, experience is unable to completely satisfy total domestic expenditure from its own domestic production, especially in the short term.
+ Consequently, high levels of economic growth bring about significant increases in import purchases.
_ The level of exchange rate
+ The value of the $A influences the size of CAD.
A fall in the value reduces export prices and markets our exports more competitive on the world market.
A fall in the value also increases import prices, making import purchases less attractive on the domestic market. Bringing about increased demand for exports and reduced demand for imports.
+A strengthening of the $A reduces import prices on the domestic market and increases export prices on the world markets. Therefore, bring about increased demand for imports and reduced demand for exports
_ The relative rate of inflation.
+ The rate of inflation, relative to other trading nations, will exert significant influence on the size of the CAD.
+ Relatively high rates of inflation can cause the CAD to deteriorate.
+ Rate of inflation influences both the level of export and import purchases and subsequently.
14. What are the differences between fixed exchange rate and dirty/managed floating exchange rate?
a/ Fixed exchange rate.
_ A balance of payments occurs when the receipts of foreign currency equals the payments of foreign currency: that is when the source of funds ( demand for the $A) equals the use of funds ( supply of the $A)
_ The value of the currency is set changed by Reserve bank.
_ Under a fixed exchange rate, the government was required to keep an adequate stock of international reserves. These reserves are generally held in the form of foreign currencies and gold.
_ Maintaining an appropriate balance of payments was a major macroeconomic objective under the fixed exchange rate system.
+ Temporary balance of payments deficit: selling foreign currencies.
+ Temporary balance of payments surplus: buying foreign currencies.
+ Permanent balance of payments problems: changing to a more appropriate fixed rate (devaluation/ revaluation)
b/ Floating exchange rate.
_ The rate is determined by market forces of supply and demand
_ Change in demand will result in changes in the value of local currency.
+ An increase in the demand results in an appreciation or strengthening.
+ A decrease in the demand results in a depreciation or weakling.
_ Change in supply:
+ A decrease in the supply will result in an appreciation.
+ An increase in the supply will bring about depreciation.
_ Exchange rate is determined in relation to each particular currency.
15. Explain why an appreciation of VND will act to reduce the level of employment in Vietnam
-International economics nowadays plays an essential role in the researches of the economic growth and development. In theory, depreciation of real exchange rate will increase export and decrease import, thus improving trade balance. As a result, in policy terms, devaluation is often used as a good instrument suggested by IMF stabilization program for improving trade balance for countries suffered from trade deficits. However, in practice, the result is still ambiguous and mixed. Some countries succeeded in improving trade balance by devaluation, but some not.
-In Vietnam, the exchange rate regime has been really a problem. Since 1993, Vietnam has continuously suffered from large trade deficits, after the only surplus in 1992. During 1993-1996, the nominal exchange rate was relatively stable while the real exchange rate is seen appreciated. The competitiveness of exports may reduce in line with the increase in real exchange rate.
-Especially since 1997, Vietnam has suffered from appreciation of its exchange rate in comparison with those of its major trade partners. The reason is that the financial crisis in East Asia forced affected countries to float their exchange rates with sharp depreciation of exchange rate (from 20 per cent to 80 per cent in terms of US dollar). As a result, trade balances in these countries in 1998 were improved. But the problem is that exports did not clearly increase. One reason for improving trade balance was the decline in imports due to lower domestic income and corporate restructuring, and the implementation of other trade policies to restrict imports.
16. What is meant by the term “the equilibrium level of income”? give and explain the equation of equilibrium level of income in an open economy?
_ Economy is in equilibrium when aggregate demands equals aggregate supply.
_ Aggregate demand (or total expenditure) determines the level of total production, income and employment.
_ this component of aggregate demand:
+ Consumption C
+ Investment I
+ Government spending G
+ Exports minus import purchases (X – M)
Aggregate demand = C + I +G + (X –M)
_ An open economy is one involving the household, business, government and overseas sectors. Consequently, the components of aggregate demand are consumption, investment, government spending and exports minus import purchases. Total leakages for an open economy are savings, taxation and imports (M). total injections are investment, government transfer payments and export purchases (X).
_ Equilibrium level of income for an open economy occurs when:
Aggregate demand = Aggregate supply
Total expenditure = Total production
C + I + G + (X – M) = Y
Or: Total leakages = Total injections
S + T + M = I + G + X
Meaning: total amount of expenditure = total amount of production of goods and services.
_ As a result, at equilibrium level of income there is no tendency for change within the economy.
_ Assuming in the sector economy:
+ Changes in the economy will only occur if the economy is at disequilibrium. example: where total expenditure is not matched by an equivalent level of total production.
If total expenditure is greater than total production then forces within the market will see total production increasing to match the excessive demand. This process will continue until equilibrium level is reached.
If total expenditure is less than total production, then total production will continue to fall until equilibrium level of income is reached.
+ When aggregate demand is equal to aggregate supply, the economy is at equilibrium and there is no tendency for the level of total income to change.
+ When aggregate demand is greater than aggregate supply, the economy is not at equilibrium and excess demand will result in an increase in the total level of income.
+ When aggregate demand is less than aggregate supply, the economy is again at disequilibrium. The lack of total expenditure will result in a fall in the level of total income.
+ The mechanics involving total income determination are described fully below.
+ S<1 g investment decrease saving increase till S=1
+ S>1 investment increase S decreases till S=1.
17. what are the two types of inflation and the cause of it?
Inflation occurs when there is a general upward trend in the level of prices. During periods of inflation, both the purchasing power of money and the value of money fall.
-there are 2 types of inflation, these being demand-full inflation and cost-push inflation.
v Demand-pull inflation results when total demand exceeds total supply forcing prices up. demand-pull inflation can result from:
A general shortage of materials
The economy approaching full employment level
v Cost-push inflation results when increasing costs of production push prices up. it can result from:
A general increase in wage costs
A general increase in the costs of intermediate goods
A general increase in the price of imports
A general increase in the rates of taxation and government costs
A general increase in profit margins.
18. Comparing CPI and GDP deflator.
_ The CPI value is based on a sample only and therefore any CPI changes reflect price movements for this sample and not for all goods and services.
_ The construction so a CPI may involve inaccurate in the composition and weighting of items included. The CPI may be measuring prices movements of items now not purchased or the weighting of such items may have needed reassessing.
_ The CPI involves prices movements during the last quarter.
_ The regimen involved in a CPI is centered around metropolitan wage and salary earner household spending only. It is a blazed index, not representative of price movements for the whole of the economy.
_ The CPI can be used in the adjustment of wage levels and in the maintenance of living standards (ex, wage indexation). There should not be a blanket wage adjustment.
_ Price increases may be a direct consequence of improvements in the quality of goods and services. Consequently, cost of living adjustments based on CPI movements, should not be made if price increases are a result of improvements in the quality of products.
_ Price increases may be due to increased levels of taxation (ex, rises in company tax...) or increased import cost.
_ The GDP deflator can be used to gain an alternative, more comprehensive measure of inflation. Unlike the CPI, which measures price changes for just a selective, well defined sample, the GDP deflator measures price movements for all those goods and services included in the measure of GDP. That is, the GDP deflator measures changes in prices for the total range of goods and services produced.
19. what are the determinants of economic growth? Shortly explain each determinant?
1. Natural resources:
-natural resources such as land, mineral deposits, waterways ,climatic conditions and other “gifts of nature” provide an essential foundation for economic growth. Combined with the other resources of capital, labor and enterprise, natural resources can be developed and organized to increase the productive capacity of the nation.
2. The quality and size of the labor force:
-a major determinant of economic growth is the quality and sized of labor force. The promotion of education and job training schemes increase the knowledge, skills and flexibility of the workforce.
3. Population growth:
-population growth, whether from natural increase or immigration, can cause a higher rate of economic growth.
-an increasing population requires increased public spending on housing, education and other social needs while business expectations of increased demand induces higher levels of private investment-population is a key factor in promoting economic growth.
4. Research, innovation and technological development:
-research, innovation and technological development are essential to any economy wishing to increase its long term productive capacity. Improved technology lifts overall efficiency and raises the productive base to the economy.
5. Capital accumulation:
-capital accumulation or investment, is an important prerequisite for economic growth. The greater the degree of capital accumulation, the greater the potential for increased production.
-public sector capital expenditure also contributes to capital accumulation.
6. The rate of inflation:
-the rate of inflation is an important factor in determining the rate of economic growth. High levels of inflation cause market interest rates to rise and this upward movement can adversely affect business confidence and levels of investment.
7. Political stability:
-the political stability of the nation is a vital factor in determining economic growth and the standard of living .countries experiencing civil disturbances and political instability are unable to effectively sustain efficient production. As a result, these countries are also disadvantaged through their inability to attract foreign investment and export markets.
8. The nature of government initiatives:
-a country’s capacity to increase its production depends to a large extent on its level of enterprise or entrepreneurial talent. Entrepreneurs are innovative and self-motivated persons who are willing to take the opportunity and risk to initiate business ventures.
9. The overseas sector:
-the overseas sector is a key factor in determining the level of economic growth within Australia. The inflow of funds to promote production and spending is not the only stimulus to growth in Australia .trade also enables domestic industry to specialize and raise production through economics of scale.
20. What are the difference between fiscal policy and monetary policy? Through which activities each policy operates on?
a/ Fiscal policy: is a policy undertaken by the government to attain specific macroeconomic objectives by means of changes in the government budget.
_ Under fiscal policy, economic activity is influenced by:
+ Changes in government spending.
+ Changes in the rates of taxation.
+ Changes in the level of public borrowing.
_ the general direction and thrust of the government’s fiscal policy is outlined in the Federal government budget, handed down each year. Because of this, fiscal policy is often referred to as the budgetary policy.
_ Fiscal policy involves the prudent management of the Federal government budget to bring about specific macroeconomic objectives. This stringent and structured organization of fiscal management is often referred to as discretionary fiscal policy.
b/ Monetary policy is a policy undertaken by the government, through the reserve bank, to attain specific macroeconomic objectives by means of regulating the total money supply and the level of interest rates.
_ Open market operations are now the main instrument of monetary policy. All transactions involving the buying and selling of Commonwealth government securities: ex; treasury notes, treasury bonds.
_ An integral part of the official money market are exchange settlement funds. Exchange settlement accounts are held at reserve bank with funds used to settle transactions between banks, the authorized money market dealers and the reserve bank.