Economics Assignment 1: New Zealand Economic Analysis and Policy

This economics assignment analyzes various aspects of the New Zealand economy. It begins by examining the monopoly market structure of Auckland International Airport, discussing allocative efficiency and market failure. The assignment then explores externalities related to cigarette smoking, including health effects and the impact of tobacco taxes. It also covers public goods, such as education, and their provision by the government. The second part of the assignment delves into New Zealand's free trade agreements, its trade relationships with countries like Australia, China, and Korea, and the concept of comparative advantage. Furthermore, it analyzes the effects of NZ dollar depreciation against the US dollar on current account balance, discussing the factors influencing currency depreciation and the relationship between currency depreciation and trade. The assignment also includes calculations of the current account balance and discusses how demand elasticity can affect the balance of payments.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the student
Name of the University
Author Note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer one:...............................................................................................................................2
Answer two:...............................................................................................................................6
References:.................................................................................................................................9

2ECONOMICS ASSIGNMENT
Answer one:
1.
a.
The Auckland International Airport follows monopoly market structure in New
Zealand. This is the busiest and largest airport across the country. Monopoly market
represents single seller and large number of buyers in a specific industry. Thus, two
characteristics of this monopoly market are barriers to entry and profits (Zeuthen, 2018).
Firstly, the monopolist set up significant barriers for other firms to enter into the market. This
is because monopolist cannot control the industry completely if supply increases into the
market after entering of new markets. Hence, in monopoly market, firm and industry has the
same meaning. Secondly, in monopoly market, the monopolist firm can earn supernormal
profits in both short-run and long run. On the contrary, the monopolist can also incur loss.
This makes the chief difference with perfect competition. In long run, a perfectly competitive
market cannot earn super normal profit.
b.
In economy, the concept of allocative efficiency occurs when price equates with
marginal cost. However, in monopoly market, both marginal cost and average cost remain
below price and consequently the market experiences loss regarding allocative efficiency.
This further causes market failure (Holmes, Hsu & Lee, 2014). The monopolist firm cannot
experience this allocative efficiency in long run, as the chief focus of this firm is to extract
price from consumers. This price remains higher compare to the production costs. On the
contrary, a competitive market achieves this condition in long run. With the help of following
diagram, this situation can be explained.

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Revenue and cost
Output
O
Q
P
C
LACLMC
AR=D
MR
Source: (created by author)
The above figure represents long equilibrium condition of a monopoly firm.
According to this figure, price (P) remains higher compare to long run marginal cost (LMC).
As a result, the monopolist firm does not experience allocative efficiency.
2.
a.
Externalities represent costs related to consumer behaviour, which are not included in
the price of final consumed product. Thus, cigarette smoking also generates externalities, as
economic costs of smokers in this context are to bear medical costs. However, non-smokers
as well as governance bear this cost (Lorant et al., 2017). The other externality associated
with cigarettes consumption is the health effects within the environment of tobacco. Due to
smoking, non-smokers along with other family members suffer from various health problems.
This further decreases worker productivity within country.
b.
Figure 1: Inefficient allocation of resources in Monopoly market

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D= PMB = SMB
S1 = PMC
S2 = SMC
O
Price
OutputQ2 Q1
P1
P2
Source: (created by author)
As smoking has negative externalities, its social cost remains high compare to private
cost. Due to imposition of tax by 10%, price increases from P1 to P2. This further reduces
demand and consequently supply curve shifts from S1 to S2 (Hsing, 2017). Thus, total
consumption of tobacco reduces from Q1 to Q2.
3.
a.
Public good represents a product, which one person can consume instead of reducing
its availability to other one. Therefore, no person can be excluded from consuming this
product. Thus, two chief characteristics of this public good is non-excludable and non-
rivalries (Stiglitz & Rosengard, 2015). From this aspect, education also falls under the
category of public good, as it is the basic good. Every person needs basic education for which
government of all countries provides education to everyone through implementing policies.
Figure 2: Imposition of tobacco tax

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b.
The government of a country provides public goods to its citizens for accessing basic
needs. This type of goods become essential, as market failure occurs within economy and the
market does not provide those (Stiglitz & Rosengard, 2015). Thus, it becomes beneficial for
some market to do not allow any form of market provision.

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Answer two:
1.
a.
Three organisations membership related to free trade policy of New Zealand is:
 The ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA)
 New Zealand-China Free Trade Agreement
 New Zealand-Korea Free Trade Agreement (Trade, 2018)
b.
Two countries trade with each other when they one of them experiences comparative
advantage to produce one product due to lower opportunity cost. Therefore, opportunity cost
helps a country to measure its trade-off.
 New Zealand exports precious metals, coins and jewellery to Australia. On the other
side, New Zealand imports motor vehicles, miscellaneous edible preparation as well
as mechanical equipment and machinery.
 New Zealand exports dairy products including cheese, butter and milk powder to
China. The country also exports wood products as well as meat products, tourism and
education to China. On the other side, New Zealand imports electronics, toys,
furniture and clothing from China.
 New Zealand exports industrial goods such as organic chemicals, metals and plastics
to Korea. Moreover, New Zealand also exports beef, dairy and lamb along with
squash and kiwifruit to Korea (Trade, 2018). On the contrary, the country imports
cars, refined oil, machinery and electronic equipments from Korea.

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Price of NZ dollar in terms of US dollar
Quantity of NZ dollar
O
D
S
S1
Q Q1
P1
P
2.
a.
NZ dollar depreciation against the US dollar:
Source: (created by author)
The above figure has represented currency depreciation of NZ dollar in terms of the
US dollar. Two main reasons of currency depreciation are high inflation and easy monetary
policy. The interest rate in New Zealand remains comparatively low. Moreover, the country
experiences higher inflation. Consequently, its currency has depreciated compare to the US
dollar.
b.
Currency depreciation in New Zealand can influence its current account balance
significantly. Due to this depreciation, exports become cheaper and this in turn increases
exports of this country (Rbnz.govt.nz., 2018). On the other side, imports become expensive,
Figure 3: Currency Depreciation

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which further reduces imports from other countries. As a result, current account of New
Zealand improves significantly.
3.
a.
(i)
Current account balance (CAB) of June 2017 (a):
CAB: Goods balance + Services balance + primary income balance + secondary income
balance
CAB (a): 1032 + 842 – 2214 – 266
CAB (a): - 606
CAB (b): 192 + 950 – 2521 -241
CAB (b): - 1620
According to above calculation, current account balance of New Zealand in both
years became negative.
(ii)
Current account deficit increases over the year in New Zealand and this implies that
the country has imported more goods and services over the year compare to its imports
(Beusch et al., 2017).
b.
Depending on demand elasticity, the current account balance of balance of payments
can be deteriorated even if the terms of trade of a country have improved.

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References:
Beusch, E., Döbeli, B., Fischer, A. M., & Yeşin, P. (2017). Merchanting and current account
balances. The World Economy, 40(1), 140-167.
Holmes, T. J., Hsu, W. T., & Lee, S. (2014). Allocative efficiency, mark-ups, and the welfare
gains from trade. Journal of International Economics, 94(2), 195-206.
Hsing, Y. (2017). Is Currency Depreciation or More Government Debt Expansionary? The
Case of Thailand. Journal of Advances in Economics and Finance, 2(4), 237.
Lorant, V., Rojas, V. S., Robert, P. O., Kinnunen, J. M., Kuipers, M. A., Moor, I., ... &
Richter, M. (2017). Social network and inequalities in smoking amongst school-aged
adolescents in six European countries. International journal of public health, 62(1),
53-62.
New Zealand's central bank - Reserve Bank of New Zealand. (2018). Rbnz.govt.nz. Retrieved
10 November 2018, from https://www.rbnz.govt.nz/
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth
international student edition. WW Norton & Company.
Trade, N. (2018). Free trade agreements. New Zealand Ministry of Foreign Affairs and
Trade. Retrieved 10 November 2018, from https://www.mfat.govt.nz/en/trade/free-
trade-agreements/
Zeuthen, F. (2018). Problems of monopoly and economic warfare. Routledge.