TJC JC2 H1 Econs Protected Time 24/7/12

N2009 H1 EQ3 When societies are attempting to solve the central economic problem by improving the standard of living of their citizens at a rapid rate; they are always inclined to try to do it behind protectionist trade barriers. (a) (b) Using the concept of opportunity cost, explain the central economic problem that all societies have to solve. [10] Discuss the view that the reasons for protectionism can never outweigh the benefits of free trade. [15]

Suggested Answer: (a) Preliminary thinking Command word: Explain knowledge and understanding Cue words: opportunity costs, central economic problem Content: scarcity, choice and opportunity cost Context: None specified Construction: L1 - Define opportunity cost and identify the central economic problem. (1-3) L2 - Explain the scarcity, choice and opportunity cost using a PPC diagram (4 - 7) L3 - Analyse the choices that society makes in resource allocation (8 - 10)

Introduction Central economic problem problem of scarcity due to unlimited wants and therefore limited resources. Due to scarcity, not all wants can be fulfilled and society has to decide which wants to fulfilled, leading to choices which inevitably incurs opportunity costs. Opportunity cost is defined as the value of next best alternative forgone when a choice is made. Therefore, the central problem of economics is about how to allocate resources that fulfills societys wants while incurring the least opportunity costs. Body Explain the concept of opportunity costs using the production possibility curve (include your own diagram in the space below)

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The economy is assumed to produce only consumer and producer goods. The production possibilities curve (PPC) shows the combinations between consumer and producer goods which can be produced at a given point in time assuming that all resources fully and efficiently utilised. Points outside the PPC are not attainable because resources are limited. A movement along the PPC shows opportunity costs because to produce more of one good, the production of some of the other good has to be sacrificed. Society thus has to decide which combination of good that would maximise its welfare.

Therefore, the problem of allocating resources to produce the optimum combination of goods can be solved by the free markets answer to the three essential questions. 1. What to produce? 2. How to produce? 3. For whom to produce? What to produce is a decision jointly made by consumers and producers. Consumers wanting a good are prepared to pay a price for the good. This price must allow the producers to make sufficient profits to compensate for his efforts in organizing the rest of the factors of productions. If the price is high enough, the producers then decide how to produce the goods that will incur the least cost in order to maximise profits. As resources are scarce in various extents, this depends on the relative factor prices that achieve optimum factor combination. Consumers demonstrate their ability and willingness to pay for the good by paying a price for the good that commensurate their satisfaction they expect to receive from consuming the good. As income is limited, consumers need to decide how to allocate income to produce the highest amount of satisfaction. Conclusion The government also has a role to play in redistributing resources due to the existent of market failure, income inequality and macroeconomic instability. (b) Preliminary thinking Command word: Discuss analyse and evaluate Cue words: reasons for protectionism can never outweighs the benefits of free trade Content: International trade and protectionism Context: Contemporary Construction: L1 Define protectionism and free trade. (1-2) L2- Explain the benefits of trade (3-6) L3 Analyze the arguments for protectionism (7-11)
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TJC JC2 H1 Econs Protected Time 24/7/12

E - Discuss if protectionism can ever be justified (+4) Introduction When society achieved a better allocation of resources, it will improve the standard of living of its citizen by making more goods and services available to them. However, protectionist trade barriers that opposed free trade tend to prevent the efficient allocation of resources. Despite that, there could be reasonable arguments for protectionism which aim to promote fair trade. Protectionism refers to economic policies aimed at restricting trade, designed primarily to protect domestic businesses and workers from foreign competition Free trade means unrestricted exchange of goods and services across international boundaries

Body The basis of free trade arose from the concept of comparative advantage. It assumed that different nations are endowed with different resources that make them more efficient in producing certain goods and services than others. It postulates that a country that incur a lower opportunity costs in producing a certain good or service relative to another country, it should specialize in the production of that good and service and trade for other good and service that they have a comparative disadvantage in. Trade between two countries would then occur if the terms of trade are lower than the opportunity cost of producing the good themselves. Therefore, specialization and trade would then benefit both countries if there is a difference in the opportunity costs ratio between the productions of the two goods traded, resulting in higher consumption possibilities using current resource endowments i.e. enables a country to consume outside its PPC. It also leads to; Lower prices, higher quality and improved efficiency of domestic producers arising from increased competition by foreign producers. Greater varieties consumption due differences in climate, endowment of natural resources and intra-industry trade. Transfer of technology and knowledge as developing countries import superior capital goods from developed countries. Trade can act as engine of growth because as external demand help small or developing countries overcome the lack of internal demand.

However, despite the benefits of free trade, there could be reasons for protectionist trade barriers as free trade can bring about certain problems for a country. Infant industry argument arises because for some industries, comparative advantage can be acquired overtime so the need protection for them to survive and grow. Protection against unfair competition such as dumping and cheap imports due to foreign exploitation of labour.

TJC JC2 H1 Econs Protected Time 24/7/12

Production of certain goods is of vital importance for a nation and should not rely on imports from other countries. Employment protection Reduce demand deficient unemployment by curbing imports to boost AD during an economic downturn. Reduce structural unemployment by slowing down the decline of sunset industries to allow time for labour to be retrained to enter sunrise industries.

Managing balance of payments deficit by curbing imports to improve the balance of trade, current account and hence the overall balance of payments Conclusion/Evaluation Protectionism means restricting rather than preventing trade so protection, if temporary, can possibly be justified although some reasons are better than others. Promoting free trade is important but perhaps not at the expense of fair trade or a turbulent domestic economy. However, protection is hard to remove once it is in place and countries often end up perpetually protecting inefficient domestic producers, thereby preventing resource from being channelled to other more productive uses. There are also other limitations like beggar-thy-neighbour effects and retaliation which render such policies ineffective and can be even more harmful than beneficial for the entire economy.