Economics - Advanced National Examination Paper 2 - 2008

2008 – ECONOMICS PAPER 2

SECTION A
1.
(a).
Define population.

Population refers to a group of people residing in a given place at a particular period of

time.
(b).
Critically show whether Tanzania has population problems.

A country is said to have population problems if overpopulation, high population density,

under-population or declining population exists. The problems that Tanzania has can be
partly associated to population problems. They include the following:-
(i) Shortage and fall in the quality of social services: The number of people is larger
than the available social services, such as medical care, education and water supplies.
(ii) Famine/hunger: When the rate of population growth is greater than the productivity
of capital and land resources, the food output will not suffice the demand of the
population. For example: Dodoma, Shinyanga and Singida Regions.
(iii) Environmental degradation: Too large population exerts pressure on natural
resources in terms of demand for space, food, wood, minerals, construction materials,
etc. This leads to the destruction of forests, farmlands, water sources and mineral
deposit sites.
(iv) Emergence of social evils: Due to overpopulation, many people become idle thus
forcing them to engage into illegal means of earning incomes such as prostitution,
robbery, corruption, etc. Good examples of places where such evils occur include Dar
es Salaam, Zanzibar and Tanga.
(v) Mass unemployment: A large population leads to oversupply of labour. This results
into decline in the level of wages and increased level of unemployment. This is vivid in
towns and rural areas where the situation condemns many people to poverty and for
some few to engage in informal businesses such as machingas and mamantilie.
(vi) Low level of investment: Over-population leads to low savings due to the increase
in dependency and fall in real income as a result of rise in the cost of living. In addition,
investment falls since the government channels a lot of funds to provide social services
(buying medicines, paying civil servants, etc.) instead of expanding investment.
(vii) Low level of per capita income: Too large population leads to fall in the ratio
between labour and other production inputs. This leads to fall in labour productivity due
to diminishing returns to labour.
(viii) Inflation: When population explosion occurs, there is increased demand for goods
and services. This will gradually lead to demand pull inflation.
(ix) Increase in dependency ratio: Due to unemployment and continued increase in
birth rates, the number of dependants in a population increases tremendously.
However, the above mentioned problems may not entirely be associated to population
problems but also to:-
(i) Poor planning and formulation of policies by the government: The government
has failed to prioritize in its annual expenditure. As a result majority of people, especially
in the rural areas, have no good schools, hospitals and water supply facilities.
(ii) Corruption: Sometimes resources are embezzled by indecent government officials.
Consequently the envisaged projects for the development of the society are not
accomplished.
(iii) Climate change: Has surfaced in form of prolonged drought, floods and
unstable/unreliable seasons. This has led to crop failure in many parts of Tanzania
especially in Dodoma, Singida and Northern Tanzania, causing famine and starvation
among the people.
(iv) Underutilization of resources: Due to lack of up to date technology, Tanzania has
failed to utilize the available resources to meet the needs of its population.
(v) Conservatism of some people to reside in one place generation after
generation: Some tribes in Tanzania, especially the Chagga have a tendency of not
shifting to other places, because of the “Kihamba system1”. Due to this tradition
population problems such as land fragmentation and fall in the productivity of land
prevails.
(vi) Lack of education among Tanzanians: As a result, they have low level of
creativity in exploiting the natural resources available and also fail to pursue
healthy/hygienic living conditions.
In summary, the problems (social, economic and political) that Tanzania faces are not
entirely caused by population problems but they are also attributed to other shortfalls
such as administrative inefficiencies, educational weaknesses and conservation
attitudes.
2.
(a).
What is meant by national income at factor cost?

National income at factor cost is the total income of residents of a country measured
at factor cost after deducting capital consumption.
National Income (NI) = GNP at factor cost – Capital consumption
OR
National income at factor cost is the sum of money value of all goods and services
produced in a country in a specific period of time. It includes subsidies and excludes
indirect tax; hence it is said to be at factor cost.
NI (fc) = NNP (mp) – Indirect taxes + subsidies
(b).
You are given the following information of a particular country in a certain year.
GNP at market price is Tshs. 3,960 million.
GDP at market price is Tshs. 4,020 million.
NNP at market price is Tshs. 3,766 million.
Find the:
(i) net factor income from abroad and comment on it.
(ii) net domestic product at market price.
(iii) depreciation value.

(i) Net factor income from abroad is the difference between the value of goods and
services produced by the citizen of a country outside their country and the income of the
non-citizens in a country in a given period of time.
Net Factor Income (N.F.I) = GNP – GDP
= (3,960 – 4,020) millions
= -60 millions
From the answer above it shows that the income of the citizens outside the country is
less than that of non-citizens of the country in question, so more money might be drawn
out.

(ii) NNP – Net National Product is the sum of the market value of goods and services
produced by the country’s citizens after deduction of capital consumption i.e.
depreciation.
Net Domestic Product (NDP) = GDP – depreciation
But depreciation = GNP – NNP
= 3,960 – 3,766
= 194 millions
Recall: NDP = GDP – depreciation
= 4,020 – 194
= 3,826 millions

(iii) Depreciation is payment on capital for its wear and tear. It is the cost on capital.
Depreciation value = GNP – NNP
= 3,960 – 3,766
= 194 millions
(c).
Which factors differentiate gross domestic product from gross national product of a
country?

Gross Domestic Product (GDP) is the value of all final goods and services produced
by the citizens and non-citizens in a country in one year, WHILE Gross National
Product (GNP) is the sum of the market value of goods and services produced within
and outside the country in one year by the citizens of a country.
GNP does not include net factor income from abroad.
GDP is the total output of a region (country) e.g. France, Tanzania while GNP is the
total output of all nationals of a region (country) e.g. French, Tanzanians.
3.
Discuss the nature of unemployment in Tanzania.

The nature of unemployment in Tanzania

Unemployment refers to a situation whereby a certain factor of production (capital,
labour, land and entrepreneur) is not engaged (utilized) for production OR
Unemployment also refers to a situation whereby people who are willing and able to
work cannot find jobs or works.
Unemployment can be categorized into two groups, namely voluntary and involuntary
unemployment.
By voluntary unemployment it means that a person is unemployed because she/he is
not ready to do certain work at an existing wage rate for example, a trained doctor
refuses to be a garbage collector.
Involuntary unemployment can occur when a certain labourer is able and willing to
work but cannot find a job.
The nature or origins of unemployment in Tanzania can be explained in the following
categories:-
Structural unemployment: This is the type of unemployment which occurs when there
is decline of an industry caused by decrease in demand for the product produced by
that industry or firm. Or is the change in technology of producing the product, i.e.
competition emerges with a new technology which the industry cannot cope with.
Frictional unemployment: This results from friction in the labour market, which creates
a delay or time lag during which a worker is unemployed when moving from one job to
another job. This is caused by the fact that labour is not perfectly mobile - it means a
labourer cannot move quickly from one occupation to another or from one geographical
area to another. Frictional unemployment can be caused by old age, kind of skills that a
person has and social reasons such as religion, family problems, tradition and customs,
etc.
Casual/Erratic unemployment occurs when workers are laid off in some economic
activities which occur on short time basis or temporarily. Examples of such activities are
tourism, catering, construction, docking and some type of agricultural activities such as
horticulture, because these activities occur temporarily, workers engaged in these
activities become unemployed in some periods of time.
Seasonal unemployment: Agriculture in Tanzania is the main (backbone) activity done
by many people. Seasonal unemployment can be caused by regular fluctuation in
weather conditions. For example, peasants become unemployed after the agricultural
seasons have passed. Not only farmers but also other labourers become unemployed in
winter or cold seasons.
Disguised unemployment (Hidden unemployment): This occurs when labour is
underutilized. It means work given to a certain worker is not sufficient to make the
worker fully employed. For example, if 10 workers perform some work which could be
done by only 2 people, these workers are said to be disguised unemployed.
Technological unemployment: This occurs due to excessive use of capital intensive
techniques of production especially in industries whereby more advanced machines and
equipments are highly used. This replaces human labour and results into
unemployment problems. For example, the use of computers results into
unemployment, since many workers are laid off.
4.
(a).
Explain why Laspeyres price index is commonly used than Paasches price index.
(b).
Explain the uses of price index.

Price index is the statistical measure of the average percentage change in group of
prices over some base period. It has the following uses:-
 It is used to show changes in the value of money. If the price index is greater than 100%,
then there is an increase in the general level of prices meaning that the value of money
has declined. The vice-versa is also true.
 Price index is used to measure the cost of living in any country or place of concern. If the
price index after calculation is greater than 100%, then it implies that there is an increase
in the cost of living since the levels of prices will have increased while if the price index is
less than 100% implies decrease in cost of living.
 It is used to show terms of trade in international trade.

Where

Px= Price index of exports and

Pm= Price index of imports

 Price index can be used as a GNP deflator. This means that price index can be used to
eliminate or remove elements of inflation in a nominal GNP. The formula employed to
change nominal GNP to real GNP is given below:

Real GNP is the standard volume of goods and services produced in a country in a
certain period of time.
Nominal GNP is the value of goods and services produced in a country in a given period
of time measured at market price.
5.
Examine the role of Tanzania Investment Bank (TIB) to the economy of the country.

The role of Tanzania Investment Bank (TIB) to the economy of the country
Tanzania Investment Bank (TIB) was established by an act of parliament in 1971. The
aim was to ensure that all means of production are in the hands of the public and to
boost investments in the country.
Functions of TIB
(i) To make available long and medium term finances for the development of
manufacturing, assembling and processing industries.
(ii) To make available long and medium term finances for large scale co-operative
agriculture, ranching and forestry.
(iii) To provide technical assistance and advice so as to promote industrial development.
(iv) To administer such special funds as may arise from time to time.
SECTION B
6.
(a).
Define tax.

Tax is defined as compulsory transfers (payments) of money from private individuals,

groups or institutions to the government OR It is the charge levied by a government unit
on income, consumption, wealth or on any other basis.
There are two types of taxes which are Direct tax and Indirect tax.
Direct tax is a type of tax which is imposed on people’s income, such as graduated tax,
pay as you earn tax (PAYE) and corporation tax.
Indirect tax is a type of tax which is imposed on goods or services, and is often
included in the price of the product. Examples are custom duties, octoroi tax, sumptuary
tax and excise tax.
(b).
What are the arguments for taxation in any country?

Arguments for taxation

(i) Revenue generation: Tax is an important rootstock of government revenue i.e. the
government depends on tax for most of its revenue necessary for meeting its
expenditure on public services and administration.
(ii) Redistribution of income: By taking part of the incomes of rich people, the
government uses the money collected to provide free social services to the poor people
so that it helps to reduce the income gap between rich and poor people in the society.
(iii) Control of balance of payment disequilibrium: Heavy import duties can be
disincentive to imports and therefore a means to control a deficit in the balance of
payments.
(iv) Taxation is used by the government to encourage or discourage production
and consumption of certain commodities. Certain kind of indirect tax can be used to
control production and consumption of harmful products such as cigarettes and alcohol
by imposing high taxes on them.
(v) Tax is used to remove inflation: By increasing direct tax on the incomes of people,
their purchasing power decreases. This may reduce demand pull inflation.
7.
Examine the various modes of transport and communication common in Tanzania and
provide possible solutions to the operational problems facing two (2) of them.

Modes of transport and communication common in Tanzania and possible

solutions to the operational problems facing them
Transportation is the physical movement of commodities or people from one
geographical place to another.
Communication refers to the transmission of information from one point or person to
another point or person.
Transportation and communication are closely related since it is through transportation
that information is transmitted from place to place.
Modes of transport and communication used in Tanzania include:-
(a) Land transport: It includes human portage, animal transport e.g. donkey; road
transport e.g. vehicles; railway transport and pipeline.
Land transport is good since it can be used where other means has failed e.g. human
portage; it can do in adverse climate, e.g. animal transport, it is faster and cheap (road
transport) and it is easy to construct(roads).
However, land transport is disadvantageous according to type:
 Human portage is slow.
 Animal transport cannot transport over long distances.
 Road transport causes so many accidents and pollution
(b) Water transport: It is divided into inland water transport which includes rivers,
lakes, and canals and water transport that uses oceans and seas.
Water transport is advantageous in terms of construction (no construction costs); it can
carry heavy and bulky loads over long distance (transcontinental); it is suitable for
transportation of fragile goods; risks of accidents are less compared to other modes of
transport.
On the other hand, water transport has the following shortcomings:-
It is inflexible (cannot be used where there are no water bodies); it is uneconomical for
small loads; slow in speed; unsuitable for passengers over long distances, etc.
(c) Air transport: This is transportation by airplanes. It is good since it is the fastest
means of transport; risks of damage are low; it is free from physical barriers; and it is
suitable for long distances.
However, some attached disadvantages to this mode of transport include:- limited on
the quantity of goods to be transported; it is unreliable in bad weather conditions; it is
costly (in terms of fare and buying a plane); in case of accidents the effects are fatal.
Possible solutions to the problems facing land transport include:
(i) Enacting strict laws to discipline careless drivers so as to reduce accidents.
(ii) Construction of good, well tarmacked roads, to reduce delays and accidents as well
as to enable vehicles to go through in all seasons.
(iii) The government should solicit loans/aid to finance construction of good roads since
they are costly in regard to a poor country like Tanzania.
(iv) Construction of strong bridges, furrows alongside the roads to reduce damage
during bad weather conditions e.g. floods.
Furthermore, possible solutions to the problems facing water transport include:
(i) The government should raise funds to purchase sea-going vessels such as ships.
This is because it is very expensive to purchase a modern ship for a country like
Tanzania.
(ii) Need to innovate technology to hasten the speed of sea-going vessels. They are too
slow leading to delay in delivery.
(iii) Developing good ports so that we may render more and better water transport
services by large ships from across the world.
8.
(a).
Define:
(i) Economic cooperation.
(ii) Economic integration.

(i) Economic cooperation refers to the relations which are established between
sovereign states; the relations are usually based on political, economic, social,
diplomatic and cultural aspects. It could be either bilateral i.e. between two
countries/organizations or multilateral i.e. involving more than two
countries/organizations.
(ii) Economic integration refers to the union of two or more different countries for the
sake of enjoying economic benefits OR It is the combination of selected economies so
as to trade freely among member countries e.g. SADC, ECOWAS, EC, EAC, COMESA,
etc.
(b).
In what ways does economic cooperation differ from economic integration?

Briefly, economic integration and economic cooperation differ in the following

ways:-
Economic integration has five forms which are free trade area, custom union, common
market, Economic union and common monetary union while economic cooperation has
two forms which are bilateral and multilateral cooperation.
Economic integration normally requires the economies of the member countries to be
almost of the same level e.g. EAC – Tanzania vs. Kenya vs. Uganda while economic
cooperation does not necessarily consider the level of economy of member countries
e.g. Lome Convention - Tanzania and USA.
Economic integration normally requires countries of neighbouring geographical
boundaries while economic cooperation may take place between countries of far
geographical locations e.g. China and Tanzania may form an economic cooperation.
Economic integration must involve trade transactions and this is the core objective of
economic integration while economic cooperation can be diplomatic, economic, or
political. It does not necessarily involve trade transactions.
Economic integration normally involves reduction of trade barriers such as tariffs while
economic cooperation can exist without removal of tariffs.
Economic integration requires a definite organization structure e.g. AU and EC while
economic cooperation may operate without any organization structure.
Economic integration requires similar political and social background but less important
in an economic cooperation.
9.
Why do most plans in less developed countries (LDC’s) fail to achieve their intended
objectives?

Planning is the process of organizing the country’s resources for the purpose of
attaining certain envisaged objectives.
Plans in the third world fail to achieve the intended objectives due to the following:-
  Lack of information: In most countries there are no reliable and accurate information
on various socio-economic variables such as population, national income statistics, and
government budgets; therefore it becomes very difficult for planners to make different
plans for the country.
 Lack of trained personnel in planning: Planning process requires people with skills in
formulation and implementation of plans. Many countries lack enough trained personnel
in the field of planning; therefore most of the plans are not well prepared and fail to be
implemented.
 Existence of large private sector: The existence of a large and strong private sector in
the economy harms some of the government plans since the private sector is sometimes
not ready to cooperate with the government in implementing the plans.
 Political interference: Politicians often use planning as a tool of achieving their
(personal) political objectives such as winning elections and increasing their popularity in
their constituencies. They sometimes manipulate resources which were intended for
some national development projects to fund their political activities and in order to please
their voters.
 Dependence on foreign aid: Most of the plans in the country depend on foreign aids
which are very difficult to get. When they are available they are usually attached with
some conditions and in most cases they do not come on time. This affects planning
process and delays implementation of plans.
 Shortage of planning machinery: Any government plan must have planning machinery
i.e. a government ministry or department which is involved in formulation and
implementation of plans. However, in a country like Tanzania there are not enough
government departments for implementation of different plans.
 Lack of funds: Planning is affected by lack of funds for buying different resources that
are important for implementation of various projects that are entailed in a plan.
 Lack of policies to support plans: Any plan must be accompanied by some policies
that support it. For example a plan of industrialization must have some protectionism
policies which promote and protect domestic industries. If there are no such policies the
plan of industrialization may fail because the local industries will be affected by cheap
imports.
10.
The theory underlying international trade concludes that countries involved in the trade
tend to gain from it. Why then do countries impose trade restrictions?

International trade refers to trade among nations. The theories underlying international
trade are:-
The theory of absolute advantage: It states that “if a nation is more efficient than the
other nation (has absolute advantage) in the production of a particular commodity, but is
less efficient than another (has absolute disadvantage) in the production of another
commodity, then both can gain by each nation specializing in production of its absolute
advantage”.
Theory of Comparative Advantage: It states that: ”Even if a nation is less efficient
than the other nation (has absolute disadvantage) in the production of both commodities
while the other nation is efficient in both commodities (has absolute advantage), still
mutually beneficial trade exists by specializing in the production and export of a
commodity in which the opportunity cost of producing the commodity is lower
(comparative advantage) and import the commodity whose opportunity cost to produce
is higher (comparative disadvantage).
Both theories advocate for free trade, that is, nations should not impose trade
restrictions. But countries today do impose trade restrictions due to the following
reasons:-
(i) Strategic industry argument: Some industries are of strategic importance in times
of crises or armed conflict. Thus, governments tend to protect such industries through
protectionist measures e.g. agriculture, aerospace, armaments, shipbuilding and fuel
industries.
(ii) Terms of trade argument: Imposition of tariffs leads to reduced importation by the
tariff imposing country. This may force suppliers to reduce their prices if the buyer has
some monopolistic power. This will improve the terms of trade of the country though
other countries retaliate by imposing tariffs on their imports.
(iii) Infant industry argument: newly established industry is unable to compete
effectively with the already well established industry in the other country. Hence it is
valid, as endorsed by many Economists, to protect such industries so as to ensure their
survival.
(iv) Anti-damping argument: Dumping occurs when a country sells a product
abroad/in an overseas market at a price below the price in the country of origin. It is
thus generally accepted that protection against predatory dumping (dumping intended to
drive out competitors) is justifiable.
(v) Importation of harmful products: Free trade may result in the importation of
harmful commodities to the citizens of a country such as expired medicines and food
items.
(vi) Loss of revenue: A country engaging in free trade will lose revenue it earns
through tariffs. That is why the countries impose trade restrictions to control these
problems which are caused by free trade.