Country Alpha, a developing economy, has experienced fluctuations in economic performance due to external trade shocks, government interventions, and exchange rate adjustments. The following data represents various economic indicators and policy changes that have impacted Alpha's economy.
The domestic rice market in Alpha is subject to government intervention. The government recently imposed a price ceiling of 7 per kilogram, with an equilibrium quantity of 500,000 kg. The following diagram illustrates the domestic rice market for Alpha:
Figure 1: The Domestic Rice Market in Country Alpha
A price ceiling is imposed at $5 per kilogram.
Country Alpha's government has been implementing various macroeconomic policies to improve GDP growth and reduce income inequality. The following table presents selected national income data:
Table 1: Selected National Income Data (in million $)
| Indicator | Value |
|---|---|
| Nominal GDP | 12,000 |
| Real GDP Growth Rate | 3.2% |
| Gross National Income (GNI) | 11,800 |
| Keynesian Multiplier | 2.5 |
| Gini Coefficient | 0.42 |
| Unemployment Rate | 6.8% |
In response to a growing current account deficit, Alpha's central bank intervened in the foreign exchange market. The government has also imposed tariffs on certain imported goods to protect domestic industries.
Table 2: Balance of Payments for Country Alpha (2016, in million $)
| Category | Value |
|---|---|
| Net capital transfers | -288 |
| Net current transfers | -170 |
| Net direct investment | 361 |
| Exports of services | 409 |
| Imports of goods | 829 |
| Net investment income | 144 |
| Imports of services | 435 |
| Exports of goods | 852 |
The government of Alpha has also imposed a $2 tariff per kilogram on imported rice. Following the depreciation of Alpha’s currency, the current account initially worsened before showing signs of improvement.
Using the text/data provided and your knowledge of economics, recommend a policy that the government of Alpha could implement to reduce income inequality while maintaining economic growth.
Using information from the text/table above, calculate the change in consumer surplus after the imposition of the price ceiling.
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Explain why imposing a price ceiling on rice can lead to a welfare loss.
- Shortage of rice: At , quantity demanded exceeds supply, leading to excess demand.
1 mark - Inefficient allocation: Some consumers willing to pay can't buy at , leading to inefficiencies.
1 mark - Black market formation: Due to shortages, a parallel market emerges, raising effective prices.
1 mark - Reduced producer surplus: Producers receive lower prices, reducing their incentive to supply.
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Using information from Figure 1, calculate the resulting shortage in the market due to the price ceiling.
Using data from Table 1, calculate the real increase in GDP if investment spending rises by $500 million.
Define the term comparative advantage.
Using the data in Table 2, calculate Alpha’s current account balance for 2016.
Draw a diagram to illustrate the impact of a price ceiling on market equilibrium.
Explain why the current account balance might initially worsen following a currency depreciation but improve later.
- Inelastic demand for imports initially: Imports become expensive, but demand may not fall immediately.
1 mark - J-curve effect: In the short run, trade balance worsens due to price adjustments before volume changes.
1 mark - Export competitiveness improves later: As exports become cheaper, foreign demand rises.
1 mark - Marshall-Lerner condition: If demand for exports and imports is elastic enough, depreciation improves the current account in the long run.
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