Answers

Chapter 1

1. Zero: if the good is free, nothing has to be sacrificed in order to obtain it.
2. The severity of the economic problem can be measured by the 'gap' between total wants and those wants
which can actually be satisfied from available resources. If these resources are already full employed,
additional money cannot lead to the production of more goods. There is merely likely to be a rise in
prices.
3. (b) and (d)-not wanted; (e)-not scarce; (g)-not transferable.
4. Time. This is by no means a trivial question; the time element is continually entering into economic
decisions. Thus people are often prepared to pay extra to have A now, instead of in the future. It follows
that 'A in the future' is really a different economic good from 'A now.'
5. 'Money income' is income in terms of money. Since 1979 the price level has doubled-the value of money
has fallen. 'Real income' is income in terms of goods-what money income will actually buy. Because of
the rise in prices, my money income wil1 buy only twice as many goods; that is, my real income has
doubled.
6. (a) (i) 10, (ii) 20, (iii) 8, (iv) 6, (v) 2
(b) They lie on a straight line (called the 'budget line'). The budget line defines the possibilities open to
the consumer; the production possibility curve defines various production possibilities. In both cases,
points above the line are unattainable.
(c) 2.5 X; 0.4 Y.
(d) Opportunity costs.
(e) The budget line would not move at all.
(f) Real income remains unchanged, although money income has doubled.
(g) The budget line moves outwards from the origin, parallel to the old one. If the man buys no X, he can
now purchase twice as much Y as before, and so on.
(h) Real income has fallen (unless we have the exceptional case where the man spends all his income on
X). The budget line cuts the Yaxis halfway to the origin from the original position.
7. Positive-(a) and (b); normative-(c).
8. (b), (a), (c), (e), (d), (f).
9. (c). Note that unless a choice can be made between wants, little progress can be made in making an
economic decision.
10. (d). Note that land, for example, cannot be physically transferred but it is still an economic good.
11. True-(a), (b), (f), (h); false-(c), (d), (e), (g).
12. (a) A normative statement is a subjective opinion because it cannot be tested by facts.
Equity implies fairness, in this case, in the distribution of wealth.
(b) Economics can examine:
whether taxation is the best means of achieving equity;
ii what kind of tax would be most effective;
iii what effect the tax would have on other economic variables, e.g. investment.

146
Chapter 2

1. (a) to prevent rents rising beyond the means of poor people;

(b) to combat inflationary pressure;
(c) to raise revenue; to support the coal industry;
(d) defence and political reasons;
(e) strategic, social and political reasons;
(f) to protect health;
(g) to prevent a high degree of monopoly;
(h) equity; to raise revenue.
2. (a), (d) and (f)-flows; (b), (c), (e)-stocks.
3. (a) remain constant; (b) exceeds; (c) exceeds.
4. Both imports and exports are flows, and thus we must specify some time dimension. If the value of
exports in a year is less than the value of imports in that year, the stock of gold and convertible currency
reserves will tend to fall during that year.
5. Building Societies will: (1) ration out mortgages according to the funds available; (2) raise their mortgage
rates to deter applicants; (3) raise the rates paid to depositors to attract funds.
6. (a), (d), (f)-micro; (b), (c), (e)-macro.
7. (c)-consumers' spending influences the price 'signals'.
8. (d)-how much of the 'cake' received depends upon the size of income (and wealth).
9. (c), (e), (g), (h)-true; (a), (b), (d), (f)-false.
Notes:
(a) The relative prices of different factors have to be taken into account when deciding how to produce.
(b) Consumers also have a say in what goods shall be produced.
(f) Many of the reasons for government interference, e.g. when private and public costs differ, are
economic in character.
10. (a) Poland was under a Communist regime.
(b) It has changed towards a market economy.
(c) Privatisation, e.g. British Telecom.

Chapter 3

1. (a) A newspaper = 0.2 lb. of bacon = 0.5 bus ticket.

A pound of bacon = 5 newspapers = 2.5 bus tickets.
A bus ticket = 2 newspapers = 0.4 lb. bacon.
(b) 6. (c) 3.
2. (a) Costs of transport for wheat are much smaller in relation to value.
(b) Wheat is not so perishable.
(c) Wheat can be classified into standard grades.
3. (b), (d), (e)-imperfect;
(a) (c), (f), (g)-approximating to perfect.
4. (a) Transport difficulties or lack of mobility, e.g. labour.
(b) Imperfect knowledge, e.g. paint (retail).
(c) Some goods are not standardised, e.g. secondhand books, antiques.
5. Prices throughout the market become known more quickly, e.g. by telephone and information technolo-
gy, and hence price differences tend to be eliminated more quickly.
6. 15, 18, 22, 30, 50, 150,402, reading downwards.
7. Coffin; graduation hood. We have to think in terms of market demand according to the prices of
alternative qualities.

147
 8. Beef is a much better substitute for mutton than meat is for fish.
9. The Budget Speech; taxes on some goods are expected to be varied.
10. (a) Stocks fall. (b) Producers' order books lengthen. (c) Queues form. (d) Extended delivery delays.
11. Meat (autumn killing); potatoes (main crop); apples, pears, etc.
12. (a) P2; (b) Demand would expand from Q2 to Q3. (c) Supply would contract from Q2 to QI. (d) There
would be an excess demand (or shortage) of QIQ3.
13. Subsidise producers sufficiently to shift the supply curve to the right from S to Sl.

5,

P21-------3'!<.
~~--~~~-~-~~~

14. (a) £112 per ton, because only at this price is the quantity demanded equal to the quantity supplied per
week.
(b) The flow of wheat on to the market is 1000 tons per week, whereas the flow of wheat off the market is
only 500 tons per week. This high price would therefore cause wheat stocks to rise at the rate of 500
tons per week. Sellers would lower their price in order to prevent stocks accumulating.
(c) Stocks would fall at the rate of 275 tons per week. Sellers would raise price to prevent stocks running
out too fast.
(d) 'the conditions of demand and supply do not change.'
15. (a) At the old price of £112, stocks will now fall at the rate of 200 tons per week.
(b) Market price will rise to £128 per ton.
16. (a) Farmers will tend to sow more wheat.
(b) Next year's supply curve will shift to the right and, other things being equal, price will fall.
17. (a), (d), (g), (h), (i)-D2; (b)-DI; (c), (f)-S2; (e)-Sl.
18. (b).
19. (d).
20. (b).
21. (c).
22. (d). Note: (a) does not mention a time period.
23. (c).
24. (a).
25. (b).
26. (c).
27. (c).
28. (b).
29. (d).
30. (c).
31. Question deals with the misunderstanding between 'shifts in', and 'movements along' supply and demand
curves.
148
In the first case, the price rise (a shift upwards and to the left in the supply curve) leads to a movement upwards
and to the left along the demand curve. Because the price has risen, people will wish to buy less of that
particular good and so the quantity demanded falls (Fig. a).
p p

s s

D
D

0 0, 0 0 0 0, 0 0
(a) (b)

In the second case, 'demand fell' (a shift downwards and to the left in the demand curve) leads to a movement
downwards and to the left along the supply curve. Because people demand less of that particular good at all
prices, the price of any given quantity also falls (Fig. b.)
32. (c), (f)-false: Note: (c) The effect on quantity demanded of a fall in price can be shown on the same
demand curve.
33. (a) Floods in the Mississippi basin.
(b) It has risen from £150 a tonne to £200.
(c) Price (£)
per tonne
200

100

o D and S soya beans (tonnes)

(d) Imported soya bean meal is imported to provide protein in dairy feed, which has risen in price.
(e) As substitutes, also rise in price through increase in demand.
(f)
Price
per tonne
p,f----~-~

p f-----~O<'

D,

o Rape meal (tonnes)

Chapter 4

1. (a) 400, 30p. (b) 40p.

2. (a) £2.4 per kg.
149
 (b) Total current expenditure on butter is £19.2 mn. This has to be reduced to £9.6 mn by restricting the
import of butter to 40 kg mn. With a population of 80 mn, this gives a ration of 500 g. per person per
month.
3. Because rents of council fiats are subsidised from taxation and rates, they are less than the market
price-rents of equivalent fiats provided by private enterprise. Hence demand exceeds supply. Draw
diagram.
4. Because tickets are sold by the All-England Tennis Club below the price they would fetch on the open
market they are allocated to the general public by ballot with each successful applicant being restricted to
two tickets. Some tickets are bought by or are re-sold to 'spivs', and the limited supply is sold at a high
'market clearing' price.
5. Cars and video recorders-appreciable increase;
Food, books, etc. -slight increase.
6.
Demand Supply
Increase Decrease Increase Decrease
(a) X
(b) X
(c) X X (alt.)
(d) X
(e) X
(f) X

(a) and (b) (c) (c), (d), and (f) (e)

~
(alternative) ~ ~'S
.~P~S P S S, P P

~P~ P, D P, D, D ~ D

o 0 0 0
Second-hand cars demanded and supplied

7. (a) lOp per kg. (b) (i) nil, unless the government bought surplus supplies; (ii) shortage of 8 m lb .. (c) 12p
per kg .. (d) 8p per kg .. (e) 8 m kg .. (f) £96000. (g) 8p. (h) 53 m x 4p.
8. (a)

S
G) P,I----~
(.)

;t P 1--7"""'=------+-~~_
D

o a, a
D and S oranges

(b) A contraction.
(c)

D,

o D and S apples

150
 (d) An increase.
9. (a) Joint demand. (b) Competitive demand. (c) Joint supply. (d) Competitive demand. (e) Composite
supply. (f) Joint demand. (g) Bricks are a derived demand from houses. (h) Joint supply.
10.
S
5

5, R,
.go...
Q)
(.)
P ;t R D,
P, r----;;I"''''-----?<

o D and 5 petrol o Dand 5 cars

The price of petrol falls from P to Pl' Since petrol and cars are in joint demand, demand for cars will
tend to increase, and their price rises from R to R I •
11. Price falls. Prices of all goods in a group of substitutes move in the same direction.
12. Prices will rise.
13. The price of bricks will rise.
14. (a) Fall; price of A falls, so people tend to substitute A for B. Decreased demand for B lowers its price.
(b) Fall; price of A rises, so people buy less A, and therefore less B. Decreased demand for B lowers its
price.
15. (a)

5
5

.go... P, 1---~--7<
~ Pt----~--~
P, t - - - - - - - - : : K
P t-----::X:

o D and 5 low-fat milk o D and 5 full-cream milk

(b) Increase for low-fat milk; decrease for full-cream milk.

(c) Rise in price of low-fat milk; fall in price of full-cream milk.
16. (a) £9 (b)
(c) 65
(d) 90; 70
(e) £11
(f) £2
(g) £1.

OL-~~-------70L--~90--------'

D and 5 of X (units p/weekJ

17. (a) Tax unleaded petrol at a lower rate than that on leaded petrol.

151
 (b) Decrease demand for road transport by raising its cost, e.g. increasing price of diesel oil and
petrol, heavier duties on vehicles, stricter safety regulations;
(c) Charge more for resident roadside parking;
ii Give a Council tax rebate when a house has a garage.
IS. (a) 2Op. (b) 19p. (c) i. (d) t. (e) 20. (f) ISO mn x 3p = £5.4 mn.
19. (a) MM1 • (b) MM2 • (c) (i) OP.OM1 ; (ii) OP.OM2 •

Chapter 5

1. So long as marginal utility is positive (greater than zero), the purchase of an extra unit must increase total
utility. If marginal utility is zero, total utility will remain constant, and if marginal utility becomes
negative, total utility will then fall.
2. (a) 4, 3, 2, 1, O. (b) 4, as Fifth unit adds nothing
3. 'Take care of the pence, and the pounds will take care of themselves.'
4. (a) Marginal utility; the list must be written down with the units clearly stated, e.g. 1 loaf of bread, lIb.
of jam, etc., not just bread, jam, etc. It follows that bread can appear more than once in a list, each
loaf having a different marginal utility.
(b) No; the market price of the good, taken in conjunction with the consumer's fixed income, may rule
out certain preferences. The consumer has to economise.
5. No. Suppose I buy 10 units of X at 5p each, and 5 units of Yat lOp each. If this is an equilibrium position,
it follows that the marginal utility derived from the fifth unit of Y must be twice that of the tenth unit of X
(since the price of Y is twice that of X). But this tells us nothing about the marginal utilities obtained from
the first 9 units of X, or from the first 4 units of Y. These will, in general, be higher than the utilities of the
tenth and fifth units respectively, but we do not know how much higher.
6. Stamp collector completing a set; antique collector matching second chair to first already in his posses-
sion.
7. (a) Sp. (b) 16p.
S. For the consumer to be in equilibrium he should distribute his income so that marginal utility (MU) to
price (P) of each commodity is equal, ie:
MUx MUy MUz
----= ---- =----
Px Py Pz
40 50
Substituting in the figures: ~~ (fruit) 42 (fish) 60 (meat)
5 20 5
6 21 6
The ratio of MU to P of fish shows that the consumer has purchased it to a point where MUfP is higher
than for the other two commodities. To reach equilibrium the consumer should purchase more fish and/or
less fruit and meat so that the ratios are equal.
9. (a) 5 toffee, 10 peanuts, because the respective marginal utilities of the fifth and the tenth packets are 8
and 4, which are in the same ratio as the respective prices, 40p and 20p.
(b) 8 toffee, 12 peanuts, because the respective marginal utilities are now 2 and 2, and both prices are
20p.
(c) We can infer that the boy substitutes toffees for peanuts to start with because they are now better
value. But the 50% fall in price presents him with an appreciable rise in real income. Thus more
peanuts are bought, although their price has not fallen. We cannot, however, isolate the increased
purchases of toffee into those due to a substitution effect and those due to an income effect.
(d) More is demanded at a lower price.
10. For some individuals, margarine may be an inferior good, and when its price falls there is sufficient
change in their real income for them to be able to purchase the superior good (butter) instead.
However, it is unlikely that the market demand curve will be 'perverse' even over a narrow price range,
because:
152
 (a) there may only be a few persons for whom margarine is inferior; (b) while margarine may be inferior
for some uses, e.g. bread and jam, it is still purchased for other uses, e.g. cake-making; (c) it is
unlikely that margarine will become inferior for all the persons concerned at exactly the same price.
11. (a) (i) 4.0; (ii) 7.0; (iii) 3.0. (b) Our formula gives an elasticity of - 7.0 for a fall, and - 3.0 for a rise in
price. The answers are not identical because we are expressing the same changes in price and quantity (lp
and 150 lb.) as proportions of different original prices and quantities (7p and 150 lb. for the fall; and 6p
and 300 lb. for the rise).
12. (a) 70p
(b) Inelastic: if prices rises to 80p, total revenue rises from 4060 (th.p) to 4160 (th.p); for a price full to
60p, revenue falls to 3840 (th.p).

13. (a) (i) qlq 7 P1P

Oq Op

(b) Elastic, because as price falls (rises), total outlay increases (decreases). From the diagram,PlpBA is
smaller than qlqCB.
14. (a) Elastic. (b) Inelastic.

!:lq
50 !:lq 25 !:lq
15. 90. We have: 4 = -- = - x - =-
5 50 5 10
25

:. !:lq = 40
+ 50 (original quantity) = 90.
16. E of d = 1. (See also Chapter 15 and Fig. 15.4).
17. (a) Infinity. (b) Zero. (c) 1.

18. Assuming that outlay on agricultural products roughly represents farmers' incomes, then a fall in price
(the result, for instance, of a good harvest) would lead to an overall drop in income.
19. (a) Reduce supply. (b) Prices rise.
20. (a) Necessity; little used, and a tax would have to be so high that poor would be adversely affected.
(b) Persons would substitute holidays at other resorts.
21. More.
22. Elastic; more.
23. (a) £4. (b) £160. (c) 1.
24. (a) £2. (b) Elastic £6 to £4; e = 1 from £4 to £3; inelastic at lower prices.
. % change in quantity demanded
(c) Smce the = 2, there must be a 50 per cent increase in demand
% change in real income
at all prices.
This gives a new demand schedule 150, 300, 450, 600, etc. Thus price rises to £3.
25. (a) - 2.5. (b) Complements.
26. (d)
27. (b)
28. (c). Note: (d) 'Successive additions' is too vague.
29. (c)
30. (b)
31. (c)

153
32. (a)
33. (c), (g), (h)-false.
Note: (c) Marginal utility must be relative to price; thus it should be the utility of the last unit of
money spent on each good which must be equal.
34. (a) Commuters have to travel before 8:40 a.m., that is, during the peak period, and so have a relatively
inelastic demand curve.
In contrast, other travellers are more price sensitive since they can travel by slower buses and outside
the peak periods. Yet, if their demand is price elastic, they can provide a useful addition to revenue.
(b) (i) A difference in elasticity of demand between the two types of traveller.
(ii) Separation by time.

Chapter 6

1. Oil tanker, tractor, printer's ink, lorry, salesman's car.

2. Production is not complete until goods are in the hands of the final consumer. Manufacturers find that it
pays to carry stocks of all kinds as a 'buffer' against sudden increases in demand. Stocks are, therefore, a
factor of production assisting in the process of production (see 'investment').
3. (a) Farm buildings, combine-harvester, seed, grain storage;
(b) Concrete mixer, lorry, ladders, scaffolding;
(c) Till, stock, delivery van, scales.
4. He takes the risk that the book will not sell after going to the cost of having it printed, etc. The author
who writes a book in return for a percentage of the selling price on each copy sold is a part-entrepreneur,
for his labour could be wasted.
5. (a) Sainsbury; Vodafone; British Gas
(b) British Coal; Brent Walker (property development).
6. 'Production' is defined as any activity which results in the satisfaction of wants. Hence all activities quoted
are productive. (In practice, 'production' is limited to wants satisfied through the market-see Chapter
28.)
7. (a) Rate of dividend.
(b) Growth prospects.
(c) Government economic policy.
(d) 'Take-over' possibility.
(e) The rate of interest on government securities.
(f) Newspaper comment.
(g) Political developments abroad.
(h) The likelihood of a 'rights' issue.
8. Company.
9. A-private; B-public.
10. (a) A share is a share in the company; a debenture is a loan of cash.
(b) No redemption date for share; a debenture is for a fixed period of years.
(c) Return to the share is a dividend based on profits; a debenture earns a fixed rate of interest.
(d) Shareholders have voting rights according to number of shares held; debenture holders have no
voting rights.
(e) Debentures are usually secured on some fixed assets of the company and interest is a prior charge.
(f) Debenture holders can force the company into liquidation if interest not paid.
11. i Ordinary share;
ii preference share;
iii cumulative preference share.
12. (a) £457 000.
(b) No; the issued capital is often less than the authorised capital in its Memorandum of Association. The
company keeps some authorised capital in reserve for its expansion needs.
154
 (c) 'A' shares are non-voting and, while they raise capital, they allow control of the company to be
retained in the hands of the original shareholders.
(d) (i) Redeemable accept lower risk; (ii) finance raised at different times when the market rate of
interest differed.
(e) To tap as large a section of the public as possible.
13. (a) (i) Nominal or par value; (ii) market value.
(b) The market price depends upon the forces of demand and supply. If a firm prospers, its market share
price will tend to rise steadily above the nominal price.
14. (a) The declared dividend refers to nominal price-receives £10.
(b) 1.25%.
15. Ordinary shares. The government stock will have yielded £75 over 11 years = £825. Shares would have
yielded £70 per annum over 11 years = £770, but they also show a capital gain of £250. (Interest and
taxation have been excluded for simplicity, but they would also have to be reckoned in.)
16. (a) High-geared.
(b) i Shareholders' profits = £(50000 - 45 000) = £5000 = 5% or 5p a share.
ii Shareholders' profits = £(60000 - 45 000) = £15 000 = 15% or 15p a share.
17. (i) b; (ii) d; (iii) c; (iv) a; (v) e.
18. (a)
19. (b)
20. (a)
21. (b)
22. (a)
23. (d)
24. (b), (e)-false.
25. (a) i Facilitates the provision of further capital for expansion;
ii Allows original investors to realise capital and take their capital gains if they so wish.
(b) Shares are provisionally sold in advance, i.e. 'placed, with a range of investors, usually institutions,
and others through stock brokers.
25 x 6.7 1.1 x 100)
(c) Approx. 11 mn. ( 15 or
9.8
(d) In this case they are financial companies forming a consortiums to provide 'venture' capital, e.g.
Midland Montagu, Morgan Grenfell.
(e) 62 per cent.
(f) Yes: the cost of the MBO in 1984 was £4.5 m. The value in 1992 was £25. Their capital gain was
approximately 62 per cent of the difference, nearly £13 m.
(g) They are also interested in long-term investment and expect the Critchley Group to increase profits.
(h) (i) Reorganisation costs in early years;
(ii) Increased demand for electrical cable accessories;
(iii) Increased profit margins.

Chapter 7

1. Specialisation and exchange.

2. (a) rose-grafting, fruit picking
(b) shepherd, dairyman
3. (a) Facilitates the exchanges implicit in division of labour.
(b) Extends market and therefore makes a greater degree of division of labour possible.
155
 4. Smith can make 5 tables + 2 chairs in a day;
Jones can make 2 tables + 5 chairs in a day;
No specialisation: total production 7 tables + 7 chairs.
If Smith specialises in making tables, and Jones chairs, total production is 10 tables + 10 chairs.
5. No specialisation: total production 9 tables + 6 chairs.
Specialisation by Smith where advantage most marked-chairs; total production 8 tables + 8 chairs-
a net increase of 1 unit.
6. (a) Lifts fully used; delivery van filled.
(b) Window-dresser; store detective.
(c) Restaurant and bank provided; furniture and fabric departments near to one another.
(d) Buys goods in bulk from producer; wide reputation for quality of goods and fair dealing.
(e) Specialised managers; specialists on Board of Directors.
(f) May run own bank; shares well known, e.g. Bentalls (Kingston); Elys (Wimbledon).
(g) Sells many different products; buys from different sources.
7. (a) External economy to all fishing firms.
(b) Internal-a technical economy of scale.
(c) Internal-a commercial economy, as bank loans and house purchase are often linked.
(d) Internal-a risk-bearing economy.
(e) Internal-technical economy as store is using greater division of labour.
8. (a) and (c) horizontal; (b) vertical; (d) lateral.
9. (a) i a basic 'peoples' car
ii flow method of production
(b) i few colour choices
ii interchangeable parts
(c) i high degree of division of labour
ii specialised machines
10. By-products can be sold
11. (a) Exide, Triplex (glass).
(b) Massey-Ferguson (tractors), ICI (fertilisers).
12. (a) i Village store; local shoe repairer.
ii Brewers; furniture manufacturers; timber merchants.
iii Personal services; foundry castings.
(b) i Small property company limited by lack of capital; taxation splitting up agricultural estates.
ii Specialist firms in building, e.g. electrical work, roofing;
Specialist printers, bookbinders, etc. in publishing.
iii Agriculture; personal services; cafe proprietor.
iv Small farmer; window cleaner.
13. Repairs differ from one job to another, therefore firms tend to be small.
14. Agriculture, retailing, professional services, personal services.
15. (d).
16. (e)-false; rest-true. Note: (b) One person may be better than the other at a different task.
17. (a) It has production bases in many different countries.
(b) BOC, Morgan Crucible, Cable and Wireless.
(c) (i) It can spread development costs over worldwide output;
(ii) it can draw on expertise accumulated in solving customers' problems worldwide.
(d) (i) Can base operations on tax advantages;
(ii) large-scale economies;
(iii) lower tariffs, e.g. Toyota, Nissan factories in UK are within the EC single market.
(e) The MNC can transfer production to another country, leaving unemployment problems.

156
Chapter 8

1. (a) 20000; (b) 4020.

2. (a) Economies in distribution, e.g. on journeys, bills, etc.
(b) Holds stocks, e.g. bricks, and delivers as required.
(c) Transports bulky materials.
(d) Gives credit.
(e) Informs and advises trade on new materials and techniques (occasionally).
3. (a) Stocks a variety of books according to likely demand.
(b) Situates his shop within reach of the consumer.
(c) Orders books, and may allow customer to have a monthly account.
(d) Advises publishers of readers' comments on style, price, etc.
4. (a) The size of likely demand.
(b) Accessibility to quick replacements.
(c) Perishability.
(d) The time of year.
(e) Possibility of a future price rise.
(f) Rate of interest on bank overdraft.
5. It is convenient for customers (including dealers) to have all similar shops together in order to be able
to compare products and prices; it also establishes a reputation for the locality, thereby inducing
further custom. Other examples: jewellers, art galleries, fashion clothing.
6. Fresh vegetables are perishable and it is easier and quicker for greengrocers to go to a central market
than for wholesalers to attempt to distribute to them direct.
7. (a) 'Retailing' does not involve extra cost as the farmer's wife is usually available.
(b) Customers are prepared to make the journey to ensure having fresh eggs.
8. (a) Economies of bulk buying.
(b) Economies in carrying stocks through centralised control.
(c) Management economies.
(d) Elimination of wholesalers' profits.
(e) Economies of advertising.
(f) Reputation.
9. Personal management and attention to consumers' personal requirements.
10. (b).
11. (c).
12. (a).
13. (b).
14. (b), (d) and (e)-true; rest-false.
15. (a) A firm which offers a 'brand name' or well-proven service to an independent operator.
(b) Thirty per cent.
(c) Countrywide Garden Maintenance Services.
(d) (i) Provides a tested formula;
(ii) Gives in-house training to operator;
(iii) Helps in promotion advertising and marketing;
(iv) Reduces the initial capital required in setting up the business.
(e) McDonalds, K Shoes, Wimpy, British School of Motoring, Coca Cola, Happy Eater, Pizza Hut,
Prontaprint.

Chapter 9

1. (a) Cotton-South-East Lancashire.

(b) Banking-City of London.
157
 (c) Steel-Sheffield.
(d) Pottery-Staffordshire.
(e) Plums-Vale of Evesham.
2. (a) Teesside shipbuilding-navigable water, etc.
(b) Cornish china clay.
3. Steel-coal used for heating; shipbuilding; pig iron.
4. Ice-cream, furniture, beer, potato crisps, plate glass.
5. Near the source of its raw materials.
6. (a) Brewing; mineral waters.
(b) Hairdressing; hotel and catering.
(c) Bricks; cement.
(d) Potato crisps; furniture.
(e) Market gardening; baking.
(f) Water supply.
7. Electricity as a source of power freed industries from being on the coalfields so that they could produce
near their markets, e.g. London.
8. Assisted Area.
9. London: Car accessories; electrical goods; processed foodstuffs; durable household goods; home and
office furniture; sports goods.
(a) Near rich and large market.
(b) Do not lose weight in manufacture.
(c) Electricity used for power.
(d) Road transport.
(e) Labour supply.
10. (a) Concentrated urban areas, with traffic congestion, smog, lack of open spaces.
(b) Where heavy industry predominates, few jobs available in other types of work, especially for
women.
(c) Dependence on the prosperity of one industry may lead to regional unemployment.
11. (d).
12. (a).
13. (d).
14. (d). Note: (a) is not true.
15. (a)-false; they also include cost of transporting finished goods, and sometimes cost of transporting
labour.
(b)-false; any country has concentrations of population.
(c), (d), (e)-true.
(f)-false; acquired advantages may hold such firms.
16. (a) British.
(b) Speciality chemicals.
(c) Yes: it is a multi-national company.
(d) A corporation backed by the government and local authorities to attract new industry to the area
centred on Birmingham.
(e) To centralise the location of three member companies.
(f) i Financial assistance from the BCDC;
ii nearness to existing customers and suppliers;
iii excellent access to the national distribution network.
(g) Motorway connections.
(h) Birmingham is situated at the centre of England and distribution of products is largely by road.

158
Chapter 10

1. (a) 10, 12, 10, 8, 5.

(b) Third.
2. (a) 15, 36, 54, 68, 75.
(b) 15,21, 18, 14, 7.
3. 6, 16, 31, 43, 48.
4. (TPPn ) - (TPPn - 1)
5. Yes; so long as MPP exceeds APP, APP will be pulled upwards. This is true whether MPP is rising or
falling. However, as soon as MPP is less than APP, APP will decrease.
6. (a) 13 workers.
(b) 14 workers.
(c) 14 workers.
Workers 10 11 12 13 14 15 16
APP 10 11 12 13 131f2 13 121f2
MPP 21 23 25 20 6 5
(d) No. All we are given is a technical relationship between a variable factor and a fixed factor. The firm
determines its output (and thus employment) from the objective of profit maximisation. Hence two
variables must be considered: the price of the factors and the price of the product. So far we have
been given neither.
7. (a) 10 units of X.
(b) 15 units of X.
8. (c).
9. 20 units of X for B; 12 units of X for C.
10. (d).
11. (d).
12. (c) (a) is too vague by comparison; (b) total product need not increase at first, and the law should be
stated in terms of marginal product; (d) the law looks at returns to variable factor.
13. (a).
14. Only (c) and (g) are true; the rest are false.
(a) The law does not depend upon differences in quality, but simply on additions of variable factor.
(b) Should be marginal physical product.
(d) We must know price of factors, etc.
(e) MP = AP when latter is at a maximum.
(f) Occurs in all production whether there is a fixed factor.
(h) There may be negative returns if men get in one another's way.
(i) Takes no account of price of units.

15. (a) £240 ( 50 = 200).

60 240

(b) £2160 (
Land = 4 x £60 )
Labour = 8 x £240 .
(c) £1680 (£3840 - £2160).

Chapter 11

1. (b), (c), (e), (f), (h), (i), (k), (I)-variable; rest fixed.
2. (a) 5 months. (b) 7 years. (c) 9 months. (d) 21 months. (e) 8 months.

159
 3. Assume:
(a) labour is the only variable factor in producing a good;
(b) perfect competition in selling the product and buying labour (i.e. constant wage-rate).
Therefore, if the MPP of labour is falling, the cost of an extra unit of product (MC) must be rising.
4. (a) i 70, 41, 29, 23, 24, 30;
ii 15, 12,5,5,28,60.
(b) 55.
5. (a) 60, 100, 120, 120, 100, 60.
(b) 4.0,2.0,0, -2.0, -4.0.
6. (d) Note: this is equal to its best alternative use. (c) lacks precision.
7. (b).
8. (a), (b), (c), (d), (e), (f), (h), (i), (j), (k) (I)-true.
Note:
(c) True: applies to fixed factors.
(f) True: normal profit is a cost, supernormal profit is a residual reward.
(g) False, because it is the difference between total costs.
9. (a) £378. (b) 108. (c) £288 per week. (d) £18 per week. (e) £54 per week. (f) (i) £108; (ii) £486.
10. (a) Perfectly (or infinitely).
(b) Downward-sloping.
11. (a) Perfect.
(b) Imperfect.
(c) £20.
(d) £10.
12. (d).
13. (b), (d), (f), (g)-true; rest-false.
14. D1-firm making supernormal profits;
D 2 -firm just making normal profits;
D3-firm is making a loss, but will stay in business in the short period as variable costs are just being
covered;
D 4 -firm shuts down as variable costs not covered.
15. (a) OS.
(b) OD.
(c) OD x SR.
(d) OQ.
(e) OP.

16. (a) Perfect. (b) £50. (c) £50. (d) 8. (e) £140 (400 - 260). (f) £110. (g) 1 2 3 4 5 6 7 8 9
MC: 30 22 13 5 5 9 25 41 65
(h) i £14,5; ii £31, nearly 7.
17. (d) Variable costs are still being covered.
18. Close down: marginal revenue is below minimum average variable cost.
19. Please see figure on page 161.
20. (a) Yes; the tax will shift the MC curve upwards, and MC = MR at a smaller output.
(b) No; this tax is in the form of a fixed cost.

21. (a) OB. MR > MC on each unit of output between OA and OB, hence increasing output will increase
profits.
(b) MR = MC is necessary for profit maximisation; but it is not a sufficient condition. In addition we need
(i) MC curve rising; and (ii) that AR > ATC at this output-otherwise we are 'minimising
losses.'
160
19.

o Output

22. (d).
23. (c).
24. (d).
25. (b).
26. (d).
27. (a) (b) and (h)-false; (b) is too imprecise.
28. (a) A limitation on supply to a given amount.
(b) To reduce supply, since the price paid by the EC exceeds the market clearing price.
(c) 56727 litres. (By the end of February he has produced 1152000 litres, so that his final production
will be 1 256 727 litres.)
(d) £5184.85 (i.e. 56727 x 9.14 pence).
(e) i P = MR = MC; ii Minimum ATC at output of 1 200 000 litres.
(f)

ATe
22 I-----~-------___,(_:....-____,{__-- Price

o 1200 1600
Litres
Quota No quota
output

Chapter 12

1. (a) and (e) by raw material used;

(b) by product;
161
 (c) by the activity involved;
(d) by the services offered (a particular kind of product).
2. (a) Price (£) Quantity supplied
14 250
12 200
10 150
8 100
6 50
4 20
2 5
(b) £10.
(c) 50.
(d) Decreased.
(e) £6.
(f) 30 (20 firms like D go out of production).
(g) Smaller.
3. (a) D 1 ; (b) D z; (c) Ds; (d) D4 ; (e) D3 •
4. (a) Each firm: MC = MR = price = AC.
(b) Each firm produces where profits maximum.
(c) Each firm is producing at minimum AC.
(d) Each firm is making only normal profits.
(e) Number of firms in industry is constant.
5. (a) Factors of production are not equally available to all firms.
(b) Entrepreneurs differ in ability and efficiency.
(c) As industry expands, higher rewards must be paid to attract factors of production.
(d) Economy is dynamic, not static, so that some firms are doing better than others.
52 7
6. (a) Es = 56 x "1 = 6.5.
(b) Es = 2.5.
7. OM1
OM
PP1
OP
8. (c)
(a)
(b)

o Quantity supplied

9. Elasticity will be higher if stocks can be drawn on.

10. Owing to the more elastic supply curve S' when large stocks are carried, price only rises to P1 instead
of to Pz•
p

51
Plr-----~----r---~~

pl-----~~

o q

162
11. Elasticity of supply is increased if stocks are carried, enabling changes in consumer demand to be satisfied
without forcing up prices as much as would otherwise be necessary. Hence the carrying of stocks is a
useful economic activity.
12. Price rises more when supply of workers is inelastic.
13. (a) Price rises by full amount of tax when supply perfectly elastic.
p p

P, S,
P,
P 0
0
0 M,M q 0 M q
(a) (b)

(b) Price remains the same when supply absolutely inelastic, farmers having to pay tax.
14. (c).
15. (a).
16. (c).
17. (b).
18. (a) False-existing firms may expand output.
(b) False-price will rise proportionately less than quantity supplied.
(c) False-the less will be the fall in the quantity supplied.
(d) True.
19. (a) The Pig Price fluctuates on a regular basis around the price which would prevail if demand and supply
conditions were stable.
(b) Nov. 1987: price well above 85.87p per kg;
Feb. 1988: price 85.87p per kg;
July 1988 onwards: price rose to Nov. 1987 level;
1989: price likely to rise to 105p.
(c) (i) The time lag which must occur before the supply of pigs can respond to a rise in price.
(ii) Pig producers base their supply plans on the current market price. Thus expectations introduce
dynamic conditions.
(iii) There are many pig producers acting independently.
(d)

S (i) initial price rise to Pl.

P,r-----~---.--~~ (ii) Supply eventually increased to MI.
(iii) But demand will only clear Ml at price P2 •
(iv) As a result, supply falls to M 2 •
~ P2r-----~~~~~~ (v) Demand raises this smaller supply to price Pl.
D
(vi) Price cycle repeats.
:t

o M2 M,
Pig Demand and Supply

(e) Introduce a 'buffer' stock policy, putting surpluses into cold store, and releasing as price rises. (In
fact, EC CAP does not do this for pigs, but does so for beef.)

Chapter 13

1. The demand for the factor is derived from consumer demand for the final product.
2. (a) and (e)-direct demand; (b), (c) and (d)-derived demand.
163
 3. (i) Physical productivity; (ii) price of product.
4. (a) aMI; (b) ow; (c) OWl; (d)OW2; (e) Yes.
5. (a), (b), (c)-towards MRP 2; (d), (e)-towards MRP 3 •
6. (a) 4. (b) 5.
7. (a), (e)-rise; rest-fall.
8. (d).
9. (c).
10. (a).
11. (a), (b), (c)-true; (d)-false, the reward depending in practice upon other factors, e.g. as regards
wages, on government policy.
12. Fertiliser (units) MRP of fertiliser Total bales
Price per bale
£1 £1.50 75p
1 15
20 30 15
2 35
18 27 13.50
3 53
15 22.50 11.25
4 68
12 18 9
5 80
11 15 7.50
6 91
7 10.50 5.25
7 98
4 6 3
8 102
(a) 6.
(b) (i) 7; (ii) 4.
(c) 5.
(d) 2.
(e) Because the MRP exceeds the cost of an extra unit of fertiliser.
(f) 6 units.
(g) £91.
(h) £60 + £10.
(i) £21.
(j) No.

Chapter 14

1. Technical efficiency refers to maximising output from limited resources. Economic efficiency relates
demand to supply so that limited resources produce that assortment of goods which yields maximum
satisfaction.
2. There may be spillover benefits and costs.
3. It may not be possible to exclude 'free-riders', e.g. street lighting.
4. (a) it should attempt to ensure that full employment ensures production on the curve.
(b) it should note that a satisfactory growth rate will move the curve outward from the origin.
5. The distribution of income.
6. (a) Since a tax to raise the price of cigarettes is only likely to achieve a small reduction in the demand for
cigarettes, the government could try to move the demand curve to the left by: (i) forbidding or
curbing promotional advertising; (ii) forbidding smoking in public places; (iii) advertise the harmful
effect of smoking on health.
(b) Yes, because there are external costs of: (i) discomfort, etc. to nearby non-smokers; (ii) National
Health Service treatment for lung cancer and heart trouble.
7. (a) Cigarettes, leaded petrol;
164
 (b) Assisted Area policy, listed building repairs;
(c) National Health Service, education, motorways;
(d) physical control: drugs, pornographic literature, planning control;
(e) price control: rent regulation, agricultural wages;
(f) improving knowledge: Job Centres, weather reports for shipping, food inspection and testing;
(g) intervention in markets: foreign exchange market; bond and Treasury bill markets.
8. (d).
9. (a).
10. (b).
11. (b) False: the economist could only adjust on a personal, subjective basis. Rest: true.
12. (a) 5 m bars.
(b) 3 m bars.
(c) £60000.

Chapter 15

1. i (b), (c), (d); ii (a) and (e).

2. i compare the rate of profit with that in other industries.
ii calculate the percentage of total sales controlled by the dominant firm(s) in the industry.
3. Method (ii) above-a monopoly situation exists, prima facie, when a firm or group is responsible for
one-quarter of an industry's output.
4. Total revenues are: £600, £609, £594. Thus MRs are £9 and -£15. Under perfect competition, MR would
have been £30.
5. (a) 2000 tons.
(b) approximately unity.
6. (a) Imperfect.
(b) £100.
(c) 4; Where TR - TC is maximum.
(d) £184.
7. y
p
2J
8'"
-g
C\)
S I---~----""""

£ L.-_ _ _----.:II...-_ _ _ X
o
---"~.

Z R
Output

(a) OZ (see (d) below).

(b) 1.
(c) If there are marginal costs, output must be less than OZ.
(d) Marginal revenue = 0 at equilibrium output OZ.
Therefore elasticity of demand = 1; therefore, PQ = QR.
Triangles PSQ and QZR identical; therefore OZ = ZR.
8. (a) Half-price fare for children.
(b) Sold at a lower price.
(c) Expensive goods charged at a higher rate than coal irrespective of bulk.
(d) Cheaper evening calls and business users pay a higher standing charge than private subscribers.
9. (a) BT is acting as a discriminating monopolist, charging small consumers more per unit if their quarterly
bill is not consistently above £40.
165
 (b) The standing charge is designed to encourage consumers to contribute towards fixed costs, whereas
the charge per unit can be regarded as covering MC. With very small consumers fixed costs are spread
over the units price.
10. No; the services are not identical-that is, the product is not homogeneous. The 'first class' letter is
guaranteed delivery within 24 hours.
11. (a) £240. (b) £250. (c) £330 (£240 + £50 + £40 for 60 units).
12. (d).
13. (d).
14. (a).
15. (c).
16. (a).
17. (b).
18. (d).
19. (d).
20. (b).
21. (b).
22. (c), (e), (h), (i), (D-false.
23. (a) Sara Lee, who already owned Kiwi, acquired Cherry Blossom.
(b) Once established, they have long customer loyalty.
(c) i People buy on 'brand', rather than price.
ii People spend only a small amount on it and infrequently.
(d) Sara Lee's share of sales through groceries of shoe polish increased from 44 to 74 per cent.
(e) Twenty-five per cent.
(f) The familiar brand names owned by Sara Lee presented a barrier to entry by possible competi-
tors.
(g) The Secretary of State for Trade and Industry.

Chapter 16

1. No, this is not product differentiation. This term is reserved for the practice of a single producer making
his product distinguishable from that of his rivals. Although there are different types of apple, Farmer
Jones cannot make his Worcesters different from Farmer Smith's. There is, broadly speaking, a perfect
market for Worcesters, and a separate perfect market for Pippins; and, since one kind of apple is a very
close substitute for another, there is also an approximately perfect market for apples as a whole. Cars, on
the other hand, can easily be differentiated by the manufacturer, because there are so many different
kinds of consumer satisfaction to cater for in a single product: acceleration, top speed, number of seats,
etc. Any single car nowadays has a number of good substitutes, but each can command a market either
because of real differences or imagined differences in the consumer's mind.
2. (a) Branding and trade marks.
(b) Advertising.
(c) Distinctive packaging.
(d) Free gifts, coupons, cigarette cards.
(e) Competitions.
3. (a) Number of similar brands available.
(b) Extent to which brands are considered 'inferior.'
4. CR. Advertising shifts curve to right, and therefore makes demand less elastic.
5. (a) To inform.
(b) To expand demand in order to produce on a large scale.
(c) To persuade.
166
 6. (a) Different scents and colour.
(b) Advertising beautiful girls.
(c) Styling.
(d) Differences in service, shopping conditions, etc.
(e) Cigarette cards, advertising, coupons, sponsoring sport.
7. (a) Consumers are assumed to have complete knowledge of goods.
(b) Advertising would not benefit the producer, since he can sell infinite amount at given market
price.
8. Farmer Jones cannot differentiate his wheat from Farmer Smith's. Hence, if he advertised, he would
merely reduce his profits-and sales, too, because Smith would also benefit.
9. Yes; there can be collective advertising, e.g. for apples, eggs.
10. (a) The ATC and MC curves will rise, if the selling costs are regarded as a cost which varies with output
(see 0.11).
(b) If the advertising increases demand the firm may be able to achieve economies of scale. The cost
curves may then shift downwards.
11. (a) No; the £10 000 is a fixed cost, and so does not affect MC, which is the same thing as marginal variable
cost.
(b) Provided there is no change in demand, the firm's equilibrium output will remain the same, since MC
is unaffected.
12. (a) Price taker.
(b) Can determine its selling price.
(c) In deciding price, it has to take account of the likely reactions of competitors.
13. Prices tend to be identical, though this tacit arrangement is broken from time to time. Some competition
by gifts, lucky draws, etc.
14. (b).
15. (c).
16. (a), (b), (d), (f), (g)-true, Rest false. Note: (c) advertising may lower price through achieving
economies of scale.
17. (a) Duopoly.
(b) i Vodafone; ii 55.
(c) Yes: it has lower connection and monthly rental charges, but higher call charges for the domestic
customer?
(d) i To compete with Cellnet;
ii To make use of the different elasticities of demand of the domestic and business customer. The
former may consider the standing charges are too high for the few calls made.
(e) By a growth in the number of customers.
(f) By reliability, service and area covered.

Chapter 17

1. (a) Loss of visual countryside. (b) Noise for nearby residents.

2. (a) This may increase the nitrate content in the water supply.
(b) Straw burning increases CO2 in the air and may reduce visibility on roads.
3. (a) It prevents 'ribbon' development.
(b) It is likely to increase the price of land, as supply is limited to that having planning permission.
4. Yes.
5. (a) Cost.
(b) Agreement between those affected cannot be secured.
(c) An exceptionally large number of people may be affected.
167
 6. (a) Parking meters.
(b) Public transport.
(c) Double yellow line.
(d) Free car parks.
7. The existing authorities could have diverse objective priorities, which may confer external costs on each
other. The new body could 'internalise' externalities.
8. Two main taxes:
i Vehicle licence - car, £125 per annum is a fixed cost.
ii Petrol at 36.3p a litre is a variable cost.
If vehicle licence were abolished and revenue recouped by increasing the petrol tax, it would raise the cost
of running a car on the road and could therefore reduce its use with beneficial effect on congestion. (A
~rther beneficial effect would be to encourage the production of low-fuel consumption cars.)

But there are difficulties in such an approach: equity, especially regarding those dependent on car travel,
e.g. country dwellers.
9. (a).
10. All statements are true.
11. (a) Yes.
(b) To compare the net benefits of the three alternative routes.
(c) i The beauty of the Devil's Punchbowl;
ii lowland heaths;
iii an ugly viaduct;
iv time lost by the reduced speed from 75mph to 44mph;
v possible accident reduction through the lower speed;
vi cost of delay and parliamentary time in overcoming the National Trust's objection;
vii with all the above there would be difficulty in establishing a 'cut-off' point of losers.
(d) i It ensures the national heritage is secured for the distant future;
ii it gives 'teeth' to its functions, ensuring that its objections receive adequate consideration before
being overruled.
(e) Applying a low social time preference rate of discount.
(f) There has to be a public enquiry at which they can put forward their views.

Chapter 18

1. (a) There has been up to a ten-fold increase in the demand for countryside activities.
(b) i An increase in leisure time;
ii A greater appreciation of the enjoyment to be derived from the countryside;
iii Rambling, etc. is a free good.
2. (a) It would indicate whether the government should spend more on conserving these resources.
(b) Because no charge is made, there is no money transaction involved. Thus any figure given would have
to be derived from 'shadow pricing'.
3. i Intensive agriculture;
ii urban development;
iii roadbuilding;
iv housebuilding;
v modern forestry practices, e.g. conifer planting;
vi mineral workings.
4. i A recognition that the rainforests need protecting;
ii more potential customers seek eco-friendly products;
iii competition between the retailers in view of (ii).
5. i To protect Icelandic interests in what is her main industry;
ii to conserve stocks through overall control.
6. To compensate for reduced net output in order to preserve the particular features of the Area.
168
 7. i Introduce a system of tradeable permits;
ii subsidise the decommissioning of ships surplus to long-term requirements.
8. (a) £210 000. (b) £190 000.
9. Recycle waste.
10. (a) Natural gas. (b) coal mines will close down because of the cost of reducing the high emissions of
coal-burning stations.
11. (a) To protect water supply from an excessive nitrate content.
(b) The water of some areas does not have excessive nitrates.
(c) It is easy to collect and the revenue raised could support conservation measures.
On the other hand, it has been estimated that a 50% tax will reduce the use of nitrate by only
10%.
12. (a) i The 'congester pays';
ii The toll could be adjusted to achieve the flow of traffic desired;
iii revenue raised could be used to subsidise bus services and commuter trains.
(b) i Administrative costs and difficulties;
ii the tax is regressive as regards the essential motorist or one who cannot charge the toll against
expenses.
13. (c).
14. (d) False. While CO2 and S02 emissions would be less, there is still an undetermined external cost of
disposing of nuclear waste or of irradiation through a possible leak.
Rest-true.
15. (a) A private action affecting a third party and which is not allowed for.
(b) i Full production costs are not allowed for;
ii consumers obtain the good at a lower price than if the full cost of resources used were paid.
(c) Impose a tax.
(d) Taxation provides an incentive to a firm to invest in pollution-reducing technology, whereas regula-
tion simply imposes a fixed norm.
(e) Yes. A tax could be levied according to clearly marked 'bands' on the consumer good. Resulting
lower sales would mean that the producer would take measures to move into a lower taxation band,
e.g. lead-free petrol.

Chapter 19

1. i Community goods are indivisible, e.g. defence, motorway lighting, and free-riders cannot be
excluded (non-excludable).
ii Collective goods are similarly indivisible, but charging would mean they are not fully used because
marginal cost is nil (non-rivalry), e.g. bridges, and so the State provides from taxation.
iii Merit goods, where external costs arise from inadequate consumption, e.g. vaccination, hospital
treatment, largely through inadequate income.
iv Project needs to embrace widespread externalities, e.g. urban renewal, or requires exceptionally
large initial cost, e.g. new town development.
2. (a) Because free-riders cannot be excluded.
(b) Street lighting, lighthouses, commons.
3. (a) Marginal cost is nil; administrative delays and disproportionate costs of collection.
(b) MC nil; difficulty of excluding free-riders.
4. (a) Officials exercising powers on behalf of the State are to some extent required to answer to
representatives of the people.
(b) Too detailed accountability could lead to a play for safety attitude.
5. (a) Minister in charge is responsible to Parliament.
(b) Treasury control.
6. So restrictive as to impede quick decision-making and bold financial policy.
169
 7. i Defence, justice, education;
ii foreign relations;
iii regulating the market economy, e.g. Department of Trade and Industry (monopolies).
8. Public accountability and economic efficiency.
9. Medical services; housing; education; libraries, waste disposal.
10. (a) The demand for education is an economic concept - how much people would be willing to buy at a
given price over a given period.
Needs is a social concept of how much education is desirable for people according to their age, ability,
etc.
(b) State education has to be financed from public funds, but how much should be spent depends upon
the policies (subjective views) of the party in power.
11. i Estimating the number of households requiring dwellings;
ii deciding on the standard of an adequate housing unit;
iii estimating the preferences of households as between houses and flats;
iv deciding the extent to which current houses should anticipate future standards;
v whether houses should be built by private enterprise or by the direct labour of local authorities.
12. (a) i Those who pay are those who benefit from the service;
ii encourages economy in use;
iii provides an indication of the level of investment which meets consumer's preferences.
(b) i Those on low incomes may not be able to afford an appropriate standard;
ii regressive in that it penalises families having many children of school age.
13. (a) Supply restricted by limited funds.
(b) i Waiting for non-urgent hospital treatment;
ii lower standards in the provision of school books, etc.
14. Telephones, electricity, gas.
15. Telephone: initial connection charge and quarterly fixed charge.
Railways: i price discrimination by charging 'what the traffic will bear, e.g. cheap excursion rates;
ii government subsidy, e.g. for electrification.
Electricity: fixed quarterly charge and unit consumption charge which varies with day or night consump-
tion.
16. (d).
17. All statements are true
18. (a) Demand is not related to the costs of provision.
(b) Demand is related to the price people are willing to pay.
(c) Unless everybody can afford expensive insurance, poor people would be denied expensive opera-
tions, surgical appliances, etc.
(d) Limiting supplies.

Chapter 20

1. Commission salesmen who also receive a basic wage; profit-sharing employees (e.g. John Lewis Part-
nership); bonus payments (e.g. ICI employees).
2. (a) Teachers, firemen, nurses; (b) envelope addressing, contract work in farming, window cleaning; (c)
car-assembly workers, building workers, salesmen.
3. All increase demand.
4. Inelastic.
(a) Few substitutes.
(b) Inelastic supply of substitutes-non-union electricians.
(c) Small fraction of cost of electricity.
(d) Inelastic demand for electricity.
170
 5. All decrease supply.
6. (a) Expands; workers substitute work for leisure.
(b) Contracts; income effect dominates the substitution effect.
(c) Remains the same; substitution effect exactly counterbalanced by income effect.
(d) Income effect dominates because labour's income has reached a point where, given the existing level
of prices, other goods are inferior to leisure.
7. (a) Wages in terms of money received.
(b) Wages in terms of their purchasing power of goods and services.
8. Chiefly the immobility of labour-for all the reasons given in the text.
9. (a) Subsidised council housing-workers must obtain similar accommodation.
(b) Controlled rents-ditto.
(c) General shortage of unfurnished accommodation at low rent.
(d) Difficult for owner-occupiers to sell in present market.
10. (a) Desire to stay with relatives, friends, etc.
(b) Doubts on ability to learn new job.
(c) Pleasantness of existing job, or unpleasantness of alternative job.
(d) Optimism over chances of success, e.g. artists, writers.
(e) Receipts in kind, e.g. housing, cheap coal, cheap travel, free milk, pension rights.
(f) Comparative regularity or lack of worry of existing job, e.g. Civil Servants.
(g) General pleasantness of a particular locality, e.g. South Coast.
(h) May be necessary to work at weekends or Bank holidays or at nights.
Note: (c)-(h) usually carry wage differentials to compensate.
11. Demand for skilled workers higher, because of higher MRP-they make a more vital contribution to
production.
Supply smaller-cost of training, inherent skill required, etc.
12. (b), (c), (d) and (e).
13. Demand for men higher-employers consider that MRP higher (whether logically or illogically makes no
difference); reasons:
(a) Less sickness.
(b) Better long-term prospect for training.
(c) Likely to stay longer.
(d) Many customers may prefer men.
(e) Probably better able to control staff.
Supply:
(a) Although overall supply of women is smaller than that of men, many occupations (e.g. heavy
industry, taxi driving, building) are virtually closed to women so that they have to crowd into the
fewer occupations that are open to them.
(b) Badly organised into trade unions compared with men.
(c) Fewer hours worked.
14. (a) Ignorance of other jobs which he could do and which are wanting labour.
(b) Difficulty of adapting himself to the expanding light industrial work.
(c) Bridging the period of training financially.
15. (a) Costs of moving.
(b) Difficulty of finding alternative accommodation, especially as his own house in a depressed area may
fetch little on the open market.
(c) Strong local ties, e.g. in South Wales.
(d) Family ties, especially in a closely-knit community.

16. Inducement to move is reduced from £4000 to £3000 by income tax. In addition there are the costs of
moving.
17. 1700.

171
18. 11. Men employed Me per man
6
300
7
340
8
380
9
420
10
480
11
500
12
19. (a) Leads to disputes when cost-of-living index is falling.
(b) Leads to the wages spiral-wage-push inflation.
20. Electricity generation
21. (a) Where there is monopsony, wage rate will be less than value of marginal product;
(b) It cannot be applied to the problem of general unemployment;
(c) Where there is unemployment, a rise in the MRP may lead to increased employment rather than a
rise in money wages;
(d) Where one employer bargains with a strong trade union, there is no determinate position for the
wage rate. The wage rate actually agreed upon will lie somewhere between the maximum the
employer is prepared to offer and the minimum the union is willing to accept.
22. (d).
23. (d).
24. (c).
25. (d).
26. (c).
27. All true.
28. (a) Would fail to take account of regional variations.
(b) i It would push up the pay of those already earning above the minimum rate as they sought to
preserve differentials;
ii higher wage rates would damage competitiveness and cost jobs.

Chapter 21

1. (a) £32 410. (b) £500.

2. Logically, yes, for all yield a series of satisfactions to their owners. Practically, there are difficulties;
should, for instance, a toothbrush be included? Hence we limit those included to owner-occupied houses.
3. (c), (d), (e), and (f), but there would be difficulties in estimating their value.
4. (a) Shop, till, bacon-slicer, stocks of goods.
(b) Farm buildings, plough, combine-harvester, fertiliser, seed.
(c) Cement-mixer, ladders, stocks of bricks, scaffolding, excavators.
5. Fixed capital is that capital which can be used many times, e.g. till, plough, cement-mixer. Working
capital is that capital which is used only once because it is embodied in the finished product, e.g. stocks of
consumer goods, fertiliser, seed, stocks of bricks.
6. Waiting, i.e. time.
7. Apple-tree growing; wine maturing.
8. Consumer goods or leisure have to be forgone while resources are devoted to the production of the
capital goods.
172
 9. (a) Airstrips after the war.
(b) Tin-mines in Cornwall.
(c) Cinema seats not repaired.
10. (a) Depreciation.
(b) Value of assets at the beginning of the period.
11. No; circumstances may change before future yields are obtained. For example, Robinson Crusoe may
discover a shallow pool where fish trap themselves, or the peasant farmer may suffer a complete crop
failure through the weather.
12. (d).
13. (b).
14. (b), (e)-false; rest true.
15. (a) Providing medium-term finance through leasing arrangements or hire purchase.
(b) i Greater confidence in the future released pent-up demand;
ii improved 1992 farm incomes;
iii lower interest rates;
iv better capital allowances;
v higher agricultural support prices resulting from the Green £ devaluation.
(c) The tax year ended on 5 April 1993 for many farmers.

Chapter 22

1. (a) Minerals, sunshine, rain, space.

(b) Capital usually has to be added to the 'natural element' to make use of land.
2. Yes; land-Nature, with capital, provides fish, power, and a waterway.
3. (a) It can be increased by the addition of capital, e.g. fertilising, irrigation, reclamation.
(b) It may be decreased by natural causes, e.g. flooding, erosion, volcanic eruption.
(c) It may be increased by technological discoveries, e.g. transport, shorter growing period for wheat.
4. (a) Bedouin farming in the Sahara.
(b) Grouse shooting on many Scottish moors.
(c) Reindeer farming in Lapland.
(d) Guano collecting from islands off Chile.
(e) Peat obtained from Irish bogland.
5. (a) Fall in rent. (b) and (c) rise in rent.
6. (a) £600. (b) £600. (c) £480. (d) £4520. (e) £3000.
7. Oxford Street (shops), City of London (offices), Park Lane (hotels), Harley Street (doctors), Leicester
Square (cinemas).
8. (a) BCE. (b) BOFE.
9. £5760 per week.
10. Elizabeth Taylor, Terry Wogan, Bob Hope, Cliff Richard, Ian Botham, Paul Gascoigne.
11. Yes; it results from restriction of supply. We can therefore speak of a 'rent of monopoly.'
12. Printers (limit entry); plumbers and electricians (five-year apprenticeship required).
13. (a) Property owners.
(b) Science lecturers.
(c) Caravan-site owners on South Coast.
14. Will not reduce output or supply of that factor. Difficulty in distinguishing how much of reward is rent and
how much is transfer price.
173
 Supply

D
T f - _ _ _ _---=::=.Iof..:.:
K

D,

a M
Oil demanded and supplied

15. Effect of tax is simply to reduce the rent received by the owner from OMNP to OMKT. Supply remains
unchanged at OM.
16. (d).
17. (c). (Note: with a, factor could still be in elastic supply.)
18. (d).
19. All true.
20. (a) Demand. (b) (i) Supply price; (ii) Economic rent.

Chapter 23

1. (a) Any insurable risk.

(b) One that can be reduced to a mathematical probability, e.g. factory may be burned down, a cargo
which has been paid for may be lost of sea, workers may suffer injury.
(c) One that is due to uncertainties of the market.
2. (b), (c), (d).
3. Yes; he bears uncertainty.
4. (a) Negative.
(b) His independence and way of life.
5. When it results from a contrived monopoly position, for then profit cannot set in motion the forces of
competition to increase supply, etc., or from employees being exploited.
6. Higher; entrepreneurs are less worried over the uncertainties of demand.
7. Yes; there is less uncertainty with a well-established industry.
8. (a) Will demand be equal to expectations?
(b) What kind of weather will prevail in the summer?
(c) Will competitors bring out a rival drink?
(d) Will an improved method of manufacturing be found?
(e) Will the government increase tax on soft drinks?
(f) Will incomes generally decrease?
9. (a) Oil prospecting; goldmining; ladies' fashion clothing; furniture; aircraft.
(b) Property; banking; sugar refining; flour milling; insurance.
10. (a) Penalises uncertainty-bearing, particularly ordinary shareholders.
(b) Hits those who bear high risks the hardest, but does not compensate for losses.
(c) Destroys the differential required to accept the high risks connected with innovation. It thus
discourages enterprise.
(d) Where profit is earned on patents, a reduction of the return may discourage invention.
(e) Reduces profits available for ploughing back to expand the industry.
(f) Inefficiency not fully penalised (some is borne by the Board of Inland Revenue through reduced tax
liability).
174
11. (c).
12. (d).
13. (c).
14. (d) and (f) False (monopoly profits remain as new firms by definition cannot enter industry). Rest true.
15. (a) i To reduce debt; ii to concentrate on its core activities.
(b) Management Buy-out (MBO).
(c) Candover Investments.
(d) Yes.
(e) i Consolidating on the one site at Stow market; ii re-equipping to produce improved models.
(f) i Rapid changes in the market place; ii two years of low rainfall reduced demand.
(g) Capital gains.
(h) Yes: profits moved from losses to profits in 1992.
(i) The Bank of Scotland.
(j) Yes.
(k) i Provides incentives; ii past experience indicates their ideas will prove successful; iii possibility of
capital gain through share appreciation.

Chapter 24

1. (a) Exchange: a medium of exchange; a measure of value and a standard of account.

(b) Asset: a store of wealth; a standard of deferred payment.
2. Yes; there would still be a generally acceptable means of payment. In the last resort, credit accounts,
credit cards, etc., are settled by cheque-the transfer of bank deposits.
3. Gold is the most liquid form of international payment, although sterling balances are normally of quite
high liquidity unless there is a risk of depreciation. Foreigners hold sterling balances because they earn
interest-some of which can be regarded as compensation for the risk of depreciation.
4. Perfect liquidity-it can be spent on anything immediately and without question.
5. The ability to turn wealth into any form without delay or loss.
6. The desire to hold assets in the form of money rather than in other goods.
7. Saving is income not spent. The demand for money is retaining assets saved in the form of money, i.e.
liquidity preference.
8. (a) Yes. (b) Liquidity. (c) Interest.
. assets held in liquid form . .
9. A person's liquidIty can be measured as . Both these are stocks; hence liqUIdIty is
total assets
a ratio of two stocks. But note that there will still be the usual connection between a stock and a flow. As a
man's income increases, he can usually add to his total assets and, as he does so, the proportion of those
assets which is liquid will probably vary.
10. (b), (g), (f), (c), (h), (e), (d), (a).
11. (a) £100. (b) £400.
12. It would double also.
13. 7 per cent.
14. (a) 7. (b) 2. (c) 5. (d) 6~. (e) 2. (f) 2i.
15. No. £960.
16. Cash, notes, bank deposits. Bank deposits. Because each has peculiar advantages of convenience: cash
for small transactions; notes for ease of carrying; bank deposits for safety from fire or theft or in post.
17. 'Near money' is any asset which cannot be reckoned as part of the money supply, but which can be
converted quickly and easily into money. Government bonds, Treasury Bills, commercial bills, postal
orders.
175
18. By affording a large measure of liquidity, it reduces the size of actual cash balances which have to be held.
19. 8 per cent.
20. The difference between the yield on equities and the higher yield on government bonds.
21. People bid up the price of equities because they have an 'inflation-hedge'.
22. (d).
23. (b).
24. (a).
25. (a), (d), (f)-false; rest true.
26. (a) Mo is increasing.
(b) It is an indication of possible recovery from the recession.
(c) Yearly rate of increase to 4.9 per cent exceeds his guideline of 4 per cent.
(d) Raising the rate of interest.
(e) People still have spare money holdings to spend so that they do not need to rely on credit.
(f) Uncertainty regarding the future.
(g) No.
(h) The more likely rise in the rate of interest would involve them in a capital loss (the speculative
motive).
(i) It has to cover a PSBR of £50 bn, preferably by non-bank borrowing.

Chapter 25

1. Discounting.
2. (a) The face value of the bill. (b) The period of time. (c) The current discount rate. (d) The estimate of
B's financial standing and reliability.
3. Arrange for the bill to be 'accepted' by a merchant bank, etc.
4. (a) £960 approx. (b) £986 approx.
5. (a) rise; (b) fall; (c) increase; (d) fall (less is now obtained for them compared with foreign financial
centres).
6. Tap; tender.
7. (a) Lend 'call money' to discount houses. (b) Bills of Exchange are held as part of 'liquid assets'.
(c) Discount some bills for customers.
8. Without such help, Discount Houses could not repay 'call money'. This would undermine the financial
system.
9. Institutions, as opposed to private persons, who have funds which are used for the purchase of bonds and
equities.
10. Factors who take over trade debts enable the original owners of such debts to become liquid much more
quickly.
11. (a) (i) Can borrow with 3-month certainty;
(ii) more funds available as lender can regain liquidity through market.
(b) (i) Higher rate of interest than on a bank deposit account;
(ii) can sell in market should cash be required.
12. (c).
13. (d).
14. True: (a), (b), (d), (f), (g); false: (c) seller receives sum less interest, (e) building societies also receive
mortgage repayments and can borrow on the open market.
15. (a) One-fifth.
(b) Yes: indirectly through pension funds and life assurance companies.
176
 (c) Privatisation issues.
(d) The switch to pension funds does mean a switch to safe, proven securities as opposed to the
nineteenth century when most shares were owned by individuals more willing to take risks.

Chapter 26

1. i Use of computer becomes economic; ii staff can be trained for highly specialised tasks, e.g. trustee
work; iii risks spread geographically. Decisions have to be referred to Head Office when loans
exceed a given size.
2. (a) Can be sent safely through the post; can be written for any amount; obviate taking around large sums
of money; form a record of payment; act as receipts.
(b) Permit credit creation where cheques are widely used.
3. Current; deposit.
4. £30.
5.

Cheque

6. (a) A bank deposit is generally acceptable in payment of a debt; hence it acts as money.
(b) If I pay a debt out of my agreed overdraft with my bank, the creditor receives payment, just as though
I had deposited cash there. It makes no difference that I have gone 'into the red.' Hence an overdraft
is money-it confers liquidity.
7. It could be argued that while current accounts are true money, deposit accounts are only near-money. In
practice, however, money in deposit accounts can be transferred to current accounts without giving 7
days' notice (interest is forfeited). Cheques can, therefore, be drawn immediately, and so there is little
real distinction between the two accounts.
8. £15000.
9. (a) +£24000; (b) -£16000.
10. (a) 15%.
(b) £1200 m.
II. (a) 10 per cent; (b) 30 per cent.
(c) Stage 1 Stage 2 Stage 3
Cash 100 } 300 160 } 360 120
Treasury Bills 200 200 240
Advances 700 700 840
Total deposits 1000 1060 1200

(d) 3~; (e) (i) 60; (ii) 20.

12. (a) Cash held; (b) demand for advances; (c) the policy of the other banks through the clearing associa-
tion; (d) The Bank of England's monetary policy.
13. (a) To the banks, it is almost as good as cash.
(b) A proportion matures each day.
(c) Credit creation is now based on liquid assets.
(d) Treasury Bills are under control of government.
177
14. To achieve security, profitability and liquidity, a bank:
(a) Requires collateral.
(b) Lends to different types of borrower.
(c) Lends for different periods.
15. Banks must maintain a given percentage of assets in liquid form. At the other extreme, advances earn the
highest rate of return. Consequently, investments are increased or decreased according to liquidity
requirements and the ease with which the banks can lend to the public. (Note the basic idea of the
conventional assets structure as a pull between profitability and liquidity.)
16. An asset is liquid to the extent that it can be turned into money (a) quickly, and (b) without loss.
Investments do not fulfil (b)-they may have to be sold when the market price has fallen.
17. (a) Funds lent to the Discount Market by the commercial banks at low rates of interest and capable of
being 'called back' very quickly, e.g. within the hour, by telephone.
(b) Asset. (c) Liability.
18. (b).
19. (d).
20. (c).
21. (c).
22. (a), (c)-true; rest false.
23. (a) i Lifting controls on foreign exchange, credit and money;
ii Encouragement of competition and innovation.
(b) Previously their markets for deposits loans were uncompetitive as regards price (the rate of interest)
by 'established convention'.
(c) They would have to observe the competitive rate for deposits from lenders and for borrowers.
(d) i Competed with building societies for retail deposits and mortgage lending, and with merchant
banks, etc. for other business (e.g. property development);
ii Used its customer base for extending other business, e.g. insurance and pension advice, Stock
Market dealing, estate agency, e.g. (Lloyds' Black Horse);
iii Charged customers for services previously performed free, e.g. safe custody, keeping accounts,
stopping cheques, exceeding overdraft limit.
(e) i Ancillary services charged for; ii interest paid on different deposit accounts.

Chapter 27

1. That institution through which a government operates its monetary policy.

2. To make it more easy or difficult to borrow money.
3. People borrow from the bank in order to spend. If borrowing increases, total spending will increase. This
will be desirable if there is unemployment. The opposite will apply if there is inflation.
4. (a) 90, 810, 900; (b) 120, 1080, 1200.
5. (a) Tight. (b) Easy.
6. No; banks cannot find borrowers (still pessimistic) or wish to increase their reserves because they are
uneasy.
7. No; they must contract credit.
8. No-provided total deposits were only £1000m and the cash ratio was 10 per cent.
9. (a) Contract. (b) Expand.
10. (a) Fall. (b) Rise.
11. Part of the National Debt is held by foreigners, e.g. some Treasury Bills. Higher interest rates have to be
paid on new bills.
178
12. (a) £155 600.
(b) Mostly during World Wars I and II.
(c) Interest payments are financed out of taxation. There is thus some redistribution of the national
income from tax payers to holders of the debt.
(d) No; most of the debt is held internally, though note Question 11 and that a PSBR adds to the
National Debt through the sale of bonds.
(e) i paying interest on outstanding debt;
ii redeeming old issues as they mature;
iii floating new issues, either to reduce old ones or to raise fresh finance;
iv handling the Treasury Bill issue;
v 'funding' the debt as necessary.
13. (a) Banks can be told the type of borrower to be refused loans. Hire-purchase relates mainly to consumer
durables, which, on the whole, are expensive items of expenditure. Thus such controls tend to apply
to certain items of expenditure. In addition, the authorities can vary hire-purchase controls between
different classes of goods, e.g. cars, furniture, TV sets.
(b) Banks dislike having to discriminate between one customer and another on grounds other than
credit-worthiness. Hire-purchase controls affect chiefly expensive durable consumer goods. Reduced
demand through fluctuations in government policy prevent manufacturers from growing steadily-
often at growth points in the economy where steady expansion would be most beneficial.
14. By funding the debt.
15. (a) Cash is now made available by the Bank of England in whatever quantity is required for transactions,
and not to control liquidity.
(b) Joint-stock banks create credit largely on the basis of their holding of Treasury Bills.
(c) Government finds it difficult to decrease its overall borrowing.
16. (a) Adds to cost of government borrowing.
(b) Raises the long-term rate of interest.
(c) Joint-stock banks may be holding liquid assets (mostly Treasury Bills) above any stipulated require-
ment.
17. A lower liquidity ratio.
18. (a).
19. (b).
20. (b).
21. (a) (d) (f) (g)-true; rest false.
22. (a) Interest rate and repayment of capital is guaranteed by the government (originally, 'as good as gold').
(b) To part-finance PSBR.
(c) All sold at market clearing price (which could be more or less than £100).
(d) To make the offer more attractive, giving time for an orderly assembly of funds.
(e) Insurance companies, pension funds, overseas institutions, etc.
(f) Twenty years.
(g) No. They prefer short-dated securities.
(h) It would be higher as it could mean a possible fall in the UK rate of interest.

Chapter 28

1. (a) +capital consumption (or depreciation).

(b) +net property income from abroad.
(c) +indirect taxes-subsidies.
2. (b) = (c) - (a).
3. Gross investment = net investment + depreciation.
4. (a) £45 m. (b) £25 m.
5. (a), (b), (e), (f), (i), (j).
179
 6. (a) £25 000 m;. (b £23 000 m.
7. (a) £2350 m. (b) £2150 m.
8. (a) £28 500 m. (b) £25 000. (c) £23 000 m.
9. £17200 m.
10. (c), (e), (g) are excluded; (a), (b), (d), (f) are consumption spending; (i), (j) are investment spending;
(h), (k) are government spending.
11. (a) 35%. (b) 20%. (c) £1000; £1125.
(d) GNP per head increased because the rate of growth of GNP exceeded the rate of growth of
population.
12. (a) 108. (b) £25000 m. (c) 25% real as opposed to 35% money increase. (d) Risen; GNP per head in real
terms rises from £1000 to £1042. (e) £29 160 m.
13. The consumer goods and services enjoyed per head of the population over a given period, allowing for
the amount of leisure.
14. (a) Reduced investment. (b) Running down capital. (c) Paying for imports by foreign loans.
15. 1978-88; national income increased by £5000 m. in 1968-78, and by £10 000 m in 1978-88. But £1000
extra on investment and defence expenditure will tend to reduce extra consumption to £9000. In real
terms, period 1978-88 had a smaller percentage rise in prices, but this was partly offset by the fact that
average weekly hours did not fall (as they did in 1968-78). 1978-88 also had a smaller percentage
increase in population.
16. (a) Different currencies.
(b) Different tastes and needs.
(c) Larger proportion engaged in subsistence agriculture in India.
(d) Differences in hours worked.
(e) Fewer goods exchanged against money in India.
(f) Tax coverage less complete in India, thereby giving less reliable statistics.
17. (a) Labour
i People work harder or longer hours.
ii Greater proportion of population works.
iii Increased skill.
iv Less time lost through strikes or illness.
(b) Land
i Discovery of mineral deposits.
ii Weather particularly favourable for agriculture or building.
(c) Capital
Additional capital used.
(d) Organisation
i Improved combination of factors.
ii Improved siting of production.
iii Improved deployment of labour through work study.
iv Improved mobility of factors.
(e) Foreign trade
i Increase in income earned by foreign investments.
ii Improvement in terms of trade.
iii Increase in foreign aid.
18. (c).
19. (d).
20. (a), (d), (e)-true; (b), (c) false.
21. (a) GNP covers only measurable wealth, not welfare.
(b) Increase in crime and homelessness; loss of environmental beauty, e.g. meadow land, ancient
woodland, hedges.

180
Chapter 29

1. (a) Skill deteriorates. (b) Psychological effect of not being able to work.
2. 10.5 per cent.
3. (a) Unemployables. (b) People merely wishing to change jobs. (c) Workers discharged when a project is
completed. (d) Factory re-organization.
4. Building; holiday camps; ice-cream salesmen; temporary postmen for Christmas.
5. (a) A regular labour force working overtime in rush periods.
(b) Irregular employees, e.g. students, in rush periods.
(c) Complementary jobs, e.g. boarding-house domestics - shop assistants.
6. (a) Decline in shipbuilding through competition from foreign yards.
(b) Decline in demand for Lancashire cotton cloth.
(c) Decline in demand for ships and coal.
(d) Decline in demand for coal.
7. Structural.
8. (a) Shipbuilding; coal.
(b) Cars to USA, 1980; car components to Germany, 1993.
(c) Cottons (India, Argentina); steel (India).
(d) Japan (cottons, ships); West Germany (ships).
9. (a) Hats going out of fashion.
(b) Competition from Japanese, Swedish, and German shipyards.
(c) Railway redundancy through road-transport competition.
(d) Cotton replaced by man-made fibres.
10. (a) Textile machinery displacing labour leading to Luddites breaking machines 1811-1816.
(b) Oil replacing coal.
(c) Effect of Malayan tin-mines on Cornish mineworkers.
11. (d).
12. (a) False-unemployment varies considerably between areas and industries.
(b) and (c) True.
(d) False-more perfect labour markets would reduce unemployment, but the overall level of unemploy-
ment is affected by the level of aggregate demand.
(e) False-it is aimed at unemployment due to frictions.
(f) True.
13. (a) £3400.
(b) An increase.
(c) Cyclical.
(d) Extra staff required by the Department of Employment and the Department of Health and Social
Security.
(e) Expenditure taxes; corporation tax; income tax.
(f) An increase in debt interest payments resulting from higher borrowing to cover the higher PSBR.

Chapter 30

1. The link between spending and production

1. AD is the total expenditure on consumer goods and investment over a given period, including govern-
ment spending.
2. AD
Q
« Full
: employment

o Employment
181
 3. (a) i Stocks of finished goods are depleted;
ii Additional investment and employment to increase production.
(b) i Stocks of finished goods accumulate;
ii Investment and employment cut back.

II. Reasons for changes in Aggregate Demand.

4. (a) Increase in investment, saving unchanged.

Decrease in saving, investment unchanged.
(b) Decrease in investment, saving unchanged.
Increase in saving, investment unchanged.
5. Decrease in AD.
6. When the money is 'hoarded,' that is, not borrowed by firms for investment.
7. (a) When spent on imports. (b) When there is full employment. (c) When existing machinery can cope
with the increased production without additional labour.

III. Consumption spending and saving

8. Consumption is spending on consumer goods.

9. Saving is income less consumption.
10. Company; government.
11. Superannuation, insurance, and mortgage payments.
12. (a) £15000; (b) £5000.
13. (a) Increase taxation. (b) Decrease welfare payments. (c) Harden hire-purchase terms.
14. (a) Raise rate of interest. (b) Give tax relief on interest earned. (c) Provide facilities, e.g. Premium
Bonds. (d) Stabilise value of money.
15.
(a) (b) (c) c
9 c 9 c 9c:
c: c:
.g .~ .g 0
0. 0.0
E
:;,
E E 0
:;, N
:;,
CI) CI) CI)
c: c: c:
8 8 8
0 0 0
2000
Income (£) Income (£) Income (£)

16. (a) False-the marginal propensity to consume is constant (slope of consumption curve is constant).
(b) and (c) True.
(d) False-There is negative saving at low income.
(e) False-The proportion falls as income expands.
(f) and (g) True.
17. 0.1.
18. (a) Rise. (b) Lower. (c) Raise, increase.
19. (a) The average propensity to save is the value of savings out of a given income divided by that income;
i.e. S
y
(b) The marginal propensity to save is the addition to saving out of a given addition to income, divided by
that addition to income, i.e. !J.S
!J.Y
(c) The volume of savings is the amount actually saved out of income in £.
182
20. (a) To plough back, i.e. investment; (b) for liquid reserves, usually to safeguard future dividend rate.
21. (a) Budget surplus.
(b) Public corporations retaining profits for investment.
(c) Local authority budget surplus.
22. (a) Redistribute income in favour of lower incomes by taxation.
(b) Increase welfare payments.
(c) Easier hire-purchase terms.

IV. Investment spending and the accelerator

23. Spending on the production of new capital goods or on additions to stocks.

24. (a) A firm which retains some of its profits to expand its factory.
(b) A farmer who ends the year with more hay than he started with.
25. The economist refers only to the purchase of real, new investment goods. The man in the street includes
any asset which yields him a return, although it may represent only the entitlement to an old asset or
government debt.
26. (b), (d), (f), (h), (i), (j).
27. (a) Buoyant current demand.
(b) Expectation of future price rises.
(c) Fall in the rate of interest.
(d) Government subsidy (e.g. farmers) or tax allowance (e.g. depressed areas).
(e) Possibility of government restrictions on building or on the import of raw materials in the future.

28. (a) 11 per cent-We have 200 = 1222 ,therefore 200r = 22. if r = 11 per cent. (b) Yes.
+r
29. (a) Saving habits fairly stable, depending largely on income.
(b) Investment depends on volatile expectations of entrepreneurs.
30. (a) Give investment tax allowances.
(b) Lower the rate of interest.
(c) Subsidise investment.
(d) Increase its own investment.
31. (a) 100. (b) 80. (c) 80%. (d) 480000.
32. (a) 80. (b) 80. (c) 100%. (d) 480000.
33. (a) Changes in the rate of consumption have a magnified effect on investment.
(b) Swings in the level of production are greater in the producer-goods industries.
(c) The swing will be greater the longer the life of a machine.
(d) One change in the level of consumption can lead to cyclical fluctuations in the level of income in the
future.

V. Equilibrium through changes in the level of income

34. (a) 800, 200, 200.

(b) 400.
(c) (i) £1200; (ii) £960; (iii) £240; (iv) No; investment exceeds saving.
(d) £1360, £1088, £272.
(e) £2000, £1600, £400, £400.
(f) Saving equals investment.
35. (a) (i) 2400; (ii) 1800; (iii) 600.
(b) (i) 2800; (ii) 2100; (iii) 700.
(c) (i) 2200; (ii) 1650; (iii) 550.
(d) (i) 2000; (ii) 1400; (iii) 600.
(e) (i) 6000; (ii) 5400; (iii) 600.
36. (a) £100 m. (b) £200 m. (c) £40 m.
183
37. The expansion/contraction of AD.
38. No, both are subject to the multiplier.

VI. The effect of changes in consumption

39. (a), (b), (g), (h)-C; rest Cl"

40. £500 m.

VII. Government spending and taxation

41. £1000 m.
42. (a) Y = AD = C + I +G
- T) + 50 + 30
= ~ (Y
= ~ (Y - ~Y) + 50 + 30
= ~ Y - ~ Y + 50 + 30
~Y = 50 + 30
Y = 200.
(b) T = ~Y = 50, therefore budget surplus of 20.

VIII. The effect of foreign trade

43. (a) Y =C+I +X - M

= fa Y + 10 + 10 - ~ C
= fa Y + 10 + 10 - fa Y
fa Y = 20
Y = 100.
(b) 10.
(c) Yes.
(d) 125.
(e) Imports increase to 12.5, thus producing a balance-of-payments deficit of 2.5.

IX. Demand management

44. The government can:

(a) Plan and collect statistics.
(b) Adjust its own spending.
(c) Eliminate uncertainty by commitment.
45. (a) Neglected rising AS curve and the price level as full employment approached.
(b) Did not recognise the direct impact of increased money supply on AD.
(c) Underplayed the consequences of a large PSBR.
(d) Ignored Balanced-of-Payments difficulties when income buoyant.
(e) Theory of rate of interest glossed over influences other than 'speculation'.
46. (d).
47. (b).
48. (d).
49. All true, except (g).
50. (a) The models did not take sufficient account of people's desire to rebuild their liquid wealth. Between
1988 and 92, saving as a percentage of Personal Disposable Income rose from 5.6 to 11.
(b) i A large part of spending in the 1980s was financed by borrowing, e.g. for house purchase.
Mortgage repayments rose with higher interest rate.
ii House prices fell, sometimes below the outstanding mortgage ('negative equity').
iii Unemployment reduced incomes, and confidence in the future. People would not take on more
debt for spending.
(c) AD did not increase.

184
 (d) The housing market will not revive until recovery prospects are better. But recovery depends on the
housing market - a vicious circle!
(e) An international upturn.

Chapter 31

1. Other objectives have to be taken into consideration and cannot always be relaxed any further.
2. (a) The rate of inflation eventually gathered momentum.
(b) High AD led to an uncomfortable balance of payments deficit.
3. In Fig. 30.9 the level of output is related solely to AD. In 31.1 a given AD is related to the price level
through the introduction of the AS curve.
4. i C increases the higher real value of cash balances;
ii C and I increase as the rate of interest falls (lower transactions demand for money);
iii (X - M) improved.
5. It leads to falling AD in foreign countries and thus to unemployment there.
6. i Diminishing returns;
ii bottlenecks;
iii accelerating wage increases.
7. Fiscal policy covers budgeting measures; monetary policy varies the money supply through the rate of
interest or the control of liquidity.
8. (a) Income tax.
(b) VAT.
(c) corporation tax.
(d) Unemployment insurance benefit.
(e) Maintenance of dividends from retained profits by companies in depression, and non-distribution of
some profits in boom.
9. (a) Adjusting individual taxes.
(b) Public works spending.
(c) Increase in transfer incomes.
(d) Reduction of taxation.
10. (a) Reduce income tax to stimulate consumption.
(b) Reduce indirect taxes especially on goods bought by lower income groups.
(c) Increase allowances for children in income tax.
(d) Increase investment allowances for tax purposes, especially for new investment.
11. (a) i Ensures investment spending.
ii Investment improves future living standards.
iii Can be concentrated where unemployment is heaviest.
(b) i Takes time to prepare, etc.
ii Projects tend to be delayed for a possible slump period.
iii May simply tend to offset changes in the structure of industry brought about by fundamental
long-term economic changes.
iv May lead to an uncomfortable increase in the PSBR.
12. Raising funds may involve i a higher rate of interest or, ii providing the banks with more liquidity enabling
them to expand credit.
13. i C and I respond to interest changes;
ii can be applied quickly;
iii boosted by psychological impact.
14. i May need a high rate of interest to reduce C and I;
ii non-discriminatory;
iii an outflow of short-term capital if rate falls below general world rates.

185
15. 'Adaptive expectations' are based on past experience; 'rational expectations' are based on all relevant
information - past experience, current statistics, an assessment of the effects of actual or proposed
government measures - so that wage adjustments are immediate.
16. (a) Minimum wage regulations removed; privatisation policy; introducing competition into natural
monopolies; reducing trade union power to strike.
(b) Reduced National Insurance contributions; improved training and mobility of labour; flexible work-
ing hours, Assisted Area subsidies; advisory services.
(c) Reduced income and corporation taxes; start-up schemes; profit-related pay.
17. (a).
18. (c).
19. (a) false; (b) and (c) true.
20. (a) i Forecasters may have more up-to-date facts (e.g. from a recent survey) than those built into the
model.
ii Models are based on past experience, but an equation which fits the past may start to under- or
over-predict as time goes by.
iii We cannot be certain as to how people will react to a given change, e.g. their expectations about
the future can have a major effect on the decisions they make now.
(b) Consumer spending e.g. on housing, did not respond to falls in the rate of interest.

Chapter 32

1. 50 per cent.
2. 1983-5p in the pound; 1993-2p in the pound.
3. The yield from the asset is likely to rise in money terms with inflation.
4. (a) Real property e.g. shops; ordinary shares; antiques.
(b) Fixed interest bonds; building society deposits. But: to some extent a higher rate of interest
compensates.
5. (a) Makes profits easy to earn and minimises risk of loss.
(b) The economy is unstable through 'stop-go' policy.
6. People refuse to hold money, rushing to spend it before further price rises occur.
7. Publishers will not bind themselves to a given price when printing as during the life of a book it may have
to be amended through an updated price list to keep pace with inflation.
8. (a) Worsen; as exports lose competitiveness and imports gain competitiveness over home-produced
goods.
(b) Short-term capital moves out as inflation can lead to depreciation/devaluation of currency.
9. (a) Base year. (b) Basket. (c) Weights.
10. 132.
11. (d).
12. (c).
13. (b).
14. (c).
15. (a), (c), (d), (e) (f)-true; (b) false.
16. (a) i It distorts the market economy;
ii it creates uncertainty.
(b) By masking changes in relative prices.
(c) If firms are unsure about future inflation, they fear a possible rise in real interest rates. They are thus
less willing to take risks and invest in long-term projects.

186
Chapter 33

1. (a) The increased supply of money is matched by an increased demand for money.
(b) Unemployed resources are set to work so that the extra supply of money is matched by an increased
supply of goods.
2. (a) Reduced supply of consumer goods, e.g. through war, strikes, weather.
(b) Decrease in demand for money (i.e. increase in V).
(c) Higher costs, through import prices rising or wage increases without corresponding increase in
productivity.
3. When the community has an AD greater than its full-employment output valued at current prices.
4. (a) Increase in consumption.
(b) Increase in investment.
(c) Increase in government spending.
5. (a) Higher money wages, without increase in productivity.
(b) Higher import prices.
(c) Firms raise prices to improve profit margins.
6. (a) Bottlenecks in supply of factors, especially skilled labour.
(b) Trade unions in strong bargaining position.
(c) Less efficient labour taken on.
(d) High labour turnover.
7. A voluntary wages restraint agreement.
8. (a) The government must take steps to reduce AD.
(b) It is inappropriate to reduce AD if there is a cost-push inflation. This would simply result in
unemployment and a reduced rate of growth, while not tackling the real cause of the inflation. (A
severe deflationary policy might stop a wage inflation, but the social costs of the high unemployment
required and the economic costs of wasted output make this an inefficient method.)
The government must therefore analyse the causes of the cost-push. Is it a wage-inflation? Or is it
due to higher import prices? Or to both? A prices and incomes policy has its rationale in trying to cure
a wage-inflation without having to deflate unnecessarily, but is only effective temporarily.
9. It must operate on Cor G. However it must be careful not to affect business confidence adversely by
reducing C, or this may lead once again to a fall in f.
10. (a) Control volume of imports by quota system, the effectiveness of which would depend upon how
essential the imports are. Alternatively, or in addition, it could try to lower industrial costs to offset
the higher import costs, e.g. by 'supply-side' measures.
(b) Devaluation will cause import prices to rise-the original cause of the inflation. The government
would therefore be advised either: (i) to choose another method, e.g. import controls; or (ii) couple
the devaluation with intensive attempts to increase productivity.
11. (a) Does nothing to remove the causes of inflation.
(b) Produces static conditions.
(c) May have to be reinforced by rationing.
12. Demand-pull can lead to cost-push because, as prices rise, workers try to obtain wage increases to
compensate for rises in the cost of living. Pure cost-push, however, does not generate demand-pull
because the rise in wages (say) is immediately cancelled out as the employer raises prices of his goods to
the consumer.
13. AD is the initial position of aggregate demand, and equilibrium output is Y and the price level P. AD is
now increas~d to AD j and the price level rises to Pj' Trade unions win a compensatory wage increase,
thereby movmg the AS curve to AS and the price level to P2 • This could increase AD (depending on any
j

resulting unemployment), and so the process continues.

Expectations of a future higher rate of inflation explain why the rate of inflation gathers momentum.
14. The rate of inflation to the rate of unemployment.
15. Where increasing unemployment is accompanied by an increasing rate of inflation.

187
16. Wage demands are adjusted to an expected future higher rate of inflation.
17. Whereas Keynes considered that the demand for money adjusted to an increase in its supply by being
held in 'idle' balances (speculative motive), Friedman considers people have a fairly stable demand for
money balances so that any increase tends to be spent on goods and services.
18. With Keynes the impact of an increase in the supply of money is on the bond market, and any effect on
prices generally is indirect through the resulting fall in the rate of interest, which increases aggregate
demand. With Friedman the impact is more direct, the extra money finding its way on to the goods and
services market.
19. (a) People spend cash balances surplus to their requirements.
(b) Expectations of higher future prices reduce saving.
20. (a) The rate to which unemployment will tend given the current real wage rate.
(b) The real wage rate is higher than that which would clear the labour market when the rest of the
economy is in equilibrium. This is because trade unions have obtained a wage increase which exceeds
the current rate of inflation.
(c) i It must convince wage bargainers that the future rate of inflation will not increase-and prove this in
practice.
ii More emphasis must be placed on supply-side measures.
21. (a).
22. (a).
23. (c).
24. (d).
25. (b) and (c) true. Notes on others:
(a) A theory cannot be held to be valid on the basis of one piece of evidence. There does, however,
appear to be support for the Quantity Theory over long periods of time like this.
(d) Prices usually start to rise before, e.g. through bottlenecks, less efficient factors, etc.
(e) The law of diminishing returns expresses a technical relationship between marginal output and
variable factors of production. Inflation is primarily a relationship between AD and total output.
(g) Government expenditure is not necessarily inflationary; there may be unemployment, or the govern-
ment may increase taxation to compensate, or private saving may increase.
26. (a) Exports should expand, but these goods are sold on the foreign market; the price of imports rises.
(b) Should increase the demand for credit for spending. Only good for stimulating the economy in the
short-term.
(c) Borrowing from the banks could increase their liquidity and thus their ability to expand credit.

Chapter 34

1. 3-4 per cent.

2. (a) Redistribution of consumption towards goods having a high income elasticity of demand.
(b) Proportion of income saved likely to increase.
3. Widening: employing more, but similar capital equipment. Deepening: increasing the proportion of
capital to other factors.
4. The internal combustion engine, air transport, microelectronics, computers.
5. UK: improvement in the terms of trade in 1981 with the high price of North Sea oil exports. Saudi Arabia:
fall in the world oil price in 1986.
6. (a) Greater pollution, noise and congestion.
(b) Destruction of aesthetic beauty.
7. (d).
8. (b).
9. (c).
188
10. (c).
11. (a) false; rest true.
12. (a) A high level of spending on: i research and development; ii technologically advanced capital
equipment; iii education and training of management and the workforce.
(b) Innovation should be converted into competitive marketable products.
(c) R&D could be switched to civil projects.
(d) Manufacturing processes tend to be based on low level skills, limiting the need to train further, and
so on.

Chapter 35

1. (a) Fall in demand for good A means lower price OPI' Therefore supply contracts to OM I (Figure i).

5
!!!
p I--~----:~ ~ W I---"<---~
(ii)
(i) Q,
Pl f-----i~
~ Wll---::~
s: D

o Ml M o Nl N
Labourers

There is thus less demand for labour producing good A. Demand for labour falls from D to DI and
wages fall to OWl (Figure ii).
If national income is maintained, demand for goods elsewhere should have risen-with the reverse
effects. Higher wages there should attract labour from industry producing good A where wages have
fallen.
(b) High unemployment should produce lower wage-rates (e.g. Figure ii). Shortage of labour should
produce higher wage-rates. In time industry should move from areas of high wage-rates to areas of
low wage-rates in order to lower costs of production.
(c) (i) Labour immobility; (ii) wage-rates 'sticky' downwards.
2. (a) Avoids forcing workers to leave areas to which they are attached.
(b) Stimulates_ the activity rate by helping immobile older workers and married women.
(c) Relieves congestion and inflationary pressure in South-east England.
(d) Prevents loss of social capital through depopulation.
(e) Reduces the adverse multiplier effect resulting from falling expenditure in the depressed area.
3. Department of Health and Social Security has been located in Newcastle, branches of the Inland Revenue
have been moved to Wales and the administration of the Department of Employment to Sheffield.
4. All are in Assisted Areas.
5. (a) High income elasticity of demand to ensure increasing demand as income grows, e.g. washing-
machines.
(b) i High labour content, e.g. cars.
ii Light raw materials which are not lost in course of production, e.g. electrical and electronics
equipment.
iii Flow method of production, where semi-skilled labour can be used, e.g. cars.
6. (a) 100. (b) 10. (c) Yes. (d) 125. (e) M = 12.5, X = 10.
7. Firm will seek most advantageous location in terms of 'profit'.
It will therefore have to compare:
(a) Transport costs of obtaining materials.
(b) Transport costs of distributing products, or contacting customers.
(c) Advantages of being associated with similar firms or suppliers.
(d) Rent costs and suitability of site.
(e) Wage costs and availability of type of labour required.
(f) Amenities of district, physical and cultural, particularly from viewpoint of attracting and holding
key managers.
189
 (a) A private consultant would prepare detailed figures as far as possible, orientated with regard to profit.
But he would also mention other aspects, e.g. employee contentment regarding the new area.
(b) The government official would be concerned with attracting growth firms to a depressed area. In
dealing with the firm, he would have to cover the same points as the private consultant, but he could
stress certain aspects based on his experience of other firms in the Development Area, e.g. drawing
attention to the special amenities of the area, the availability of labour, the lack of traffic congestion
etc.
The official would have three advantages over the private consultant. (1) The government would in
fact be 'internalising externalities', and so the official could show how the area's advantages for the
firm could grow, e.g. as it attracted similar and ancillary firms, improvement in the infrastructure as
prosperity returned, and so forth. (2) He could speak for the government's long-term plans, again
convincing the firm that it would be moving to a prosperous region, where labour supply could be
guaranteed through retraining schemes, and where communications would be improved. (3) He
could estimate 'feedbacks' through the 'multiplier' on the particular region and other regions.
8. (d) (ii) and (iii) are not acceptable, as costs may be higher through loss of the advantages of localisation
elsewhere, while where there is only one industry in a district workers are usually in a comparatively
weak bargaining position.
9. (b).
10. (a) False-immobility of labour seriously reduces such movement.
(b), (c), (d), (e), (f), (g), (h)-True.
11. (a) Operational considerations had to be given due weight in assessing net benefits.
(b) i Departmental work had accumulated there;
ii High costs there: office rents, 'London allowance' for workforce.
(c) i Geographical spread;
ii Most are in Assisted Areas.
(d) Through the regional multiplier.
(e) i Essential experienced and managerial staff would require generous relocation compensation
terms;
ii Relief of unemployment in depressed areas.
(f) i Reduced Departmental expenditure on accommodation;
ii Easier recruitment;
iii Improved overall efficiency;
iv Staff enjoy cheaper housing, more comfortable transport, higher standards of amenity and quality
of life;
v Regional multiplier effect on jobs.

Chapter 36

1. Two-fifths.
2. The size of the 'cake' is limited; if the government takes more, less is left for private consumption. In the
last resort there is a political sanction at the polls.
3. (a) 10 per cent. (b) 43 per cent. (c) 13 per cent. (d) 9 per cent.
4. (a) Print notes. (b) Borrow by selling bonds. (c) Raise revenue by taxation. (d) Charge for goods and
services.
5. Taxation system is built up of a variety of taxes. Because they have different attributes and defects.
6. A specific tax is a fiat-rate tax; an ad valorem tax is a given proportion of the value of a good.
7. (a) Proportional. (b) Progressive. (c) Regressive.
8. Regressive.
9. VAT is not paid on food and rent, upon which poorer people spend a larger proportion of their income.
But VAT on domestic fuel from 1994 will have a regressive element.
10. Tobacco, alcohol, motoring.
190
11. (a) Income tax.
(b) Petrol duty.
(c) P.A.Y.E. income tax.
(d) Progressive income tax.
(e) Inheritance tax on death.
(f) Council Tax
(g) Progressive income tax rates on higher incomes.
12. (a) High yield; can be made progressive.
(b) Possible disincentive; encourage avoidance and non-taxable benefits.
13. (a) Certain; adjustable to specific policy.
(b) Regressive; may dislocate industry.
14. People get used to a tax. Tax should not be frequently tampered with.
15. Unless people are dis-saving by spending out of capital, it will merely fall on past saving instead of
enforcing present saving out of income.
16. (b) 0,0,0,5,9, 12; (c) 5, 9, 12, 14, 15.
17. (a) 6p. (b) 7p. (c) 1p child, 2p producer. (d) Demand. (e) 70000. (f) £2100. (g) 5p, 110000; £3300.
18. (a) Consumer. (b) Producer.
19. (b).
20. (a).
21. (b).
22. All true except (d).
23. (a) £50 bn.
(b) 8.
(c) To avoid the inflationary effects of short-term bank lending, it has to be funded by offering a higher
long-term rate of interest.
(d) To avoid stifling the 'green shoots' of recovery from the 1990-3 recession.
(e) Tax allowances, pensions, etc. are raised in line with the current rate of inflation.
(f) Income tax.
(g) Inelastic demand.
(h) Tobacco: health; fuel: reduction of carbon dioxide emissions.
(i) Regressive, especially for older people, though some compensating income increases can be given,
e.g. through social security payments.

Chapter 37

1. (a) Wine, meat, paper, timber, dairy produce.

(b) Whisky, power generating machinery, pharmaceuticals, cigarettes, Hawker Harrier aeroplanes,
china clay, oil.
2. (a) Skilled labour, capital, coal, highly trained professional people, oil.
(b) Unskilled labour, land, tropical climate.
3. (a) Exports of manufactured goods, services, oil and pharmaceuticals. Imports of tropical products, basic
materials, foodstuffs, minerals, cheap and semi-manufactured goods.
(b) Exports to developed countries 81 per cent, primary-good producers, and those countries short of oil.
Imports from foodstuff and basic material producers (e.g. Australia, New Zealand), tropical coun-
tries (India, West Africa), Japan, Hong Kong, Taiwan and developed countries (84 per cent),
particularly the EC.
4. (a) Increased UK production.
(b) Smaller proportion of increasing income spent on food.
5. (a) Longer distances usually involved.
(b) Immobility of labour.
191
 (c) Immobility of capital.
(d) Currencies have to be changed.
(e) Subject to government control.
(f) Involves crossing frontiers.
(g) Internal trade more certain.
(h) Account has to be taken of differences in languages, customs, tastes, weights and measures, etc.
(i) Transport costs and difficulties.
6. (a) Language difficulties.
(b) Different customs.
(c) Cost of travelling greater.
(d) Government policies restricting immigration.
(e) Trade union barriers.
7. The law of comparative cost should apply.
8. Other land has greater relative advantage in other uses.
9. Total production with specialisation: 2000 small cars, 1400 large cars possessed by UK and USA
respectively.
USA exchanges 700 large cars for 1400 small cars; therefore, gains 200 small cars by specialisation.
UK has 600 small cars left and 700 by exchange. She therefore has 1300 cars instead of 1100, and 600 of
these are large cars (instead of only 100 previously).
10. (a) Demand for and price of large cars will rise.
(b) i Improve.
ii Deteriorate.
iii Higher.
iv Lower.
11. (a) 95. (b) 110.
12. (a) Countries which have lost relatively may not be able to afford her exports.
(b) If the improvement is only temporary, there will be a loss of income when conditions return to
normal.
(c) If the improvement has occurred in a developed country, underdeveloped countries may have lost
and extra aid may have to be given as a result.
(d) A fall in output, e.g. through the exhaustion of a mineral, may lead to a higher world price, but less
home income, depending on the elasticity of demand.
(e) Invisible income may be less as foreign countries' spending at home falls.
13. (i) (b), (e), (f); (ii) (a), (c), (d), assuming the UK is a major exporter of small cars.
14.
(a) (b)
p p

S1

o q q

15. A customs duty is a tax placed on imported goods, while similar home goods are untaxed. An excise duty
is imposed on home goods and imported goods alike. Thus a customs duty tends to be protective in
nature, while an excise duty is a revenue duty.
16. A quota prevents more than a limited amount, e.g. 1000 tons of a good, from being imported. The
government therefore knows the precise effect on domestic producers who may be affected by the import.
For example, it may allow in so many tons of wheat, and design its agricultural policy so that the
192
 remainder of the economy's demand is satisfied by home farmers. If the quota is fixed in value, it can
estimate accurately the cost in foreign exchange.
The main arguments against quotas are: (i) they interfere with consumer sovereignty, since people
cannot purchase the good at all once the quota has been reached, whereas if a tariff is imposed, those who
wish to pay the higher price and can afford to do so, can still buy the good; (ii) by the same reasoning,
quotas tend to distort the pattern of international trade to a greater extent; (iii) other countries retaliate.
17. (a) If Taiwan is seeking a monopoly which she can subsequently exploit.
ii If it will seriously injure the British industry because workers cannot move elsewhere and the
adjustment of supply by contraction takes time.
(b) Undermines comparative costs and reduces the standard of living of the community.
11 Lower price may be due to better capital equipment or organisation rather than cheaper labour.
iii The way to raise Taiwanese wages is to encourage exports.
iv May be necessary to give aid if trade denied.
v It will reduce Taiwan's ability to buy British exports.
VI May lead to retaliation.
vii Britain may lose markets for her own transistors because Taiwan is forced to compete there.
18. (a) Advantages of trade are lost, and community's standard of living reduced.
(b) Many of gains claimed are very doubtful, often ignoring economic analysis.
(c) Protection, by creating a vested interest, is not easily reversed.
19. Americans obtain £1600 less for a car. Here two-thirds of the tax is paid by the American exporter. The
British pay only £800 more, though fewer cars would be bought. The British government receives £2400
on each car sold, which can be used for home spending.
20. They are world-wide and multilateral in their operation.
21. (b).
22. (b).
23. (a), (b), (c) false; rest-true.
24. (a) i It accounts for one-fifth of all economic activity;
ii Has shown an annual growth rate of over 20 per cent;
iii Provides one-half of invisible earnings.
(b) Any fall in demand has a major impact on the economy.
(c) i Sunny, warm climate;
ii Competitive prices;
iii Modern hotels.
(d) Agricultural products such as citrus fruit, early potatoes, wine.
(e) No, a deficit.
(f) By earnings from tourism.
(g) Increase the deficit.
(h) Sucks in imports especially of consumer goods; potential exports are sold on the bouyant home
market.
(i) Devaluation of the Cyprus £.
(j) It would increase the price of imports.

Chapter 38

1. Any payment by a person outside the United Kingdom to a person in the United Kingdom.
2. (a) Exports. (b) invisibles. (c) Defence Aid. (d) take-over of British companies by American interests.
(e) short-term capital borrowing. (f) drawing on dollar reserves and gold. (g) disinvestment in the USA.
(h) long-term borrowing.
3. Gain: (a), (b), (d), (e), (g), (h), (k), (m). Loss: the rest.
4. (a) The terms of trade are the relationship between the price of exports and the price of imports.
(b) The balance of trade is the difference between the value of goods exported and the value of goods
imported.
193
 (c) The balance of current account is the difference in value between earnings from exports and invisibles
and payments for imports and invisibles.
(d) The balance of payments is a record of a country's monetary transactions over a period (usually a
year) with the rest of the world; it includes both the current and capital transactions.
5. The balance of trade shows the difference between the value of exports and the value of imports.
6. (a) Free on board-i.e. without insurance and freight being added. It is the cost of the goods when they
are placed on the ship or aircraft for transport abroad.
(b) Cost, insurance, freight included.
7. (a) Current account has deficit or surplus added to balance each side.
(b) Overall the balance-of-payments balances because any difference on current account earning and
spending is balanced by capital, including changes in the official reserves.
8. 'Private transfers' debited, i.e. UK loses francs.
9. (a) Decrease by £500 m.
(b) Exports rise to £5600 m; hence reserves rise by £100 m.
(c) The gold reserves are a stock which can be measured on, say, 31 December each year. Receipts from
exports and payments for imports are flows of gold (in this instance) which increase or decrease the
stock of gold reserves.
10. (a) An increase in invisible payments (imports) as dividends now go to foreigners.
(b) Gain on capital account through 'disinvestment'.
11. An addition to short-term sterling balances.
12. For convenience in settling their international trade debts-a banking service.
13. (a) Balance of payments, country X (£ million)

Current Account
Debit Credit
£ £
Imports ..................... . 1813 Exports. . . . . . . ..... . . . . . . . . . . 1529
Invisibles ................... . 158 Invisibles. . ...... . . . . . . . . . . . . 772
Surplus .................. . 330
£2301 £2301

Capital Account
£ £
Long-term loans ......... . 96 Short-term borrowing .. . 97
Investment ................ . 131 Investment ................ . 146
Aid .......................... . 40
Addition to reserves .... . 306
£2544 £2544

(b) £284 m deficit. (c) Surplus 330. (d)Addition 306.

14. (a) -280. (b) +170. (c) -110. (d) -150. (e) +80.
15. (d).
16. (b).
17 . (b), (e) true; rest false.
18. (a) i Exports and imports (by value) of goods;
ii The value of payments for invisibles, e.g. property income from abroad, insurance services,
tourism, etc. which cannot be recorded by customs as they cross frontiers.
(b) Reveals trends by visual impact.
(c) Until 1982 there was a positive trade balance, largely accounted for by the sale of surplus North Sea
oil.
As North Sea oil production fell, there was a rapid decline in the value of exports, and the value of
194
 imports increased largely because the economy was growing faster than the ability of UK producers
to meet demand. But the surplus on invisibles kept the current account in balance until 1986.
(d) Private short-term and long-term investment; official borrowing from the IMF or foreign central
banks; drawing on gold or foreign currency reserves.
(e) The trade and current balances only recovered partially from the downturn, indicating that the fall in
exports had deeper roots e.g. a reduced manufacturing base (see Chapter 43).

Chapter 39

1. (a) Risen. (b) Fallen.

2. (a) If the man changes his sterling to francs, he obtains 12 ()()() f. If he changes the francs to dollars, he obtains
$2182. If he changes these to sterling, he obtains £1091. (Ignoring any commission charges, etc.)
(b) In a highly competitive market, arbitrage operations eliminate any price differences which may
temporarily emerge; e.g. in (a) above, the dollar-franc rate is out of line with the other two rates.
(c) Arbitrage operations occur in any organised market where there is a homogeneous commodity, e.g.
rubber, foreign exchange, etc.
3. (a), (b), (d), (e), (f) rise; (c), (g), (h) fall.
4. Price of pound falls relative to that of dollar.
5. (a) Rise in prices occurs only for goods which do not enter into international trade.
(b) Increased demand for dollars is balanced by a movement of capital from New York to London.
(c) The rise in UK prices may have been solely due to increases in VAT.
6. (a) The Frenchman will have to pay 90 000 francs now, but only 81 000 francs if the pound is devalued to
9 francs. He will therefore be tempted to postpone payment as long as possible.
(b) A lag.
7. (a) The Briton will have to pay £400 instead of £333, if the DM is revalued, and will therefore pay as
quickly as possible.
(b) A lead. Leads and lags operate in the same way on the UK balance of payments; a lead accelerates the
out-flow of foreign exchange, and a lag slows down the receipts of foreign exchange. This kind of
speculation can therefore be quite important in putting pressure on the exchange rate in the short period.
8. Rising prices in the UK make her exports less competitive, and increase demand for imports especially of
consumer goods. If this leads to a balance of payments deficit, it tends to depreciate the £ sterling,
especially if aggravated by speculative capital movements out of sterling. Raising the rate of interest
reverses this by (a) attracting foreign capital; and (b) deflating AD.
9. (c).
10. (a).
11. (b).
12. (a) False-other factors affect; (b) (c)-true.
13. (a) £1 = $1.50.
(b) The rate falls to £1 = $1.48.
(c)
s
1.54

~ 1.52
.S:
t..I 1.50
.....
0
Q)
.~ 1.48
Il..
1.46
D

Demand/supply of £/week

195
 (d) (i) Sell pounds, shifting S curve to the right.
(ii) Buy pounds, shifting D curve to the right.
(e) To keep the rate at $1.52, when the free market would be $1.50, the authorities must continually buy
pounds off the market. This would eventually exhaust the reserves, and lead to the abandonment of
the pegged rate, unless other measures are taken, e.g. exchange control. If the amount of foreign
currency which UK citizens can obtain is rationed, there will be a leftward shift of the supply curve,
forcing the rate upwards.
(f) An overvalued pound means that the exchange rate does not reflect accurately the cost-price
structure of the UK relative to other countries. Thus, in 1992-3, keeping the £IDM exchange rate at
DM 2.95 was one cause of recurrent balance of payments deficits and eventual loss of foreign
currency reserves.

Chapter 40

1. As a 'bank balance' to cover an excess of payments in dollars over receipts.

2. Consumption borrowing occurs when capital is borrowed from abroad simply to meet spending on
consumer goods. Productive borrowing occurs when the foreign capital is used to buy capital goods which
will eventually yield returns from which interest can be paid and the capital repaid.
3. (a) Revalue her currency upwards. (b) Liberalise import policy by reducing tariffs, etc. (c) Expand
money income at home to encourage imports. (d) Lend to the countries having deficits.
4. (a) The government must agree to buy and sell gold at a fixed price.
(b) The government must allow the export and import of gold without restriction.
5. Raise the bank rate.
(a) Reduced the export of capital, in that fewer bills came to London for discounting because of the
higher rate of interest charged.
(b) Short-term funds came to London to earn the higher rate of interest offered.
(c) Higher interest reduced holding of stocks, bringing about a fall in the demand for imported raw
materials as existing stocks were used up.
6. (a) Deflation. (b) Depreciation.
7. (a) Trade unions resist a reduction in money wage-rates.
(b) Many costs are contractual, e.g. rents.
(c) Monopoly and restrictive practices can maintain prices.
8. (a) Unemployment resulting from reduction of home income.
(b) Reduces volume of international trade.
(c) Depends upon every country acting in full co-operation regarding devaluation, maintaining full
employment, etc.
9. High home prices encourage imports and discourage exports. Balance of payments deficit-increased
demand for foreign currency relative to home currency.
10. Buy-(a), (b), (d), (e), (f); rest-sell.
11. (a) Nil. (b) Cheaper.
12. (a) Elastic demand for imports and exports.
(b) No competitive devaluation in retaliation.
(c) Elastic supply of exports.
(d) Inelastic supply of imports.
(e) British investments abroad mostly in equities; foreign investments in UK fixed-interest stock paid in
sterling.
(f) Not regarded abroad as likely to be followed by further depreciation.
13. (a) Demand for raw materials to be manufactured into exports likely to increase.
(b) Higher home income leads to greater demand for imported goods.
14. Liabilities.

196
15. (a) Countries with a recurrent surplus must either revalue or lend to the deficit countries or else they will
have to restrict imports.
(b) Devaluation must be in accordance with agreed rules, or else nobody is helped.
(c) Attempts must not be made to 'export' unemployment by following narrow nationalist policies.
16. (a) and (b) are terms applying to the fall and rise, respectively, of the price of something in a free market,
e.g. if the demand for pounds decreases, the value of the pound will tend to depreciate. (c) and (d)
refer exclusively to foreign exchange; they refer to the deliberate lowering or raising of the exchange
rate officially declared by the government.
17. (d).
18. (a).
19. (a).
20. (b).
21. (b).
22. (d)-false; rest, true.
23. (a) A multinational holding company.
(b) 83 per cent.
(c) Yes, through profits received by UK shareholders or retained.
(d) Profits made by overseas companies should be worth more in terms of sterling.
(e) i Raw materials - finished product ratio lower;
ii local factories have been acquired.
(f) It has concentrated on developing technically advanced products, such as carbon fibre.

Chapter 41

1. France, Germany, Italy, the Netherlands, Belgium, Luxembourg, the UK, Denmark, the Irish Republic,
Greece, Spain and Portugal.
2. By eliminating customs duties between member countries, it allows trade to flow more freely according
to comparative cost advantages.
3. It imposes duties against outside countries, thereby hampering trade flows.
4. (a) Aircraft, computers, motor vehicles, patent drugs.
(b) A larger market would enable overheads to be spread on higher output, thus reducing average cost
per unit.
5. (a) Harmonising policies cover a wide range of subjects so that a Single Market exists within the customs
union.
(b) Political considerations promote a 'Community spirit' between most countries.
6. While a free-trade area simply removes tariff barriers between member countries leaving each country to
impose such duties as it wishes against outsiders, a customs union has common external tariffs.
7. High prices for agricultural produce are maintained on the home market by imposing duties on cheaper
imports from abroad.
8. More wheat has to be bought at the intervention price and stored, and subsequently sold at the lower
world market price.
9. (a) The target price gives farmers an adequate return.
(b) The threshold price is used as the basis for assessing the size of import levies.
(c) The intervention price is the price at which EC agencies buy any output offered by farmers.
10. VAT.
11. Allocations can be made from the Fund to help Britain's Assisted Areas. Britain should be a major
recipient.

197
12. Countries could otherwise secure price advantages over other members, not by lower production costs,
but by manipulating the exchange rate of its currency.
13. Devaluation of the 'green pound' would result in higher prices in sterling of farmers' products. But food
prices would rise to the British consumer.
14. (a).
15. (b).
16. (c).
17. (c), (e), (f) false; rest-true.
18. (a) The ecu, or European currency unit, is a 'basket' of Community currencies made up of specified
amounts of each currency. All Community transactions are denominated in ecu.
(b) Approximately 7Op.
(c) They have provided an incentive to farmers to produce more.
(d) Supply has exceeded demand, with the surpluses going first into store and eventually sold on world
markets.
(e) Depressed world prices.
(f) Other food producers who sell on world markets, e.g. USA, Australia, New Zealand and some less
developed countries, such as Botswana.
(g) Agreement was blocked until EC agreed to amend method of CAP support.
(h) Direct payments to farmers for: (i) each cereal acre planted, to compensate for bringing intervention
prices down to nearer world market prices; (ii) reduced production by a compulsory 15 per cent
'set-aside' of cereal land. (Milk production was restricted by quotas introduced in 1984.)
(i) It has risen to 77p.
U) They have risen by some 8 per cent.

Chapter 42

1. (a) Country B has an 'ageing' population.

(b) i Increasing dependence of retired persons on workers;
ii Changed pattern of consumption;
iii Increasing pressure on the social services, e.g. hospitals;
iv Less mobility of labour overall;
v A less progressive community.
2. (a) Increase in unskilled labour supply.
(b) Increase in younger workers.
(c) Increased demand for housing.
(d) Increased demand for certain consumer goods.
3. Year 1 2 3 4 5
Food supply 10 11 12 13 14
Population 1 2 4 8 16
4. (a) Positive. (b) Preventive.
5. Preventive.
6. (a) Increased food supply because of: (i) imports; (ii) improved techniques.
(b) Fall in size of family.
7. 30 million.
8. (a) Assumes static conditions of production and demand, whereas a different population will have
induced effects on both.
(b) Takes too long for an 'optimum' population at anyone time to be achieved, therefore cannot be
planned for.
9. (a) i Lower costs per output if producing under conditions of decreasing cost;
ii Easier to maintain full employment;
iii Younger working force;
iv Allows surplus for emigration.
198
 (b) i Demands on investment for new projects rather than improving old;
ii Adds to pressure on a fixed factor, e.g. land;
iii Increases environmental problems.
10. (a) Country B. (b) Country A.
11. (a) The switch to 'services' with the increase in income.
(b) Rising wage-costs per unit compared with foreign competitors.
(c) The appreciation of sterling in 1984 with the increase in receipts from oil exports.
12. (b).
13. (b).
14. (c).
15. (b), (c), (e), (f), (h), (i), (j)-true; (a), (d), (g)-false. (Note as regards (d)-standard of living could
still increase through technological improvement, etc.).
16. (a) Loans for owner occupation house purchase.
(b) (i) Fall in new household formation;
(ii) Owner occupation is nearing its limit at 66 per cent;
(iii) Deceleration in the rate of increase in real incomes.
(c) Recession and the reluctance of consumers to take up more credit.
(d) Building societies; banks.
(e) Construction; furniture, soft furnishings, etc.; house insurance.
(f) (i) Fall in 25-30 age group will mean fewer first-time buyers at the cheaper end of the new house
market;
(ii) Ageing population will generally demand smaller homes.

Chapter 43

1. The nearer we approach full employment, the more likely are prices to rise (see question 2) and imports
to increase.
2. (a) Less efficient labour employed.
(b) Decrease in efficiency of plant, management, and labour.
(c) Bottlenecks arise.
(d) Trade union demands for higher wages.
3. Rolling four-year targets were set for:
i increases in the money supply;
ii reductions in the PSBR as a percentage of GDP.
4. Because of the difficulty of defining 'money'. For the purposes of controlling inflation, money is any asset
which contains an element of immediate spending power or induces the owner to pare down money
balances because it can be quickly turned into cash. Thus what is 'money' rests on a spectrum of assets
which have some liquidity according to the personal view of the owner.
5. It simply reflects the level of economic activity as it is provided by the Bank of England according to the
needs of trade.
6. (a) It results in inflationary pressure, a higher rate of interest, a crowding out of private investment, while
the monetary aspect of a high PSBR in one country has repercussions on others.
(b) 8 per cent.
(c) i High spending on unemployment-related benefits;
ii Reluctance to reduce consumer spending by raising taxes.
(d) Increases the fiscal burden of higher interest payments on the increased National Debt.
7. It would reduce monthly mortgage and hire purchase payments.
8. i Mo growth limited to between 1 and 4 per cent, 1993.
ii M4 , house prices, and other indicators to be monitored.
iii Public sector annual pay increases limited to 1! per cent.
199
 9. (a) The headline rate includes mortgage payments.
(b) It varies with changes in the current rate of interest.
10. (a) By enabling a reduction in the rate of interest, consumer demand could be stimulated through lower
mortgage repayments and a restoration of confidence in recovery as investment increased.
(b) Following the devaluation, UK exports are more competitive.
11. (a) Imports cost more, resulting in: (i) increased inflationary pressure; (ii) an initial deterioration in the
balance of payments until exports increase.
(b) Supply of exports may be inelastic in view of the reduced manufacturing base.
12. A single currency would:
i eliminate possible exchange rate depreciation by a country;
ii eliminate the costs of exchanging currencies;
iii through the European Central Bank (ECB), provide ,stability of the ECU vis-a-vis other currencies;
iv bring identity to the single market.
13. i UK would be unable to follow an independent economic policy to suit her own domestic conditions;
ii directions from the ECB would cover fiscal (taxation) policy as well as monetary.
14. The other countries could proceed to full EMU leaving the UK isolated in a slow lane and unable to
influence its development.
15. Undermines Britain's price competitiveness in export markets and leads to import of cheaper manufac-
tured goods.
16. (a) Manufacturing has, compared with services, a high proportion of tradeable products, and thus
potential exports.
(b) Import penetration has been mainly in foreign manufactured goods.
17. (c).
18. (b).
19. All the statements are true.
20. (a) Organisation for Economic Cooperation and Development.
(b) Cyclical changes are those linked to changes in the level of economic activity, whereas structural
changes are those resulting from discretionary government policy changes.
(c) 70 per cent cyclical; 30 per cent structural.
(d) i Unemployment-related benefits would fall;
ii Tax yield would increase.
(e) i Autonomous cuts in government expenditure;
ii Increases in taxation; privatisation sales.
(f) i Fear of killing off the 'green shoots' of recovery by reducing AD;
ii political commitment to reduce income tax and corporation tax rates;
iii the regressive nature of taxes on spending.
(g) PSBR deficit would be reduced by cyclical recovery; balance of payments deficit could be aggravated
by recovery as imports could increase with the expansion of AD.
(h) PSBR must eventually be improved by a policy to reduce government expenditure and, more likely,
to increase revenue by higher taxation, i.e. by structural changes.
The post-September 1992 devaluation of sterling could lead to an export-led growth, but with
increased spending on imports. (See factors determining the success of a devaluation.) The portents
are encouraging:
i elastic demand for lower-priced exports;
ii surplus capacity to produce exports;
iii surplus capacity to switch to domestic production to compete with higher-priced imports;
iv lower UK costs through: recent re-equipment of industry; the removal of firms' 'surplus fat';
improved management and research and development expenditure showing through.
Structural change towards manufacturing industry required because manufactured goods have
high export potential compared with services.

200