IB Economics - Internal Assessment

School code

Name of School

006047

EF International Academy - Tarrytown NY

Candidate name

Alexmary Romero

Candidate number

VEP 190091

Teacher

T. Kwabi

Tittle of the article

Airlines keep cutting off Venezuelans from

tickets

Source of the article

USA Today
http://www.usatoday.com/story/news/world
/2014/01/24/venezuela-airlines-suspend-tic
ket-sales/4826171/

Date the article was published

01/24/2014

Date commentary was written

01/30/2014

Word count (750 words maximum)

750

Section of the syllabus the article

relates to (please tick the one that is
most relevant)

Airlines keep cutting off Venezuelans from tickets

CARACAS, Venezuela Air Canada on Friday joined a growing list of international
airlines suspending ticket sales in Venezuela over the country's refusal to exchange
billions of bolivars for U.S. dollars.

"We received notification of Air Canada's decision yesterday,'' said Mildred Amaro,
who runs Barquero Tours in the central industrial city of La Victoria. "Other airlines
are not making seats available."

Spain's Air Europa was the first airline to suspend sales this month and has been
followed by a number of other carriers. This week, Ecuador's TAME suspended all
flights to Venezuela because of the currency issue.

International airlines say they are owed up to $2.6 billion for bolivars they received as
payments for flights that by contract are supposed to be exchanged for U.S. dollars by
Venezuela. Many airlines have waited months for their dollars.

Given the delay, airlines are reluctant to accept more business from Venezuelans.

It is likely Venezuela is avoiding the exchange in a bid to protect its dwindling

international reserves and free up money needed for imports.

Venezuelan Tourism Minister Andres Izarra said this week that the government was
seeking to resolve the impasse with airlines and could pay what's owed in a mixture of
cash, bonds and free jet fuel.

Airlines flying to Venezuela will hold a meeting Monday to address the situation, the
country's airline association said.

The meeting will discuss Venezuela's decision today to reduce the amount of dollars
travelers can apply for when traveling abroad, which allowed Venezuelans to make
huge amounts of money because of the difference in the artificial exchange rate set by
Venezuela and the true higher rate on the international market.

Before today, Venezuelans who had an international airline ticket could exchange
bolivars in Venezuela for up to $3,000. The dollars would be credited to a credit card
and withdrawn as cash overseas. The cash was then brought back to Venezuela and
exchanged for bolivars on the black market, which pays a much higher exchange rate
than the Venezuelan government.

Travelers would often go abroad and spend only a fraction of their allowance and
bring back the rest to sell on the country's black market for a substantial profit.

The reduction is likely to cut into the demand for tickets from such speculators.

Venezuela receives millions of dollars from selling its oil, which it requires to be paid
for in U.S. dollars, so it could use those dollars to pay the airlines. But the country
pays for many goods with dollars as well, and partly because of inefficiencies in its
state-run economy, it imports 70% of its food.
Weakening oil prices and falling crude production in Venezuela due to ineffective
extraction by its state-run oil company has resulted in a drop in dollars coming in
as well.

The market economy is based on the forces of supply and demand, with no or

little government control. However, when we talk about a completely free market,
it can be define as an idealized way where the market economy allows buyers and
sellers to interact freely, under the conditions of a mutual agreement in price and
without any government intervention.
For an efficient economy should have market equilibrium, meaning a satisfactory
price where the supply of goods matches demand, therefore buyers and sellers are
in a state of equilibrium.
Venezuela has been suffering its worst economy ever, where the foreign exchange
is everyday more restricted. Because of that, now Air Canada has retired its sales
of tickets in Venezuela, due the huge debt that Venezuelas government has with
them, therefore it is joining to a growing list of international airlines that have
suspended their tickets sales in the south american country.
Currently, there is a high demand by venezuelans to travel internationally, but
with the government mismanagement, to get a ticket for an international flight, can
be a truly odyssey. Tickets are every time more expensive, as a consequence of the
fall in quantity supplied, all these as a result of the measures imposed by the
government to reduce the parallel dollar illegal transactions.

Effect of cut off airlines tickets

Why government does not pay its debts? There has been in incredible run out of
money, causing problems in international flights, where people who travel abroad,
receive a considerable amount of money by government, in a cheap exchange
(being a subsidize dollar), eventually come back to Venezuela earlier, and exchange
the rest of their dollars for bolivars on the black market, making higher profits than
from the Venezuelan Government.
Venezuelan government owes a lot of money (up to 2.6 billion of bolivars ) to
international airlines; companies that want their payments exchange from bolivars
to dollars, which supposed to be done many months ago. Due that Venezuela has a
planned economy, foreign exchange must be done by government. However,
airlines have not receive any payment yet, so they are too dissapointed and
reluctant to make business from Venezuelans. All these inducing to fall in supply,
which means a shift to the left for the supply curve (
S
1
S
2). Consequently there
is an increase in tickets price from
P
e to
P
2 and also a decrease in quantity
demanded from
Q
e to
Q
2. We can notice that we have a movement along the
demand curve, because now there are less people willing and able to buy those
tickets at that given price; moreover the new equilibrium e

2 would be very
inestable, with the fact that everyday more airlines retire their sale of tickets in
Venezuela, supply will shift to the left sporadically. However, everything seems to
be planned, the reduction in demand has been largely imposed by the state, to
prevent such speculations in the black market, but in the other hand, also closing
venezuelan borders by air.
The best solution in this case would be very complex, Venezuelas economics
situation is frail. Hence there must be efficient methods to fix this current problem.
We can take advantage that Venezuelas oil income is in dollars, so with that money
the debt can be paid, although with the dollars also pay many import products, the
main one is food. If Venezuela pays to the airlines, encourage national production
(food), improve crude production and increase its oil price to venezuelans, then we
can see positive results.

Effect is airlines tickets by paying them in dollars

If Venezuelan government does the incredible effort of pay its debt to the
international airlines, and assure them a stability of payment to satisfy the
demand for international flights in the Caribbean country. These will lead to a
incredible increase in the supply curve, having a shift to the right (
S
1
S
2). Seeing
that, there would be an increase in quantity demanded from
Q
1 to
Q
2, also as a
consequence of the fall in the price, from
P
1 to
P
2. As a result, there would be an
equilibrium way more stable, were as producers as consumers are happy.
We can also advise, that to maintain the equilibrium Venezuela should get other
ways to increase its revenue in dollar, and also decrease its imports of food. The
crude production can improve, making the extraction more effective, moreover, the
national production of food must have a subsidy to stop wasting money by
importing them, and then Venezuela could be better.