Economics - Advanced National Examination Paper 2 - 2014

2014 – ECONOMICS PAPER 2

SECTION A
1.
(a).
Outline five features of an economic plan.

Economic plan is a set of strategies that a government sets in order to make best use
of its resources with the objective of maximizing the economic welfare of its citizens.
There are two types of economic plans which are partial plan and comprehensive plan.
Partial plan is based on an individual sector of the economy while comprehensive plan
is based on all sectors of the economy.
The following are the features of an economic plan:
It covers a certain period of time: An economic plan must have a time limit in which
the intended objectives should be achieved for example 3 years, 4 years or 5 years and
so on.
It addresses a particular issue or problem: An economic plan must show which issue
or problem it is dealing with, for example a plan to promote rural development or a plan
to control economic problems like inflation, unemployment and so on.
Plan evaluation or appraisal: This feature of economic plan includes the process of
assessing the costs and benefits of the projects in a certain plan. It examines the
suitability of the project to the society and the social costs that may be incurred.
A plan is a social, national institutional process: A plan is said to be social in the
sense that its formation involves people and it is made for the people. A plan is intended
to achieve specific objectives for the benefit of the people.
A plan must have goals: An economic plan must state what it intends to do and
achieve. An example of such target is to promote growth of national income, to create
employment, to reduce dependency, and so on.
However there are other features of economic planning such as planning machinery,
policies, consistency and strategy.
(b).
Why is economic planning ineffective in developing countries like Tanzania? (Give five
points).

Economic planning is the deliberate attempt by a government to make the best use of
the country’s resources with the objective of maximizing the economic welfare of its
citizens under a given political and institutional set up.
The following are the reasons why economic planning is ineffective in developing
countries like Tanzania:-
Lack of information: Accurate and relevant information is needed to prepare plans. In
most of the developing countries there is no reliable and accurate information which
makes it difficult for planners to make proper plans for their countries.
Lack of trained personnel in planning: In most of the developing countries like
Tanzania, there is lack of trained personnel in the field of planning, so most of the plans
are not well prepared, hence most of them fail to be implemented.
Political interference: Most of the politicians in developing countries like Tanzania use
planning as a tool for achieving their political objectives such as winning elections and
increasing their popularity in their constituencies. They sometimes manipulate
resources which were intended for certain development projects to fund their political
activities in order to please the voters.
Shortage of funds: In most developing countries, planning is affected by lack of funds
for procuring goods and paying for services required in implementing economic
projects.
Existence of large private sector: Existence of a large private sector in the economy
which does not fall under the control of planning authority may hinder planners from
preparing adequate and comprehensive plans.
2.
(a).
Analyse six factors determining taxable capacity.

Taxable capacity is the ability of tax payers to pay tax assessed on them and at the
same time, retain a reasonable level of income to enable them to live the life they are
accustomed.
The following are the factors determining the taxable capacity:
Inflation: This is one of the factors that determine taxable capacity. Inflation lowers the
people’s purchasing power, hence it greatly affects the taxable capacity, especially from
indirect taxes.
Population size: The size of population in a certain geographical area can determine
the taxable capacity. When population size increases it also increases the taxable
capacity which leads to higher revenue to the government from tax. But when the
population size decreases taxable capacity also decreases and leads to low revenue to
the government.
Income distribution: Usually, equitable distribution of wealth leads to less tax revenue
as compared to a situation where the wealthy are more and accordingly taxed.
The level of income: Stability of income will generate more tax revenue and increase
production and vice-versa.
Attitude of the taxpayers: A positive attitude towards development will increase the
taxation potential among the people, but negative attitude will decrease the taxation
potential.
The objective of taxation: The taxable capacity will increase if there are specific aims
for which the revenue is directed; for example, if it is meant to promote education,
culture, industrialization, health, poverty eradication , tourism, sports, and so on.
However, there are other factors that determine taxable capacity such as the level of
economic development, the tax procedure, and existence of conservative tendencies.
(b).
Describe four functions of a national budget.
National budget refers to estimates of the government revenues and expenditures in a
given year. In Tanzania, the national budget is presented to the national assembly by
the minister of finance in June each year. There are three types of budgets. These are
surplus budget, deficit budget and balanced budget.
The following are the four functions of a national budget:-
To redistribute income: Through the national budget, the government may redistribute
income by increasing expenditure in social services and providing subsidies to small
scale businesses.
To control inflation: Through the national budget the government can control demand-
pull inflation by increasing direct tax in order to reduce the purchasing power of the
people.
Economic stabilization: The national budget can be used as an instrument for
stabilizing the economy. For example, during economic recession, the government can
reduce tax and increase expenditure to stimulate consumption and create employment.
To stimulate employment: The government can create more employment
opportunities through the budget by increasing expenditure on economic and social
services, and providing subsidies to sectors which increase the level of employment
such as agriculture. It can also reduce tax on inputs in order to encourage investments
and therefore create jobs.
The national budget can create or correct a deficit in the balance of payment: The
government can discourage certain imports and correct a deficit in the balance of
payment by increasing import duty.
3.
(a).
Explain six differences between central bank and commercial Bank.

Central bank is a government institution that manages a state’s currency, money

supply, interest rates as well as operations of all commercial banks in a country. It also
provides banking service and financial advice to the government. An example of a
central bank is the Bank of Tanzania (B.O.T). Commercial Banks are financial
institutions that accept deposits, give business loans and offer other related services to
individuals, corporations and/or governments. Examples are the National Bank of
Commerce (NBC), Co-operative and Rural Development Bank (CRDB), Akiba
Commercial Bank (ACB), etc.
The following are the six differences between a central bank and commercial banks:-
Creation of credit: Commercial banks create credit through lending to the public while
central banks do not create credit through lending to the public.
Control of financial institutions: Central banks control other financial institutions in
the country while commercial banks do not. A central bank has authority to control all
financial institutions in the particular country while commercial bank do not have.
Acceptance of deposits: A commercial bank accepts deposits from the public while
central bank does not.
Aim of establishment: A commercial bank is established as a business entity to make
profit while the central bank is established to serve public interest and not for profit
making.
Printing money: Central banks have sole authority of printing money of their country
while commercial banks do not print money.
Ownership: A central bank is wholly owned by the government while commercial banks
may be owned by individuals, joint stock companies, co-operatives or even a
government.
(b).
What are the main objectives of the central bank in controlling credit? (Provide four
points).

Central Bank is a government financial institution established to control, guide and

assist other banks in a country. It also provides banking services and financial advice to
the government. A central bank uses different methods to control credit in a country.
These include open market operation, control of interest rates, special deposit, selective
credit control, etc.
The following are the main objectives of the central bank in controlling credit:-
To save gold reserve: The central bank adopts various measures of credit control to
safeguard the gold reserves against internal and external drains.
To achieve stability in the price level: Frequent changes in price adversely affects the
economy. Inflationary and deflationary trends need to be prevented. This can be
achieved by adopting judicious measures in credit control.
To achieve stability in foreign exchange rate: The objective of credit control is to
achieve stability in foreign exchange rate. A stable currency indicates stable economic
condition of the country.
To meet business needs: According to Burgess “one of the most important objectives
of credit control is the adjustment of the volume of credit to the volume of business”.
Credit is needed to meet the requirements of trade and industry.
4.
(a).
You are given the following information for country J in the year R.
GNP Mp is 97,503 million shs.
Net factor income from abroad is – 201 million shs.
Capital consumption allowance is 5,699 million shs.
Net indirect taxes are 10,576 million shs.

Where:
GNP = Gross National Product.
Mp = market price.
Fc = factor cost

Find:
(i) Gross National Product at factor cost.
(ii) Net National Product at factor cost.
(iii) Net Domestic Product at factor cost.
(iv) Net Domestic Product at market prices.
(i) GNP at factor cost

∴ Gross National product at factor cost is 86927.

(ii) NNP at factor cost

∴ Net National Product at factor cost is 81228

(iii) Net Domestic product at factor cost

∴ NDP at factor cost is 81027

(iv) Net Domestic Product at Market price

∴ Net Domestic Product at Market Price is 91603

(b).
Explain five importance of National Income Analysis.

National income refers to the sum of the market value of all goods and services
produced in a country per period of time, usually per year. There are three methods of
measuring the national income: product method, expenditure method and income
method.
The following are the importance of national income analysis:
Determination of economic growth rate: The national income analysis helps to
determine the growth rate of the national economy by comparing the GNPs of different
years. For example, if the GNP of country Z in the year 2000 was Tshs. 30 million and
GNP in the year 2001 was Tshs. 50 million, then the growth rate of the national income
was 66.67 percent.
Contribution of different economic sectors in the country’s economy: The national
income analysis can be used to show performance of each sector of the economy in the
national income by examining the contribution of each sector to the national income.
That means, by using national income data, we can know the contribution of agriculture,
industry, mining sector, and so on.
Decision making by the government: The national income analysis can be used by
the government to make decisions concerning the allocation of resources for different
and alternatives uses. It means that, by knowing the national income, the government is
able to make good decisions on how to allocate its resources in different social and
economic sectors.
Budget preparation: The estimates of the national income are helpful in preparing the
annual budget of the country; when a new tax is levied by the government, the
economic position of different sectors of economy is kept in view and similarly
expenditure is incurred in such a way that distribution of income may be equalized.
Comparison of standards of living: With the help of the national income estimates of
various countries of the world, we can compare the standards of living and the levels of
economic welfare of the people living in those countries.
5.
(a).
Describe five possible reasons for the existence of externalities.

Externalities are unintentional positive or negative side effects of an economic activity

affecting people other than those involved directly in that activity and which is not
reflected in the cost of goods or services involved. Example: environmental pollution
caused by a manufacturing industry.
The following are the possible reasons for the existence of externalities:-
Interaction between the economic system and the environment: The system of
economy must be quite different from the environment, if economic system is interacted
with the environment, negative or positive externalities will occur, e.g. environmental
pollution due to the production of goods in the industries.
High cost of obtaining rights: In most cases, the rights of people are obtained in the
courts of law and it may take both time and money for one to get his/her rights. For
example, the cost of acquiring compensation from externalities is very high. The
affected person is required to pay money to advocates and sometimes judges in order
to keep them on his/her side.
Laws are not enforced: The laws that have been legislated against those who bring
negative externalities in the environment are not enforced. As a result people’s actions
that affect others are not checked and so externalities persist.
Poor government industrial plan: The government should create good plans for the
establishment and location of industries. One plan is to set aside special areas for
establishment of industries which are far from residential areas thereby minimizing
chances of externalities. Failure to do this may attract investors to build industries close
to residents in order to easily get labour. As a result, negative externalities occur and
hence people are affected.
Interdependence between production and consumption: Goods produced must be
consumed. The interdependence between production and consumption leads to positive
and negative effects. For example, the production and consumption of cigarettes brings
negative effects to the consumers and other people who don’t consume it.
Low level of awareness: Investors as well as the public may fail to determine the
consequence of a particular economic activity in an area and/or possible mechanisms to
curb the negative externalities caused by it.
(b).
Explain five ways to reduce pollution.

Pollution is the introduction of unwanted materials and substances in the environment.

The following are the ways to reduce pollution:-
Introducing pollution tax: In order to reduce the amount of pollution, the government
should introduce pollution tax to those who pollute the environment based on the
amount of pollution introduced in the environment. This will reduce the amount of
pollution by a great extent.
Quotas on pollution: The government should put a limit of the amount of pollution that
is allowed in the environment. This method is mostly applied in those cases where a
particular activity can not be eliminated due to its overall benefits to the society.
Example mining, use of motor vehicles, etc. In such cases, pollution limits can be set so
that those who exceed it are charged or punished.
Giving subsidies to environmentalists: The government should encourage
environmentalists by giving subsidies to firms or NGOs which protect the environment. It
may also provide environmental gear to reduce pollution in the society such as dustbins
in public areas. Subsidies can as well be used to plant trees and protect water sources.
Establishment and enforcement of laws: The government should make strict
environmental laws in order to reduce or eliminate pollution. Heavy punishments must
be given to those who break those laws.
Provision of education: This should be provided to the society so as to educate them
on how to reduce pollution and the negative effects of pollution. This will greatly reduce
pollution without using force. This method is effective only if the society involved is
literate enough.
Introduction of efficient machines and programs: Use of efficient machines that
minimize pollution and recycle waste may help in reducing the levels of pollution of the
environment.
Recycling: Waste can be recycled to useful materials and in the process minimize the
amount of pollutants that can get to the environment.
SECTION B
6.
(a).
“Economic growth may not necessarily lead to economic development”. Give five points
to support this statement.

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

Economic development is the increase in per capita income associated with an
improvement in the indicators of the quality of life. Economic growth may not
necessarily lead to economic development due to the following reasons:-
Unemployment during economic growth: A country may experience economic
growth while there is unemployment; this situation is against human welfare which is a
factor for economic development.
Inflation during economic growth: Inflation is a persistent increase in the prices of
commodities in a given period of time. When there is economic growth while there is
inflation, this will not bring economic development because persistent increase in prices
decreases human welfare.
Income inequalities during economic growth: If there is economic growth while there
is income inequalities, economic development will not have occurred because a society
will not have economic welfare due to disparities in income.
Low per capita income during economic growth: Economic growth may occur while
per capita income is low. This will not lead to economic development because with low
per capita income human welfare will not be acquired.
Political instabilities during economic growth: Sometimes economic growth may
occur while there is political instabilities. This situation may not bring economic
development
(b).
Explain five determinants of economic growth.

Economic growth is the quantitative increase in the national output, that is, it is an
increase in the volume of goods and services produced in an economy. The following
are the determinants of economic growth:-
Availability of natural resources: If a country has enough natural resources such as
arable land, minerals and a favourable climate, and they are well utilized, it can achieve
economic growth whereas if the country is not gifted with natural resources, economic
growth will be hard to achieve.
Size of labour force available: Labour force greatly contributes in the production of
goods and services which is a major factor in increasing economic growth. If the country
has a large labour force it can increase the size of its national output, and so achieve
economic growth fast.
Availability of capital: If a country has a large stock of capital goods such as
machinery, buildings, infrastructures and other factors of production it can use them
efficiently and easily achieve economic growth.
Political and social situation: Economic growth of a country depends on its political
and social stability because investments and economic production require peace and
security to be maintained and sustainable.
Entrepreneur situation: The growth of investments and thus ultimate growth of the
economy depends much on the number of efficient entrepreneurs. The greater the
number, the greater is the rate of conversion of natural resources and labour to useful
output
Government policies: Economic growth in a particular country depends on the
favourable policies to the investors and entrepreneurs that are formulated by the
government. For example, the tax exemptions for newly established enterprises
motivate more people to invest in the country and hence high economic growth.
7.
(a).
Differentiate between backward and forward linkage as applied in economic sectors.

Forward linkage is the situation whereby finished products of one industry are used as
raw materials in another industry. It involves linkage between a primary industry and a
secondary industry. Examples include sugar from sugar factory is used as a raw
material in bakery or cattle from cattle farming is used as raw material in meat
production.
While
Backward linkage is a situation whereby the demands of one industry leads to the
establishment of other industries to produce for the needs of that industry. Example: the
establishment of several multinational fast food restaurants in Tanzania has led to the
establishment of poultry keeping and vegetable farming to supply these restaurants with
poultry eggs and vegetables.
(b).
Outline four roles and five problems of small scale industries in the economy of
Tanzania.

Small scale industries are industries which use low initial capital and low technology,
especially indigenous technology and locally produced raw materials. Examples of small
scale industries include honey processing, local breweries, and brick making industries.
In Tanzania small scale industries were introduced in 1973.
The following are the roles of small scale industries in the economy of Tanzania:-
Offering market for domestically produced raw materials: Small scale industries
stimulate consumption of local raw materials such as food crops, sand, etc. This lead to
the growth of the economy of Tanzania because farmers and other producers of raw
materials produce greater or larger quantities due to availability of markets.
They provide employment to local people: This helps them to get income and
improve their livelihood. Today many people are employed in various small scale
industries such as brick making, stone quarrying, local breweries and fishing.
They earn forex from exports: Another role of small scale industries in the economy of
Tanzania is to earn foreign currency by way of exports. When the finished goods such
as carvings are exported we earn foreign currency which can later be used in
international purchases.
They provide goods and services: Another role of small scale industries in the
economy of Tanzania is to provide goods and services that are needed by the society.
Goods such as butter, salt, mats, chairs and tables that are constantly consumed are
produced by small scale industries in Tanzania.
Small scale industries provide a good ground for future investment in heavy industries.
Success of small scale industries prepares a good ground for their expansion and more
investment for large scale industries for similar products. However, despite their good
role in the economy, these industries also face various problems.
The following are the problems of small scale industries in the economy of Tanzania:-
They produce low quality goods: This is due to the fact that they use low technology
in production, lack of expert skills and have to produce low cost goods.
Poor transport and communication technology hamper the transport of raw
materials and distribution of finished goods from these industries. As a result production
time is extended and availability of goods becomes unreliable.
Lack of capital: Small scale industries face a problem of lack of capital that is
necessary for buying inputs and expansion. These industries find it difficult to obtain
financial services such as loans from banks and other financial institutions.
Unreliable power: Unstable electricity supply in Tanzania hinders production of goods
by small scale industries.
8.
(a).
Elaborate four reasons for international trade.

International trade is the exchange of goods and services between one country and
another. It involves export trade and import trade. Selling goods or services to other
countries is known as exporting whereas buying goods or services from other countries
is known as importing.
The following are the reasons for international trade:-
Difference in natural resource: Some countries may have certain natural resources.
For example, Arab countries have a lot of petroleum reserves while African countries
have fertile soils. Therefore, African countries produce and export agricultural products
to the Arab countries and in return Arab countries produce and export petroleum to
most of the African countries.
Gain from trade: Countries earn revenue and profit by engaging in international trade
or foreign trade.
Difference in human skills: Citizens of different countries have different skills which
result in difference of types of commodities being produced. For example, Tanzania has
people who are very skilful in making carvings, while America, Japan and European
countries have people with skills in industrial manufacturing, Therefore, Tanzania is able
to produce and export carvings to these countries, and in turn import manufactured
goods from those countries.
Uneven distribution of capital and technology: Countries without enough capital and
technology are compelled to import goods from those countries with enough capital and
technology. For example, most of the African countries are faced with the problem of
lacking capital and technology to produce goods. Therefore, they have to engage in
international trade so as to export raw materials and import manufactured goods such
as cloth, cars, electronic equipments, etc.
(b).
Analyse six advantages of international trade in the economic development of Tanzania.

The following are the advantages of international trade in the economic development of
Tanzania:-
It encourages specialization: International trade enables Tanzania to specialize in the
production of goods in which they have comparative advantage. So, Tanzania is
encouraged to specialize in the production of goods such as sisal, tanzanite, coffee, etc.
because she is assured of external market.
Transfer of technology: International trade may facilitate the transfer of technology
from one country to another which helps production activities to go smoothly, and hence
leads to economic development in Tanzania. Through international trade Tanzania can
acquire various technologies from developed countries like USA, China and Japan.
Economies of scale: International trade widens the market for a country’s products
and therefore encourages local producers to produce in a large scale, therefore leading
to economic development of Tanzania.
Employment opportunities: International trade enables people in a country like
Tanzania to get employment because many engage in export or import trade and
associated services such as clearing, freight forwarding and transportation.
Foreign exchange earning: International trade enables a country to earn foreign
currencies and revenue from tariffs. Foreign earnings increase government revenue,
which enables a government to finance different social and economic projects for the
development of Tanzania.
It reduces scarcity of goods: Since no country in the world is self sufficient in
everything, international trade reduces deficits in the supply of commodities and
therefore ensures constant supply of goods in the domestic market.
It is important during calamities: It enables a country to obtain various necessities
that are absent but greatly needed during calamities such as floods and droughts.
Dispose of surplus products: It enables a country to sell its surplus products that
remain after meeting domestic consumption/needs.
Triggers competition: It exposes local firms to foreign markets which is very
competitive; this compels local firms to adapt to new techniques of production and
modern economy.
9.
(a).
Explain five importance of economic cooperation.

Economic cooperation refers to the economic relations which are established between
sovereign states. The relations are usually established at political, economic, diplomatic
and cultural levels. There are two types of economic cooperation which are bilateral
economic co-operations and multi-lateral economic co-operations.
The importance of economic cooperation:-
Market enlargement: Economic integration leads to the abolition or reduction of trade
barriers among the member countries. Abolition of trade barriers increases the size of
markets for goods produced by the member countries.
It enables member countries to specialize: Economic integration enables each
member country to specialize in the production of commodities of its comparative
advantage. Specialization leads to increase in output, quality and gain from trade.
Increase in employment: Reduction of trade barrier, expansion of trade and
specialization all lead to increase of employment in cooperating countries. In addition,
growth of service industries such as clearing and freight forwarding also open more
employment opportunities for the citizens of member countries.
Transfer of technology: Economic cooperation leads to exchange of technology
among member countries. It is easy for technology to be transferred from one member
country to another.
Increase in political and social understanding: Economic cooperation promotes
good political relationships between the governments and the people of the member
countries.
(b).
Describe five problems which can be faced in economic integration.

Economic integration: is the agreement among countries in a geographic region to

reduce and ultimately remove tariff and non-tariff barriers for the free flow of goods,
services and factors of production among each country. There are five forms or stages
of economic integration. These are free trade area, customs union, common market,
economic union and common monetary union.
The following are the possible problems which may face economic integrations:
Uneven distribution of gains: The distribution of gains among the member countries
may differ due to different levels of economic development among the member
countries and non-uniform local terms of trade.
Political instabilities: Civil wars and political misunderstanding in a member country or
between members may hinder the development of economic activities, such as trade
among the members.
Difference in political ideologies: The different political ideologies pursued by
member countries makes it difficult for them to have common objectives and
approaches in implementing their obligations towards economic development.
Poor infrastructure: For an economic integration to be successful, there must be
reliable infrastructure in the region. The absence of roads, railways and other means of
transport and communication hinders smooth movement of goods, services and
information between member countries.
Difference in currencies: Currency difference and sometimes fluctuation of currency
value in member countries may pose difficulties in buying and selling of goods and
services.
10.
(a).
Describe six challenges facing the agricultural sector in Tanzania.

Agricultural sector is a sector of economic production which involves crop cultivation,

animal husbandry and harvesting of plants (e.g. timber), animals (e.g. fish) or their
products. Through this sector we obtain food, raw materials for industries and fuel such
as wood and charcoal. In Tanzania, about 80% of the people are employed in this
sector which contributes about 60% of the country’s Gross Domestic Product (GDP).
The following are the challenges facing the agricultural sector in Tanzania:-
Unfavourable climate and weather conditions: Unreliable rainfall badly affects
farming and livestock keeping which depend on rain water for the growth of crops and
grass for animals.
Lack of capital: Most of the farmers in Tanzania lack enough capital to buy farm
implements. This forces them to use poor farm implements such as the hand hoe thus
producing small quantity of agricultural product.
Poor infrastructure: Poor transportation and communication systems hinder the
transport of raw materials and other agricultural produce from where they are produced
to where they are demanded.
Lack of storage facilities: Many crops and crop products get destroyed after
harvesting because of lack of enough proper storage facilities. As a result, farmers are
discouraged from producing in large scale since they can not keep their harvest.
Pests and diseases: They affect crops and animals and lead to reduced quality and
quantity of agricultural output.
Price fluctuation on the world market: When the prices of agriculture products fall
down on the world market, the agriculture sector is negatively affected as it earns low
income or even loss to the country.
(b).
Explain how price fluctuations of agricultural products affect the economic growth of
Tanzania (provide four points).

Price fluctuation are changes in the prices of goods in the market over a period of time
as a result of changes in demand and supply.
The following are the problems that are caused by price fluctuation of agricultural
products to the economic growth of Tanzania:-
They cause fluctuations in government revenue: As prices of agricultural products
fluctuate, so do the revenues that the government obtains from such products. When
this happens, the government budget and investment plans are affected.
Unemployment problem: Since agriculture is Tanzania’s major employing sector, the
level of employment will also tend to fluctuate due to price instabilities in the world
market. This will ultimately affect economic growth of Tanzania.
Balance of payment problem: This is another effect of price fluctuation of agricultural
products on the economic growth of Tanzania. Balance of payments problem may occur
in case foreign exchange expenditure exceeds foreign exchange revenues resulting
from selling agriculture products abroad at low price.
It may cause a country to over-depend on foreign aid: Low revenues collections,
unstable markets and other associated factors lowers the country’s purchasing power
and so in the end its ability to cover for its needs. This may necessitate countries like
Tanzania to seek and continuously be dependent on foreign aid.