Question

< > a paper of approximately 750 words that answers all of the following questions. Use the contemporary economic issue with Cuba

What is the economic issue?

Why is it important?

Which principles of economics apply? Choose from each of the areas: decision making, interaction, and how the economy works.

How do the forces of supply impact the issue?

How do the forces of demand impact the issue?

How does elasticity apply to the issue? If appropriate, include a calculation for elasticity.

< > graphical representations of economic concepts such as supply and demand curves, equilibrium, elasticity, and cost curves to support your findings.< > the theories of economics that apply (for example, theory of consumer choice, theory of the firm)?< > the issues faced in the economic issue chosen and how it relates to the economic topics discussed in the textbook and class. For example, do any of these concepts apply to the issue: efficiency of markets, costs of taxation, benefits of international trade, government interventions, competitive markets, features of labor markets, macroeconomics data, monetary system, and economic fluctuations?

Answer 1

The Cuban economy is one that is constantly challenged by issues. Where majority of the countries rely more on free market forces to determine the functioning of the economy, with minimum government intervention in required sectors, Cuba lags behind because of its political and bureaucracy systems. In a world which relies blindly on technology and internet, Cuba is famous for having very little access to the same. Cuba is one of the world’s largest Communist dictatorships with too much state control, making the economy very inefficient. When the free market forces are allowed to work, the outcome is efficient and lies in everyone’s best interests. However, constant control and forceful allocation of resources in the wrong places has plagued the Cuban economy with various issues. Some of them include overriding poverty in many parts of the economy. This is because of a lack of basic resources where people just about survive through food shortages and other necessities. The quality of education is very low which affects human capital and thus the production in the economy. Quality healthcare is also not available to the Cuban economy. However, recently, an issue that made the headlines was how Venezuela’s oil exports to Cuba have adversely affected the economy and led to shocking levels of power shortages in Cuba. This is the economic issue that is going to be focussed in this paper.

Firstly, Cuba’s trading partners are also limited. One of the primary exporters of oil to Cuba was Venezuela. However, as the oil industry began to give way in Venezuela, the ripple effects that Cuba faced were horrifying. This issue is extremely important because Cuba has suffered from severe energy shortage which even led to a cut in public lighting. Fuel is an integral part of production and at alarmingly low levels the productivity of Cuba’s industries hit an all time low. The tourism industry which has made a prominent mark in Cuba has begun to suffer.

Out of the three broadly classified heads of Economic Principles, the area of “Interaction” applies most to this economic issue. However, decision making and how the economy works also get affected at secondary levels. Interaction usually involves how trade can make everyone better off. It also stresses on the importance of markets. Both of these are lacking in Cuba as everything is essentially controlled by the government. Neither does Cuba have a good number of trade partners to make it better off, nor are the market forces allowed to efficiently allocate resources. Comparisons of Cuba’s imports and exports show that it runs a huge deficit. Unless Cuba increases exports, specialization and gains from trade will not increase. Its limited number of trading partners is also a big disadvantage to Cuba. Moreover, like other centrally planned economies that failed, Cuba too did not allow markets to work freely. A good economy harps on the fact that government should step in where markets fail to allocate resources, for example in the case of public goods which have externalities. However in Cuba, it is the government that controls every activity and dictates working of market against its natural forces, thereby reducing efficiency levels to the minimum.

Cuba being heavily dependent on Venezuela for the supply of oil, experiences a leftward shift in the supply curve. This is shown in the graph by a shift of S to S’. Since oil is an import of Cuba, and oil is an input in other productions, a shortage of oil raises the price of oil and thus reduces production from other industries as the cost of input rises. Further, in addition to lack of domestic production of oil, the lack of implementing government policies favourable to trade reduces the supply of oil in Cuba.

The demand on the other hand, goes on increasing as oil is a major input for most of the activities of households and firms. The demand curve this shifts to the right from D to D’. Equilibrium changes from E to E’ followling from a rise in price from P to P’ and fall in quantity from Q to Q’ as is shown in the diagram of Cuba’s oil market.

Elasticity refers to the degree of responsiveness with respect to quantity, due to change in price. Since supply of oil consists of exports from Venezuela, the exporting country will retract from supplying to other countries when its own supplies are at risk. Moreover, since domestic cost of oil production is high and profits are low, domestic producers of oil shift to other industries. Thus, supply fluctuates largely and supply curve is flatter and relatively elastic. On the other hand, since oil is a necessity and without any close substitute, the demand for oil is inelastic. Not much scope is there to make demand fluctuate, making the demand curve steep and relatively inelastic.

Thus, as the dictatorship continues with fall in supply of oil and rise in demand, Cuba’s economy will experience further downfall, not only in the oil market, but also in other manufacturing sectors resulting from aftershocks of tremors in the oil industry.