Economies of New Zealand

Explore the economic environment and factors affecting the economies of New Zealand. Learn about the impact of drought, Chinese demand, and externalities on the dairy and meat industry. Understand the trade competitiveness, exchange rates, and circular flow of the economy. Find out how the government is limiting the dairy industry and its effect on GDP.

Running head: ECONOMIC ENVIRONMENT
Economic Environment
Name of the Student
Name of the University
Author Note

1ECONOMIES OF NEW ZEALAND
Table of Contents
Part 1..........................................................................................................................................2
Answer to Question 1.............................................................................................................2
Answer to Question 2.............................................................................................................2
Answer 2.1.........................................................................................................................2
Answer 2.2.........................................................................................................................4
Answer to Question 3.............................................................................................................5
Answer 3.1.........................................................................................................................5
Answer 3.2.........................................................................................................................5
Answer to question 4..............................................................................................................6
Answer to 4.1.....................................................................................................................6
Answer to 4.2.....................................................................................................................7
Part 2..........................................................................................................................................7
Answer to Question 1.............................................................................................................7
Answer to a........................................................................................................................7
Answer to b........................................................................................................................7
Answer to c........................................................................................................................7
Answer to d........................................................................................................................8
Answer to question 2..............................................................................................................8
Answer to a........................................................................................................................8
Answer to b........................................................................................................................8
Answer to c........................................................................................................................9
Answer to question 3..............................................................................................................9
Answer to a........................................................................................................................9
Answer to b........................................................................................................................9
Answer to c........................................................................................................................9
Answer to d......................................................................................................................10
Answer to question 4............................................................................................................11
Answer to a......................................................................................................................11
Answer to b......................................................................................................................12
References................................................................................................................................13

2ECONOMIES OF NEW ZEALAND

3ECONOMIES OF NEW ZEALAND
Part 1
Answer to Question 1
The price (P) of the dairy products in New Zealand increased in the first half of 2013
because of fall in supply caused due to drought. In the latter half of the year supply rose but
price did not fall due to rise is Chinese demand. The effect can be seen in the figure below.
Figure 1: Effect of drought and Chinese demand
Source: (Created by the Author)
In Figure 1, during drought supply of milk fell from Q1 to Q2 given same demand at
D1, thus price rose from P1 to P2 (Kamber, McDonald & Price, 2013). As the industry
rebound and production recovered, supply curve shifted back to S1form S2. However, it is
seen that price is at P3, which is close to previous high price P2. The reason behind this high
price is due increased Chinese demand that pushes demand curve rightward from D1 to D2.
Q3
P3
S2
S1
D1
D2
P2
Q2 Q1
P1
Price
Quantity of milkO

4ECONOMIES OF NEW ZEALAND
Answer to Question 2
Answer 2.1
Young cows are going to meat works because of their low productivity, that does not
generating enough revenue in milk industry. The farms are of the plan that reducing cows’
numbers would reduce their cost of cow rearing; hence, the unproductive cows are going to
meat works (Morris & Kenyon 2014). The effect of reduced cow in the milk industry would
be minimal as the decrease in supply of milk will be less because unproductive cows are
going to meat works only. The effect of reduction in cows can be seen in Figure 2 given
below.
Figure 2: Effect of cows going to meat works
Source: (Created by the Author)
Hence, due to unproductive cows going to meat works supply curve shifts from S1
to S2. As a result, equilibrium quantity falls to Q2 and equilibrium price increases to P2.
S2 S1
D1
P2
P1
Q2 Q1
Price
Quantity of milkO

5ECONOMIES OF NEW ZEALAND
Answer 2.2
As cows going to meat works demand for crops will fall significantly, hence crop
price falls and farmers will face decrease amount of revenue (Bayoumi et al., 2013).
Figure 3: Effect of cows going to meat work on crop prices
Source: (Created by the Author)
In Figure 3, the fall in demand for crops shifted the demand curve inward from D1 to
D2 Consequently, equilibrium price in the crop market falls to P1 and equilibrium quantity in
the crop market declines to Q1.
S1
D1
P1
P*
Q*
Price
Quantity of cropsO
D2
Q1

6ECONOMIES OF NEW ZEALAND
Answer to Question 3
Answer 3.1
In Figure 4, the price above breakeven is shown as P1. The area P1P0KO is the
amount of profit when the price above breakeven point (Pindyck & Rubinfeld 2014).
Figure 4: Price above breakeven point
Source: (Created by the Author)
In the long run the firm would not be making the profit as shown in Figure 4. It will
earn normal profit, that is at the point where marginal cost (MC) and average total cost (AC
intersects because in long run new firms will enter the market until the profit reaches the
point of breakeven and factor cost will increase as there will be more number of firms
demanding same resources.
K
O
P0
MC
AC
$5.40
Price
Quantity of milkO
Breakeven
ARProfit
P1

7ECONOMIES OF NEW ZEALAND
Answer 3.2
In Figure 5, the profit maximizing quantity is at F and the profit-maximizing price is
given as J.
The blue shaded region in the Figure 5 is the amount of supernormal profit the firm earns.
Figure 5: Monopoly Firm Equilibrium and Supernormal Profit
Source: (Created by the Author)
Yes, Aggarwal et al. (2014) explained that the monopoly firm will maintain the
supernormal profit the long run because in monopoly, new firms cannot enter even in the
long run due to presence of entry barriers and monopoly firm has the entire resource factors
for its own causing no increase in factor cost thereby no effect in production cost.

8ECONOMIES OF NEW ZEALAND
Answer to question 4
Answer to 4.1
The cost or benefit of any consumption or production incurred by an individual or a
group of people for which they are not responsible in anyway is considered as externalities to
them (Emas, 2015). There are two types of externalities one is positive and the other is
negative. The externalities associated with dairy farming are water pollution and degradation
of land quality. Both the externalities are negative externalities.
Answer to 4.2
Forestry absorbs carbon dioxide from the atmosphere and transforms them into wood
and soil. Therefore, improves the environment for all (Apsalyamova et al., 2015). Hence, the
externalities associated with forestry are positive one.
Part 2
Answer to Question 1
Answer to a
Trade Weighted Index (TWI) measures the effective exchange rate of a currency of a
country in comparison with one of the important trading partners. In other words, TWI
measures the strength of a country’s currency.
Answer to b
In 2014, NZD/USD exchange rate is high whereas TWI is low, that means, high value
of NZD is due to the weakness of USD. However, in 2015, TWI is more than the normal
exchange rate between NZD and USD; this indicates that though the exchange rate has fallen
the strength of NZD has increased (Jääskelä & Smith, 2013). In 2016, the gap between TWI

9ECONOMIES OF NEW ZEALAND
and exchange rate has decreased in comparison to 2015, but it is still stronger for NZD. Thus,
the trend shows from 2014 to 2016 the trading position of New Zealand has improved.
Answer to c
In 2009, NZD/USD exchange rate was low and TWI was much lower that means
during this period trading competitiveness of New Zealand was poor. However, in 2014 the
NZD/USD exchange rate grew significantly, same is the case with TWI, and the gap between
NZD/USD exchange rate and TWI is much less in comparison to 2009. Hence, the trading
competitiveness has improved from 2009 to 2014.
Answer to d
Current account deficit can cause due to overvaluation of domestic currency that rises
the value of import than export and leads to current account deficit (Coudert, Couharde &
Mignon, 2013). On the other hand, current account deficit can also occur due to
uncompetitive export products that cause decline in total exports and thereby give rise to
current account deficit.
Answer to question 2
Answer to a
The fall in household income of China would reduce the consumption of people. As a
result, the demand for products will decrease including imported products. Hence, the exports
of dairy and meat to China will reduce resulting less export for New Zealand and thereby
current account balance will decrease.

10ECONOMIES OF NEW ZEALAND
Answer to b
China is the exporter of New Zealand’s meat and dairy. Thus, decrease in exports of
New Zealand decrease the demand for dairy products. The impact of decreased demand can
be seen in the Figure 6.
Figure 6: Effect on dairy market
Source: (Created by the Author)
Decrease in demand shits the demand curve inward from D1 to D2 and caused price
to fall from P1 to P2 and equilibrium quantity to decline from Q1 to Q2.
Answer to c
From the above discussion, it can be said that New Zealand is trade dependent on
China. It is evident that economic fluctuations in China affecting exports of New Zealand and
negatively influencing its economy (Dussel Peters, 2013). Thus, New Zealand should reduce
its trade concentration by diversifying its products of exports, increasing its number of
exporters and encouraging domestics demand of its products.
S1
D1
P2
P1
Q1
Price
Quantity of dairyO
D2
Q2

11ECONOMIES OF NEW ZEALAND
Answer to question 3
Answer to a
The representation of goods and services in a flow chart in terms of money flow
between the economics agents of an economy is defined as the circular flow in a
macroeconomy.
Answer to b
https://www.stuff.co.nz/business/farming/95765613/rampant-dairy-growth-drawing-to-a-
close-rabobank
According to the article mentioned in the above link there will be an effect on the
economy’s circular flow due to the event reported in it.
Answer to c
According to the article, the government of New Zealand is limiting the dairy industry
from production because of its negative impact on the environment (Foot, Joy & Death,
2015). Hence, limiting the production of dairy industry will reduce the output of dairy
industry and as a result, the GDP of the country will have a negative impact because value of
GDP will decrease.
Answer to d
HouseholdsFirms
Foreign Sector
Financial Sector
Factor payment
Tax payment
Consumption expenses
Factor payment
Tax payment
Net transfer payment
Factor services payment
Import payments
Savings
Savings Savings
Import payments
Export income Borrowings

12ECONOMIES OF NEW ZEALAND
Figure 7: Circular flow of multi-sector economy
Source: (Created by the Author)
In a circular flow of an economy money, goods and services flow in opposite
directions. The circular flow discussed in Figure 7 is a multi-sector model consists of five
sectors, government, financial sector, firms, households and foreign sector (Sinha et al.,
2017). The leakages of the economy are savings taxes and imports, whereas, injections are
investment, government spending and exports (Murray, Skene & Haynes, 2017). The
government makes payment for goods and services and subsidies to firms and factor
payments and transfer payment to households. These are all injections in the economy; on the
other hand, tax payments to the government by firms and households are leakages
(Toporowski 2015). Similarly, firms pay import payments (leakage) to foreign sector and
receive export payments (injection) from it. In the case of households, it pays import payment
(leakage) to foreign sector and receives factor services and net transfer payments (injection).
The relation with financial market is same with all the three sectors that are firms,
government and household, that is of savings and borrowings. Understanding the components
and flow of injections and leakages will help to determine the value of money circulating in
the economy that giving rise to the flow of income. More is the injections in the economy
Government
Transfer payment
Goods & Services payment
Subsidies

13ECONOMIES OF NEW ZEALAND
more is the flow of income. Conversely, more is the leakage less is the income flow because
leakages withdraws money from the economy and that remains idle, which is not the case
with injecting components. Therefore, more is the initial injection of money in the economy
in the form of investments, loans and government subsidies more will be the flowing money
in the economy that rises the income of individuals and thus generates a positive income
effect.
Answer to question 4
Answer to a
Consumer Price Index (CPI) is a method of measuring change in price of a particular
basket of goods and service purchased by households in comparison to a base year price.
Calculating inflation rate
Inflation rate= CPI 2017−CPI 2016
CPI 2016 ×100
¿ , Inflation rate= 1150−1055
1055 × 100
¿ , Inflation rate=9 %(¿)
Answer to b
In calculation of inflation rate, value of base year is used. The base year in this case is
the year in comparison to which the change in price of the current year or recent period is
calculated.

14ECONOMIES OF NEW ZEALAND
References
Aggrawal, D., Anand, A., Singh, O., & Singh, J. (2014). Profit maximization by virtue of
price & warranty length optimization. The Journal of High Technology Management
Research, 25(1), 1-8.
Apsalyamova, S. O., Khashir, B. O., Khuazhev, O. Z., Tkhagapso, M. B., & Bgane, Y. K.
(2015). The economic value of forest ecosystem services. Journal of Environmental
Management & Tourism, 6(2 (12)), 291.
Bayoumi, A. E. M., Saleh, M., Atiya, A. F., & Aziz, H. A. (2013). Dynamic pricing for hotel
revenue management using price multipliers. Journal of Revenue and Pricing
Management, 12(3), 271-285.
Coudert, V., Couharde, C., & Mignon, V. (2013). On currency misalignments within the euro
area. Review of International Economics, 21(1), 35-48.
Dussel Peters, E. (2013). Recent China-LAC Trade Relations: Implications for
Inequality?. Geopolitics, History & International Relations, 5(2).
Emas, R. (2015). The concept of sustainable development: definition and defining
principles. Brief for GSDR, 1-3.
Foote, K. J., Joy, M. K., & Death, R. G. (2015). New Zealand dairy farming: milking our
environment for all its worth. Environmental management, 56(3), 709-720.
Jääskelä, J. P., & Smith, P. (2013). Terms of trade shocks: What are they and what do they
do?. Economic Record, 89(285), 145-159.
Kamber, G., McDonald, C., & Price, G. (2013). Drying out: Investigating the economic
effects of drought in New Zealand(No. AN2013/02). Wellington: Reserve Bank of
New Zealand.

15ECONOMIES OF NEW ZEALAND
Morris, S. T., & Kenyon, P. R. (2014). Intensive sheep and beef production from pasture—A
New Zealand perspective of concerns, opportunities and challenges. Meat
science, 98(3), 330-335.
Murray, A., Skene, K., & Haynes, K. (2017). The circular economy: An interdisciplinary
exploration of the concept and application in a global context. Journal of Business
Ethics, 140(3), 369-380.
Pindyck, R., & Rubinfeld, D. (2014). Microeconomics GE. Pearson Australia Pty Limited.
Sinha, R., Pearson, P., Kadekodi, G., & Gregory, M. (2017). Income distribution, growth and
basic needs in India. Routledge.
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the 21st Century (pp. 252-264). Palgrave Macmillan, London.