Market economic system — practice question

Before you answer Question 1, study the source material carefully. Source material: Economic changes in Montenegro Montenegro is a European country where the private sector has become more important. By 2020, 90% of state-owned firms had been privatised. All commercial banking, telecommunications and aluminium production has moved into private ownership. The country’s banks now use more computers, employ more workers and have more office buildings. In most years, Montenegro receives three times as many tourists as the number of people living there. Tourism is a highly competitive market. Demand for holidays is price-elastic, which affects the pricing strategy used by firms in the industry. The share of workers employed in tourism and other tertiary sector industries has risen. In 2020, 75% of Montenegro’s labour force were employed in the tertiary sector. Some workers in the primary sector help to produce and export oranges. It has been proposed that a minimum price should be fixed for oranges and some other crops. Changes in the price of a country’s exports can influence both the trade in goods and services balance and the current account balance of its balance of payments. Table 1.1 shows selected details of six East European countries’ balance of payments in 2020. The amount and pattern of consumer spending affect a country’s international trade position. Privatisation has influenced consumer spending. Moving into the private sector has changed investment, the number of workers employed and competition in these industries. It has also affected firms’ objectives, prices and how quickly they respond to changes in consumer demand. In 2020, Montenegro had very low inflation. It was expected that this might become deflation. A fall in the price level could affect the country’s output, employment and balance of payments.