END OF UNIT QUESTIONS UNIT 6

DATA RESPONSE
A)
a. Using the data in Figure 1, compare the change in Cambodia’s inflation rate
and current account balance over the period shown [2/2]
Over most of the period, both the inflation rate and the current account deficit were
relatively stable. However, the inflation rate was relatively low while the current account
deficit was relatively high. Furthermore, at the end of the period, a fall in the inflation rate
was accompanied by an increase in the current account deficit.

b. Explain whether the relationship shown in Figure 1 is the expected

relationship [2/2]
No, it would not be the expected relationship, as it is expected that a low and stable inflation
would lead to the value of exports surpassing the value of imports because we are more
price competitive and therefore lead to a current account surplus.

B) Using the data in Figure 2, explain how Cambodia’s current account balance might be
affected by an increase in the economic growth of the USA [2/2]
An increase in the economic growth rate of the USA is likely to reduce the deficit on the
current account of the balance of payments, as US firms and households are more likely to
buy more goods and services from Cambodia if their currency is depreciated.

C) With the help of a diagram, explain why the Cambodia’s exchange rate changed at
the end of the 20th century
?????

D) Assess how Cambodia’s consumers could benefit from the removal of the country’s
import tariffs
Import tariffs are takes that a government imposes on imported goods to make them more
expensive, which is a protectionist measure to make imported goods more expensive.

Cambodia’s consumers could benefit from the removal of the country’s import tariffs
because it lowers their prices. When tariffs are removed, the prices of imported goods
become lower, which can benefit consumers by providing them with cheaper products and
therefore increase the standards of living of a population.

Another way they could benefit is from increased competition. The removal of tariffs can
increase competition by allowing foreign companies to compete with domestic companies
to make products more price competitive (to have more quality and lower prices), which
overall lead to better quality products, greater innovation, and improved productivity.

E) Discuss whether Cambodia’s fiscal policy in 2018 would have reduced the deficit on
the current account of its balance of payments
Cambodia's fiscal policy in 2018 was expansionary, with increased government spending
and reduced taxes. This policy was aimed at boosting economic growth and reducing
 poverty levels in the country. However, it is unlikely that this policy would have reduced
the deficit on the current account of its balance of payments.

The current account of a country's balance of payments is the record of its trade in
goods and services with the rest of the world, as well as income received from and
payments made to foreign investors. A deficit on the current account means that a
country is importing more goods and services than it is exporting and is therefore
dependent on foreign borrowing or investment to finance the shortfall.

While fiscal policy can have an impact on a country's balance of payments, it is not the
primary factor. The main determinants of the current account balance are the exchange
rate, the level of economic activity, and the competitiveness of a country's exports.

In Cambodia's case, the country is heavily dependent on exports, particularly in the

garment and footwear industries. The demand for these exports is largely determined
by external factors such as global economic conditions and changes in consumer
preferences. Therefore, Cambodia's fiscal policy in 2018 would have had a limited
impact on its exports and, consequently, on its current account balance.

In summary, while Cambodia's fiscal policy in 2018 may have had positive effects on the
domestic economy, it is unlikely to have reduced the deficit on the current account of its
balance of payments. Factors such as exchange rates, global economic conditions, and
export competitiveness play a much larger role in determining a country's current
account balance.

ESSAYS

2a) Explain the difference between an import tariff and an import quota and consider
which would be more effective in reducing imports

An import tariff and an import quota are both measures used by governments to regulate
the flow of goods into a country from foreign markets.

An import tariff is a tax imposed on imported goods by the importing country. The purpose
of the tariff is to make the imported goods more expensive and less competitive with
domestically produced goods. Import tariffs increase the price of imported goods, which
reduces the quantity demanded of them.

An import quota is a limit set on the quantity of a particular good that can be imported in
the country. It reduces the quantity of imported goods, which increases their price and
makes domestically produced goods more competitive.

Both import tariffs and import quotas can reduce imports and protect domestic industries.
However, they have different effects on consumers, foreign producers, and the economy.
Import tariffs can result in higher prices for consumers, and foreign producers may respond
with retaliation. Import quotas, however, can create scarcity and reduce competition,
leading to higher prices for consumers as well.
Overall, the effectiveness of import tariffs and import quotas in reducing imports depends
on the specific circumstances of the market and the goals of the government. In some cases,
a combination of both measures may be more effective than either one alone.

2b) Discuss whether protectionism can reduce unemployment

Protectionism occurs when a country takes action to protect its own industry by restricting
trade. The reasons for this could be to protect infant industries, protect industries from
cheap labour, prevent dumping, protect declining and strategic industry, improve terms of
trade and improve the balance of payments. Unemployment is when people who are willing
and able to work are unable to find a paid job.

Protectionism can reduce unemployment by protecting infant industries. Firms in new

industries can find it difficult to survive if they have to compete with foreign competition, so
they are protected to give them time to grow in the domestic market before competing
internationally. If there is a potential to develop, this can lead to a reduction in
unemployment, as people who are seeking jobs can find them in new industries.
Nevertheless, industries can become dependent on protection, as they might not be willing
to reduce costs and therefore will never become competitive in the international market. If
the government can no longer maintain the protection on infant industries for different
reasons (such as a recession), the infant industry could potentially collapse, leading
therefore to a higher percentage of the population unemployed.

In addition, protectionism can reduce unemployment by protecting declining industries. If an

industry’s products are no longer demanded, the industry loses its comparative advantage
and will lead to unemployment if it is not protected, as the industry will go out of business.
Giving a protection to the industry which is gradually removed will give workers plenty of
time to retire or seek other more competitive jobs on other industries, therefore reducing or
avoiding mass unemployment. However, declining industries do not offer as much profit as a
strategic or rising industry, which can create a deficit in the current balance of payments
(because the products that declining industries are produced are not really demanded
internationally but imports should continue being demanded), leading consequently to
inefficiency and a deficit in the current account of the balance of payments.

Moreover, protectionism can reduce unemployment to prevent dumping. Dumping is the

selling of products in a foreign market below the cost of production, creating an unfair
competition. If for example, Country Y sells its exports for 100$ but the cost of producing
them is of 120$, other countries like Country X cannot lower their prices more, leading to
the disappearance of the industry in Country X. In the short-run, consumers may benefit
from the lower prices but in the long-run, as domestic firms from Country X are driven out
from the industry and a monopoly has been created, country Y can introduce higher prices
with no competition. This disappearance of industries in the country leads to
unemployment, as there is no real reason to protect it like a declining industry because it
may still be demanded in the country, but other countries are taking advantage of the cost
of production, creating therefore unemployment.
All in all, protectionism can reduce unemployment, but it could make the economy be
inefficient and therefore not work at full capacity. Furthermore, as they are protected by the
government, they might not be willing to lower their prices to make them competitive and
consequently the population would have to pay higher prices.

3a) Explain the advantages a country may gain from engaging in international trade and
consider the extent to which the theory of comparative advantage explains the pattern of
international trade [8]
International trade is the exchange of goods and services between countries where there is
no government intervention. A country will have the comparative advantage of a product
when opportunity cost in one country is lower than in another country.

A country might benefit from engaging in international trade because it encourages

specialisation. Workers who are more specialise are likely to be more efficient and therefore
costs are reduces and prices are lowered (consequently being more competitive in the
international market). It increases output as there is a higher understanding of the
requirements of the products and will reduce costs and there is a more efficient use of time.
Nevertheless, as each economic unit specialises in what they are best at, it could lead to an
unfair advantage. For example, if country X specialises in oranges and country Y specialises
in cars because they both have the comparative advantage in each respective product,
country Y could take advantage of country X because the demand for cars is inelastic and
prices are excessively high, therefore being unfair and being a disadvantage.

A country might benefit from engaging in international trade because it offers more
employment opportunities. As exports are increasing, the industries increase as-well,
demanding workers, reducing unemployment and consequently, increasing the aggregate
demand, which consists of consumption, investment, government spending and net exports.
Nonetheless, these employment opportunities can turn to structural unemployment as if
the demand for the product lowers, it could potentially lead to structural unemployment.

3b) Discuss whether a surplus on the current account of the balance of payments will
benefit an economy