MZUMBE UNIVERSITY

DAR ES SALAAM CAMPUS COLLEGE DCC

NATURE OF THE WORK: GROUP ASSIGNMENT

LECTURER’S NAME : AMBASSADOR DR KAMALA

SUBJECT NAME : MACROECONOMICS

SUBJECT CODE : ECO 121

SUBMITTED BY : GROUP NUMBER 5

S/N MEMBERS REGISTRATION

NUMBER
1 CHARITY PIUS MHAGAMA 31314050/T.22
2 SAID J MGAWE 31314060/T.22
3 ROFIN ROFIN KITALI 31314034/T.22
4 MARIAM MASOUD HAMIDU 31314007/T.22
5 COLLINS KELVIN MWALYOSII 31314033/T.22
6 MOHAMED SHEIZA 31314041/T.22
7 JANETH NICODEUS 31314043/T.22
 8 RONALD FRANCIS GWAHARAGE 31314059/T.22
9 LOVENESS GODFREY JOHN 31314061/T.22
10 KELVIN MZEE MKUYA 31314025/T.21
11 RACHEL STEVEN KANJE 2633113/T.22

QUESTIONS
5. Explain at most four types of fiscal policy.
11. List and explain key assumptions of Ricardo’s theorem assumptions which explain his
theory of comparative cost advantage, and elucidate how the theory justifies the basis of
trade among nations.
QN 5
INTRODUCTION(Romer and Romer 2010)
Fiscal policy refers to the government’s use of taxation and spending policies to influence
the economy. Essentially, it involves decisions made by government regarding how much
money it will collect from citizens in taxes and how it will allocate those funds through
spending on public goods and services such as healthcare, infrastructure education and
defence. The goal of fiscal policy is to promote economic growth, stabilize prices and
achieve other macroeconomic objectives
Explained below are 4 types of fiscal policy(Taylor and Wieland 2016)
 Expansionary Fiscal Policy: This is a macroeconomic strategy that involves increasing
government spending and/or reducing taxes to stimulate economic growth. This
policy is typically used during times of economic recession or stagnation when there
is a need to boost aggregate demand and increase employment levels. One of the
main tools used in expansionary fiscal policy is government spending. When the
government increases its spending on goods and services, it creates a demand for
those goods and services, which stimulates economic activity. Another tool used in
expansionary fiscal policy is tax cuts. When the government reduces taxes, it puts
more money into the hands of consumers and businesses, which can lead to
increased spending and investment.
 Contractionary Fiscal Policy: This is a macroeconomic strategy that aims to reduce
aggregate demand and slow down economic growth. This policy involves decreasing
government spending, increasing taxes or a combination of both. The goal of
contractionary fiscal policy is to decrease inflation and prevent an economy from
overheating. When the government decreases its spending, it reduces the amount of
money flowing into the economy. This reduction in spending can lead to a decrease
in demand for goods and services, which can cause businesses to slow down
production and potentially lay off workers. Additionally, when taxes are increased,
individuals and businesses have less disposable income to spend, which can also lead
to a decrease in demand.
 Discretionary Fiscal Policy: This refers to the deliberate changes in government
spending and taxation policies by the government to influence the economy’s
performance. The primary objective of discretionary fiscal policy is to stabilize the
economy reducing unemployment, controlling inflation and promoting economic
growth. The government uses two main tools to implement discretionary fiscal
policy. These are government spending and taxation.
 Non Discretionary Fiscal Policy: This refers to the automatic stabilizers built into the
government’s budgeting process. These stabilizers are designed to offset fluctuations
in economic activity without requiring explicit action by policymakers. Non
Discretionary fiscal policy is based on predetermined rules and formulas that
determine how much money the government will spend or collect in taxes based on
 changes in economic conditions. Examples include unemployment insurance and
progressive income taxation

CONCLUSIVELY
These fiscal policies may have negative consequences to the economy such as inflation,
deflation, unemployment, decreased savings and investments, decrease in aggregate
demand or aggregate demand and so on.
QN 11.

INTRODUCTION(Obstfeld and Rogoff 2016)

The Ricardo's theory of comparative advantage is an economic principle that explains how
countries can benefit from trade by specializing in producing goods which they have a lower
opportunity cost than other countries. The theory was developed by David Ricardo, a British
economist in the early 19th century. According to the theory, even if one country is more
efficient than another country in producing all goods, both countries can still benefit from
trade if each specializes in producing the goods in which it has a comparative advantage. A
country has competitive advantage in producing a good if it can produce that good at a
lower opportunity cost than another country. Opportunity cost refers to the cost of
producing one good in terms of the production of another good that must be foregone.
EXAMPLE
Suppose Country A can produce either 100 units of wheat or 50 units of cloth with its
resources, while country B can produce 60 units of wheat or 40 units of cloth with its
resources. In this case, country A has an absolute advantage in producing both wheat and
cloth because it can produce more of goods than country B. However, Country A has a
comparative advantage in producing wheat because it has lower opportunity cost of
producing wheat than country B. To produce one unit of wheat, country A must give up
producing two units of cloth (100/50), while Country B must give up producing 1.5 units of
cloth(60/40). Therefore Country A should specialize in producing wheat and trade with
country B for cloth.
Explained are the key assumptions of the comparative advantage theorem(Rose 2018)
 Two countries and two goods: The theory assumes that there are only two countries
producing two different goods. Under this assumption, trade can occur if one
country has a comparative advantage in producing a particular good. For instance , if
country A is better at producing steel compared to country B, and country B is better
at producing textile compared to country A, then it makes sense for the two
countries to trade steel from Country A with textiles from Country B.
 Fixed resources: The resources such as labour, capital and land are fixed in each
country. They can’t be moved from one industry to another. The assumption is a
 country cannot increase or decrease their factors of production in the short term.
Hence, a country with an abundant fertile land may have a comparative advantage in
producing agricultural products, while a country with advanced technology and
skilled labour may have a comparative advantage in producing high tech goods.
 Constant returns to scale: This means that the cost of production does not change
when the production increases. It is an assumption of comparative advantage theory
that states that if all factors of production are increased proportional, the output will
also increase proportionally. Doubling the inputs leads to the doubling of the
outputs. This implies that there are no economies of scale or diseconomies of scale
in production.
 Free trade: The theory assumes there are no restrictions on trade such as tariffs or
quotas. When countries engage in free trade, they can exchange their specialised
products with each other, resulting in increased competition, lower prices and
greater efficiency. This allows countries to benefit from the advantages of their
comparative advantage, regardless of their size or level of development.
 Perfect competition: The markets for goods are perfectly competitive. Under perfect
competition, no single buyer or seller can influence the price of goods or services,
and all market participants have to accept the prevailing market price. This
assumption helps us to understand how countries specialize in the production of
goods and services in which they have a comparative advantage.
Conclusively, The Theory of comparative advantage justifies the basis of trade among
nations by recognizing each country’s unique strengths and encouraging trade through
specialization. By focusing on their strengths, countries can produce more efficiently and
at a lower cost, resulting in increased economic activity and the potential for higher
living standards.
 REFERENCES
Obstfeld,M. & Rogoff,K(2016). Foundations of International Macroeconomics. MIT Press.
Rose,A.K(2018). Exchange Rates and the Macroeconomy: A survey of the Literature.
Handbook of exchange rates, 1-54.
Romer, D & Romer, C(2010). The Macroeconomic Effects of Tax Changes: Estimates
Based on a New Measure of Fiscal Shocks. American Economic Review, 100(3).
Taylor, J.B & Wieland, V.(2016). Finding the Equilibrium Real Interest Rate in a Fog of
Policy Deviations. Journal of Monetary Economics, 82(C).