New Zealand’s Economy

New Zealand’s Economy


Student I.D:



Section One

Question 1

In the New Zealand supermarket subcategories, the operations depict imperfect competition. This is because a large number of companies are influential in the determination of the market prices. Moreover, the goods offered to the consumers are heterogeneous. This results in an even manipulation of the market prices for various commodities. The market structure governing the operations of the chief supermarkets in New Zealand’s retail sub sector is the monopolistic form of competition. In this market subdivision, there are various sellers dealing in an assortment of products. For instance, the New World chain of food stores caters for consumers who desire local and international foodstuffs. Likewise, Super Value supermarkets sell differentiated groceries. Consequently, there are products present in one group of stores and absent in the other (Mankiw, 2007). With the large number of buyers in this market structure, no specific seller can influence the market prices although they can form a semi-monopoly owing to the enhanced commodity differentiation.

Question 2

The Commerce Commission has the main mandate of implementing policies that encourage competition in the market sub sectors of New Zealand. It also ensures that business people do not deceive their customers. In terms of suppressing anti-competitive behaviors among traders, the commission prohibits the purchase of commercial shares or properties that can discourage the development of a competitive setting in the country. Moreover, according to the Fair Trading Act of 1986, this governmental agency has the authority to evaluate the advertisement and retailing mechanisms adopted by a company in addition to scrutinizing the terms of their business accords (Mankiw, 2007). This protects the consumers from deceptive traders as well as promoting competitiveness in the business sector.

Question 3

Retail stores in New Zealand have adopted specific measures aimed at reducing the prices of their commodities while still increasing their proceeds. However, these tactics vary depending on the objectives and management style of the supermarket. One of these general strategies is the adoption of certain technological aspects. For instance, New World chain of supermarkets has embraced the CO2 Transcritical Technology. This system enhances refrigeration of different groceries at low energy levels. Consequently, the low energy costs has aided in the reduction of commodity prices (Mankiw, 2007).

The design of this refrigeration system has also improved the decor of the stores, a marketing strategy that has attracted more consumers to the supermarket. Conversely, in the Super Value stores, technology has enhanced the advertisement activities. This is by using various sites to publicize their products and services through low-cost tactics. The size of the stores also varies, indicating divergence in the marketing proceedings. For instance, New World focuses on the urban population by providing local and imported groceries at reduced costs. Contrastingly, Super Value supermarket has small-sized stores in residential areas and packages products of different quantities in order to cater for a wide range of consumers through their low-cost strategy (Mankiw, 2007).

Question 4

The issuance of shopping vouchers to customers not only benefits the purchasers but it is also advantageous to the retailer. For example, in the case of supermarkets, this activity is an appropriate marketing strategy that attracts additional customers to the stores. This is because the customers who obtain these discounts will buy more commodities from the store during and after the stipulated period. Likewise, it acts as an advertisement technique especially where one has to download the ticket from the firm’s website (Mankiw, 2007). Through this criterion, the search engine presents additional products and services offered by the retailer. In addition to the benefits obtained by the retailer, shopping vouchers are valuable to consumers since one is able to purchase many essential products at low costs.

Question 5

In this lawsuit, the parent company of Pak ‘n Save was the complaint. The grievance filed with the Advertising Standards Authority (ASA) indicated that Countdown Supermarket had conducted a price crusade at one of its stores in the North Shore region of Auckland. Pac ‘n Save is a grocery store that sells a wide range of products includes baked foodstuffs, fresh agricultural commodities, and animal products. The chain of stores owned by Foodstuffs Company has an effective low-cost strategy, which aims at attracting many consumers. In this case, the petitioner accused the management of Countdown of conducting a price crusade against the set rules by comparing the prices of various products from the two popular stores (Callander, 2004).

The price comparison indicated that Countdown was the cheaper alternative for customers. While responding to the claims, the management of Countdown supermarket stated that the argument was vague. The authority ruled in favor of Pak ‘n Save arguing that the price comparison was misleading to customers. This incidence illustrates perfect information as one of the assumptions of ideal competition. If all buyers have perfect information regarding a product, they will make the most appropriate decision. This assumption governed the action of Countdown supermarket since they aimed at enlightening the consumers on the price differences in both stores (Callander, 2004).

Question 6

With respect to the perfect information in the marketplace, most supermarkets in New Zealand are allocatively efficient. This is because the sellers exceed the point of possibilities frontier while the buyers select a product mix on the production section of this borderline. Consequently, the market maximally utilizes the resources available in the market. Likewise, distortion of the market principles will be more beneficial to some participants compared to others. The principle of efficient allotment of capital relates to optimization in the microeconomics sub section (Callander, 2004).

Question 7

As indicated in the diagram, a monopolistic economy consists of producer and consumer surplus. Under the consumer surplus, the customers seek to purchase a commodity at a charge higher than the equilibrium price although they end up paying the symmetric charge set by the market. Conversely, in the producer surplus, traders are willing to deliver goods at a price lower than the equilibrium price although they ultimately trade at the equilibrium charge (Callander, 2004).

Section 2

Question 1

Free trade agreements are beneficial to the New Zealand economy in several ways. To start with, the country has a market economy that relies on international trade activities with such nations as the United States, China, and the European Union. With these business treaties, the local traders are able to expand the market of their products to an international level. Likewise, the country benefits from increased investors who provide the market with an assortment of products. Consequently, the consumers can purchase the commodities at low prices. Based on this argument, financiers of the country’s agricultural sector will aid in price reduction of groceries. In addition, free trade agreements create various job opportunities for the inhabitants of New Zealand (Callander, 2004). Through this job creation avenues, the purchasing power of the general population increases. This makes it possible for most people to access essential foodstuffs.

Question 2

The food crisis experienced in most regions of New Zealand is responsible for the current account debit of the June 2013 quarter. The drought compelled the government to expend more than its earnings. For instance, exports of animal products reduced by $ 498 million. Despite the predicted food shortage, the debit level did not match the expectations of economists. This is because of the inaccurate nature of export estimations. Moreover, the transactions of international investments in the country contributed to the large deficit. This is because of the reduction of returns acquired by the foreign firms, an aspect that affected the national economy. The ongoing review is important in order to formulate measures that will encourage investors to continue trading in the region. For instance, the government liquidated some of its assets in foreign countries with the aim of reducing the debit (Callander, 2004). Moreover, a review of the situation will enable the relevant authorities to devise techniques useful in avoiding similar occurrences in the future.

Question 3

The principles of the market economy of New Zealand encourages trading on a comparative advantage as oppose to absolute advantage. This is because the ideology of international trade bases its operations on comparative advantage. In this macroeconomic philosophy, the producing country benefits from generating commodities at a lower cost than the competing nation. Conversely, in absolute advantage, the producing country benefits from using fewer resources to manufacture a product in comparison to another state. Since New Zealand depends on foreign trade, it is important to adopt the ideology of comparative advantage in order to obtain higher returns from the transactions. For instance, a comparison between wheat production in Australia and New Zealand indicates a comparative advantage for the latter country. This is because New Zealand is able to cultivate large quantities of wheat at low production costs. Conversely, it has an absolute advantage over Australia in cotton production, an aspect that provides more benefits to Australia (Heyne, Boettke & Prychitko, 2003).

Question 4

Opportunity cost for producing clothing;

New Zealand: 1 clothe= 0.2 cans of milk powder

China: 1 clothe= 0.5 cans of milk powder

Opportunity cost for producing milk powder;

New Zealand: 1 can of milk powder= 5 clothes

China: 1 can of milk powder = 2 clothes

Based on these calculations, in comparison to China, New Zealand has a lower opportunity cost of producing milk powder as opposed to clothes. For this reason, New Zealand should focus on the production of milk powder while china should export clothing. This is because of the differences in opportunity costs. According to comparative advantage, a state should produce a commodity that has a low opportunity cost compared to other countries.

Question 5

The botulism scare in the dairy sector of New Zealand has had an adverse effect on the national economy. This is because of the reduction of exports to countries such as china and Russia. With these nations being the leading importers of New Zealand’s dairy products, most companies have had to reduce their production in order to avoid heavy losses. One of the affected corporations was Fonterra, a major manufacturer and exporter of dairy products. This firm is the fourth largest producer of dairy products with a yearly income of $ 16 billion. With China being its largest market, the executive of this company had to address the situation through government assistance in order to control the situation. Furthermore, the country’s currency depreciated by two cents in comparison to the American dollar. This occurred immediately after the announcement. To save the situation, the government has employed 60 personnel and substantial amount of funds to support industries affected by the scare (Heyne, Boettke & Prychitko, 2003). This is essential in promoting the competitive status of companies such as Fonterra and the entire New Zealand economy.

Question 6 (a)

There are several positive and negative externalities related to market prices.  For example, if a trader sells a commodity at a lower cost than the market value, other potential buyers will use it as a justification to buy other products at reduced charges. Nonetheless, positive externality may occur when prices lower rationally. This results in the expansion of the market where more people are able to access essential commodities. Externalities in dairy farming include the use of personal experiences to promote the industry (Heyne, Boettke & Prychitko, 2003). For example, in Japan, dairy farmers use their experiences to motivate young people. This helps in developing the sub sector.

Question 6 (b)

Evaluation of externalities related to market prices is important in the New Zealand economy. This is because the government seeks to ensure that traders sell their products at prices that concur with the purchasing power of the citizens (Heyne, Boettke & Prychitko, 2003). The relevant authorities also aim at promoting the business sector in order to facilitate the acquisition of higher returns by traders in all sub sectors.

Section 3

Question 1

According to the economy of New Zealand, the country is at the peak stage of the business cycle. A percentage growth of 2.5 % in the year ending March 31st 2013 indicates the pinnacle of the expansion section. This is on line with the government’s objectives with regard to economic growth. With various sub sectors experiencing massive expansion in their operations, there is reduced unemployment in the country. Moreover, the production rate of various commodities is able to meet the market demand. Consequently, the Gross Domestic Product (GDP) is at its highest mark (Heyne, Boettke & Prychitko, 2003). This is an indication that the economic activity of the country is encouraging and is ion line with the developmental objectives.

Question 2

The botulism scare experienced in New Zealand has had an effect on the circular flow and current account of the nation’s economy. To start with, there is an unstable reciprocation of resources between the producers and consumers. This is because of the reduced demand of dairy products from Fonterra. This results in reduced income for the producers as well as lesser products for the consumers. Likewise, there is an effect on the current account of the country. This refers to the payments balance that includes the trade balance, factor proceeds, and fiscal transfers (Heyne, Boettke & Prychitko, 2003). Following the botulism scare, china and Russia stopped importing dairy products from New Zealand. Consequently, the net returns on exports were lesser than the costs of imports. Other aspects such as money transfers and factor revenue decreased.

Question 3

Based on the Fonterra botulism scare, GDP is a more appropriate measurement technique compared to the circular flow. This is because the Gross Domestic Product comprises of all aspects involved in the transaction of goods. This includes a detailed comparison between import payments and export proceeds. With this tactic, it is possible to obtain a comprehensive effect of the botulism scare on the economy of the country as well as foreign investments. Conversely, the circular flow only indicates the flow of products and income in the market. There is minimal information regarding the consequences of the product quality panic on other sectors of the national economy(Heyne, Boettke & Prychitko, 2003).

Question 4 (a)

GDP= C + I + G + (EX- IM)

Where; C = domestic consumptions

I = gross investments by the corporate sector

G = government procurement of tangible and intangible products

EX = export value

IM = imports

126,990 + 40,231 + (42, 415 + 1, 309) + (60,620 – 60,044)

GDP = $ 211,521

Question 4 (b)

The calculated Gross Domestic product is a nominal figure. This is because it does not consider the inflation and deflation elements of the national economy. The calculation is an overview of all products and services generated throughout the year. Consequently, the Consumer Price Index (CPI) is not part of the calculations. CPI is a tool used to measure inflation in a country’s economy. The Consumer Price Index considers locally and internationally produced commodities as the main mode of inflation detection (Heyne, Boettke & Prychitko, 2003). Based on this argument, it is safe to state that the figure calculated indicates the nominal Gross Domestic Product of New Zealand.

Question 4 (c)

The free trade agreements have been beneficial to the New Zealand economy. This is because of the high returns from exports and the reduced international deficit in business transactions with other countries. In the recent past, New Zealand has had beneficial trade relations with countries such as China, United States, and the European Union. Consequently, the value of exports surpasses the payments made on importation of various goods and services. This has a positive effect on the current account of the country (Heyne, Boettke & Prychitko, 2003). With the high level of foreign exchange, the international trade deficit for New Zealand is lower, a feature that influenced the national economic growth.



Mankiw, N. G. (2007). Principles of economics. Mason, OH: Thomson/South-Western.

Callander, A. (2004). Understanding the economic environment. Wellington, N.Z: LexisNexis NZ.

Heyne, P. T., Boettke, P. J., & Prychitko, D. L. (2003). The economic way of thinking: Paul Heyne, Peter J. Boettke, David L. Prychitko. Upper Saddle River, NJ: Prentice Hall.














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