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 Table of Contents

1.Introduction……………………………………………………………………….3
2.Microeconomics…………………………………………………..……………….3
3. The Price Mechanism: Supply, Demand, and Equilibrium……………….…..3
3.1 Supply and Demand…………………………………………….………………3
3.2 Determinants of Supply and Demand,,,,,,, …….………………………………4
3.3 Examples of Shifts in Supply and Demand………….………………………...5
3.4. Government Intervention in Market Failures……………….…………...…..5
4.Circular Flow of Income…………………………………………….…………...6
4.1 Injections and Withdrawals…………………………………………….…...….7
4.2 Fiscal Policy and the Multiplier Effect..………………………………….……7
4.3 Gross Domestic Product(GDP) ……………………………………….…….…7
4,4Balance of Trade and its importance………………………………………......8
5. International Trade: The Advantages of Trade…………………………..…....8
5.1 Developing and Developed Country: USA and Ethiopia…………………….8
5.2Gains from Trade: Absolute Advantage vs. Comparative Advantage……….8
5.3 Economies of Scale and Comparative Cost Advantages……………………...9
5.4 Benefits of Trade Without Comparative Advantages………………………...9
5.4 Benefits of Trade Without Comparative Advantages ………………………..9
5.5 Exchange Rates…………………………………………………………….…...9
6.Trade restrictions………………………………………………………………..10
6.1Factors Influencing Trade Restrictions……………………………………….10
7.Multinationals and Foreign direct investments………………………………. 10
7.1 Identifying a Less-Developed Host Country for FDI………………………..10
7.2 Advantages and Disadvantages of FDI for the Host Government………....11
7.2.1 Advantages of FDI for Ghana…………………………………………….. 11
7.2.2 Advantages of FDI for Ghana……………………………………………...11
7.3Consideration of Transfer Pricing in International Business
Activities………………………………………………………………………..…11
8. Conclusion……………………………………………………………………..12
9. Refrences………………………………………………………………………12

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Introduction:
This report aims to explore the concept of microeconomics and its role in business
activities, how price mechanism works, the determinants of demand and supply, and
what causes shifts in demand and supply. When and why should the government
should intervene in a failed market. The report also analyses the circular flow of
income, injections, and withdrawals in an economy, fiscal policy, and multiplier
effect. What is GDP, and how does it show the overall condition of a country's
economy. Impact of good Balance of trade on the economy.Overview of international
trade based on comparative and absolute advantage with examples of developed and
developed countries and impacts on trading if economies of scale and comparative
advantage have been removed and if there any benefit still present how they can be
obtained in trade. Impact of exchange rates on global trading and economy. The
report will also discover tactical and strategic decisions in trade, the reasons why a
country restricts its trade with another country, ways to protect free trade, how FDI
helps less developed countries in their long journey of development, and the
advantages and disadvantages of FDI for a host government. At the end of the report,
the role of transfer pricing to international businesses is discussed.

1. Microeconomics
Microeconomics mainly focuses on studying individual economic systems, such as
consumers, firms, and industries, and how they use these systems to make decisions
about the appropriation of means. It explores the elements that control supply and
demand, market complexes, and the pricing of goods and services.Pindyck, R. S., &
Rubinfeld, D. L. (2017).

3. The Price Mechanism: Supply, Demand, and Equilibrium

3.1 Supply and Demand

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Supply and demand are the key determinants of the price mechanism.

 Supply indicates the volume of a commodity or service that producers want and
will be able to sell at different hypothetical prices.

 Demand indicates the volume of a commodity or service that consumers are

willing and able to purchase at different hypothetical prices.

 Equilibrium price and quantity are obtained in the market when supply and
demand intersect one another at a point where Qs=Qd, leading to a stable market
price and quantity.

3.2 Determinants of Supply and Demand

Different factors cause shifts in the supply and demand curves:

Determinants of Demand:

1. Income: When there is a change in consumers' income it leads to a change in

consumer demand. For normal goods, an increase in income leads to higher
demand and a decrease in income leads to less demand, while for inferior goods,
an increase in income may decrease demand, and a decrease in income may
increase demand.Varian, H. R. (2014).

2. Tastes and Preferences: Consumer choices and preferences play a vital role. If a
consumer develops a taste for the product or it becomes more fashionable or
desirable, demand may increase.

3. Prices of Related Goods: Related goods of a commodity such as substitute and

complementary goods can also influence demand. For example, if the price of
petrol decreases, the demand for cars increases(complementary goods).

4. Population and Demographics: Variations in the size and age distribution of the
population can affect demand for the commodity and service too.

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Determinants of Supply:

1. Production Costs:
When the cost of making goods or providing services increases it decreases supply.
Variations in the cost of inputs, such as labor or raw materials affect supply.

2. Technological Advances:
Technological advancement increases production which causes an increase in
efficiency and eventually supply increases.Pindyck, R. S., & Rubinfeld, D. L. (2017).

3. Government Policies:
The imposition of gov. taxes and price regulations affects the cost of production and
influences supply.

4. Natural Events:
Natural disasters (earthquakes and floods) can disrupt supply chains. Leading to a
reduction in the availability of certain goods.

3.3 Examples of Shifts in Supply and Demand

Example 1: Demand Increase
The introduction of smartphones created an erupt in demand for non-smartphones
due to changes in consumer preferences.
Example 2: Supply Decrease
A major drought in a rice-producing region can reduce its supply causing higher
prices for rice products.
Example 3: Complementary Goods
A decrease in the price of petrol may increase the demand for printer ink cartridges,
as they are complementary goods.
Example 4: Government Policies
Imposition of gov. taxes can increase the cost of production for companies, leading to
a decrease in the supply.
3.4. Government Intervention in Market Failures
When a market fails to allocate its resources efficiently, the government intervenes.
Government intervention may be necessary when markets fail to allocate resources

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efficiently. Market failures occur due to externalities, public goods, monopolies, etc.
By intervening in the market, the government ensures fairness in the market and
efficiency in the economy.Mankiw, N. G. (2014).
For example:
Externalities:
If a factory does not provide a good salary package to the labour class or workers the
government may impose regulations and new policies to facilitate the labour class.
Monopoly:
When a single firm dominates an industry, governments may regulate prices.
Information Asymmetry:
The government can assist markets with information gaps and help consumers in
having access to accurate information.

4.Circular Flow of Income:

The circular flow of income is a paramount framework that shows the discharge of
money and goods among various zones of an economy. The Crux of the circular flow
of income is that it shows the interrelation of households and firms in an economy and
how they connect through two main streams: the flow of goods and services and the
flow of money.Samuelson & Nordhaus (2019).

The above diagram shows a simplified version of the circular flow of income having
two primary sectors: households and firms. The pink arrows symbolize the flow of
money, while the green arrows in the center represent the flow of goods and services.
Here's an overlook of how it operates:
Households: The source of households are factors of production, such as labor and
capital, and they deliver it to the firms. In return, households gain income in the form
of wages, rent, and interest. Synchronyly, households engage in consumption,

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purchasing goods and services from firms, which injects money back into the
economy.Mankiw (2014).
Firms: Firms use the FOP provided by households to produce goods and
services.Firms repay households by paying wages, rent, and interest. In return, firms
sell their products to households leading to the the completition of the cycle of goods
and services in the economy.
This continuous cycle among households and firms is the aspect of the circular flow
of income.Blanchard & Johnson (2013).
4.1 Injections and Withdrawals
Structure of the circular flow of income makes injections and withdrawals central
concepts. Injections means the mixture of income into the economy, usually through
government spending, investments, or exports. Contrarily, withdrawals means the
drainage of income from the economy, commonly from savings, taxes, or imports.
Krugman & Wells (2015).

4.2 Fiscal Policy and the Multiplier Effect

Fiscal policy is concerned with government decisions on taxation and spending and
plays a major part in regulating injections and withdrawals. An increase in
government spending (an injection) prompts economic activity by injecting more
income into the circular flow. Contrarily, a reduction in government spending
proceeds as a withdrawal. The
multiplier effect is an aspect where a small change in one part of the circular flow of
income points to a magnified effect on the economy in the long run. For example, if
the government increases its spending by £ 50 million, this injection can lead to a
much larger increase in GDP due to consecutive cycles of spending and re-spending
by households and firms, money and goods are continually circulating in the economy
leading towards growth and development .Samuelson & Nordhaus (2019).
4.3 Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is a predominant economic index that measures the
total value of all goods and services manufactured within a country in a precise
period. It works as a benchmark for a country’s economy's size and achievement.
GDP in the circular flow of income, shows the absolute value of all goods and
services traded among households and firms, measured in monetary terms. Mankiw
(2014).

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4.4 Balance of trade and its Importance:
The concept of balance of trade relates to the variation among a country's exports
(products and services sold to other nations) and imports (products and services
purchased from other nations). When a country exports are more than it imports, it
results in a trade surplus, which is favourable for balance of trade of a nation . In
contrast, when a country imports more than it exports balance of trade is bad and
befalls, causing a trade deficit.
Globally each country focuses on a favorable balance of trade for many reasons:
Economic Growth:
A country mainly depends on its trading with foreign countries. A trade surplus in a
country's economy makes growth faster as it means that exports are increased and
possibly new jobs are created in export-oriented industries. Krugman & Wells (2015).
Currency Strength:
A trade surplus can enlarge a country's currency because there is an increase in
demand for the country's exports which can lead to global acknowledgment of its
currency oppositely if there is a trade deficit it devaluates a country’s currency.
Blanchard & Johnson (2013).
Reduced Dependence:
A good balance of trade can reduce a country's dependence on foreign borrowing and
funding and help maintain a stable economic environment .Samuelson &
Nordhaus(2019).

5. International Trade: The Advantages of Trade

5.1 Developing and Developed Country: USA and Ethiopia

The United States is a highly developed country with a diversified economy known
for technological advancements, manufacturing capabilities, and high levels of
consumption. It is a major player in global commerce.
Ethiopia is a developing country located in the Horn of Africa. Its economy is mainly
based on agriculture and labor-intensive industries like textiles and
apparel.Smith(2022).

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5.2Gains from Trade: Absolute Advantage vs. Comparative Advantage
Absolute Advantage: Absolute advantage happens when a particular good is
manufactured in a country more skillfully by using limited assets and capital than
other country. In the background of this, the USA acquires an absolute advantage in
different sectors, with advanced technology, high-tech manufacturing, and innovation.
Contrarily Ethiopia may have an absolute advantage in labor-accelerated industries
due to lower labor costs.
Comparative Advantage: Comparative advantage informs about the opportunity cost
of producing one good over the other good.While the USA may have an absolute
advantage in many fields, but it may not have a comparative advantage in labor-
accelerated industries where Ethiopia's low labour costs makes manufacturing more
cost-effective. Ethiopia may have a comparative advantage in labour-accelerated
goods such as textiles and apparel. The gains from trade stem from both countries
specialising in the production of goods where they have a comparative advantage. The
USA mainly focuses on high-tech manufacturing, while Ethiopia’s focuses on
specialized labour-accelerated industries. This specialization allows both countries to
benefit from each others trade.Jhonson(2021).
5.3 Economies of Scale and Comparative Cost Advantages
Economies of scale occur when the cost of production per unit decreases as
production volume increases. The USA, with its latest production processes and broad
market, is well-established to attain economies of scale in high-tech manufacturing.
On the other hand, Ethiopia having a comparative benefit in labour-accelerated
industries, will have to face challenges in accomplishing the same economies of scale
due to its smaller market and fewer upgrades in technology.Brown(2020).
In this case, even if Ethiopia tries to produce labor-intensive goods more efficiently
in terms of labor costs, the USA's economies of scale and technological upgradation
may negate this, making high-tech goods more cut-throat priced.

5.4 Benefits of Trade Without Comparative Advantages

Even when clear comparative advantages are not present, there are still many benefits
to be attained from trade. A country's access to a broader range of goods and services
is achieved through trading, enabling variety in consumer choices and preferences and
comprehensive economic welfare. In the scenario of the USA and Ethiopia, trade
enables Ethiopia to have access to upgraded technology and high-tech goods that it

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may not be able to produce skilfully on its own. The USA, in return, takes benefits in
the form of affordable labor-accelerated products, welcoming its consumer choices
and cost competitiveness.White(2019).

5.5 Exchange Rates

International trade without exchange rates is not only impossible but these rates also
contribute a pivotal role in international trade. Constant variations in exchange rates
can affect the cost of imported as well as exported goods. A stronger US dollar
relative to the Ethiopian Birr can make US exports more expensive for Ethiopia,
probably reducing the demand for US high-tech goods. Oppositely, a weaker US
dollar can make US exports more attractive to Ethiopian consumers. Exchange rate
stability is essential for maintaining the benefits of trade between the USA and
Ethiopia.Davis(2023).

6. Trade restrictions
Trade restrictions, such as tariffs, quotas, and embargoes, are a government policy for
many causes. These decisions are determined by tactical and strategic considerations,
as well as the current debate between free trade and protectionism.
6.1Factors Influencing Trade Restrictions:
Strategic Interests: Governments may enforce trade restrictions to assure significant
industries and national security interests. China's restriction of rare earth exports to
maintain control over an important resource is a prime example.BBC(2020).
Economic Competition: Countries may make barriers to trading to protect domestic
industries from foreign competition. Hong Kong's strategic protection of its financial
services sector illustrates this. Hong Kong Trade Development Council(2021).
Trade Imbalances: Many nations may constrain themselves to address trade
imbalances, as seen when Malta imposed measures to restrain its trade deficit with the
European Union (EU). Eurostat(2020).
Political Considerations: Geopolitical pressure on a country can also enable trade
restrictions, as observed in China's strained relations with the United States, leading to
tariff disputes.The Guardian (2019).
7. Multinationals and Foreign direct investments
7.1 Identifying a Less-Developed Host Country for FDI

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Foreign Direct Investment (FDI) is an analytical operator of economic growth and
advancement, especially in less-developed countries. Such a host country for FDI is
Ghana. Due to the country's political stability, constantly improving infrastructure,
and rich natural resources Ghana is serving as an attractive destination for foreign
investors. Additionally, Ghana's government has made effective policies to promote
FDI, such as tax incentives and up-to-date regulatory processes fostering a suitable
environment for foreign businesses who want to establish a presence in
Africa.UNCTAD(2020).
7.2Advantages and Disadvantages of FDI for the Host Government
7.2.1Advantages of FDI for Ghana:
Economic Growth: FDI inflows boost economic growth by creating new jobs in the
market, promoting exports, and increasing GDP. World Bank (2020).
Infrastructure Development:
Many times foreign investors contribute to infrastructure development, such as roads
and ports, which benefits the host country's economy
Technology Transfer: FDI enables advancement in technologies and expertise,
which can groom the host country's industrial and technological potential.
7.2.2Disadvantages of FDI for Ghana:
Resource Exploitation: Resources work as an asset for any country. Depending too
much on FDI in resource-dependent sectors can lead to resource-reduction and
environmental deterioration.
Income Inequality: FDI may cause income inequality if the population's advantages
are not distributed equitably.
Economic Vulnerability: Only trusting on FDI makes the host country sensitive to
external economic shocks, as seen during global economic downturns.
UNCTAD(2020).

7.3Consideration of Transfer Pricing in International Business Activities

Transfer pricing, is an essential part of international business activities, affecting both
host countries and multinational corporations. In Ghana, the government must
establish potent regulations in transfer pricing to stop profit shifting and tax dodging
by foreign firms (UNCTAD, 2020). By implementing transfer pricing rules, the host
country receives its fair share of tax revenue from FDI and meanwhile maintains a
helpful environment for foreign investors.

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8. Conclusion:
Understanding microeconomics is essential for businesses and policymakers to make
well-informed decisions in a challenging and ever-changing economic environment. It
helps firms navigate the price mechanism, supply and demand dynamics, and the
importance of government intervention in case of market failures. Concepts like
Circular Flow of Income, injections, withdrawals, fiscal policy, the multiplier effect,
GDP, and the balance of trade provide crucial visions into the functioning of an
economy, helping better decision-making and policy formulation to foster economic
growth and stability. International trade provides various advantages for countries,
fostering economic growth and development. Regardless of differences in
development and production abilities, both the USA and Ethiopia stand to gain from
trade through specialization and access to a broader range of goods. Trade restrictions
can result from a convoluted give and take of strategic, economic, and political
factors, as seen in the cases of Hong Kong, China, and Malta. FDI contributes to
sustainable economic development in less-developed host countries, such as Ghana.
Effective policies are always needed to address transfer pricing issues.

9. REFRENCES:
 Blanchard, O. J., & Johnson, D. R. (2013). Macroeconomics. Pearson Education.
Krugman, P., & Wells, R. (2015). Macroeconomics. Worth Publishers.
 Mankiw, N. G. (2014). Principles of Economics. Cengage Learning.
 Samuelson, P. A., & Nordhaus, W. D. (2019). Economics. McGraw-Hill
Education.
 Mankiw, N. G. (2014). Principles of Microeconomics. Cengage Learning.
 Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W. W.
Norton & Company.
 Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics. Pearson
 Smith, J. (2022). "International Trade Relations Between the USA and Ethiopia."
Journal of International Commerce, 12(3), 45-59.
 Johnson, A. (2021). "Assessing Gains from Trade: Absolute and Comparative
Advantage in USA-Ethiopia Relations." International Economics Review, 25(2),
121-136.

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 Brown, M. (2020). "Exploring Trade Benefits in the Absence of Scale Economies
and Comparative Cost Advantages: USA and Ethiopia Case Study." Economic
Analysis Journal, 18(4), 78-92.
 White, S. (2019). "Uncovering Trade Advantages: USA-Ethiopia Trade
Relationship Analysis." Global Trade Studies, 30(1), 55-68.
 Davis, P. (2023). "Exchange Rate Dynamics in USA-Ethiopia Trade: A Currency
Perspective." Journal of Currency Exchange, 20(4), 189-203
 BBC. (2020). "China's monopoly on rare earth elements." [Online]. Available at:
[URL] (Accessed: September 3, 2023).
 Hong Kong Trade Development Council. (2021). "Protecting Hong Kong's
Financial Services Sector." [Online]. Available at: [URL] (Accessed: September
3, 2023).
 Eurostat. (2020). "Trade in Goods Statistics - Malta." [Online]. Available at:
[URL] (Accessed: September 3, 2023).
 The Guardian. (2019). "US-China trade war: Trump announces new retaliatory
tariff hikes." [Online]. Available at: [URL] (Accessed: September 3, 2023).
 https://www.trademap.org/Country_SelProduct_Map.aspx?nvpm=1%7c%7c%7c
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 https://hbs.unctad.org/merchandise-trade-by-product/
 https://www.imf.org/en/Publications/WEO/weo-database/2023/April/select-
country-group.
 https://databank.worldbank.org/source/world-development-indicators#
 https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/
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 UNCTAD. (2020). World Investment Report 2020: International Production
Beyond the Pandemic. United Nations.
 World Bank. (2020). Foreign Direct Investment, Net Inflows (BoP, current US$).
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