General Economics: Exercise Book

by Egor Sidorov

Ústí nad Labem, 2008

2

Preface

This exercise book is designed for students enrolled in non-economic study programs studying

General Economics course. The significant share of macroeconomic problems in this book is

based on statistics from developing and transformation economies. This fact makes it different

from the literature alike. The microeconomic part of issues refers to world-known brands,

companies and forms of business in order to involve the students‘ experience in solving the

problems.

The work on this exercise book was financed by the grant of the Higher Educational Institutions

Development Fund. The support is greatly acknowledged.

Please note:

This Book uses to some extent an informal style of number abbreviations:

— €50B – correspond to 50 billion euro;

— $24M – corresponds to 24 million dollars.

Exercises marked with ―*‖ sign are more complicated than the rest.

Exercises marked with are more time consuming than the rest.

© Egor Sidorov — Ústí nad Labem, 2008

ISBN 978-80-7414-057-0

3

Book review

This exercise book is developed for those students who study general economics course while

being enrolled in non-economic study programs and schools. The book consists of 10 chapters

summing up the basic spheres of economic theory. In principle the book covers the whole range

of problems discussed in the general economics course.

Each chapters of the book is divided into two parts. The first part of the chapter contains

discussion points on chosen problems. These questions have such style and structure that in many

cases they lead reader to discover certain economic phenomena by himself. The second part of

the chapter contains specific problems to solve both by using calculations or logical reasoning.

The approach used in the book combines theoretical knowledge with personal assumptions and

reasoning of the student. This captivating approach leads to closer understanding of far more

complicated real world issues and motivates finding possible solutions. The exercises are often

accompanied with the real-world data presented in such way that the student has enough space to

not only understand it but also give a correct interpretation.

In number of cases the problems and issues discussed in the book do not have a single and the

only possible solution. In this respect the close interaction between the teacher and student is

necessary: the student needs to get feedback if his approach and logics is right or misleading. The

aim of the book, however, is not only to find the right answer to questions and problems, but also

to bring the student to understanding, that one issue may be viewed at from different viewpoints.

This approach provides a complex view on economic reality.

The book is primarily focused at economic phenomena of developing and transforming

economies. However, in many cases parallels with developed economies are being provided. This

gives the students possibility to understand the distinctions and similarities between the economic

systems.

One can conclude that all above mentioned facts make the book a good study material.

Ing. Jakub Vosatka, Ph.D. November 6, 2008

Usti nad Labem

4

Contents 1 Introduction .................................................................................................................................................... 5

2 Supply and Demand ..................................................................................................................................... 9

3 Production and Cost Analysis................................................................................................................. 15

4 Theory of a Firm .......................................................................................................................................... 20

5 Introduction to Macroeconomics. Measuring output ................................................................... 25

6 Inflation........................................................................................................................................................... 30

7 Unemployment ............................................................................................................................................ 35

8 Monetary Policy ........................................................................................................................................... 40

9 Fiscal Policy ................................................................................................................................................... 43

10 International Trade and Economic Relations .................................................................................. 48

5

1 Introduction

scarcity of resources | production possibility frontier | opportunity costs | economic models and their peculiarities

Points for discussion a) How can you define an economic model? How does the model differ from reality? Think

about the main issues that economic modeling faces.

b) Explain what is ceteris paribus (others things remaining unchanged) assumption? Why is it so

important for economic modeling?

c) Given pairs of the following economic variables: income and consumption, price and number

of goods bought, wages and number of working hours. Think about which of these variables have

direct relationship. Which of them have indirect (inverse) relationship?

d) Try to name general categories of resources that are necessary for production of such good as

Ferrari and of such a service as hairdressing. How do economists call these groups of resources?

e) One can sometimes hear the statement that time is a scarce resource. Which of the economic

production factors already include time?

f) How do you understand the term ―scarcity‖? Name the resources that you regard to be scarce.

Name the goods which are free. What if scarcity did not exist?

g) Does scarcity mean poverty? Need a wealthy nation like the United States be concerned about

scarcity? Why? What do all economic systems commonly face?

h) What is the relation between the scarcity, choices, efficiency and economic rationalism?

i) What do economists call ―opportunity costs‖? What is the way to estimate your opportunity

costs of investing into your own business if the next best option is putting money into bank?

Exercises 1.1) Which factors would you include into the model determining the price of apartments in your

town? Which of them it is sensible to include in ceteris paribus assumption?

6

1.2) Curves on the following graphs show relations between the temperature outside (t°) and

quantity of particular goods (Q) sold in the supermarket. Think of examples of such goods for

every graph. Which graph best suits for computers?

1.3) Say you have $20 in your pocket and you plan to spend the whole sum to buy music CD‘s.

Draw a graph showing how much CD‘s would you buy in case their price is $2, $5, or $10 a

piece.

1.4) The following graphs show relations between the price of goods (P) and their quantity (Q)

sold in the market. What is the difference between these two goods? Think of examples of such

goods.

1.5) Each of the following graphs shows relations between the time (t) and quantities of particular

shoes (Q) sold in the shoe-shop. Which of the goods is more fashionable? Why?

t

Q

t

Q

t° t°

t°

Q

Q

Q

Q

P

Q

P

Q

P

7

1.6) The following graph shows relation between income (I) and savings (S) of a particular

family. Explain the ascending slope of the curve. What does the part of the curve under the x-axis

show? What does the intersection point of the curve and x-axis mean?

1.7) Draw a graph showing relation between the level of employment and number of sport-car

purchases.

1.8) Economists tend to measure choices or decisions people make in terms of opportunity costs,

i.e. of what was foregone, or the next best alternative given up, if resources were used in one way

rather than another. Try to define and evaluate in money terms opportunity costs of spending

1 hour in the class of General economics for you; for your parents; for society.

1.9) Say a janitor and a tax consultant from the same firm need to get from Prague to Berlin to

spend a weekend. The plain to Berlin costs $100 and the flight time is 1 hour. The train ticket

costs $15 but it takes 6 hours to go. The wage of a janitor is $1/hour; the financial consultant

charges $20 an hour for his services. What type of transport will you choose if you were a

janitor? What if you were a tax consultant? How high the opportunity cost will be for a tax

consultant in case he goes by train? (Assume these gentlemen value their free time at their hourly

wage rate).

1.10) Say you run a McDonald‘s restaurant and you spend 50 hours a week to manage it. By

operating a restaurant you forgo the next best alternative of working as a car seller and getting

$20 an hour. Say you are making $500 of profit a week. Does it make sense to continue running

your own business? Explain your answer.

1.11) The average Spanish spends his time doing the following activities daily as presented in the

following table. Think of what type of activities could an average Spanish give up in order to

make more money working. Now calculate the opportunity cost of lifestyle depicted in the table,

if a minimum monthly wage is €700. Activity % of a daytime

TV and video 8

Free time 17

Eating 7

Sleep 36

Household work 15

Work 17

Source: http://epp.eurostat.ec.europa.eu

I

S

8

1.12) Say the economy of the small village is capable of producing the two types of goods:

cookies (consumer goods) and ovens (investment goods). Due to scarcity of the available

resources (labour, capital and land) the more ovens are being produced the fewer cookies are

being baked. The following table depicts the village‘s production possibilities. Option Cookies (boxes) Ovens (units)

A 0 5

B 6 4

C 11 3

D 15 2

E 18 1

F 20 0

a) Draw a production possibility frontier (PPF). b) Which of the goods refers to present and

which one to future consumption? c) Explain what happens in the economy while moving from

point to point on the graph? d) Show the how the marginal rate of transformation changes along

the curve. Try to explain this phenomenon. e) Draw two additional points G (15; 4) and H (6; 6).

Show points that are efficient, inefficient and unattainable given that PPF shows the optimal use

of available resources? f) In which case the economy is in F state? g) What should happen before

the economy is able to reach the state depicted by ―G‖? h) What are the opportunity costs of

moving from point D to point C? What does this relocation actually mean? i) Say the village has

built a new power plant that allows producing 50 percent as more cookies and ovens as it does

now. Draw a new PPF. j) Draw a new PPF for the case when the technology of oven production

improves, so that the quantity of ovens doubles for any given quantity of bread and the bread

production doesn‘t experience any changes. k) Does all this necessarily mean that our village will

reach the possible production level in reality?

1.13) Your younger brother receives weekly $10 of pocket money, which he spends entirely on

sandwiches at school and his football cards collection. Football cards cost $2 a piece and

sandwiches cost $1. Draw your brother‘s budget line with axes showing the quantities of football

cards and sandwiches he can buy. a) What is an opportunity cost of buying a football card?

b) Show how the budget line will shift if the weekly allowance changes up to $24, if it decreases

down to $12. c) Show the budget change if the price of a football card reduces down to $1.

d) What is the budget line equation?

1.14) Are there any common problems that are being solved as in centrally planned as well as in

market economies? Explain your point of view.

1.15) Distinct between economic and non-economic goods: a) air we breathe; b) street ice in

winter; c) artificial ice used for packaging; d) oil used for rubber production; e) sand on the wild

beach; f) sand used in glass production. Explain your point of view.

9

2 Supply and Demand

supply and demand curves | demand factors | supply factors | price elasticity | market equilibrium

Points for discussion a) What is utility? What is marginal utility? Can marginal utility be negative? If ―No‖, why? If

yes, think of your own examples of such situations. What is an indifference curve? Can two

indifference curves cross? Explain why. What is marginal rate of substitution (MRSxy)? In which

case will MRSxy be a constant?

b) What is the difference between demand, demand function, and demand curve? When the

economists say ―change in demand‖ and ―change in quantity demanded‖ do they mean the same

things?

c) What does the law of demand state? What about the law of supply?

d) Explain why does the demand curve have a downward slope? Why does the supply curve have

an upward slope?

e) Why do economists need ceteris paribus assumption when constructing the demand curve?

What is being held constant when a demand curve for iPhones is being constructed?

f) Name as much as possible non-price factors influencing the demand for Volkswagen

minivans?

g) What are main non-price factors influencing the supply of Budweiser beer?

h) What is price elasticity? How can one calculate it? In which units one can measure elasticity?

Why can elasticity coefficient be either positive or negative?

a) Knowing what price elasticity of demand is, try to explain what is income elasticity of

demand?

i) What is market? Name the main market players? What is the main aim of the household on the

market? What is the main aim of the firm on the market?

j) What is market equilibrium? Which forces lead to market equilibrium? Try to explain this

mechanism using such terms as excessive stock (surplus) and deficit (shortage).

10

Exercises 2.1) Say the cost of public transportation in you city is regulated by municipality. The maximum

price of the ticket for all private transporters is fixed at $1 per 30 minutes long trip (this is a so-

called price ceiling). Look at the following graph and describe the current situation on the market.

What will happen if municipality releases the ticket price?

2.2) The prices on the shoe market fluctuate around the equilibrium price. What economic sense

do segments AB and CD have? What happens in the market after P1 and P2 prices are being

established?

2.3) Explain using a supply-demand graph why during the summer season vegetables sold in the

supermarket are cheaper compared to winter time?

2.4) Imagine you visit a pub where only two types of beer are served — Budweiser and Heineken

at a price of $2 for a bottle. Your demand is elastic since you are indifferent what beer to drink.

You are planning to spend $10 for a beer today. You get known that the price of Heineken is

reduced by $1 for today. Discuss the substitution and income effects connected with this price

change.

2.5) Try to name at least 3 goods or services complementary to mobile phones, DVD players, and

library services. Think of substitutes to them.

2.6) What will happen to the demand for paper books if publishing houses begin to sell electronic

books to the libraries? Use the supply-demand model.

Q

P

A

B

C

D

P2

P1

D

S

P

1

2

3

Q (thous.) 1 2 3 4 5 6

11

2.7) What happens to the demand for Lamborghini if the price of their tires goes down by

40 percent? What happens to demand for Lamborghini tires if the price for Lamborghini goes

down by 40 percent?

2.8) Draw the curves of perfectly elastic and perfectly inelastic demand. Think of examples of

goods with perfectly inelastic demand.

2.9) Which of the presented graphs depicts the supply of yoghurts in Kaufland store: a) during

the day? b) during the week? c) during the year? Explain your point of view. When the supply

curve is most elastic by price and why?

2.10) Curves D and S0 depict the initial demand and supply on the local market of cheese. Name

the possible reasons for moving from E0 to E1?

2.11) Curves S and D0 depict the initial situation the market of CD-players. Try to name the

possible reasons for moving from E0 to E1?

Q Q

Q

P

P

P

Q

P S

D1

E1

E0

D0

Q

P

S0

S1

D

E1

E0

12

2.12) Due to attractive leasing offer the demand for Ford Focus is exceeding supply, so the

customers have to wait up to half a year to get their car from a plant. Try do depict this market

situation on a graph assuming that the price of Ford Focus remains at the initial level.

2.13) In 2006 over 8.3 million people visited Musée du Louvre in Paris. This is close to its total

capacity. Draw a curve depicting supply of tickets at this museum.

2.14) The graph shows the situation on the market of car tuning services. What happens on the

market if: a) price of car components goes up? b) automotive plants start producing cars with

aggressive sporty design? c) car tuning stops being fashionable? d) more people start preferring

bicycles to cars? e) the car tuning services advertising campaign turns out to be very successful?

2.15) The marketing research agency provided the following data on DVD rentals in Usti nad

Labem. a) Graph market of DVD rentals in Usti nad Labem, plotting at least 8 points on the

graph. b) Determine the equilibrium price and quantity of DVD‘s. c) What quantity of DVD‘s is

supplied and what quantity is demanded at the price of $5? Analyze what happens if this situation

occurs the on market. d) What situation occurs if the price of DVD increases up to $7? Price, $ Quantity demanded Quantity supplied

2 1000 200

4 800 600

6 700 700

8 300 900

2.16) * The following table presents a situation on the market of CD-players in a small village.

a) Determine the coefficients of the demand function of y=ax+b type? b) Draw a demand curve.

c) The current price for a CD-player is $40. The firm is planning to decrease the price of from

$40 to $35. Calculate the price elasticity of demand on this part of a curve. d) What happens to

the total sales in this case? e) Draw a supply curve described by the following equation:

P=15+0.5Q. f) Finally, find coordinates of the market equilibrium point. Price Quantity demanded

40 20

30 40

20 60

Q

P S

D

13

2.17) Which of provided graphs depicts a normal good? a necessity good? an inferior good?

Think of examples of such goods.

2.18) Sony Vaio notebooks are quite comparable to other brands on the market according to

technical parameters. Say when their price has risen by 30 percent the quantity demanded has

also increased significantly. How can you explain this paradox? What type of goods do Sony

Vaio notebooks belong to?

2.19) Think of examples of goods for which the demand curve is likely to be inelastic. In case of

what goods will the demand curve tend to be elastic? Do the same exercise concerning supply.

2.20) Try to explain how the elasticity of demand is influenced by each of the following factors:

a) necessity of good or service? b) number of substitutes? c) addictiveness? d) time period? e)

and consumer awareness? Give your own examples of such situations.

2.21) Think about how the price elasticity of supply is influenced by the following factors:

a) time horizon? b) availability of stocks? c) resource mobility? Think of your own examples.

2.22) Which of presented demand curves D1 or D2 is more elastic? Explain your point of view.

2.23) Say you are running a music shop. Will you need information about the demand price

elasticity of your merchandise? What for? What information will you need to calculate elasticity

coefficients? How will you collect it?

2.24) What is the price elasticity of demand a) for salt? b) for Tesco sale catalogue merchandise?

c) for Santa Claus costumes before Christmas? d) for hairdressing services? e) for drugs?

I I

I

Q

Q

Q

P($)

1

2

3

Q (pieces) 1 2 3 4 5 6

D1

q

D2

q

14

2.25) Suppose you run a shoe-shop and you need to determine the new price policy of your firm.

How data on demand and price elasticity will affect your decision?

2.26) Say you are a manager in a coffee shop. You know that the demand for cheesecakes has

price elasticity coefficient equal to 0.4. What will be the change in quantity demanded after you

reduce the price for cheesecakes by 20 percent? Is this a rational marketing policy?

2.27) The Tesco store has announced a 50-percent off sale for all white t-shirts this week. During

the week the sales of t-shirts increased by 100 percent. Determine the price elasticity coefficient

of demand. What type of demand is that?

2.28) Mr. Jenkins from the USA thinks that Coca-Cola tastes much better than Pepsi. Mr. Novak

from the Czech Republic sees no difference between these two beverages. Whose demand for

Pepsi beverages is more price elastic and why?

2.29) Hewlett Packard decided to reduce the prices of their notebooks in order to see if it would

help to increase their total revenues. Say company reduced notebook prices by 25 percent on

average and their sales increased from $100 000 per month to $105 000. Comment on the price

elasticity of demand without making any precise calculations; calculate the elasticity coefficient

then.

2.29) Say as a grocery store-keeper you are selling 100 packs of salt and 100 packs of sugar

daily. By chance the price of salt and sugar is equal to $1 per pack. Suppose you want to increase

your sales. How would you change the prices of salt and sugar in order to get the maximum effect

if you have read that price elasticity of demand for salt equals to 0.5 and for sugar it is 2?

2.30) Adam Smith‘s paradox of value sounds like that: ―Although water is on the whole more

useful, than diamonds, diamonds command a higher price in the market‖. Try to explain this

classical dilemma.

15

3 Production and Cost Analysis

revenue | output | costs | inputs and outputs | profit | production optima

Points for discussion

a) What factors of production do you know? What costs are connected with each of them?

b) Some authors single out additional entrepreneurship (and enterprise) production factor. What

is peculiar about it? What costs are connected with entrepreneurship production factor?

c) Define the fixed, variable and total costs. In what time horizon can we speak about fixed and

variable costs? Why? Think of examples of such costs in case of university.

d) How can one calculate average costs and marginal costs? Why do managers need information

about costs in general and average and marginal costs in particular? What determines the shape of

average total costs curve in a short run?

e) What is revenue? What information will you need to calculate revenue? Define what is

average and marginal revenue?

f) Speak about the law of diminishing returns. Think of your own situation in production or

services when every other unit of input brings less effect than the previous one.

g) What is profit? What is peculiar about economic profit? Why do you think practical

accountants are usually reluctant to deal with implicit opportunity costs and economic profit

categories?

h) What do economists call a normal profit? Why do economists (however, not accountants)

regard normal profit to be part of costs?

i) What is the difference between technical and economic efficiency?

Exercises

3.1) The economies of scale may occur along with the expansion and growth of an enterprise. Try

to explain why can this phenomenon occur? Give the concrete examples of technical, managerial,

marketing and financial economies of scale. However the growing firm may also face different

issues. Think of possible diseconomies of scale.

16

3.2) The following table presents data on cost of advertising (in €) in most viewed commercial

television channels in different countries of Europe in 2001. Explain where the economies of

scale occur and what are the reasons for it? Why is advertising an important activity on an

imperfect competitive market? What ―imperfections‖ does it help to overcome? What effect

advertising has? Show it on the supply-demand model.

Country Channel Cost of a 30 second

prime time advert

Average number of

spectators

Cost of reaching

1 000 inhabitants

Germany RTL 45 507 11 376 750 4

Spain TVE1 16 954 3 390 800 5

Netherlands RTL 4 10 775 920 940 11,7

Austria ORF 10 400 522 613 19,9

Source: http://epp.eurostat.ec.europa.eu

3.3) Suppose you are a management analyst for a McDonald‘s fast-food chain. Make a list of the

inputs and outputs of your firm assuming you produce only Big Macs. Refer each input to some

production factor category (labor, capital or land).

3.4) The graph presents results of a farmers‘ work. As you can see after the farmer adds the first

tonne of fertilizer the crop increases by 50 percent, the next tonne brings 100 percent increase.

However, the following melioration activities aren‘t so efficient and furthermore can do harm

reflecting in the decrease of crops. Look at the graph of total output (TP) depending on amount of

fertilizer (Q) and prepare your own graph depicting the marginal output (MP) depending on

amount of fertilizer. Explain the positive, zero and negative values of marginal output. What

economic law is reflected on these graphs?

3.5) Suppose you run a pizza restaurant. Try to determine which of the following costs are likely

to be variable or fixed this year: a) monthly rental payments for the building; b) wages of the

cook; c) salary of an accountant; d) central heating; e) flour; f) insurance; g) electricity; h) wages

of waiters; i) advertising expenditures; j) property tax.

3.6) What examples of fixed and variable costs can you find: a) in a beauty shop?

b) at the university? c) in a bar?

3.7) Would a firm still have any costs if it didn‘t produce any goods this month?

TP(t)

1

2

3

Q (t of fertilizer) 1 2 3 4 5 6

MP(t)

0

1

2

Q (t of fertilizer) 1 2 3 4 5 6

-1

17

3.8) Explain why do average variable costs and marginal cost curves start in the same point?

3.9) Think about the reasons, why does supply curve of a perfectly competitive firm have an

upward slope?

3.10) The fixed costs of a firm are 5 money units. Based on information on variable costs in the

table calculate total, average fixed, average variable, average total and marginal costs. Q FC VC TC AFC AVC AC MC

0 0

1 5

2 9

3 14

3.11) Using data from the table find average fixed costs corresponding to 4 units of output

(marked as X). Q FC VC TC MC AFC AVC AC

0

1

2 80 30

3

4 X

3.12) Using available data fill in all the blank cells. Q FC VC TC MC AFC AVC ATC

0

1 20

2 30 12

3 114

4 160

3.13) Say you are selling popcorn near the movie theater. Name all the fixed costs and average

costs you have. Say your fixed costs are $100 and average variable costs are $1 per bucket. Draw

the average fixed cost, average variable cost and average cost curves. It is obvious that selling

100 buckets of popcorn instead of 20 is more attractive. Now explain why, using economic

theory terminology.

Q

MC AVC

P

18

3.14) Your firm is currently producing and selling 100 brushes for $2 each. It has average fixed

costs $0.5 and average variable costs $0.75 at this production level. a) Calculate the firm‘s total

revenue, total fixed cost, total variable cost, and total profit at this production level. b) Draw total

cost and revenue curves. c) What is the word for intersection point of revenue and total cost

curves? What is the economic sense of this point?

3.15) Say you have got a report from the economic analyst that currently your firms‘ marginal

cost is greater than the marginal revenue. Will you a) expand output, b) leave output as it is, c)

reduce output, or d) decrease price (assuming you are acting on the market close to perfect

competition)? Explain your answer.

3.16) The consulting firm has informed you that has your firm has the following average cost

function AC = 500 – 5Q + Q2

(―AC‖ is average cost and ―Q‖ is units of output). Derive the

equations for total cost and marginal cost. At what level of Q are total costs minimized?

Demonstrate with at least one calculation.

3.17) * Why may an organization‘s average cost of production rise as output rises in the short run,

but fall in the long run?

3.18) In case of which business will the long run be longer: the space shuttle production or the

ice-cream stand on the corner? Explain you answer.

3.19) Given quantities sold, price, and total costs in the table, determine the total revenue, profit,

marginal costs and marginal profit. Q P TR TC Profit MC MProfit

0 30 120

20 30 240

40 30 480

60 30 960

80 30 1 920

100 30 3 840

3.20) The table shows the unit costs of producing jackets. a) Draw a graph characterizing the

total production costs. b) Say the market price for a jacket is $80 a piece. Draw a total revenue

curve. c) Locate the point of maximum profits. Monthly number of

produced items, thous. Cost per jacket, $

1 80

2 65

3 60

4 70

5 80

3.21) Your accountant has the following data: when your restaurant produced 40 pizzas the

average variable costs (AVC) were $0.5. When you produced 20 pizzas average fixed costs

(AFC) were $1. Define the average cost (AC) level when you produced 80 pizzas.

3.22) Mr. Jenkins insists that that the new wardrobe in the sleeping room didn‘t cost him

anything since he used his own boards from the garage and he worked by himself for

3 weekends. Is this statement true from the economic point of view? Explain why.

19

3.23) Explain the difference between the explicit cost of buying a bakery for $30 000 and the

opportunity cost. State any necessary assumptions by yourself. How may these costs influence

your decision to buy the bakery?

20

4 Theory of a Firm

types of proprietorship | types of competition | volume of market | market share | concept of added value

Discussion points

a) What are the main features of organization? Why organizations exist? What role do transaction

costs play here? Name the main goals of a firm.

b) Name basic types of proprietorships and their main peculiarities, advantages and

disadvantages. Explain the difference between limited and unlimited liability.

b) Which form of proprietorship is the most numerous? What are the reasons for that? What

forms of proprietorships employ the most people?

d) What types of competition can you name? Name the basic features, advantages and

disadvantages of each type and give real-life examples explicitly showing these features.

e) What is market in the economic sense? What is an ―invisible hand of market‖? Market

failures: in what cases competitive market mechanism is efficient good and in what cases it is

not?

f) What are the main reasons for monopoly existence? What is a natural monopoly? How can

monopolist perform price discrimination? Think of price discrimination examples from your own

experience.

g) Why is monopolistic competition ―monopolistic‖?

h) What is market power? In which situations and in which way can firms display it? How can

one measure it?

i) Name the general types of market failures that you know. Explain the reasons for them.

Exercises

4.1) What factors would you consider before choosing the type of proprietorship of your firm, if

you are planning to start: a) a bakery or b) automotive plant? What are the main sources of

finance available for a start-up business? What are the main advantages and disadvantages of

each source?

4.2) What type of proprietorship is likely to predominate in the following business spheres:

a) aircraft building? b) plumbing services? c) construction? d) advocacy? e) small retailing?

f) tourist operating? g) publishing? h) oil extraction? i) laundering? Explain your point of view.

21

4.3) Name several companies from your town that represent the following types of competition:

a) monopoly, b) oligopoly, c) monopolistic competition and, finally, d) those who are close to

perfect competition. Think about the main reasons for existence of monopoles. What

disadvantages connected with their existence can you name?

4.4) Why is perfect competition normally regarded as being ―better‖ than monopoly? Model a

situation when monopoly is more preferable. Explain you point of view.

4.5) Think about what types of market competition exist among the following businesses:

a) potato farmers? b) online book retailers? c) flight operators? d) beer brewers? e) local

stadiums?

4.6) Choose one of the businesses: a) a hotel, b) a pizza restaurant, c) a cinema, d) a CD retailer,

e) a taxi service. Describe the market conditions in which this business operates on your local

market. To what extent and in which way does the market of this business deviate from the

perfect competition?

4.7) What type of elasticity is peculiar for demand curve of the perfect competitive firm? Why

can consumers afford such type of behavior?

4.8) Why so few examples of perfectly competitive markets exist? How do the contemporary

communication technologies influence the overall situation?

4.9) Would you choose Nokia over Sony-Ericsson or vice versa? What type of competition exists

at this market? How and why do these firms differentiate their products?

4.10) Draw the ATC, MC and MR curves for a perfect competitive firm in a short run. Show

under what conditions will this firm maximize its profit. Why the profit approaches to zero in the

long run on this type of market?

4.11) * Say your family is involved into potato farming business on a market close to perfect

competitive. After the General economics course you have calculated the following data

presented in the table. If the price of potatoes is $45/ $51/ $70 per tonne, will it sensible to

continue production: a) in the short run? b) in the short run? Explain your answer for each case. If

your aim is to maximize profit (or minimize loss) what volume of production will you choose and

why? Crop, t AFC, $ AVC, $ ATC, $ MC, $

1 60 60 120 60

2 30 55 85 50

3 20 52 72 46

4 15 51 66 48

5 12 58 70 86

4.12) Does it make sense for a perfectly competitive firm to advertise? Explain your answer.

22

4.13) Which of the curves depicts the demand for the product of a firm on a perfectly competitive

market?

4.14) Say you are planning to start you own telephone company. What kind of entrance barriers

will you expect to face on this market?

4.15) Which factors of supply and demand made a traditionally monopolistic market of local

phone services an oligopoly?

4.16) The state of Lichtenstein has only 3 cinemas. What type of competition is likely to exist on

this movie market? Why?

4.17) The pure monopolist can establish any price he wants since he is the only supplier of the

considered good or service and the demand curve is inelastic. Do you agree with this statement?

4.18) Can the monopolist decrease the price of every next good sold without decreasing the price

of the previous one? If yes, give your examples. If not, why? Why should monopolist decrease

the price so far?

4.19) The graph depicts the demand, marginal cost and average cost curves. Which additional

curve is necessary for establishing the price maximizing the profit of the monopoly?

4.20) Say you represent organs of power. Would you abolish the existence of monopolies in your

area? Why?

Q

MC

AC

P

P Q

P

P

Q

Q

23

4.21) A cartel is an organization of several companies that is aimed at restricting competition and

raising the price. Imagine you are a member of cartel of construction firms in your locality. What

should you do in order to get unfair advantage? If you were a representative of authority

controlling the fair trade in the area, what would you do in order to prevent and reveal the cartel

agreement?

4.22) How may the following businesses act as cartels: a) banks? b) insurance companies?

c) reality firms? d) auto dealers?

4.23) Is European automotive market competitive? What kind of market is that: an oligopoly or a

monopolistic competition? Explain your point of view.

4.24) The population of Usti nad Labem is around 100 thousand people. Say average family

consists of 4 people and spends $200 a week in local supermarkets. Calculate the Herfindahl

index for 2, 4, and 6 biggest firms, given the following data for supermarkets‘ market share

calculation. Interpret this figure. Supermarket name Average weekly sales, $ thous.

Tesco 4 000

Hypernova 3 400

Kaufland 3 000

Globus 2 900

Plus 2 800

Lidl 1 700

Others 2 200

4.25) The following table presents the general purpose credit and debit card usage in Europe in

2003. Calculate the market power of index of the 2 and 4 biggest card operators.

Card type Cash and purchase volume,

€ billion

Total 2 160

Maestro 970

Visa 700

MasterCard 270

Visa Electron 180

American Express 34

Diners Club 6

Source: http://epp.eurostat.ec.europa.eu

4.26) Think of examples of world-known firms that maximize their profit and fight against

competitors by: a) increasing their prices; b) decreasing the product prices; c) improving the

quality of their product or service; d) actively advertising their product; e) cutting the costs?

4.27) It is known that transportation costs declined substantially compared to what it has been

e.g. 30 years ago. What impact do lower transport costs have on market power of different firms?

How do communication technologies influence the market power?

4.28) Think about the reasons, why Adidas, RBK and Nike dominate on the market? What

distinguishes these firms from all the rest?

24

4.29) Define the market for McDonald‘s business in whole and for local McDonald‘s restaurant

in your hometown (name geographical boundaries, main consumer groups and competitors).

What type of market competition is typical for McDonald‘s? Can a local Italian restaurant be

called a substitute for local McDonald‘s? And what if this Italian restaurant is 100 km away

from it?

4.30) A: Say you are a local mobile phone operator. What will you do in order to discourage

other competitors to enter your market (what entrance barriers will you prepare for them)? B: Say

you represent the local authority. What will you do in order to encourage new phone operators to

come to the market (how will you make this market competitive)? Why would you do that?

4.31) What is more important: price competition or quality and design competition? What keeps

McDonald‘s from raising prices? What can you say about quality of this food?

4.32) Explain why buying honey in a far away village is likely to be much cheaper than buying

honey in the local supermarket?

25

5 Introduction to Macroeconomics.

Measuring output basic macroeconomic definitions | nominal national accounting aggregates | double counting issue | issues of growth

Points for discussion

a) What is the difference between micro- and macroeconomics? How are these two fields related

to each other?

b) Name the main economic agents studied in macroeconomics. What issues are being studied by

macroeconomics?

c) What‘s the difference between gross domestic product (GDP) and gross national product

(GNP)? What do policymakers need the GDP (GNP) estimation for?

d) How do you understand the ―double counting‖ issue while estimating aggregate output? What

is the way to eliminate double counting?

e) What approaches to estimation of GDP (GNP) do you know? Describe them. How can GDP

measure both the economy‘s income and the expenditure on its output?

f) What is the difference between the capital good and final consumption good? What do

economists call an intermediate good? Give your own examples of such commodities.

g) * What do you think are the main data sources providing information for national accounting,

in particular for calculating GDP (GNP)?

h) What is the difference between gross domestic product (GDP) and net domestic product

(NDP)? Why NDP is being calculated?

i) If two countries have the same level of GDP, can we say that those countries are equally well

off? What indicator makes it clearer?

a) * What is ―potential GDP‖? How do you think economists calculate the potential GDP figure?

j) What are the main shortcomings of a GDP? What does GDP measure and what it doesn‘t? Can

we use GDP as a welfare indicator? Explain your answer.

k) Starting with GDP, how can you calculate national income (NI) and disposable income (DI)?

What is the difference between NI and DI?

26

l) What is a business cycle? What four phases of a business cycle can you name? What is peculiar

about each of them? How can you determine in which phase of business cycle the national

economy is? What phase is your country currently in? What would you do that for?

Exercises

5.1) What macroeconomic issues have you heard about in your national news lately? What does

your government plan to do about that?

5.2) Which statements belong to microeconomics and which belong to macroeconomics: a) the

total output of Dombey and Son, Ltd. has increased by 23 percent last month; b) the government

liberates prices in agriculture; c) the minimum wage rate has reached its historical maximum;

d) the successful marketing campaign has attracted additional customers; e) the budget deficit can

be covered by international loans; f) the oil extracting industry has increased the volume of daily

output.

5.3) Think of your own examples of gross investment and net investment made by a company

providing taxi services. Explain why NDP indicator is so interesting to economists?

5.4) Think about what is the value added created by a) a grocery store? b) a pizza restaurant?

c) a real estate firm?

5.5) The table presents a simplified model of a small no-tax economy producing beef. Fill in

missing fields, calculate GDP and compare it to other total indicators in the bottom line of the

table. Production stage Product market price Intermediate product Value added

Cow-calf operation 100 -

Livestock auction 200 100 100

Feedlot operation 250

Packing plant 400

Fabrication 450

Supermarkets and restaurants 900

Total

5.6) Which one of indicators GDP or GNP is more suitable for the USA? What about the

Northern Korea? Explain your answer. What indicator is more suitable for your country?

5.7) What is greater: GDP or GNP? Explain your point of view. How do you think GDP and

GNP of you country are related to each other?

5.8) During a year a small nation produces the following goods and services. In what units may

the following quantities be represented? Calculate the nominal GDP.

Item Price

($ per unit)

Quantity

(units)

Cars 1000 10

Shoes 100 100

Food 2 10 000

Medical services 30 1000

27

5.9) What do you think, what happens (or is likely to happen) to level of GDP if: a) hurricane

destroys buildings on the seashore? b) oil spill involves ecological catastrophe? c) house maid

cleans the house? d) farmer grows tomatoes for personal consumption? e) housewife cleans the

house? f) illegal copy of Windows is sold on the grey market? g) government passes the new

environmental law that restricts emission of greenhouse by producers?

5.10) Classify the following as consumption, investment, or government expenditure from

national accounting point of view: a) Mr. Jenkins buys a new family van; b) farmer buys a new

tractor; c) Mr. Novak hires a limo for his daughter‘s wedding; d) bakery buys a side-load truck;

e) president‘s administration rents an apartment for foreign consultant; f) Tesco has bought a lot

of copies of Star Wars books that are laying among other warehouse inventories.

5.11) Think of your own examples of transactions that may be classified as consumption (C),

gross capital formation (I), government final consumption expenditure (G), export (X), import

(Im), and governmental transfer payment.

5.12) Can the net export indicator be negative? Explain your answer. How do exports and imports

influence the national production?

5.13) Say you have sold you collection of stamps to your friend for $100. How did it affect this

year‘s GDP indicator? Explain your answer.

5.14) The sum of expenditure by consumers, business, and government is $100B. Exports are

$10B and imports are $15B. Determine what approach will you use to find GDP? Calculate GDP.

Explain, why did you use the net export figure for calculations?

5.15) In 2006 household expenditures in EU 27 were 57.8 percent of GDP, gross capital

formation 21.1 percent, and general government expenditure 20.8 percent. Define the net export

share.

5.16) Imagine a small closed economy. The oil rig provides oil to the refinery for $10M. The

refinery sells the produced gasoline to the gas station for $15M and the gasoline production by-

products to the chewing gum producer for $5M. What is the GDP of this economy if the gas

station sells the gasoline for $20M and chewing gum is sold for $10M?

5.17) A forest cutting company sells wood to the paper producer for $1M. The paper producer

sells the paper to the Central Bank for $2M. Using this paper the Central Bank prints additional

$1 000M. Calculate the GDP of this economy before the Central Bank emits the money,

supposing that value added by a Central Bank amounts to $1M.

5.18) GDP of an economy is $100B. National statisticians have calculated that foreign residents

working in the country have earned $1B during this year. On the other side the residents of this

country working abroad have earned $2B. Calculate GNP for this country.

5.19) Explain why the following components are being subtracted in the formula of national

income: NI = GNP – Depreciation – Indirect Business Taxes.

28

5.20) Should the following components be subtracted or added to national income in the formula

of disposable income: (Dividends − Corporate Profits); (Government Transfers to Individuals −

Social Insurance Contributions); and (Personal Tax and Nontax Payments). Explain why?

5.21) What is the difference between government purchases and transfer payments? Think of

your own examples.

5.22) GNP is currently equal to $4 500B. Consumption is $3 000B, and government purchases

are $1 000B. If Net Exports are zero, how much is gross capital formation?

5.23) Calculate the 2006 GDP of Turkey using the data presented in the table (constant 1990

prices). Note: some items are excess. Type of Expenditure Value, $B

Household consumption expenditure 203

General government final consumption expenditure 29

Gross capital formation 79

Gross fixed capital formation 72

Changes in inventories 7

Exports of goods and services 99

Imports of goods and services 114

Source: http://data.un.org

5.24) Calculate the GDP of the country using the data presented in the table (billion USD). Note:

there are some excess items. Define what the Import of goods and services was in this year. Say

fixed capital consumption was $5B, estimate the NDP indicator. Item Value, $B

Social contributions of employers 10

Household consumption expenditure 25

General government final consumption expenditure 9

Gross capital formation 14

Compensation of employees 35

Changes in inventories 4

Exports of goods and services 64

Net export 2

5.25) Find an inappropriate item in the following General government final consumption

expenditure: a) new Boeing purchase; b) purchase of a new yacht for presidential meetings;

c) purchase of a new townhouse by one of the ministers; d) purchase of software for parliament

security service.

5.26) If the economy is currently in a trough phase of the business cycle, what phase would you

expect to be the next: peak, recovery, or recession?

5.27) It is a known fact that (real) GDP follows a seasonal cycle. Think about the reasons for it

and give your own examples of seasonally influenced economic activities.

29

5.28) Say this is all the data you could find on internet about the Czech Republic economic

activity in 2006 (2000 constant prices, trillion CZK). Can you define the GDP for 2006? If yes,

also try to estimate the level of NDP. What was the Net investment level?

Item Value,

thous. CZK

Compensation of employees 1,4

Gross fixed capital formation 0,8

Social contributions of employers 0,3

Taxes on productions and imports 0,4

Gross operating surplus and mixed income 1,5

Gross capital formation 0,8

Net operating surplus and mixed income 1,0

General government final consumption expenditure 0,5

Fixed capital consumption 0,6

Household consumption expenditure 1,4

Wages and salaries 1,0

Changes in inventories 0,1

Net export 0,0

Source: http://www.czso.cz

5.29) The following table presents the GDP of Hungary for several years (constant 1990 prices,

billion USD). Draw a line chart of GDP development. Find GDP growth rates. What can you say

about the economic situation in Hungary? What phase of business cycle the Hungarian economy

is in? Year 2004 2005 2006

GDP, $B 47 49 51

Source: http://data.un.org

30

6 Inflation

inflation | real and nominal aggregates | deflator | consumer price index | interest rate

Points for discussion

a) What can you buy for $10 today and what could you buy for this money 10 years ago? What

happened? How do economists call this phenomenon? What is the difference between ―nominal‖

and ―real‖ measures?

b) What is the difference between nominal GDP and real GDP? How can you calculate real

GDP? Why is real GDP important for decision-makers?

c) When calculating the real GDP indicator, why instead of money measurement (that is highly

influenced by the inflation) can‘t we just use the data on goods and services production in

physical units?

d) How do you understand the expressions ―change in volume‖ and ―change in price‖? How are

they connected with real and nominal GDP?

e) What is a price index? What is base year and what is current year? What do we need a base

year for? In what units can one measure the price index?

f) What is inflation? How can one estimate the inflation? Suppose you are a policy-maker, what

would you need this indicator for?

g) Describe the consumer price index (CPI), producer price index (PPI) and the deflator. What do

they have in common? What is different about them? What is the most peculiar about the

deflator? Why PPI is not suitable for analyzing consumer market? If you were a policy-maker

what would you need these indexes for?

h) What is average market basket of goods? If you were a national statistician, how would you

approach to definition of market basket of goods of an average household? How would you

determine the cost of an average basket of goods? How would you collect data on prices? What

does ―weighting‖ mean?

i) What does the term ―constant price‖ mean? How can you switch from current to constant

prices?

j) Explain how does inflation reduce the purchasing power of money? Give an example.

31

k) What are the main factors influencing inflation? How can you explain the statement, that one

of the reasons for inflation is the fact that everyone expects it? How does the political climate

influence the inflation?

l) What are the consequences of inflation? Who ―suffers‖ from inflation most of all? Who ―wins‖

due to inflation existence?

m) What is an ―interest rate‖? What is the difference between the real and nominal interest rates?

How can you approximate a real interest rate using inflation rate and nominal interest rate?

Exercises

6.1) If nominal GDP has doubled in comparison with the previous year, what happened to the

real GDP in this case (ceteris paribus)?

6.2) Can the real GDP increase while the nominal GDP has actually decreased in comparison

with the previous year? Explain your answer.

6.3) The Central Bank of Zimbabwe issued bank notes with nominal value of 100 billion local

dollars. What could have forced it to do that?

6.4) What groups of goods would you include into the basket of goods of an average

household? What differences can one likely find between the average baskets of goods of

American and English households? If a decade ago average baskets of goods contained such

items as videocassette players, tape-cassette recorders and film cameras, what do you think they

contain now? What do you think which items are the most ―stable‖ in this list? Why not to select

a new market basket every year?

6.5) 20 years ago a cell phone cost $2000. Things have changed and now its price is between

$50-$300. How did this fact affect the CPI? Do you think a cell phone was included into basket

of goods 20 years ago? What type of good it was at that time?

6.6) Estimate the inflation rate for 2007 if CPI for 2006 was 110 and for 2007 it was 115.

6.7) Can use of CPI overstate or understate inflation rate? Explain your answer.

6.8) Say you heard in the business news that the price index in the steel industry is 150 percent.

What does it actually mean?

6.9) If the price index of a DVD recorder is 0.9, what can you say about the change of price of

this product?

32

6.10) The table presents prices of 4GB USB flash memory cards in USD over time. Calculate the

price indexes for each year assuming that 2006 is a base year. Year 2004 2005 2006 2007 2008

Price, $ 450 200 50 30 20

Price index, %

6.11) Table presents the CPI data for Belorussia. Calculate the yearly inflation rate between

2001-2002, and 2003-2004. Say a sack of potatoes in 2004 cost 150 rubles and in 2005 — 160

rubles. Define when the sack of potatoes was more expensive in real terms (in constant 2000

prices). Year 2000 2001 2002 2003 2004 2005 2006

CPI 100 161 230 295 348 384 411

Source: http://laborsta.ilo.org

6.12) The salary of the USA president in 1946 was $75 000. Today it is around $400 000. Is Mr.

President better off today than 60 years ago? Use the data in the following table for explanation. Year 1946 1982 2007

CPI 19 100 207

Source: http://www.bls.gov, http://www.senate.gov

6.13) The following table presents the economic data from Poland. Calculate the real GDP and

compare it with GDP in current prices. Is nominal GDP a misleading indicator? What was the

real development trend of the Polish economic activity during the whole considered period? Year 2000 2001 2002 2003 2004

GDP in current (market) prices, €B 186 212 210 192 204

Deflator, % 100 113 110 97 98

Source: http://epp.eurostat.ec.europa.eu

6.14) The following table presents the South Africa‘s real GDP growth rates. In what units are

the growth rates measured? Think about and tell in which of the presented years the real GDP

was at its highest level? Explain your answer. Year 1999 2000 2001

Real GDP growth rate 2.4 4.2 2.7

Source: African Economic Outlook; http://www.oecd.org

6.15) Look at the data about the basket of goods and services of an average household in a fake

economy. Calculate the fixed weight consumer price index (CPI).

2007 2008

P Q P Q

Bread 5 1000 6 1000

Shirt 20 100 19 100

Rent 500 100 510 100

Gasoline 2 1000 2 1000

33

6.16) Look at the data on the average basket of goods and services of an average household the

way the national accountants do. The column ―Weight‖ represents the share of expenditure on a

particular commodity in total household expenditure. The year 2007 is a base one. The ―Price

index‖ column presents the change of prices of single consumption items. Calculate the fixed

weight CPI for 2008. Item Weight, % Price index 2007 Price index 2008

Food 15 100 102

Clothes 5 100 104

Housing 25 100 100

Health 5 100 101

Transport 15 100 102

Recreation 15 100 105

Other 20 100 101

Total 100 - -

6.17) The fake economy is producing only milk and bread. Given the following data on

production volumes and prices of these commodities calculate the nominal and real GDP

(assuming 2007 is a base year). Is the economy better off in 2008? Which indicator better reflects

the economic reality? Why?

2007 2008

P Q P Q

Milk 5 1000 6 1200

Bread 2 2000 4 1700

6.18) Imagine a fake economy, where only French fries and notebooks are being produced. Using

the information from the table calculate the nominal and real GDP and a fixed weight CPI

assuming that 2007 is a base year. Calculate implicit deflator using real and nominal GDP

indicators and explain why implicit deflator differs from fixed weight CPI? (Note that in practice

national statisticians use far more sophisticated techniques for calculations; see e.g. chain-

weighting).

2007 2008

P Q P Q

French fries 1 10 000 2 11 000

Notebooks 1 000 100 1 200 120

6.19) In a fake economy only two goods are being produced — bread and butter. Complete the

missing cells in the following table assuming 2007 is a base one.

Year Bread Butter Nominal

GDP Real GDP

Fixed weight

CPI Price Quantity Price Quantity

2007 1 10 2 20

2008 2 15 18 84

6.20) Suppose you heard on TV that the Chinese real GDP annual growth rate has reached the

fantastic 8 percent. However in another news-block you get known that the inflation rate in China

is around 20 percent. How can you estimate the nominal GDP growth rate? Is Chinese economy

really better off this year?

6.21) Define the real change of the real GDP, if nominal GDP growth rate is 10 percent and the

price level has increased by 4 percent.

34

6.22) Say you have a $100 in your pocket. Supposing current year is a base one, estimate the real

value of your $100 in a year if the expected inflation rate is 4 percent per annum. What can you

do in order to save the value of your money?

6.23) The ticket to the movies cost $10. As a movie theater manager you have to keep an eye on

the pricing policy. You got known that the annual inflation rate this year is 3 percent. What

would be reasonable to do with the price of a ticket?

6.24) The nominal interest rate for deposits in commercial banks of the Czech Republic is 2.6

percent. Say the official inflation rate in the Czech Republic is 2.9 percent. What is the real

interest rate earned on bank deposits?

6.25) Suppose that the consumer price index went up from 120 percent to 150 percent during the

year. Year 2000 is a base year. In the beginning of the year your nominal wage is $10 an hour

and in the end of the year you get a rise that increases your nominal wage to $11. Calculate your

real wage in constant prices of year 2000 (using data on nominal wages and CPI) in the

beginning and at the end of the period and make a conclusion whether you are better off or not.

6.26) Explain the following fact from the viewpoint of economic theory: when the government

prints new money for its use, it makes the old money in the hands of the public less valuable.

Why do economists call this phenomenon an ―inflation tax‖?

6.27) Think about the following situation: what can you say about the inflation rates in the Czech

Republic and in Russia (note that currency exchange rate is close to 1), if Czech banks normally

offer around 3 percent annual deposit rate and Russian banks offer around 10?

6.28) In order to adopt euro the EU country must fulfill the Maastricht criteria. One of them, the

inflation rate criterion, claims that the inflation rate in the member country should be no more

than 1.5 percentage points higher than the three lowest inflation member states of the EU. The

following table presents the relevant data for Croatia with the base year 2000. Did Croatia meet

inflation rate criterion during in 2005 and 2006? Year 2004 2005 2006

CPI 110 114 117

Reference inflation rate 2.4 2.2 2.8

Source: http://laborsta.ilo.org/

35

7 Unemployment

unemployment factors | structure of labor force | types of unemployment | unemployment and demography

Discussion points

a) Explain how population and labor force relate to each other.

b) Who is regarded to be unemployed according to the International Labor Organization (ILO)

definition? Think about how national statisticians may overestimate the unemployment figure

using such definition?

f) How can one measure the unemployment rate? What data would you need to calculate the

unemployment rate? Where and how would you collect it? Think about what practical issues

statisticians meet while collecting this information?

c) Define what is frictional, structural, cyclical, and seasonal unemployment? Name the main

reasons for their existence. What types of unemployment are present in your country? Give your

own examples of every type of unemployment. Can these types overlap? Give examples.

d) * Imagine you are a national statistician and you need to calculate seasonal, cyclical, structural

and frictional unemployment in the country. How would you approach to estimation?

e) Give examples of persons that can be classified as ―out of the labor force‖.

g) What consequences does the phenomenon of unemployment have? Are they all negative?

h) Think about how different types of discrimination influence unemployment. Think of your

own examples from your country. How does your government fight against discrimination?

i) Economists use the term ―natural rate of unemployment‖. Why is it ―natural‖? What types of

unemployment if summed up give the natural unemployment rate? Explain why.

j) What is unemployment insurance? What are the main reasons for unemployment insurance

existence? Speak about unemployment insurance program in your country.

Exercises

7.1) * Why did the classical economist believe the economy would always return to full

employment? Keynes believed that markets, particularly the labor market, adjust slowly. How

does this belief help to explain unemployment?

36

7.2) Think of the ways how the technical and technological progress contributes to

unemployment. What changes do these processes catalyze?

7.3) If the labor market of a fake economy may be characterized by high cost of geographical

mobility and the high cost of retraining, what type of unemployment is likely to be present in the

country? Do you have such type of unemployment in your country? In what spheres is it most

likely that such type of unemployment exists?

7.4) The official governmental statistics usually estimate number of unemployed by amount of

people claiming unemployment benefit in employment agencies. International Labor

Organization proposes a wider measure including those, who are without work but not claiming

the benefit among others. What advantages and disadvantages of the ILO method can you name?

7.5) Such expressions as ―not employed‖ and ―unemployed‖ are quite synonymous in everyday

life. Do they have the same economic sense? Who of the following persons is ―not employed‖

and who is ―unemployed‖: a) a 6 year-old kid? b) a student studying 24/7? c) a graduate returning

home from the job agency? d) a retiree? e) a housewife? f) a top manager taking some time off

before looking for a new position? g) a fired worker reading job vacancies page in a local

newspaper?

7.6) What kind of good is being sold on the labour market? Who is the seller and who is the

buyer? Think about what type of market competition (monopoly, monopsony, oligopoly, or

monopolistic competition) are the following groups of employees involved in: a) automotive

industry workers? b) presidents of the USA? c) sheikhs of the Saudi Arabia? d) secret spies who

would never betray their native country? e) geography teachers? f) popes of catholic church?

7.7) Use the standard supply-demand model and explain the following. How do employers

influence the salaries of those employees who have experience by discriminating young men with

no work experience and therefore not hiring them?

7.8) The average gross annual earnings in industry and services in Germany is around €40 000.

Average annual earnings in Slovakia is around €6 000. In the meantime Germany has introduced

number of limitations for foreign labor force to come to work there. Explain what could happen

on German labor market in case these limitations were abolished? Use the supply-demand model.

7.9) What is minimum wage rate in your country? If any exists, why did government introduce

it? What is an average wages (salaries) of a teacher, of a sales manager, of a worker of a plant? If

you were a national statistician what groups of people you wouldn‘t include in order to calculate

the average wages? If you did, what would have happened?

7.10) Classify the following as frictional, seasonal, cyclical, or structural unemployment:

a) the cook working at the spa is forced to take a non-paid vacation during the winter time;

b) currently unemployed secretary is waiting for the 1st of May to get started at a new job with a

higher hourly rate; c) the coal miners can‘t find a job after the mine was closed; d) people

standing in a row and waiting for any job offer during the Great Depression in the USA;

e) workers from automotive industries who lost their jobs after Ford, Chrysler and General

Motors started reducing costs.

37

7.11) Around 5 percent of employed people in the Inner London work in publishing and printing

services. What happens on this market along with development of Internet and information

technologies? What type of unemployment will most likely occur in the following decades here?

7.12) ―Discouraged workers‖ are persons who would like to work and are available to do so, but

who do not look actively for work for various reasons. Generally, they are not considered as

unemployed in national statistics and they are out of labor force. What are the reasons for this

omission? How can national statisticians estimate the quantity of ―discouraged workers‖ in a

country?

7.13) The person is ―underemployed‖ in case he works but he is unable to find a job that uses his

skills and productive capacity to its full extent. Think of examples of such employees. Why

national statisticians usually classify such workers as ―employed‖? How would you approach to

estimation of the number of underemployed persons among the employed?

7.14) Think about what governmental polices may encourage and discourage employment in the

country? Think of concrete examples of governmental actions encouraging employment a) in

touristic business; b) in automotive industry; c) in educational sphere.

7.15) ―The 5 percent unemployment rate signals that a country has reached a full employment.‖

Does this statement have economic sense? Explain.

7.16) According to national Labor Force Survey of 2006 there was around 1 086 thousand people

employed in Latvia (source: http://laborsta.ilo.org). Calculate the unemployment rate in the

country if labor force was 1 168 thousand people.

7.17) Say in a fake economy the population is 15 million people, a labor force is 10 million

people, and 2 million people are unemployed. Define the unemployment rate. Say the statistical

office has made a special survey and estimated that 5 percent of not in labor force people has

stated that they are ―discouraged workers‖. Calculate the new unemployment rate.

7.18) The graph presents the situation in Namibia in 2004 (in thousands). Find the following

indicators: not in labor force population, labor force, and unemployment rate.

Source: http://laborsta.ilo.org

38

7.19) The following table represents the 2006 labor force structure (thousands) in Saudi Arabia

and Sweden. Define which country is represented under A? What about B? Why do you think so? Country Labor force Men Women

A 8025 6781 1244

B 4586 2405 2181

Source: http://laborsta.ilo.org

7.20) The following graph shows the Turkish population by age groups and gender, in 2000 and

2050 (forecast), in percentage of total population. What is peculiar about the contemporary

population structure and labor force? Think of the reasons why does it have such shape? Why

did United Nations specialists forecast such pattern of population structure in 2050?

in 2000

in 2050

TURKEY

MEN

WOMEN

85+

80 - 84

75 - 79

70 - 74

65 - 69

60 - 64

55 - 59

50 - 54

45 - 49

40 - 44

35 - 39

30 - 34

25 - 29

20 - 24

15 - 19

10 - 14

5 - 9

0 - 4

in 2000: 68,3 Total population (in millions) in 2050: 97,8

,0,2,4,6,8,10,12 ,0 ,2 ,4 ,6 ,8 ,10 ,12

Source: OECD Demographic and Labor Force database, http://www.oecd.org

7.21) The following pyramids depict the population of Mexico and Sweden. Define which is

which. Think about the possible socio-economic problems existing in both states.

MEN

WOMEN

85+

80 - 84

75 - 79

70 - 74

65 - 69

60 - 64

55 - 59

50 - 54

45 - 49

40 - 44

35 - 39

30 - 34

25 - 29

20 - 24

15 - 19

10 - 14

5 - 9

0 - 4

,0 ,2 ,4 ,6 ,8 ,10 ,12,0,2,4,6,8,10,12

MEN

WOMEN

85+

80 - 84

75 - 79

70 - 74

65 - 69

60 - 64

55 - 59

50 - 54

45 - 49

40 - 44

35 - 39

30 - 34

25 - 29

20 - 24

15 - 19

10 - 14

5 - 9

0 - 4

,0,2,4,6,8,10 ,0 ,2 ,4 ,6 ,8 ,10 Source: OECD Demographic and Labor Force database, http://www.oecd.org

39

7.22) Look at the following graph presenting 2005 unemployment rates in percent in different

countries and comment, why mainly young people suffer most from joblessness? Why is 25 years

chosen as a border age? Country Total <25 years 25+ years

Czech Republic 7,9 19,2 6,8

Poland 17,7 36,9 15,1

Slovakia 16,3 30,1 14,4

Italy 7,7 24,0 6,2

Germany 9,5 14,8 8,6

Denmark 4,8 8,6 4,2

Netherlands 4,7 8,2 4,1

Source: http://epp.eurostat.ec.europa.eu

40

8 Monetary Policy

money aggregates | central bank | monetary policy tools | money demand | money supply | anti inflation policy

Discussion points

a) What is money? Explain the following functions of money: a) medium of exchange,

b) standard of value, c) a store of value. Give examples based on your own experience.

b) Think of advantages and disadvantages of barter, commodity money, paper and electronic

money.

c) How do economists call the price of money? What factors influence the price of money? How?

d) Name the basic money aggregates. How do they differ? Think about why did economists

invent this classification?

e) Name the main factors influencing the demand for money. Give examples based on your own

experience.

f) What value do banks bring to their customers? Why do commercial banks exist by far? How do

banks ―create‖ the money: a) what is the required reserve ratio? b) what are its functions? and c)

what is the bank money supply multiplier? Explain this mechanism.

g) What is the difference between the Central Bank and the commercial bank? What are the main

functions of the Central Bank? What is the name of the central bank in your country?

h) How can you define a monetary policy? Who promotes the monetary policy in the state? Why

should the Central Bank have the certain extent of independency from the government?

i) What are Central Bank‘s open market operations, discount rate and reserve requirements policy

about? Why should the Central Bank keep the reserves? How Central Bank can increase the

money supply in the economy?

j) What is restrictive and expansive monetary policy? Give your own examples and describe the

possible situations when these actions are necessary.

Exercises

8.1) Explain why the sack of potatoes performs the money functions during the hyperinflation

much better than the conventional bank notes?

41

8.2) The following table presents the time deposit rates offered by the Turkish Garanti Bank for

accounts in euro (from €1 000 up to €5 000 account limits). Why is the short term deposit interest

rate always lower in comparison with long-term deposits (think in terms of risk and return)?

Which money has a higher liquidity: a 1 month deposit or a year deposit? Why in case of €10 000

deposit the bank offers 1,5 percent rate for a 1 – 3 months period? Term Interest rate

1 – 3 months 1,25

3 – 6 months 1,5

6 months – 1 year 1,75

Source: http://www.garantibank.com

8.3) You have a €1M in your pocket. The friend of yours owns a house worth €1M. Whose

property has a higher liquidity? What are advantages and disadvantages of keeping high liquid

money?

8.4) * If all commercial banks kept 100 percent reserves, would they ―create‖ the money?

Explain your answer. Suppose the opposite: if minimum reserve requirements were canceled,

would any voluntary reserve standards occur in single commercial banks? Explain your answer.

8.5) If the minimum reserve requirement is reduced by 1 percent, can the growth of generated

amount of money be greater than 1 percent (given banks carry no excess reserves)? Explain why.

8.6) Have you noticed what has been happening to the dollar lately? A decade ago a dollar was

primary reserve currency of majority of Central Banks of the world. What do you think is

happening now?

8.7) The minimum reserve requirements established by Magyar Nemzeti Bank (Central Bank of

Hungary) is 5 percent. Calculate how much money has been created in the economy by a banking

system, if the minimum reserves of commercial banks are €5M (given banks carry no excess

reserves)?

8.8) Which of the following do not belong to money aggregate M1: a) your pocket money?

b) long-term deposits in a local bank? c) current account money? d) checking account money?

e) money in the Pay-Pal internet payment system? f) grandma‘s savings hidden in a mattress?

g) state bonds owned by uncle Jenkins?

8.9) Say the fake economy is highly dependent on the foreign capital flows (making 40 % of

commercial banks‘ deposits). The minimum reserve rate is 10 percent. Say due to political

instability in the country the foreign investors decide to draw their money back. What is likely to

happen with the banking system in a country? Think of possible scenarios and consequences.

8.10) Draw a curve showing the demand for money (M1) related to the interest rate, assuming

that the only substitute for money M1 is saving account. Think about what will happen to

demand for money if: a) the food prices go up? b) aggregate income goes up? c) nominal and real

GDP go down? d) banks offer a higher saving accounts interest rate? What happens to the

demand saving accounts in each case? Explain why the quantity of money demanded decreases

as the interest rate rises.

42

8.11) Say the Central Bank of the Northern Korea controls the money aggregate M1 at the level

of 10B of Northern Korean wons. Draw the money M1 supply curve in the country (with an

interest rate on the y-axis).

8.12) How would the following Central Bank actions influence the money supply: a) increase of

minimum reserve rate? b) discount rate decrease? c) government bonds buyback in the open

market? How would it influence the interest rate?

8.13) What is the link between the money supply and the level of investment and income?

Describe this chain.

8.14) * Explain every relation in the following graph. Give concrete examples using as macro- as

well as microeconomic reasons.

Source: http://www.bankofengland.co.uk

8.15) In which way are open market operations different from simple exchanging government

securities for money? How does this tool actually influence the money supply?

8.16) Say the Chinese economy is in threat of ―overheating‖. Imagine you are a Central Bank

governor: what set of monetary measures would you propose. Explain how each of them will

influence the interest rate, aggregate consumption, investment, and finally the real GDP. What

will happen to the money supply curve in this case?

8.17) Say a fake economy is facing the high inflation rates. As a Central Bank governor, what

policy mix would you advise in order to fight the inflation?

8.18) The target for inflation of National Bank of Poland is holding the ratio in the corridor

between 1.5 percent and 3.5 percent. Using the information in the following table say how

successful are the professionals from the National Bank of Poland?

Year 2005 2006 2007

CPI 112.2 114.6 115.8

Source: http://laborsta.ilo.org/

43

9 Fiscal Policy

fiscal policies | multiplier effect | anti inflation policy | budget, revenue and expenditure | government failure

Discussion points

a) Name the basic goals of macroeconomic policy. Explain why each of these goals is important.

It is well-known that these goals a quite controversial. Explain this statement and give your own

examples. Why is short-term Philips curve a good example of this overlapping?

b) * Look at the two provided models and explain the viewpoints of neoclassic economists and

Keynesians on the macroeconomic policy. Why do Keynesians stand for the fiscal policy and

neoclassic economists regard monetary policy to be optimal?

c) How can you define a fiscal policy? Who promotes and executes the fiscal policy in the state?

How income and fiscal policies relate to each other?

d) Name the main types of budgetary revenues and expenditures. What is the deficit and surplus

budget? How can the deficit be covered?

e) What is restrictive and expansive fiscal policy? Give your own examples and describe the

possible situations when these actions are necessary.

f) Describe how do governmental expenditures influence the economy. Speak about marginal

propensity to consume and to save. What is multiplier of fiscal policy? Explain this mechanism.

g) What do economists call automatic stabilizers? Give examples of such stabilizers. What

actually do they stabilize? Why is it so important? Name the examples of discrete fiscal policy

measures. What are the advantages and disadvantages of discrete measures and automatic

stabilizers?

real GDP real GDP

P

P AD

AS

AD

44

h) Do you think government failures are possible just like market failures? Think of your own

examples. Think of the reasons for the government failures. What role does the bureaucracy and

duration of decision-making process play in this case?

i) How do you understand the term ―social welfare‖ and how it differs from individual welfare?

Say you are a policymaker. What indicators will you use in order to estimate the level of

economic and non-economic welfare of your citizens?

Exercises

9.1) Say the marginal propensity to consume in the Czech Republic in 2006 was around 75

percent. How much would be saved of an additional €1M of income?

9.2) The GDP of a fake economy is €400B. Economists estimate the marginal propensity to

consume at the level of 0.8. As a policymaker you want to increase GDP up to the level of

€800B. Estimate the level of investment necessary to achieve this goal.

9.3) Think about how would the following events influence the aggregate demand: a) personal

income tax increase; b) growth of unemployment and social security transfers; c) high inflation

expectations; d) economic crisis prognoses; e) increase of overall price level. Show it using the

aggregate demand curve.

9.4) What is peculiar about the fiscal policy made by the government before the elections?

Explain your point of view.

9.5) The households play the role of suppliers on the capital market. In what form do they

―supply‖ capital: a) machines; b) land; c) buildings; d) money; e) raw materials; or f) final

products?

9.6) * Say the fake economy is in the recession stage of the business cycle. What macroeconomic

indicators witness this statement? What fiscal policy mix can you advise? Describe the scenario

how will these measures influence these indicators?

9.7) What is an appropriate fiscal measure mix concerning taxes and government expenditures at

the time of high inflation?

9.8) * Say as a policy-maker you need to prepare a package of fiscal measures aimed at

stimulating the aggregate supply. What macroeconomic indicators will you choose first to

analyze the situation? What measures will you include into your measure mix? Explain the

reasons.

9.9) Describe what happens to consumption, investment, and the interest rate when the

government increases a) VAT? b) income taxes?

9.10) The government makes social security and pension payments. How do these payments

influence the aggregate demand and production? Show it on the graph.

45

9.11) The economy of the Czech Republic has achieved remarkable improvements lately. The

confidence in tomorrow makes Czechs expect the further growth of income in future and

therefore actively consume today, e.g. using the bank loans. Think about how this increased

consumption may influence the investment and interest rate in the country?

9.12) * Explain why may the expansive fiscal policy increase the demand for money? How would

it affect the interest rate? How would it influence investment?

9.13) What types of automatic stabilizers (e.g. unemployment compensation, income taxation

scheme) are present in your country? Describe them. Explain why progressive income tax system

is more likely to stabilize the economy if compared to regressive tax system.

9.14) Direct taxes are borne and paid to government by the one and the same economic agent.

Indirect taxes on the other hand are borne and paid by different economic agents. Give examples

of such taxes in your country.

9.15) In order to adopt euro the EU country must fulfill the Maastricht criteria. Two of them, the

government finance criteria, claim that a) the ratio of the annual government deficit to gross

domestic product (GDP) must not exceed 3 percent and b) the ratio of gross government debt to

GDP must not exceed 60 percent. The following table presents the relevant data for the Slovak

Republic in billion Slovak crowns (SKK). Did Slovak Republic meet government finance criteria

during the period in question?

Indicator 2005 2006 2007

Government revenue 524 557 643

Government expenditure 565 617 683

Government debt (nominal value) 508 505 544

GDP 1485 1660 1852

Source: http://epp.eurostat.ec.europa.eu

9.16)1The following table represents the structure of 2006 central (federal) budget expenditures

of the two states – the USA and Sweden – in percent. Define which of them is marked as ―State

A‖ and which as ―State B‖? Explain your viewpoint. Which of these can be called a ―social‖

state? What does the item ―Interest‖ refer to?

Budget expense item State A State B

Defense 23 6

Education 5 5

Health care 22 22

Interest 9 5

Justice 2 4

Pensions 22 6

Transport 3 6

Unemployment benefits, child allowances, etc. 9 16

Other 5 29

Total 100 100

Source: http://www.sweden.gov.se, http://www.usgovernmentspending.com/

46

9.17) The following bar-chart presents the quarterly governmental expenditure in Bulgaria (in

billion Bulgarian levs (BGL)). Look at the graph and say what is peculiar about the governmental

spending during the year? Explain the shape of this bar chart. How can the governmental

expenditure be related to short-term business cycles?

0

5

10

15

20

25

2003

Q1

2003

Q2

2003

Q3

2003

Q4

2004

Q1

2004

Q2

2004

Q3

2004

Q4

2005

Q1

2005

Q2

2005

Q3

2005

Q4

2006

Q1

2006

Q2

2006

Q3

2006

Q4

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

Source: http://epp.eurostat.ec.europa.eu

9.18) The following table presents the 2007 budget of Romania (billion Romanian leus (RON)).

Give your own examples of each item on revenue side. The capital revenue item has a zero value

in a table: how should you understand this figure? Give as many examples as you can of what can

the item ―Sales‖ contain. Calculate the deficit. How can the government finance it? Revenue Expenditure

Taxes 49 Intermediate consumption 11

. Indirect taxes 34 Compensation of employees 26

. Direct taxes 15 Interest 3

. Capital taxes - Subsidies 6

Social contributions 3 Social benefits 12

Sales 7 Other current expenditure 11

Other current revenue 12 Capital transfers payable 6

Capital revenue 0 Capital investments 11

Total 72 Total 85

Source: http://epp.eurostat.ec.europa.eu

9.19) The following table presents the data on the Czech Republic. Why regardless of the fact

that corporate taxes have always been among the primary budget revenue sources the corporate

tax rates are being consequently decreased?

Year 1996 1998 2000 2002 2004 2006 2008

Corporate tax rate, % 39 35 31 31 28 24 21

Budget deficit, M CZK -55 834 -100 061 -81 471 -166 774 -82 749 -85 458 n.a

Source: http://epp.eurostat.ec.europa.eu, http://ec.europa.eu/taxtrends

9.20) Think about the differences between the central and local budgets. Which expenditure

items that are present in the state budget are likely to be absent in the local one and vice versa?

What budget items are prioritized on the central level and what on local level?

47

9.21) One of the major advantages of markets is that they put pressures on employees of

competitive firms aimed at getting profit to be responsive to consumers. Think what motivates

employees in public sector? Explain why bureaucracy exists?

9.22) Imagine you are a policy maker. Make a cost-benefit analysis (i.e. define all advantages

and disadvantages and think about their monetary valuation) of the following measures:

a) prohibiting smoking in restaurants and bars; b) prohibiting coal mining; c) establishing high

import tariffs on used cars older than 3 years.

48

10International Trade and Economic

Relations absolute advantage | comparative advantage | national economy competitiveness | international cooperation |

exchange rate | national trade policy

Discussion topics

a) What are the basic reasons why countries get involved into international trade? Speak about

absolute advantage and comparative advantage theories.

b) What are the main commodities and services being exported and imported in your country?

Name the few basic reasons for such structure of import and export. Think of resources of your

nation that could be the reason for an absolute/comparative advantage?

c) What is trade liberalization? What are tariffs, subsidies, and quotas? What are the main

economic and non-economic consequences of their implementation? Why do countries use the

protectionist measures?

d) What trade barriers are present in your country and what types of production are involved?

Explain the reasons for this.

e) Define fixed and flexible (floating) exchange rates. What is managed floating? What is

depreciation and appreciation? Name the possible reasons for currency depreciation. Why

exchange rates are normally so volatile?

f) What is the relation between the international trade and exchange rate policy? In what cases

interventions on foreign exchange markets are necessary?

g) What is economic integration? What examples of free trade areas, customs unions, common

markets and finally monetary unions can you name? What motivates countries to get involved

into such organizations?

h) How does your country participate in the process of economic integration? Name the

international organizations your country is a member of.

i) What is globalization? What are economic and non-economic advantages and disadvantages of

globalization?

49

Exercises

10.1) Imagine the 2 economies have the following production possibilities presented in the table.

Let‘s assume that both countries have equal number of units of labour that they fully use. What

types of advantages for international trade is presented here? What should Cuba specialize on?

Explain why, using opportunity cost approach. Define the margins of price for bananas and cigars

in case of international trade. Draw the production possibility frontiers for both countries before

trade. Draw the consumption possibility frontiers of both countries after the trade.

Country Bananas

(thous. tones)

Cigars

(thous. boxes)

Opportunity cost

of bananas

Opportunity cost

of cigars

Ecuador 4 1

Cuba 10 3

10.2) The following table presents the labor inputs (in man-hours) for production of the two

goods in the two fake economies. Who has the absolute and comparative advantage in each

good? Define the good each of the counties should specialize on.

Country Gin Tonic Opportunity cost

of gin

Opportunity cost

of tonic

A 2 4

B 4 2

10.3) U.S. producers supply nearly 75 percent of the total poultry import quota set by Russia,

which stands at 1.2 million tons. Why would Russia establish such quotas if American chicken is

30 percent cheaper than that produced by Russian farmers?

10.4) In what goods and services the following countries specialize taking part in international

trade: a) Japan? b) the Czech Republic? c) Cyprus? d) Russia? e) Switzerland? f) Germany?

g) Finland? h) Indonesia? i) Oman? Name the possible reasons.

10.5) Assume that the only good Germany exports to the Czech Republic are Volkswagen cars.

Think of the Czech crown (CZK) and Euro (€) foreign exchange market and name who demands

and supplies Euros. Draw a supply-demand model and show how the exchange rate is being

established.

10.6) The developed countries of EU actively practice countries‘ domestic support policies in

agricultural sectors (e.g. direct payments to farmers for a tone of corn). What are the reasons for

this protectionism? How do these measures influence the behavior of farmers? What

redistribution effects take place between the tax payers and farmers?

10.7) The environmental policy of the EU has been aimed at internalization of negative

ecological externalities lately (e.g. additional environmental taxes, fees, etc.). These measures

increase the costs of the companies in comparison with competitors e.g. from China, where

environmental legislation is not so strict. What are the possible consequences of EU

environmental legislation? If you were a policymaker what would you do in order to protect

European producers from low-cost competitors?

10.8) Why during recession phase of the economic cycle the governments may prefer

protectionist measures?

50

10.9) The following graph presents the market of meat in a small fake economy. Show the

domestic supply and world supply. What part of domestic demand is satisfied by domestic

production, and which part is covered by imports? Why can‘t domestic producers satisfy the

whole demand? Say the government establishes tariff. (Why would it do that?) How does it

influence price, import, domestic production and consumption of the meat importing country?

10.10) Assume that Hollywood has an almost monopolistic position on the entertainment market.

Say the USA establishes the special tax on export of films (export tariff). Show how this step will

influence the situation on the world entertainment market using a supply-demand model?

10.11) The following table provides examples of several average import tariffs established in the

EU and in 5 other countries (in perents). What tariff policies are common among the

developed/developing countries? Explain in what fields do countries have low tariffs applied and

in what fields tariffs are high? Explain the zero cotton tariffs in Japan. Why does India have 133

percent tariff on tea? Why do Turkey and India have relatively high tariffs on minerals and

metals? Why electrical machinery is not so burdened by tariffs except for Turkey and India? EU China India Japan Turkey USA

Dairy products 57 12 65 176 100 25

Coffee, tea 7 15 133 17 81 4

Cotton 0 22 110 0 80 5

Minerals & metals 2 8 38 1 46 2

Electrical machinery 2 9 27 0 53 2

Source: http://www.wto.org

10.12) There has been a huge increase in milk consumption in China lately. China has no

tradition of dairy farming, and there is a shortage of home-produced milk supply. A third of all

the milk produced worldwide is being transported to satisfy the demand of 1.3B Chinese. Much

of the milk is being exported form the EU and a significant amount from Germany. Draw a graph

showing domestic and world supply and domestic demand for milk in China. Think about how

the Chinese demand influence the price of milk in Germany? What should the German

government do in this situation?

10.13) If Namibian dollar appreciates what will happen to the following transactions: a) export of

diamonds from Namibia to South African Republic? b) import of flour from the USA to

Namibia? How this appreciation will probably influence the net export?

10.14) What happens to the Czech crown (CZK) exchange rate if: a) more Czech people would

go on vacation to Croatia? b) more Americans will come to Prague for summer holidays?

c) the demand for used German cars will increase? Show it on the graph.

Q

P

D

51

10.15) Say due to political crisis the Ukrainian economy faces the currency depreciation, since

foreign investors are actively selling the national currency. If you were a Central Bank governor,

what would you do in order to prevent national currency from depreciation?

10.16) The Czech crown (CZK) has been actively appreciating lately. What consequences does

this process have on the following economic agents: a) Škoda auto exporting its cars to

Germany? b) truck dealer buying the trucks in Sweden? c) souvenir shop selling bohemian

crystal to tourists? If the central bank wanted to fight against appreciation, what would it have

done?

10.17) Convert the following currencies into euro or vice versa where necessary: Foreign currency Foreign currency per € € per foreign currency unit

US dollar (USD) 1,43

United Kingdom Pounds (GBP) 0,80

China Yuan Renminbi (CNY) 0,10

Oman Rials (OMR) 1,82

Source: http://www.xe.com; retrieved on 8.9.2008.

10.18) Try to name as many as possible ―pros‖ and ―contras‖ of the European monetary union

from view point of government, business and households. Why some countries are eager to enter

this union and some are not? How might a single currency encourage trade in the EU? Why one-

size-fits-all policy is not appropriate for every EU member state?

10.19) The Organization of the Petroleum Exporting Countries (OPEC) is a cartel made up of

thirteen countries (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Nigeria, Qatar, Saudi Arabia,

Socialist People's Libyan Jamahiriya, the United Arab Emirates, and Venezuela). Today these

countries account for two-thirds of the world's oil reserves, and around 40 percent of the world's

oil production. OPEC is able to significantly increase or decrease the price of oil in the world

market. Explain how. How can the political instability in the Middle East influence the price of

oil? Show these mechanisms using supply-demand model.

10.20) * The Big Mac from McDonald‘s in the USA costs 3.57 USD and its price in the Czech

Republic is 66.1 CZK. The nominal exchange rate published in the economic news is 14.5

CZK/USD. Calculate the ―real‖ exchange rate. How can you explain this difference? What is the

difference between the nominal and real exchange rate?

52

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53

Name: General Economics: Exercise Book

Author: Egor Sidorov

Publisher: Jan Evangelista Purkyne University in Usti nad Labem

Printed by: MINO, Usti nad Labem

Print run: 150

No. of pages: 53

Year of publishing: 2008

ISBN: 978-80-7414-057-0