Managerial Economics - The Costs and Benefits for Latvia - Economics Assignment Help

Assignment Task:

SECTION A 

SHORT-RUN STABILIZATION AND LONG RUN COMPETITIVENESS: THE LEVITAN CASE 

Growth of a young country 

Latvia – a small, young country on the east coast of the Baltic Sea – has recently earned the title of a ‘‘tiger’’. After gaining its independence from the Soviet Union in 1991, the country embarked upon a challenging road of transitioning from a planned to a market economy. The first decade proved to be tough: the beginnings of free-market reforms were met by a harsh contraction of the economy, and only in the mid-1990s the country began to grow slowly. Inflation soared, especially in the first years of the life of the Latvian Lat (the local currency). A banking crisis struck in 1995 and the country was hit hard by the Russian financial crisis in 1998. The new millennium was thus met with an income per capita level barely one-sixth of the level of the rich European countries. 

The fall of the ‘‘Baltic Tiger’’ 

The fast growth of the economy created significant macroeconomic imbalances. The consumption boom in the country built grounds for the strong growth of imports, which led to a massive current account deficit of a staggering 25 per cent of GDP already in 2006 (Hansen, 2010). The overheating housing market was accompanied by imbalance and tensions in the labour market as well. The demand for labour in the booming economy was high, yet the supply was decreasing due to large-scale emigration after joining the EU in 2004. Thanks to such pressure, Latvia hit another record number for the EU: an annual wage increase up to 30 per cent. The wage growth by far exceeded productivity growth, forcing companies to increase prices, leading to 17.9 percent y-o-y price inflation in May 2008.

Case Studies 

QUESTION ONE 

One of the main macroeconomic objectives of any country in the World is economic growth as measured by the gross domestic product (GDP) per capita from one year to the other. However, the fast growth rate of the Latvia economy created significant macroeconomic imbalances. 

1.1 Discuss the costs and benefits for Latvia following the transitioning from a planned to a market economy.

1.2 Critically evaluate the economic imbalances that Latvia economy experienced and recommend the policy options that could have been adopted in order to manage each of them. 

QUESTION TWO 

Assume you have been appointed as the Prime Minister of Latvia and you understand that there is much to handle to stabilize the economy and restore competitiveness, which has deteriorated significantly over the last decade. Unfortunately, you have no time to evaluate future prospects of the country – after the weekly board meeting you have received a formal request from your advisors that Latvia should carry out currency devaluation or an internal devaluation. 

2.1 Critically evaluate the type of devaluation Latvia should carry out and recommend the policy options that could be adopted in order to ensure a successful development path for Latvia in the long run.

2.2 Evaluate the critical constraints to investments in Latvia and highlight how they pose as challenges to Latvia’s economic freedom and long-run competitiveness.

SECTION B

QUESTION THREE 

3.1 Economics is all about scarcity, choice and opportunity cost. Explain these concepts using a Production Possibility Curve (PPC) and also highlight the importance of this model in understanding Economics. 

3.2 Describe what is meant by the excess surplus in a goods market and explain how excess supply can be eliminated by markets forces and how can this be used in setting prices in an economy by an individual company.

QUESTION FOUR 

The recent debacle, in respect of price-fixing / collusive agreements amongst prominent construction companies in the building of the iconic Moses Mabhida Stadium in Durban, South Africa has brought to light yet again corrupt practices. 

4.1 Using the key distinguishing features of any market structure discuss the market structure of the construction industry in South Africa.

4.2 Discuss the ‘dark side’ of oligopolies and the practical ways in which cases of price-fixing / collusive agreements can be avoided.

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