Economics for the IB Diploma

Useful suggestions to help you Introduction to the IB Economics exam papers
with exams
long. When you encounter long lists, you should
Here are some general points to bear in mind relating bear in mind that your objective is not to memorise
to your exams. all the items in the list. Your objective, rather, is
to familiarise yourself with the issues at hand, and
• Define key economics terms You must be sure to then choose at least three or four items listed that
include correct definitions of the main economic you try to understand well and can write about in
terms that relate to the topic you are writing about. depth. You are better off learning about fewer items
in depth than many items that you understand only
• Use correct diagrams with correct labelling Most superficially.
exam questions require you to provide a diagram
(and possibly more than one diagram) explaining • Do not use bullets in your writing Whereas
the economic theory you are discussing and that markschemes to IB examination questions are in
illustrates your analysis. You must be sure to provide bullet point form, you should not use bullet points
the correct diagram. In addition, it is very important in your answers to questions. Your written work
that you correctly draw and label your diagram. should take the form of essays.
Even if you provide the right diagram to illustrate
the theory you are referring to, you will lose marks • Practise writing essays You should try to practise
if it is incorrectly drawn or labelled. writing essays, beginning early in your IB
economics course, taking care to include an
• Link diagrams to your writing in exams Whenever you introduction and conclusion, particularly in the
use a diagram, for whatever purpose, you must be case of questions that require longer responses.
sure to explain in your writing what the diagram (This includes all SL and HL paper 1 part (b)
shows and how it helps you arrive at your answer or questions, as well as SL and HL paper 2 part (d)
conclusion. Answers to questions that do not refer questions.) Try to organise your answer before you
to or explain diagrams are likely to lose marks, even begin to write so that your arguments will be clear,
though the analysis and explanations as well as the logical and consistent.
diagrams may be correct (and the diagrams correctly
drawn and labelled). • Write neatly and clearly You must take care that you
write neatly and clearly. A neat paper makes a good
• Clearly state and explain the theory or model you are impression. It would be a pity if you lost marks
using All exam papers, at both standard and higher simply because your handwriting or your diagrams
levels, require use of analytical skills, which means are not readable.
identifying an economic theory, model or concept
and applying it to analyze and explain something. • Manage your time properly in an exam It is very
When referring to economic theories, models or important that you divide the total time you
concepts, you must try to clearly state and explain have in an exam between the various questions
what these are. You may know and understand a and their parts. For example, in SL paper 1 and
theory, but if you don’t explain it clearly, you will HL paper 1, the 90 minutes (one and one-half
not be demonstrating your knowledge and so you hour) you have available must be divided between
may lose marks. the two questions you must answer, so that you
spend about 45 minutes doing one micro question
• Use examples You should try to include examples and 45 minutes for one macro question. Ideally,
that illustrate the topic you are writing about. For you would spend less than 20 minutes on part
example, if you are writing about goods that are (a), which is worth 10 marks, and more than 25
substitutes or complements, you could refer to some minutes on part (b), which is worth 15 marks.
examples of these. In SL paper 2 and HL paper 2, which contain
questions with several parts, it is especially
• What you should do about lists You will find that important that you do not spend too much time
your textbook often makes lists of items that relate on question parts that earn you only a few marks,
to particular topics (for example, the determinants leaving insufficient time for questions that are
of demand or supply, weaknesses of fiscal and worth more marks.
monetary policies). In some cases the lists may be

© Cambridge University Press 2012 Economics for the IB Diploma 6

Exam practice:
paper 1 (SL and HL)

Introduction to paper 1

Paper 1 has the same structure for both
standard and higher levels.

Duration of paper 1 Paper 1: SL and HL
Focus and structure of paper 1
1 hour and 30 minutes

Section A focuses on section 1 of the syllabus (microeconomics). Students must answer
one question from a choice of two.

Structure of questions and marks Section B focuses on section 2 of the syllabus (macroeconomics). Students must
earned in paper 1 answer one question from a choice of two.

Assessment objectives in paper 1 Each question consists of two parts, (a) and (b). Students must answer both parts.

Part (a) earns a maximum of 10 marks, and part (b) a maximum of 15 marks, making a
total of 25 marks for the question.

Part (a) of the questions examines assessment objectives 1, 2 and 4.

Maximum marks earned in paper 1, Part (b) of the questions examines assessment objectives 1, 2, 3 and 4.
and percentage in total IB Economics Since the student must answer two questions, paper 1 earns a maximum of 50 marks.
grade
Paper 1 accounts for 40% of the student’s overall grade at standard level, and 30% of
the student’s overall grade at higher level.

Organisation of paper 1 questions (HL students may note that some chapters may not
in the CD-ROM have any HL questions; this is because there are no
HL topics in these chapters that are examined in HL
Paper 1 questions are organised by section, i.e. section paper 1.)
A on microeconomics followed by section B on
macroeconomics, and by chapter within each section. You will notice that in each chapter there are more
This makes it easier for you to practise exam questions part (a) questions than part (b) questions. The reason
as you study each chapter in the textbook. for this is that the syllabus contains more learning
outcomes with command terms that correspond
The syllabus consists of ‘SL/HL core’ topics, which to assessment objective 2, which is the one most
are topics that are common to both SL and HL, and commonly used for part (a) questions. (For example,
of HL topics that are for HL only. Corresponding Chapter 2 has no command terms at all corresponding
to this division, the questions in each chapter have to assessment objective 3, and therefore no part (b)
been divided into ‘SL/HL core’, which should be questions.) Note that you will find markschemes to
attempted by all students at both SL and HL, and many of the paper 1 questions on the teacher support
‘HL’ which should be attempted by HL students. website at ibdiploma.cambridge.org.

© Cambridge University Press 2012 Economics for the IB Diploma 1

Exam practice: paper 1 (SL and HL)

Paper 1 section A: Microeconomics concept of excess supply, analyse the effects
of falling costs of agricultural inputs and
Chapter 2 Competitive markets: technological improvements in agriculture
demand and supply on the affordability of food. [10 marks]

SL/HL core topics 2.10 (a) Using the production possibilities model,
(SL paper 1 and HL paper 1) explain how scarcity, choice and opportunity
cost are related to each other. [10 marks]

Part (a) questions 2.11 (a) Assuming an increase in the market demand
for chocolate, analyse the role of the price
2.1 (a) Explain the meaning of the law of demand, mechanism in reallocating resources.
and using examples and diagrams, [10 marks]
distinguish between movements along and
shifts of the demand curve. [10 marks] 2.12 (a) Assuming a fall in the market supply of oil,

analyse the role of the price mechanism in

2.2 (a) Explain the meaning of the law of supply, reallocating resources. [10 marks]

and using examples and diagrams, 2.13 (a) Explain how allocative efficiency is related

distinguish between movements along and to the concepts of consumer surplus and

shifts of the supply curve. [10 marks] producer surplus. [10 marks]

2.3 (a) ‘Quantity demanded increases as price 2.14 (a) Using the concepts of marginal benefit
falls. Yet as demand falls, price falls.’ Using
diagrams, explain whether these two and marginal cost, explain how allocative
statements contradict each other.
[10 marks] efficiency is achieved at competitive market

equilibrium. [10 marks]

2.4 (a) ‘Quantity supplied increases as price Chapter 3 Elasticities
increases. Yet as supply increases, price falls.’
Using diagrams, explain whether these two SL/HL core topics
statements contradict each other. (SL paper 1 and HL paper 1)
[10 marks]
Part (a) question
2.5 (a) You observe that over time, the number of
3.1 (a) Referring to the four elasticity concepts
computers produced and sold increases, and and their respective meanings, distinguish
between those elasticities that involve
the price of computers falls. Using diagrams, movements along a demand or supply curve,
and those that involve shifts of the curve(s).
explain whether this violates the law of [10 marks]

supply. [10 marks] Part (a) and part (b) questions

2.6 (a) You observe that over a period of some years 3.2 (a) Using examples, explain the factors that
the price of strawberries has increased, and determine whether the demand for a good
the quantity of strawberries consumers buy is price-elastic or price-inelastic.
has also increased. Using diagrams, explain [10 marks]
whether this violates the law of demand.
[10 marks] (b) Increases in the price of petrol (gasoline)
have led taxi drivers to increase taxi fares
2.7 (a) In the standard demand and supply analysis, in the hope that their revenues will rise.
an increase in demand, ceteris paribus, leads Evaluate their decision on economic
to a larger equilibrium quantity supplied, grounds.
and yet supply does not change. Using a [15 marks]
diagram, explain how this is possible.
[10 marks] 3.3 (a) While the price elasticity of supply for
primary commodities is often relatively low,
2.8 (a) Growing populations and rising incomes in that of manufactured goods is relatively
high. Using diagrams, explain why.
economically less developed countries have [10 marks]

affected the price of meat, which is a normal

good. Referring to the concept of excess

demand, analyse the effects on the price of

meat by use of a diagram. [10 marks]

2.9 (a) Using a diagram, and referring to the

© Cambridge University Press 2012 Economics for the IB Diploma 2

(b) ‘A producer of a good can expect to increase Exam practice: paper 1 (SL and HL)

total revenue by increasing the price of Chapter 4 Government intervention

the good produced and sold.’ Examine the

validity of this statement, using diagram(s) SL/HL core topics
(SL paper 1 and HL paper 1)
in your answer. [15 marks]

3.4 (a) Using examples, explain the factors that Part (a) questions
determine whether the supply of a good
is price-elastic or price-inelastic. 4.1 (a) Explain in what circumstances a government
[10 marks]
might impose indirect (excise) taxes and

(b) Examine the relevance to producers and subsidies. [10 marks]
the economy of differing values of income
elasticity of demand for primary products, 4.2 (a) Using diagrams, explain how indirect
manufactured products and services.
[15 marks] (excise) taxes and subsidies may lead to over-

or underproduction of a good and allocative

inefficiency. [10 marks]

3.5 (a) Suggest likely values for the price elasticity 4.3 (a) Explain why governments sometimes impose
of supply of (i) Picasso’s paintings, and (ii) price ceilings and price floors. [10 marks]
copies of Picasso’s paintings. [10 marks]
4.4 (a) Using diagrams, explain how price

(b) Examine the importance of a knowledge ceilings and price floors lead to over- or

of cross-price elasticity of demand to firms underproduction of a good and allocative

facing changing prices of substitute or inefficiency. [10 marks]

complementary goods. [15 marks] 4.5 (a) ‘Price controls, like indirect taxes and
subsidies, are a form of government
3.6 (a) It is often observed that the price elasticity intervention in the market, yet they differ in
that price controls give rise to disequilibrium
of demand for primary commodities is market outcomes.’ Explain. [10 marks]

relatively low while that of manufactured

goods is relatively high. Using diagrams,

explain why. [10 marks] 4.6 (a) The ceiling of a room is its upper surface and
the floor is its lower surface. Yet in demand
(b) Examine the importance to producers of and supply analysis we have the reverse: a
price ceiling lies below equilibrium price and
price elasticity of demand and income a price floor lies above equilibrium price (if
they are to be effective). Explain why this is
elasticity of demand. [15 marks] so. [10 marks]

3.7 (a) Referring to the concept of income elasticity

of demand (YED) and using examples,

explain the factors that cause YED to have

(i) a positive or negative value, and (ii) a 4.7 (a) Explain, using diagrams, how price ceilings
and price floors give rise to shortages (excess
value less than one or a value greater than demand) and surpluses (excess supply).
[10 marks]
one. [10 marks]

(b) Using the concept of YED, examine why

agriculture is often referred to as a ‘declining Part (a) and part (b) questions

industry’. [15 marks] 4.8 The government decides to impose an indirect
tax on wine of €0.15 per litre.
3.8 (a) Referring to the concept of cross-price
elasticity of demand (XED) and using (a) Using a diagram, analyse the effects on
examples, explain the factors that cause XED
to have a positive, negative or zero value. market outcomes. [10 marks]
[10 marks]
(b) Discuss the consequences of the tax for

(b) A government interested in increasing its stakeholders. [15 marks]

tax revenues favours the imposition of 4.9 The government decides to grant a subsidy on
milk of €0.15 per litre.
an indirect tax on yachts rather than on

cigarettes. Examine whether its preference (a) Using a diagram, analyse the effects on

for taxing yachts can be justified on market outcomes. [10 marks]

economic grounds. [15 marks] (b) Discuss the consequences of the tax for

stakeholders. [15 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 3

4.10 A government wants to provide income support Exam practice: paper 1 (SL and HL)
for farmers, and is debating whether to provide
subsidies or price floors for agricultural products HL (HL paper 1)
with government purchases of the excess
supplies. Part (a) question
4.15 (a) Using diagrams, explain how the incidence
(a) Explain the effects of the two policies on
(burden) of indirect taxes on consumers and
the quantity of the good produced and on producers is affected by the price elasticity of
demand and the price elasticity of supply of
allocative efficiency. [10 marks] the particular goods being taxed.

(b) Compare and contrast the effects of each [10 marks]
policy on market outcomes and stakeholders.
[15 marks] Chapter 5 Market failure

4.11 In 1973, OPEC (Organization of the Petroleum SL/HL core topics
Exporting Countries) increased the price of crude (SL paper 1 and HL paper 1)
oil, which is the key input in petrol (gasoline)
production. This led to an increase in the price Part (a) questions
of petrol. Some countries initially responded
by imposing price controls (a price ceiling) on 5.1 (a) Analyse the meaning of ‘market failure’,
petrol. using the concept of allocative efficiency.
[10 marks]
(a) Explain the impacts of the price ceiling in

the petrol market. [10 marks] 5.2 (a) Referring to the difference between (i)
marginal private and marginal social
(b) Examine the consequences of the policy benefits, and (ii) marginal private and
marginal social costs, explain why
of petrol price ceilings on the economy externalities are a type of market failure.
[10 marks]
(including resource allocation and welfare)

and stakeholders. [15 marks]

4.12 The United States and the European Union 5.3 (a) Using the concept of a negative production
(EU) use price floors for sugar to support sugar
producers. externality, explain the impacts on resource

(a) Explain the impacts on the US or EU market allocation and social welfare of the practice

for sugar. [10 marks] in some poor countries where very poor

(b) Examine the consequences for the economy farmers clear forests to create more arable
(including resource allocation, welfare and
government measures to dispose of the land for farming. [10 marks]
surpluses) and stakeholders. [15 marks]
5.4 (a) Using the concept of a negative consumption

externality, explain the impacts on resource

4.13 (a) Using a labour market diagram, explain allocation and social welfare of the use of

the impacts on the labour market and the petrol (gasoline) for cars. [10 marks]

economy of the imposition of a minimum 5.5 (a) Using the concept of a positive production
externality, explain the impacts on resource
wage that is above the equilibrium wage for allocation and social welfare of a firm’s
discovery of a new robot technology that is
unskilled labour. [10 marks] widely adopted by other firms. [10 marks]

(b) Discuss the consequences for stakeholders.
[15 marks]

4.14 Greece has legislation that determines a national 5.6 (a) Using the concept of a positive consumption
minimum wage. At one time the government externality, explain the impacts on resource
proposed that the law be suspended (not allocation and social welfare of a possible
enforced) in areas that have high unemployment. discovery of a cure for HIV/AIDS.
Public reaction to the proposal was mixed, with [10 marks]
some people in favour and others against.

(a) Explain what the proposal was trying to Part (a) and part (b) questions

achieve. [10 marks] 5.7 (a) Explain how government regulations can

(b) Discuss the likely impacts of such a policy, be used to correct negative production

considering who may gain, who may lose, externalities arising from the use of fossil

and why. [15 marks] fuels. [10 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 4

Exam practice: paper 1 (SL and HL)

(b) Evaluate the effectiveness of government 5.15 (a) ‘An indirect tax imposed by the
government on petrol (gasoline) for the
regulations. [15 marks] purpose of addressing the problem of
pollution will be less effective the more
5.8 (a) Explain how market-based policies can inelastic is the demand for petrol.’ Explain.
[10 marks]
be used to correct negative production

externalities arising from the use of fossil

fuels. [10 marks]

(b) Evaluate the effectiveness of market-based (b) Discuss alternative policies governments may
pursue to correct the negative externalities
policies. [15 marks] caused by the use of petrol (gasoline).
[15 marks]
5.9 (a) Explain how tradable pollution permits (cap
and trade schemes) permits can lead to an 5.16 (a) Explain how merit goods and public goods
improvement in the allocation of resources. each represent a type of market failure.
[10 marks] [10 marks]

(b) ‘Tradable pollution permits (cap and trade (b) Discuss alternative policies that governments

schemes) are the most effective method can pursue to deal with each of these types

governments can use to deal with the of market failure. [15 marks]

problem of fossil fuel emissions.’ Discuss

this view. [15 marks] 5.17 (a) Using the concepts of rivalry and

5. 10 (a) Explain how carbon taxes can lead to an excludability and providing examples,
improvement in the allocation of resources.
[10 marks] distinguish between private goods and

public goods. [10 marks]

(b) ‘Carbon taxes are the most effective method (b) Discuss the implications of direct

governments can use to deal with the government provision of merit goods and

problem of fossil fuel emissions.’ Discuss public goods. [15 marks]

this view. [15 marks] 5.18 (a) Referring to the difference between common
access resources and resources purchased by
5.11 (a) Explain how the provision of subsidies can firms, explain why common access resources
pose a threat to sustainability. [10 marks]
help correct positive production externalities

resulting from a firm’s activities in research

and development (R&D). [10 marks] (b) Compare and contrast carbon taxes and cap
and trade schemes as alternative policies to
(b) Evaluate alternative government responses deal with threats to sustainability.
[15 marks]
to the problem of positive production

externalities. [15 marks]

5.12 (a) Explain how the provision of subsidies 5.19 (a) Using the concept of common access

can help correct positive consumption resources, explain how economic growth

externalities resulting from the consumption based on use of fossil fuels and extreme

of education services. [10 marks] poverty can both lead to unsustainable

(b) Compare and contrast alternative policies resource use. [10 marks]

that might be used by government in an (b) Evaluate alternative government policy

effort to correct positive consumption responses to correct production and

externalities. [15 marks] consumption externalities that threaten

5.13 (a) Using the concept of ‘merit good’, explain sustainability. [15 marks]
why education and health care services are
underprovided by the market. [10 marks] 5. 20 (a) Explain why international co-operation may
be necessary in order for governments to
(b) Discuss policy options available to deal effectively with threats to sustainability.
governments to correct this problem. [10 marks]
[15 marks]
(b) Discuss the potential contributions of two

5.14 (a) Explain the difference between merit goods of the following for achieving sustainability:

and demerit goods. [10 marks] (i) legislation, (ii) carbon taxes, (iii) cap

(b) Examine policies governments can use to trade schemes, and (iv) funding for clean

correct the problems posed by merit and technology. [15 marks]

demerit goods. [15 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 5

HL (HL paper 1) Exam practice: paper 1 (SL and HL)

Part (a) and part (b) questions Chapter 7 The theory of the firm II:
Market structures
5.21 (a) Explain why information asymmetries are a (Higher level topic)

type of market failure. [10 marks] HL topics (HL paper 1)

(b) Evaluate possible government responses Part (a) and part (b) questions

aimed at the correction of information 7.1 (a) Using diagrams, explain what it means for a

asymmetries. [15 marks] firm to be a ‘price-taker’. [10 marks]

5.22 (a) Using the concept of welfare loss, explain (b) ‘It is useless to study the market model of

why monopoly power is a type of market perfect competition because it does not allow

failure. [10 marks] for the possibility of economies of scale,

(b) Discuss government responses to the a feature of many real-world industries.’
problem of monopoly power. [15 marks]
Evaluate this statement. [15 marks]

Chapter 6 The theory of the firm I: 7.2 (a) Explain the relationship between price,
Production, costs, revenue and profit the demand curve, average revenue and
(Higher level topic) marginal revenue for firms that have market
power and firms that do not. [10 marks]

(b) Compare and contrast perfect competition

HL topics (HL paper 1) and monopoly with respect to social welfare

in the long run. [15 marks]

Part (a) questions 7.3 (a) Explain why a firm in perfect competition

6.1 (a) Explain the law of diminishing marginal that earns supernormal profits in the short

returns, referring to average and marginal run is unable to maintain the same profit

product curves. [10 marks] levels in the long run. [10 marks]

6.2 (a) Explain the difference between (b) ‘Monopoly will always be a less efficient
market structure compared to perfect
diminishing marginal returns and competition.’ Evaluate this view.
[15 marks]
decreasing returns to scale. [10 marks]

6.3 (a) Distinguish between decreasing returns 7.4 (a) Using diagrams, explain under what
to scale and diseconomies of scale.
[10 marks] conditions a perfectly competitive firm will

6.4 (a) Using a diagram, explain the relationships (i) continue to produce in the short run

between the average product and marginal even though it is making a loss, and (ii) shut

product curves, and the average variable cost down in the short run. [10 marks]

and marginal cost curves. [10 marks] (b) ‘Perfect competition is the only market

6.5 (a) Explain the factors accounting for the structure where efficiency is achieved;

downward-sloping portion of the average therefore, it should always be the preferred

total cost curve in the short run and in the form of market organisation.’ Evaluate

long run. [10 marks] this view. [15 marks]

6.6 (a) Explain the difference between increasing, 7.5 (a) Using diagrams, explain under what
decreasing and constant returns to scale and
their relevance to a firm’s cost curves. conditions a perfectly competitive firm will
[10 marks]
(i) shut down in the short run, and (ii) shut

down in the long run. [10 marks]

6.7 (a) Explain the difference between the short (b) Compare and contrast the profit-maximising
run and the long run as this applies firm in perfect competition and monopoly
to the firm’s production and costs. with respect to price and output levels.
[10 marks] [15 marks]

6.8 (a) Use the concept of normal profit to explain 7.6 (a) Referring to barriers to entry, explain
why a firm might be interested in keeping
its business running even though it may be whether there is a difference between the
earning zero economic profit. [10 marks]
short-run and long-run equilibrium of the

monopolist. [10 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 6

Exam practice: paper 1 (SL and HL)

(b) ‘Monopoly should be regulated by the (b) Evaluate the view that perfect competition

government because it always gives rise to is a preferable type of market structure to

socially undesirable effects.’ Evaluate this monopoly. [15 marks]

statement. [15 marks] 7.14 (a) Explain how the short-run and long-run

7.7 (a) Using a diagram, explain the meaning of equilibrium positions of a monopolist and a

‘natural monopoly’. [10 marks] firm in monopolistic competition differ from

(b) Evaluate the view that producers are the each other. [10 marks]
only stakeholders that can benefit from a
monopoly market structure. [15 marks] (b) Evaluate the desirability of monopoly from
consumers’ and society’s point of view, and
7.8 (a) Explain the role of product differentiation compare with monopolistic competition.
in making the demand and revenue curves [15 marks]
facing the monopolistically competitive firm
similar to those of a monopolist. 7.15 (a) Explain why prices in non-collusive
[10 marks]
oligopoly tend to be stable over extended

periods of time. [10 marks]

(b) ‘In contrast to monopoly, monopolistically (b) Evaluate the role of legislation and regulation
competitive firms earn normal profit in the designed to reduce monopoly power.
long run; therefore, they are a more efficient [15 marks]
type of market structure.’ Discuss.
[15 marks] 7.16 (a) Distinguish between collusive and non-

collusive oligopoly. [10 marks]

7.9 (a) Analyse the role of non-price competition (b) Discuss the view that governments

for firms in monopolistic competition and should always try to increase the degree

oligopoly. [10 marks] of competition in industries by reducing

(b) ‘Monopolistic competition is preferable to monopoly power. [15 marks]

perfect competition because it allows for 7.17 (a) Analyse the goals, incentives and difficulties

consumer choice.’ Discuss. [15 marks] faced by a cartel. [10 marks]

7.10 (a) Explain whether a firm in perfect (b) Explain how the ‘prisoner’s dilemma’ facing
two oligopolistic firms, Alpha and Beta,
competition is able to achieve allocative and shown in the figure below, illustrates the
firms’ interdependence and their conflicting
productive efficiency in the short run and in incentives to compete or to collude.
[15 marks]
the long run. [10 marks]

(b) Evaluate the view that whereas monopoly

is likely to be inefficient, it offers benefits to

society that firms under perfect competition Alpha

are unable to provide. [15 marks] High price Low price

7.11 (a) Explain how the short-run and long-

run equilibrium positions of a firm in Profit = Profit =
$ 20 $ 35
monopolistic competition may differ from High price
million million
each other. [10 marks]
4 2
(b) ‘Firms in perfect competition and in Profit = Profit =
$ 20 $5
monopolistic competition are equally
million million
efficient because they both earn zero
Beta
economic profit in the long run.’ Evaluate

this statement. [15 marks] Profit = Profit =
$5 $ 10
7.12 (a) Explain whether a firm in monopolistic Low price
million million
competition can achieve allocative and
3 1
productive efficiency. [10 marks] Profit = Profit =
$ 35 $ 10
(b) Compare and contrast perfect
competition with monopolistic competition. million million
[15 marks]

7.13 (a) Explain desirable and undesirable features of 7.18 (a) Explain how a revenue-maximising
monopolist decides how much output to
a monopoly firm. [10 marks] produce and what price to charge.
[10 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 7

Exam practice: paper 1 (SL and HL)

(b) A publisher who is a monopolist agrees to (b) Examine the output approach, the income
approach and the expenditure approach to
pay the author of a book 10% of revenues measuring national income and the value of
output produced by an economy.
from the sales of the book. Using diagrams, [15 marks]

compare and contrast the price and quantity

most likely preferred by the author and the

price and quantity most likely preferred by 8.8 (a) Explain whether you agree or disagree with
the following: If a government wants a
the publisher. [15 marks] measure of its population’s average income
level it should use GDP per capita figures; if
7.19 (a) Explain the conditions that must be satisfied it wants a measure of the quantity of output
produced on average per person it should use
for a firm to be able to practise price GNI (GNP) per capita figures. [10 marks]

discrimination. [10 marks]

(b) Using diagrams, analyse the role of price

elasticity of demand in third-degree price

discrimination practised by a profit- (b) Evaluate the use of national income statistics

maximising firm. [15 marks] as the basis for making comparisons over time

and as the basis for comparing the standard of

Paper 1 section B: Macroeconomics living across countries. [15 marks]

Chapter 8 The level of overall Chapter 9 Aggregate demand and
economic activity aggregate supply

SL/HL core topics SL/HL core topics
(SL paper 1 and HL paper 1) (SL paper 1 and HL paper 1)

Part (a) questions

8.1 (a) Using a diagram to show the income flow Part (a) questions

of the circular flow model, identify the four 9.1 (a) Distinguish between ‘demand’ in

factors of production and their respective microeconomics and ‘aggregate demand’ in

payments. [10 marks] macroeconomics. [10 marks]

8.2 (a) Using a circular flow diagram, explain how 9.2 (a) Explain the differing factors that give rise
to a negatively sloped demand curve and a
the size of the flows will change depending negatively sloped aggregate demand curve.
[10 marks]
on the relative size of leakages and

injections. [10 marks]

8.3 (a) Explain the possible importance of using 9.3 (a) Describe the four components of aggregate
demand and explain two factors that
‘green GDP’ as a measure of economic influence each of these components and shift
the aggregate demand curve. [10 marks]
activity. [10 marks]

8.4 (a) Using a business cycle diagram, explain the

phases of the business cycle and the long- 9.4 (a) Explain the reasoning behind the shapes of

term growth trend. [10 marks] the short-run aggregate supply (SRAS) curve

8.5 (a) Using the circular flow model, describe the and the long-run aggregate supply (LRAS)

relationship between the income flow, the curve. [10 marks]

expenditure flow and the value of output 9.5 (a) Explain the reasoning behind the shapes of
the long-run aggregate supply (LRAS) curve
flow. [10 marks] and the Keynesian AS curve. [10 marks]

8.6 (a) Explain what factors can account for

different values of GDP and GNI (GNP) for a 9.6 (a) Referring to two factors that can cause an

single country. [10 marks] increase in short run aggregate supply,

analyse the impacts on the economy in the

Part (a) and part (b) questions short run. [10 marks]

8.7 (a) Using the circular flow model, explain what 9.7 (a) Analyse the possible effects on an
might happen to the level of income of an
economy if it experiences an increase in economy of falling consumer and
exports and an increase in taxes.
[10 marks] producer confidence. [10 marks]

9.8 (a) Distinguish between short-run equilibrium

and long-run equilibrium in the monetarist/

new classical perspective. [10 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 8

Exam practice: paper 1 (SL and HL)

9.9 (a) Using the concepts of inflationary and Chapter 10 Macroeconomic objectives I:
recessionary (deflationary) gaps, explain Low unemployment, low and stable rate
whether or not it is possible for the of inflation
equilibrium level of real GDP to differ from
the full employment level of real GDP in the SL/HL core topics
monetarist/new classical long run; and in the (SL paper 1 and HL paper 1)
Keynesian version of the AD-AS model.
[10 marks] Part (a) questions

9.10 (a) Using diagrams, explain the factors that can 10.1 (a) Distinguish between the causes of frictional,
seasonal and cyclical unemployment.
cause shifts in the long-run aggregate supply [10 marks]

(LRAS) and Keynesian AS curves over the

long term. [10 marks] 10.2 (a) Explain the possible causes of structural

unemployment. [10 marks]

Part (a) and part (b) questions 10.3 (a) Distinguish between the consumer price

9.11 (a) An economy that finds itself at long-run index and producer price index, referring to

equilibrium experiences a fall in interest the uses of each. [10 marks]

rates. Explain the impacts over the short run

and over the long run. [10 marks] Part (a) and part (b) questions

(b) Assume that the economy is in a recessionary 10.4 (a) Explain the difficulties involved in

(deflationary) gap and there is unemployment measuring unemployment. [10 marks]

of labour. In the absence of government (b) Discuss the consequences and costs of

intervention, compare and contrast what unemployment. [15 marks]

will happen in the view of a monetarist/

new classical economist and in the view of a 10.5 (a) Using diagrams, distinguish between cost-
push and demand-pull inflation. [10 marks]
Keynesian economist. [15 marks]

9.12 (a) Using diagrams, distinguish between (b) Examine possible consequences for an
economy of a high rate of inflation.
inflationary and recessionary (deflationary) [15 marks]

gaps. [10 marks]

(b) Compare and contrast possible equilibrium 10.6 (a) Referring to how inflation is measured,

outcomes in the macroeconomy using the explain some problems in accurately

monetarist/new classical LRAS curve and measuring inflation. [10 marks]

Keynesian AS curve. [15 marks] (b) Compare and contrast the possible

9.13 (a) Explain why an economy experiencing a consequences for an economy of inflation

recessionary (deflationary) gap will revert to and deflation. [15 marks]

long-run equilibrium in the monetarist/new 10.7 (a) Using diagrams to show possible causes of
inflation, explain why economists measure a
classical model. [10 marks] core/underlying rate of inflation. [10 marks]

(b) ‘Increases in aggregate demand will always

lead to increases in the economy’s price (b) ‘While both inflation and deflation are

level.’ Discuss this view. [15 marks] undesirable, deflation poses greater risks for

9.14 (a) Explain why, in the Keynesian perspective, an economy compared to inflation.’ Discuss

an economy may achieve equilibrium at any this statement. [15 marks]

level of output. [10 marks] 10.8 (a) Explain why the rate of inflation experienced
by different income groups may be different
(b) Compare and contrast the expected impact from the rate of inflation calculated by use of
of an increase in aggregate demand on the the consumer price index (CPI). [10 marks]
price level in the monetarist/new classical
and Keynesian perspectives. [15 marks] (b) ‘Since inflation has negative consequences

9.15 (a) Using the monetarist/new classical model, for an economy, policy-makers should aim
distinguish between short-term fluctuations in
output and long-run equilibrium. [10 marks] toward achieving deflation.’ Discuss this

view. [15 marks]

(b) Given a fall in interest rates, examine the Note: Questions relating to policies to deal with
unemployment and inflation will be included in
possible impacts on the long-run equilibrium Chapter 12 (see textbook, page 347).

of an economy. [15 marks] Economics for the IB Diploma 9

© Cambridge University Press 2012

Exam practice: paper 1 (SL and HL)

HL topics (HL paper 1) Part (a) and part (b) questions

Part (a) and part (b) questions 11.7 (a) Oceanland produces two types of goods:

civilian goods and military goods. Using the

10.9 (a) Using a Phillips curve diagram, explain how production possibilities model, describe the

stagflation impacts on unemployment and factors that can cause economic growth in

inflation. [10 marks] Oceanland. [10 marks]

(b) Using a Phillips curve diagram, discuss the (b) ‘There is an inevitable trade-off between

possible trade-off between unemployment economic growth and sustainability.’

and inflation. [15 marks] Evaluate this statement.* [15 marks]

10.10(a) Using the concept of the natural rate of 11.8 (a) Using the monetarist/new classical model,
unemployment, explain the relationship
between the long-run aggregate supply curve describe the factors that can cause economic
and the long-run Phillips curve. [10 marks]
growth, shown as an increase in potential

output. [10 marks]

(b) Compare and contrast the policy (b) ‘Improvements in a population’s standards
implications of the short-run and long-run
Phillips curves regarding a possible trade-off of living and income distribution are the
between inflation and unemployment.
[15 marks] natural outcomes of economic growth.’

Discuss this statement.* [15 marks]

Chapter 11 Macroeconomic objectives II: 11.9 (a) Explain why investment in different types of
Economic growth and equity in the capital is important for economic growth.
distribution of income [10 marks]

SL/HL core topics (b) Discuss the likely consequences of economic
(SL paper 1 and HL paper 1) growth for an economy’s unemployment,
inflation and its current account.*
[15 marks]

11.10(a) Referring to the distinction between direct

and indirect taxes, explain how direct taxes

Part (a) questions can be used to redistribute income in favour

11.1 (a) Explain the importance of productivity of lower income groups. [10 marks]
improvements for economic growth.
[10 marks] (b) Discuss advantages and disadvantages of

using direct taxes as a method to redistribute

11.2 (a) Referring to the difference between equity income. [15 marks]

and equality, explain why the market system 11.11(a) Explain some causes and consequences of

may lead to an inequitable distribution of poverty. [10 marks]

income. [10 marks] (b) Evaluate the use of transfer payments and

11.3 (a) Explain the following statement. ‘The provision of merit goods as policies to
Lorenz curve and the Gini coefficient are
two different ways to show the same thing; redistribute income. [15 marks]
the first is an illustration and the second is a
measure based on the illustration.’ 11.12(a) Explain two methods (other than direct
[10 marks]
taxes) that governments can use as methods

to redistribute income in favour of lower

income groups. [10 marks]

11.4 (a) Explain methods that can be used to measure (b) Compare and contrast alternative policies
the degree of equality (or inequality) of
income distribution in a population. to promote greater equality in income
[10 marks]
distribution with respect to their possible

effects on efficiency. [15 marks]

11.5 (a) Explain the difference between absolute 11.13(a) Mountainland has a Gini coefficient 0.53
poverty and relative poverty. [10 marks] and Flatland of 0.35. Draw their possible
Lorenz curves in the same diagram and
11.6 (a) Using examples, explain the difference explain which of the two countries has a
more equal distribution of income.
between proportional, progressive and [10 marks]

regressive taxation. [10 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 10

Exam practice: paper 1 (SL and HL)

(b) Mountainland’s government decides to 12.8 (a) Using diagrams, describe how fiscal policy
increase direct taxes and make them more
progressive, and to use the additional tax can be used to close recessionary and
revenues to increase transfer payments and
provision of merit goods. Draw a possible inflationary gaps. [10 marks]
new Lorenz curve for Mountainland, and
evaluate the use of these policies. (b) Evaluate the effectiveness of fiscal policy.
[15 marks] [15 marks]

* This topic is discussed in Chapter 19, but is 12.9 (a) Explain the following statement: ‘Fiscal
included here because its corresponding learning
outcome appears in Chapter 11 (see page 301) and policy has a dual role: it can help smooth
is therefore examined in paper 1 section B under
macroeconomics out short-term fluctuations in economic

activity, and it can help promote growth in

potential output.’ [10 marks]

Chapter 12 Demand-side and (b) Evaluate the following statement. ‘Demand-
supply-side policies side policies can only deal with short-term
stabilisation (price stability and unemployment)
SL/HL core topics whereas supply-side policies can only promote
(SL paper 1 and HL paper 1) long-term economic growth.’ [15 marks]

12.10(a) Using diagrams, explain how monetary

policy can be used to close recessionary and

inflationary gaps. [10 marks]

(b) Evaluate the effectiveness of monetary

Part (a) questions policy. [15 marks]

12.1 (a) Explain the sources of government revenues 12.11(a) Referring to the objectives of supply-side
and the categories of government spending. policies, distinguish between interventionist
[10 marks] and market-based supply-side policies.
[10 marks]
12.2 (a) Explain the following statement: ‘The shape

of the aggregate supply curve may be an (b) Evaluate supply-side policies with respect to

important factor influencing the effects of their ability to reduce unemployment and

demand-side policies.’ [10 marks] lower the rate of inflation. [15 marks]

12.3 (a) Referring to the role of central banks in the 12.12(a) Explain two types of interventionist

economy, and using a demand and supply of supply-side policies and their expected

money diagram, explain how interest rates effects on aggregate demand and

are determined. [10 marks] aggregate supply. [10 marks]

12.4 (a) Referring to contractionary and (b) ‘Supply-side policies may have a positive

expansionary policy, analyse the role of impact on economic growth but this

interest rates in influencing the level of always comes at the cost of increased

aggregate demand. [10 marks] income inequalities and a negative effect

12.5 (a) Distinguish between the policy of inflation on the government budget.’ Evaluate this

targeting and policies that aim to balance statement. [15 marks]

the objectives of full employment and low 12.13(a) Explain how labour market reforms

inflation. [10 marks] intending to make the labour market more

12.6 (a) Explain how policies that are intended to flexible might contribute to growth in
encourage competition might contribute to
growth in potential output. [10 marks] potential output. [10 marks]

(b) Evaluate the policy of labour market

reforms by considering their impacts on

Part (a) and part (b) questions employment, inflation, economic growth

and equity. [15 marks]

12.7 (a) Explain how automatic stabilisers help 12.14(a) Explain how incentive-related policies are

smooth out short-term fluctuations of the intended to lead to a rightward shift in the

business cycle. [10 marks] LRAS curve. [10 marks]

(b) Compare and contrast the effectiveness of (b) Evaluate incentive-related policies with

fiscal policy and monetary policy in dealing respect to their effects on the economy and

with recession. [15 marks] stake holders. [15 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 11

Exam practice: paper 1 (SL and HL)

12.15(a) Using a diagram, explain the meaning of (b) Evaluate policies that can be used in an
effort to lower this type of unemployment.
stagflation. [10 marks] [15 marks]

(b) Evaluate the following statement. ‘Whereas

both fiscal and monetary policies can be 12.21(a) Explain the following statement. ‘One way

used to close inflationary and deflationary that a government can try to increase the

gaps, they cannot successfully address economy’s full employment level of output

supply-side causes of economic fluctuations is by pursuing policies that lower structural

(stagflation).’ [15 marks] unemployment.’ [10 marks]

Policy questions on unemployment (b) Discuss what policies might be most effective
and inflation in lowering structural unemployment.
The questions that follow refer to learning outcomes [15 marks]
first appearing in Chapter 10, involving evaluation of
policies to deal with unemployment (page 272) and 12.22(a) Explain why the identification of the cause(s)
inflation (page 281); these questions were postponed for
Chapter 12 where the topics were discussed (page 347). of inflation is important to formulating

appropriate policies to lower the rate of

inflation in an economy. [10 marks]

(b) Evaluate the use of demand-side policies as a
method to reduce inflation. [15 marks]

SL/HL core topics 12.23(a) Explain what policies might be used to lower
(SL paper 1 and HL paper 1)
cost-push inflation. [10 marks]

Part (a) and part (b) questions (b) Evaluate alternative policies that might be
used to deal with cost-push inflation.
12.16(a) Explain why identification of the cause(s) of [15 marks]
unemployment is important to formulating
appropriate policies to lower the rate of HL topics (HL paper 1)
unemployment in an economy. [10 marks]

(b) Evaluate the use of demand-side policies to Part (a) and part (b) questions
lower an economy’s rate of unemployment.
[15 marks] 12.24(a) Explain why it may be difficult to lower the
rate of inflation as an economy approaches
12.17(a) Explain what policies might be used to lower its full employment level of output.
[10 marks]
structural unemployment. [10 marks]

(b) Evaluate the use of supply-side policies as (b) Evaluate policies that a government
measures to lower structural unemployment.
[15 marks] might use to lower the natural rate of

12.18(a) Explain what government policies might unemployment. [15 marks]

be used in an effort to reduce both 12.25(a) An economy that is in a recessionary gap
has an unemployment rate of 10%. The
cyclical (demand-deficient) and structural government decides to pursue demand-side
policies to lower the rate of unemployment.
unemployment. [10 marks] It estimates that the economy’s natural rate
of unemployment is 5%, whereas in fact
(b) Examine policies that governments can use this is actually 7%. Explain the possible
to lower demand-deficient unemployment. consequences of its policies. [10 marks]
[15 marks]

12.19 (a) Referring to contractionary and expansionary (b) Discuss the following statement: ‘If the
policy, analyse the role of interest rates in
maintaining full employment. [10 marks] priority of policy-makers is to lower the

(b) Evaluate the appropriateness of supply-side economy’s rate of inflation, they must be

policies to lower cyclical and structural prepared to accept a higher unemployment

unemployment. [15 marks] rate.’ [15 marks]

12.20(a) Explain the type of unemployment that

occurs when the economy is at less than full

employment equilibrium. [10 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 12

Exam practice:
paper 2 (SL and HL)

Introduction to paper 2

Paper 2 has the same structure for both

standard and higher levels.

Duration of paper 2 Paper 2: SL and HL
1 hour and 30 minutes

Focus and structure of paper 2 Section A focuses on section 3 of the syllabus (international economics), though
students may be required to draw on other parts of the syllabus. Students must answer
one question from a choice of two.

Structure of questions and marks Section B focuses on section 4 of the syllabus (development economics), though
earned in paper 2 students may be required to draw on other parts of the syllabus. Students must answer
one question from a choice of two.

Paper 2 consists of data response questions. Each question consists of four parts, (a),
(b), (c) and (d), which are based on a text/data provided. Students must answer all
parts.

Part (a) is subdivided into two parts, (i) and (ii), each of which is worth 2 marks;
therefore, part (a) is worth a maximum of 4 marks.

Part (b) is worth a maximum of 4 marks.

Part (c) is worth a maximum of 4 marks.

Part (d) is worth a maximum of 8 marks.

Assessment objectives in paper 2 Therefore, each question earns a maximum of 20 marks.
Part (a) of the questions examines assessment objective 1.

Part (b) of the questions examines assessment objectives 1, 2 and 4.

Part (c) of the questions examines assessment objectives 1, 2 and 4.

Maximum marks earned in paper 2, Part (d) of the questions examines assessment objectives 1, 2 and 3.
and percentage in total IB Economics Since the student must answer two questions, Paper 2 earns a maximum of 40 marks.
grade
Paper 2 accounts for 40% of the student’s overall grade at standard level, and 30% of
the student’s overall grade at higher level.

© Cambridge University Press 2012 Economics for the IB Diploma 1

Organisation of paper 2 questions Exam practice: paper 2 (SL and HL)
in the CD-ROM
by the fact that much of the section 3 material
Paper 2 questions are organised by section, i.e. section (international economics) and nearly all of the
A on international economics followed by section B section 4 material (development economics) is
on development economics. Section A questions are common to both SL and HL. HL material is examined
further organised by chapter within the international by HL question parts that are marked as ‘higher
economics section. Section B questions in some cases level’. Each HL question part is accompanied by an
are based on more than one chapter (the relevant alternative question part taken from SL/HL core topics,
chapters are indicated). which is marked as ‘core’. This way, all students, at
both SL and HL, can have the benefit of completing
Most (though not all) texts/data are used as the full 20-mark paper 2 questions. Note that you will find
basis of both SL/HL core questions as well as HL markschemes to many of the paper 2 questions on the
questions. (An exception is text/data 12 which is HL teacher support website at ibdiploma.cambridge.org.
only.) This is common IB practice, and is justified

© Cambridge University Press 2012 Economics for the IB Diploma 2

Exam practice: paper 2 (SL and HL)

Paper 2 section A: International economics

Chapter 13 International trade

Text/data 1

Removing quotas on United States textiles

1 Parkdale Mills in North Carolina (in the United States) is like China. However, they accuse China of dumping its 5
one of the largest textile manufacturers in the world. Its chief textiles in international markets, claiming that subsidies 6
executive is worried that tough competition from China granted by the Chinese government on textiles allow
will get far worse after quotas on Chinese textiles (cotton China to sell some finished products at lower prices than
trousers, golf shirts, baby socks and more than 30 more the cost of producing just the yarn and threads in the
products) are removed under a World Trade Organization United States.
(WTO) agreement. The US government has opened a case with the WTO,
intended to stop what are claimed to be Chinese unfair
2 Some years earlier, when similar import barriers were trade practices. If the WTO determines that China is
temporarily removed, Chinese products had flooded the practising dumping, China could face penalties such as
market, and imports of Chinese trousers alone increased anti-dumping tariffs.
by over 1500%. Prices of the imported products fell, and Yet an official of the US International Trade
about 55 000 jobs in the United States were lost. At that Administration claims that China is not even exporting all
time, to put an end to the job losses, the US government the products it is permitted to export to the United States
temporarily re-imposed the quotas that are now to be under WTO rules. Even with reductions in US quotas,
lifted. This time, WTO rules do not permit new quotas to Chinese products still face an average tariff rate of 17%.
be applied again. Lifting the quotas is likely to result in lower prices for
US consumers. He notes that Americans benefit from
3 Parkdale Mills was among those firms that survived the the trade relationship between the US and China. Just as
increased competition from the flood of imports, and still American consumers want to buy Chinese products, so
makes yarn and sewing thread used in Central American Chinese consumers want US products. China is a growing
countries that produce clothing products sold to the United market for US exports.
States. There are now fears that a flood of Chinese products
that do not make use of US-produced yarns and threads Source: Adapted from ‘Expiring quotas threaten textiles’ in the
will seriously affect the US and Central American industry. Charlotte Observer, 29 December 2008.

4 US textile manufacturers say they have learned to
compete against the products of low-wage countries

Question A.1 Question A.2

(a) (i) Define the term dumping identified in bold (a) (i) Define the term quotas identified in bold in

in the text (paragraph 4) [2 marks] the text (paragraph 2). [2 marks]

(ii) Define the term subsidies identified in bold in (ii) Define the term anti-dumping

the text (paragraph 4) [2 marks] tariffs identified in bold in the text

(b) Draw a diagram and use it to explain how the (paragraph 5). [2 marks]

removal of the US quotas on Chinese textiles will (b) Using an appropriate diagram, explain the effects
of subsidies granted to Chinese textiles on Chinese
affect Chinese exports to the US. [4 marks] producers and consumers (paragraph 4).
[4 marks]
(c) Draw a diagram and use it to explain the effects of
the remaining US tariffs on Chinese products on US (c) (higher level) Explain why the theory of
producers, consumers and workers (paragraph 6).
[4 marks] comparative advantage is a more powerful

(d) Using information in the text and your knowledge explanation of the benefits of trade than the

of economics, discuss the benefits that might arise theory of absolute advantage. [4 marks]

from free-trade between the United States and

China. [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 3

Exam practice: paper 2 (SL and HL)

(c) (core) Using an appropriate diagram, explain [2 marks + 2 marks]

how US consumers and producers are likely to be (b) Draw a diagram and use it to explain what type of
unemployment increased in the United States by
affected once the import quotas on textiles are the loss of 55 000 jobs (paragraph 2). [4 marks]

removed (paragraph 6). [4 marks]

(d) Using information in the text and your knowledge (c) Draw a demand and supply diagram and use it

of economics, discuss arguments for and against to explain the likely effects on Central American

trade protection policies for the textile industry in clothing products of the US removal of quotas on

the United States. [8 marks] Chinese textiles. [4 marks]

Question A.3 (d) Using information in the text and your knowledge
of economics, compare and contrast the effects
(a) (i) and (ii) Outline two objectives or functions of of tariffs and quotas, considering their effects on
the World Trade Organization (paragraph 5). stakeholders and the US and Chinese economies.
[8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 4

Exam practice: paper 2 (SL and HL)

Text/data 2

Corporate fraud: free trade

1 Free trade is ruining America.You’d think economists would Most nations have imposed tariffs or quotas to protect 4
feel a duty to explain to our leaders what’s gone wrong. local industries against such cheap foreign competition. 5
Well, that’s their job, but most economists these days work This healthy protection is what free trade agreements 6
for industry, largely the same employers who benefit from seek to eliminate. Expanded to the grand scale of
cheap foreign or imported labour. They’re surely not going world trade, these actions have led to uncontrolled
to sound the alarm. Other economists work for universities, unemployment, a depressed economy and a huge trade
where they are still caught up in ancient ideology, including deficit.
the buzzword ‘comparative advantage’. So why not impose more tariffs to raise prices for
specific foreign goods and services? This would
2 (higher levela) According to comparative advantage, save and possibly create jobs. We could also use
Mexico should send avocadoes to Maine (a state in the the administrative barriers to prohibit entry of those
United States) and get blueberries in return. That way products whose manufacturer destroys the environment
everyone makes a profit. Such is the foolish logic that or abuses workers.
presidents have used to sell free trade agreements to If by any chance you would like to do your bit for the
the government, which the government buys too often. economy, you can urge your government representatives
Unfortunately what is at stake – always – is greed. to oppose upcoming free trade agreements. They would
Manufacturers and marketers don’t know avocadoes from only make unemployment worse. And don’t pay attention
blueberries. But they do seek out cheap labour anywhere to economists on trade issues. Too many have sold out.
they can find it. What’s more, they pay big money to They warn of trade wars, but ignore the damage of the
political campaigns to get it. After all, American workers trade peace we’re suffering today.
aren’t their responsibility.
a SL students can ignore this paragraph and answer the alternative
3 Large agricultural producers also don’t care about questions below marked as ‘core’ based on the rest of the text.
workers and poor farmers. They are heavily subsidised by
the government, and love selling their low-cost products Source: Adapted from William A. Collins, ‘Corporate scam: free
to countries where there is no such subsidy. That may trade’ in The Union Daily Times, 13 November 2010.
drive local farmers out of business but the companies
don’t care.

Question A.4 (d) Using information in the text and your knowledge
of economics, to what extent do you support the
(a) (higher level) (i) and (ii) Describe two sources of author’s perspective on the point that the United
comparative advantage, using examples. States should impose trade barriers to protect jobs
[2 marks + 2 marks] and avoid recession in the United States?
[8 marks]
(a) (core) (i) and (ii) Outline two benefits (gains) that
can be expected to arise from international trade. Question A.5
[2 marks + 2 marks]

(b) (higher level) Assuming Mexico exports avocadoes (a) (i) and (ii) Describe two administrative barriers

and Maine exports blueberries, draw a diagram that can be used as a method of trade protection

and use it to explain the theory of comparative (paragraph 5). [2 marks + 2 marks]

advantage. [4 marks] (b) (higher level) Assuming Mexico exports avocadoes

(b) (core) Using a supply and demand diagram, and Maine exports blueberries, draw a diagram and
explain how the use of ‘cheap labour’ by
manufacturers may lead to increased export use it to explain the theory of absolute advantage
competitiveness (paragraph 2).
(paragraph 2). [4 marks]

(c) Draw an appropriate diagram and use it to explain (b) (core) Draw a diagram illustrating a type of trade
protection of your choice, and use it to explain the
how US subsidies on agricultural products result meaning of ‘trade wars’ (paragraph 6). [4 marks]

in ‘low-cost products’ sold to other countries

(paragraph 3) [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 5

Exam practice: paper 2 (SL and HL)

(c) Using an appropriate diagram, explain how (d) (core) Using information in the text and your

removal of tariffs in the United States may lead to knowledge of economics, discuss the possible

job losses. [4 marks] consequences of a US policy involving increased

(d) (higher level) Using information in the text trade protection measures, as suggested by the

and your knowledge of economics, evaluate the author. [8 marks]

author’s perspective on the point that economists

should advise the government to ignore the theory

of comparative advantage. [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 6

Exam practice: paper 2 (SL and HL)

Chapter 14 Exchange rates and the balance of payments

Text/data 3

Vietnam tries to deal with trade deficit

1 Vietnam’s currency, the dong, is pegged to the US dollar. interest) are expected to double in the next six years. An 4
Following two devaluations in the past six months, the important reason behind the growing foreign debt burden 5
dong’s exchange rate has reached its lowest value in the is the need to finance the large trade deficit.
last seven years. Recently, the central bank bought US$1 Economic policy makers are at the same time determined
billion by selling dong in order to maintain the value of to maintain a high rate of growth, forecast to be 6.5% this
the currency at the lower level. However, some economists year. To achieve this goal, they are pursuing expansionary
claim that the dong is still overvalued. fiscal policy and monetary policy. This increases the
likelihood of inflation and also puts a downward pressure
2 Vietnam is having difficulties achieving macroeconomic on the value of the dong.
stability. It has a persistent current account deficit (due The dong devaluations are likely to help boost exports, but
to a trade deficit), which is very large and growing, and they will also make imports more expensive. This means that
which is putting a downward pressure on the value of the prices of imports of machinery, equipment and other imported
dong. Vietnam is also threatened by inflation. The dong inputs will increase, hurting export competitiveness, and also
devaluations indicate that the government and central bank increasing inflationary pressures. Much of Vietnam’s growth
are attaching greater importance to tackling the problem is based on exports. Yet exports appear to be slowing down.
of the current account deficit rather than the problem of A slowdown in export growth will create difficulties for
inflation. ‘The risk from the trade and balance of payments policy-makers concerned about the widening trade deficit.
deficits remains,’ said Hung, from one of Vietnam’s larger
brokerage firms. ‘A weaker dong is needed to spur exports Source: ‘Vietnam may weaken dong to support exports, SS I says’
and to stabilise the foreign-currency market.’ Analysts say in Bloomberg Businessweek, 20 May 2010; ‘Not all that it seems in
the dong may be devalued again in order to bring Vietnam’s the Vietnamese economy’ in The Nation (Thailand), 19 August 2010;
trade deficit under control. ‘A cheap dong may prove costly for Vietnam’ in The Straits Times
(Singapore), 2 December 2009.
3 Vietnam also faces a large and growing foreign debt. Its
payments for debt servicing (repayment of loans plus

Question A.6 (d) (core) Using information in the text and your

(a) (i) Define the term overvalued (exchange rate) knowledge of economics, discuss the effects
identified in bold in the text (paragraph 1).
[2 marks] of expansionary fiscal and monetary policies

on Vietnam’s trade deficit and the Vietnamese

(ii) Define the term monetary policy identified economy. [8 marks]
in bold in the text (paragraph 4). [2 marks]
Question A.7
(b) Using a foreign exchange diagram, explain the
(a) (i) Define the term current account deficit
effects of the central bank’s purchase of dollars identified in bold in the text (paragraph 2).
[2 marks]
(sale of dongs) on the value of the dong

(paragraph 1). [4 marks] (ii) Define the term inflation identified in bold in

(c) Using an AD-AS diagram, explain how a the text (paragraph 2). [2 marks]

devaluation can affect the rate of inflation in (b) Using an exchange rate diagram, explain how the

Vietnam (paragraphs 2 and 5). [4 marks] pegged (fixed) dong is maintained relative to the

(d) (higher level) Using information in the text dollar. [4 marks]

and your knowledge of economics, evaluate the (c) Explain why the devaluations suggest that the

effectiveness of expenditure-reducing policies that central bank is more interested in the size of

the Vietnamese government and/or central bank the current account deficit than in controlling

could use to correct Vietnam’s persistent current inflation (paragraph 2). [4 marks]

account deficit. [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 7

Exam practice: paper 2 (SL and HL)

(d) (higher level) Using information in the text

and your knowledge of economics, evaluate the Question A.9

effectiveness of expenditure-switching policies that (a) (i) Define the term devaluation identified in

the Vietnamese government and/or central bank bold in the text (paragraph 1). [2 marks]

could use to correct Vietnam’s persistent current (ii) Define the term fiscal policy identified in

account deficit. [8 marks] bold in the text (paragraph 4). [2 marks]

(d) (core) Using information in the text and your (b) Explain two possible consequences of an

knowledge of economics, discuss the possible overvalued dong (paragraph 1). [4 marks]

effects of a new devaluation of the dong (c) Explain why a deficit in the current account results

(paragraph 2). [8 marks] in a downward pressure on the value of the dong

(paragraph 2). [4 marks]

Question A.8 (d) (higher level) Using information in the text and
your knowledge of economics, discuss the possible
(a) (i) Outline the role of the balance of payments consequences of Vietnam’s persistent current
account deficit on the Vietnamese economy.
(paragraph 2). [2 marks] [8 marks]

(ii) Define the term exchange rate identified in

bold in the text (paragraph 1). [2 marks]

(b) Using an exchange rate diagram, explain why (d) (core) Using information in the text and your
expansionary monetary policy puts a downward
pressure on the value of dong (paragraph 4). knowledge of economics, evaluate the policy of
[4 marks]
government intervention to influence the value of

the dong. [8 marks]

(c) Distinguish between a current account deficit and

a current account surplus. [4 marks]

(d) Using information in the text and your knowledge
of economics, discuss the possible effects of a
hypothetical policy decision to move from a
pegged (fixed) dong to a freely floating dong.
[8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 8

Exam practice: paper 2 (SL and HL)

Text/data 4 The sharp drop in exports has led to serious job losses 4
in southern China. Given the expectations of declining 5
China’s trade surplus exports and rising imports, it is believed that the Chinese
government or central bank may try to push down the value
1 Just before the global financial crisis, China was close of the yuan (the Chinese currency). However, it is believed
to surpassing Germany in becoming the world’s largest that the yuan, which is pegged to the US dollar, is already
exporter. However the onset of the crisis caused a sharp undervalued. The large current account surplus is causing
drop in Chinese exports, leaving China as the world’s an upward pressure on the value of the yuan. If its value is
second largest exporter after Germany. Still, China’s pushed even lower, this could give rise to retaliation by the
persistent current account surplus (due to its trade United States. The United States is demanding that China
surplus) increased to record levels. The reason was that revalues its currency.
Chinese imports dropped even more dramatically than its The real problem in China is not low competitiveness,
exports. but weak foreign demand. China cannot rely on exports
when global trade is falling due to recession. The best
2 The drop in Chinese imports was partly due to falling oil way to deal with this problem is to encourage increases
and other commodity prices (causing a fall in the value in domestic demand. Falling domestic interest rates and
of imports). Also, since a large share of China’s imports reduction of government credit restrictions have resulted
(over 50%) consists of raw materials and other inputs used in an increase in bank loans of 19% in the past year, which
to produce exports, falling exports has meant a reduced is likely to support domestic spending.
need to import. Further, imports fell because of weakening
domestic demand. Construction, which relies heavily on Source: Adapted from ‘Surplus to requirements’ in The Economist,
imported materials, has collapsed. 17 January 2009; ‘China: return of the dollar peg?’ in Forbes,
31 March 2009.
3 Due to the global economic crisis and recession, it is
expected that Chinese exports will continue to fall.
Imports, on the other hand, are forecast to increase, as a
result of massive planned increases in the government’s
spending on infrastructure, which will require imports
of raw materials and machinery. Therefore China’s trade
surplus is expected to fall.

Question A.10 Question A.11

(a) (i) Define the term current account surplus (a) (i) Define the term undervalued (exchange rate)
identified in bold in the text (paragraph 1). identified in bold in the text (paragraph 4).
[2 marks] [2 marks]

(ii) Define the term recession identified in bold in (ii) Referring to China’s balance of payments, state
one item that enters as a debit and one that
the text (paragraph 3). [2 marks] enters as a credit in China’s current account.
[2 marks]
(b) Explain two possible consequences of an

undervalued yuan (paragraph 4). [4 marks]

(c) Draw an exchange rate diagram and use it to (b) Explain why a surplus in the current account

explain one way that the Chinese government or results in an upward pressure on the value of the

central bank can use to ‘push down the value of yuan (paragraph 4). [4 marks]

the yuan’ (paragraph 4). [4 marks] (c) Draw an AD-AS diagram and use it to explain
why the global recession caused an increase in
(d) (higher level) Using information in the text and unemployment in southern China (paragraph 4)
. [4 marks]
your knowledge of economics, discuss the possible

consequences of China’s persistent current account

surplus (paragraph 4). [8 marks] (d) Using information in the text and your knowledge
of economics, evaluate the policy option to lower
(d) (core) Using information in the text and your the value of the yuan (paragraph 4). [8 marks]

knowledge of economics, to what extent do you

support the view that China should revalue the

yuan (paragraph 4)? [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 9

Exam practice: paper 2 (SL and HL)

Text/data 5

Sri Lanka’s reserve assets fall to dangerously low levels

1 The reserve assets held by Sri Lanka’s central bank fell Sri Lanka used to peg the rupee to the US dollar. The peg 5
to a level just enough to cover 1.3 months of imports. In was abandoned in favour of a managed float. As a result, 6
addition, its private remittances from workers (income the rupee depreciated, but the central bank intervenes
from abroad), have fallen by nearly 7%. to prevent it from falling to its freely floating exchange
rate value. This is one reason why the central bank’s
2 Imports are contracting sharply in the midst of a global reserve assets have fallen to very low levels. The central
recessionary environment and lower domestic demand. A bank wants to allow the value of the rupee to depreciate
lower demand for imports is partly due to lower worker gradually.
remittances. A textile industry representative argues that the central
bank may not have enough reserves to keep supporting
3 In spite of lower imports, Sri Lanka’s falling exports the rupee, and that if the central bank did not intervene
are causing its huge trade deficit to grow even larger. Its in the foreign exchange market, the rupee would ‘reach
textile exporters state that they are having a harder time an acceptable level’. Domestic interest rates are falling, as
than textile exporters in India or Bangladesh, because of the central bank is loosening its monetary policy, in view
a serious shortage of skilled labour, which is driving up of rapidly falling rates of inflation. This is leading to net
labour costs and making textiles uncompetitive in foreign outflows of portfolio investments, which additionally may
markets. Some textile factories have already closed down result from a more risk-averse attitude (avoidance of risk)
or are reducing their size. Unemployment is expected to on the part of foreign investors.
rise as the textile industry is one of Sri Lanka’s biggest
employers. Source: Adapted from The Economist Intelligence Unit ViewsWire:
News analysis, ‘Sri Lanka economy: outlook – fall in exports to
4 Exporters argue that the rupee (the Sri Lankan currency) slowdown growth’, 22 January 2009; ‘Sri Lanka’s apparel exporters
should be allowed to depreciate to allow exporting firms say depreciation needed’, in Asia Pulse, 21 January 2009; ‘Sri Lanka’s
to regain competitiveness. However, the government foreign reserves fall to US$1.4 billion in Jan’ in Asia Pulse, 18 March
is concerned that a large depreciation would push up 2009.
inflation and import costs, as well as the value of foreign
debt. Sri Lanka just recently succeeded in bringing down
the rate of inflation from over 28% to single digits.

Question A.12 Question A.13

(a) (i) Using information in the text, state one item (a) (i) Define the term central bank identified in

that enters as a credit and one item that enters bold in the text (paragraph 1). [2 marks]

as a debit, in Sri Lanka’s balance of payments (ii) Define the term depreciation identified in

accounts. [2 marks] bold in the text (paragraph 4). [2 marks]

(ii) Define the term reserve assets identified in (b) Using an exchange rate diagram, explain the effect

bold in the text (paragraph 1). [2 marks] of outflows of portfolio investments on the value

(b) Using an exchange rate diagram, explain how the of the rupee (paragraph 6). [4 marks]

rupee would reach ‘its freely floating exchange rate (c) Explain how a managed float (managed exchange

value’ (paragraph 5). [4 marks] rate) operates (paragraph 5). [4 marks]

(c) Using a diagram, analyse the effects of the (d) Using information in the text and your knowledge
of economics, discuss the policy options available
shortage of skilled workers on textile firms’ export to the government and central bank of Sri Lanka
to avoid a rapid depreciation of the rupee.
competitiveness (paragraph 3). [4 marks] [8 marks]

(d) Using information in the text and your knowledge

of economics, evaluate the central bank’s decision

to avoid a rapid depreciation of the rupee

(paragraph 5). [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 10

Exam practice: paper 2 (SL and HL)

Text/data 6 60% of the value of exports produced by export-oriented 4
enterprises. Strong dependence of production of export
Mauritius’ policy dilemma goods on imports makes demand for these very price- 5
inelastic. 6
1 The Mauritius Finance Minister and Central Bank Therefore, import expenditures may not fall much as a
Governor are considering what to do with the rupee (the result of a rupee depreciation. In addition, depreciation
Mauritian currency): appreciate it to fight inflation, or may not lead to an increase in the volume of exports. Since
depreciate it to increase export competitiveness. In fact, depreciation increases the prices of imported inputs, the
export competitiveness appears to be dominating in their effect of higher costs of production may be so strong as to
minds. They appear to be thinking that rupee depreciation lead to a drop in export volumes.
will work to increase exports and lower imports, whereas By the same logic, exports need not fall as a result of
appreciation will do the opposite. Recent high inflation currency appreciation, which might even cause export
is due mainly to increases in prices of imported food and volumes to increase. Whereas the rupee appreciated
oil. The central bank recently lowered interest rates to strongly after 2007, exports were not negatively affected.
prevent large inflows of financial capital, and to prevent an Export competitiveness can also be achieved through
appreciation of the rupee. productivity increases, which can be pursued through
improvements in human capital and physical capital
2 In earlier years, a rupee depreciation did not work to including new technology development, as well as
improve Mauritius’ current account on its balance of improvements in management practices.
payments. Between 2003 and 2006, the rupee went from
1 pound sterling = Rs 47.30 to Rs 66.95. Yet the current Source: ‘AAGM: coping with food inflation’ in L’Express, 16 April,
account went from surplus in 2003 to deficit over the 2008; ‘AAGM: the competitiveness mantra’ in L’Express, 28 May
following years. 2008.

3 One possible explanation relates to price elasticity
of demand for imports and exports. The demand for
imports in Mauritius may be highly price-inelastic. The
reason is that exports have a large import content. It is
estimated that imports of raw materials and intermediate
goods required for production of exports represent about

(c) (higher level) Explain the J-curve effect and why it

Question A.14 does not appear to apply in the case of Mauritius

(a) (i) Define the term appreciation identified in (paragraph 3). [4 marks]

bold in the text (paragraph 1). [2 marks] (c) (core) Explain the kind of exchange rate system in

(ii) Outline the meaning of productivity use in Mauritius. [4 marks]
identified in bold in the text (paragraph 6).
[2 marks] (d) (higher level) Using information in the text and

your knowledge of economics, compare and

(b) (higher level) Using the Marshall–Lerner condition, contrast the effectiveness of expenditure-reducing

explain the effects of the rupee depreciation of policies and supply-side policies to increase

2003–6 on Mauritius’ current account competitiveness that the Mauritius government

(paragraph 2). [4 marks] and/or central bank could use to correct the

(b) (core) Use a supply and demand diagram to suggest current account deficit. [8 marks]

a possible reason why the rupee appreciation after (d) (core) Using information in the text and your
knowledge of economics, discuss the policy option
2007 did not lead to a decrease in the volume of to allow the value of the rupee to depreciate.
[8 marks]
exports (paragraph 5). [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 11

Exam practice: paper 2 (SL and HL)

Text/data 7

Riverland’s balance of payments problems

Riverland’s economy faces several problems. It has a reaching an expected 0.7% for the current year (2010). It
relatively high rate of inflation at 8%, which is expected has a poverty rate of 25%. Further, it has a highly inflexible
to rise further due to cost factors, including increases labour market.
in the price of its oil and other commodity imports. Riverland has also been experiencing balance of payments
Unemployment is estimated to be 11%, though this is difficulties over many years. The table below presents its
likely to be an underestimate because of the presence of balance of payments accounts for the year 2010.
extensive hidden unemployment. Its public debt is high
(at 75% of GDP). Its rate of growth has been falling,

Balance of payments accounts for Riverland, 2010 (billions of Rvl) −230
−25
1 Current account +55
2 Balance of trade in goods +37
3 Balance of trade in services −163
4 Income
5 Current transfers +12
6 Balance on current account +15
7 Capital account +27
8 Capital transfers
9 Transactions in non-produced, non-financial assets +67
10 Balance on capital account +12
11 Financial account +40
12 Direct investment +119
13 Portfolio investment +17
14 Reserve assets
15 Balance on financial account
16 Errors and omissions

(c) Referring to item 4 (income) in Riverland’s balance

Question A.15 of payments accounts, explain what was likely to

(a) (i) Outline the meaning of balance of trade in be larger in Riverland in 2010: GNI per capita or

goods (row 2 in the table). [2 marks] GDP per capita. [4 marks]

(ii) Outline the meaning of direct investment (d) (higher level) Using information in the text and
table, and your knowledge of economics, compare
(row 12 in the table). [2 marks] and contrast the use of demand-side policies
and supply-side policies as methods to correct
(b) Using the concepts of debits and credits, explain Riverland’s balance of payments problems.
[8 marks]
which of the three accounts has a surplus and

which has a deficit. [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 12

Exam practice: paper 2 (SL and HL)

(d) (core) Using information in the text and table, (b) Draw an exchange rate diagram and use it to show

and your knowledge of economics, evaluate the effect of the change in reserve assets (row 14 in

possible economic consequences of depreciation/ the table) on the value of the Rvl. [4 marks]

devaluation of the Rvl. [8 marks] (c) Explain what would likely happen to the value of

Question A.16 the Rvl if Riverland switched to a freely floating

exchange rate system. [4 marks]

(a) (i) Outline the meaning of balance of trade in (d) Using information in the text and table, and your
knowledge of economics, examine the possible
services (row 3 in the table). [2 marks] consequences of an overvalued Rvl. [8 marks]

(ii) Outline the meaning of capital transfers

(row 8 in the table). [2 marks]

(b) Considering the entry for reserve assets (row 14 in Question A.18

the table), explain what type(s) of exchange rate (a) (i) Outline the meaning of current transfers

system Riverland could have. [4 marks] (row 5 in the table). [2 marks]

(c) Explain what item in Riverland’s balance of (ii) Outline the meaning of transactions in

payments accounts is most likely to have led to its non-produced, non-financial assets

balance of payments difficulties. [4 marks] (row 9 in the table). [2 marks]

(d) Using information in the text and table, and your (b) Using the concepts of debits and credits and the
information in the table, explain how the current
knowledge of economics, compare and contrast account, capital account, financial account and
errors and omissions are related to each other.
the likely effectiveness of alternative exchange [4 marks]

rate systems in addressing Riverland’s economic

problems. [8 marks]

Question A.17 (c) Using information in the table, explain why the

(a) (i) Outline the meaning of income (row 4 in the Rvl might be overvalued. [4 marks]

table). [2 marks] (d) Using information in the text and table, and

(ii) Outline the meaning of portfolio your knowledge of economics, examine the
investment (row 13 in the table). [2 marks]
interdependence of Riverland’s current account

and financial account. [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 13

Exam practice: paper 2 (SL and HL)

Text/data 8

Dilemmas facing the Turkish economy

The Turkish economy went through a major currency on financial capital inflows. High interest rates have caused
and banking crisis in 2001, but with assistance from the the lira (the Turkish currency) to appreciate, making exports
International Monetary Fund (IMF) that imposed restrictive less competitive. It has a high rate of unemployment.
fiscal and monetary policies, it has made substantial While the rate of inflation (measured by the consumer
progress toward achieving macroeconomic stability. It has price index) fell dramatically in 2003–4, it still remains
a market-oriented economy which has experienced high high compared to the OECD average. In addition, there
rates of economic growth, above the OECD* average (see is high inequality in income distribution. According to the
the diagrams below), it has diversified its exports and the OECD, Turkey should pursue fiscal restraint by avoiding
rate of inflation has come down. However, it is still faced large budget deficits, in view of its large public debt.
with problems that the government must address. It has a Also, it should adopt supply-side policies to encourage
large current account deficit, and therefore relies heavily competition, including labour market reforms.

GDP, annual % increase Consumer prices, annual % increase
Turkey
10 Turkey 25
OECD 8 20
2003 04 05 06 07 08 09 6 OECD 15
4 2003 04 05 06 07 08 09 10
2 5
0 0

Unemployment as % of labour force

Current account deficit as % of GDP 0 Turkey 12
2 10
2003 04 05 06 07 08 09 4 OECD 8
Figure cs.1 Turkey 6 2003 04 05 06 07 08 09 6
8 4
Source: Data from OECD. 2

* The OECD is the Organisation for Economic Co-operation and Source: Adapted from: The Economist, 17 July 2008; OECD,
Development, and consists of many of the countries of the Euro- ‘Economic Survey of Turkey 2008’, 17 July 2008.
pean Union, plus Australia, Canada, Iceland, Japan, Korea, Mexico,
New Zealand, Norway, Switzerland, Turkey and the United States.

© Cambridge University Press 2012 Economics for the IB Diploma 14

Exam practice: paper 2 (SL and HL)

Question A.19 Question A.20

(a) (i) Define the term budget deficit identified in (a) (i) Outline the meaning of public debt

bold in the text. [2 marks] identified in bold in the text. [2 marks]

(ii) Define the term consumer price index (ii) Outline the meaning of labour market
reforms identified in bold in the text.
identified in bold in the text. [2 marks] [2 marks]

(b) Explain why Turkey’s large current account deficit (b) Using an AD-AS diagram, explain the likely
makes it dependent on financial capital inflows.
[4 marks] effects of supply-side policies on Turkey’s export

(c) Using an exchange rate diagram, analyse the likely competitiveness. [4 marks]

impact of Turkey’s relatively high rate of inflation (c) Using an exchange rate diagram, analyse the

on the value of the lira. [4 marks] impact of Turkey’s high interest rates on the value

(d) Using information in the text, the diagrams of the Turkish lira. [4 marks]

and your knowledge of economics, discuss the (d) (higher level) Using information in the text, the
diagrams and your knowledge of economics, justify
likely effects of lira appreciation on the Turkish two policies you would recommend to the Turkish
government to reduce the current account deficit.
economy. [8 marks] [8 marks]

(d) (core) Using information in the the text, the
diagrams and your knowledge of economics,
evaluate the OECD’s policy recommendation that
Turkey should pursue supply-side policies.
[8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 15

Exam practice: paper 2 (SL and HL)

Chapter 15 Economic integration and the terms of trade

Text/data 9

Asia free trade zone raises hopes and fears

1 At the stroke of midnight on the last day of 2009, China may be flooded by cheaper Chinese imports, resulting in 4
and ASEAN (a trading bloc of ten nations in southeast the closure of small domestic firms and higher structural
Asia*) launched the world’s largest free trade area (FTA) unemployment. Cambodian textile producers are fearful
in terms of population (1.9 billion people) and the third of the Chinese garment industry. Vietnamese consumer
largest in terms of combined GDPs. The FTA is known as goods production could also be damaged. In Indonesia,
CAFTA (China-ASEAN Free Trade Area). The agreement worries are focused on the textile and steel industries. On
will result in lower tariffs on 90% of traded goods. the other hand, it is also possible that Chinese farmers may
be affected by increased agricultural product imports from
2 CAFTA is expected to lead to large increases in trade Malaysia, Thailand and Vietnam.
between members. For ASEAN countries, increased Supporters of the FTA agree that while it is likely to bring
access to the Chinese market of 1.3 billion people will about benefits, governments should pursue policies to
produce benefits including more opportunities to achieve ensure broad participation in the benefits of growth. The
economies of scale, improved efficiency in production due World Bank argues that the FTA is a gold mine for growth,
to greater competition, lower prices and increased choices but governments must make more investments in public
for consumers. Producers may benefit from greater choice goods and merit goods, and ensure that growth improves
and access to cheaper inputs and materials from China, as standards of living for all citizens.
well as increased exports. For example, Malaysia could
gain from increases in exports of palm oil, rubber and * The countries of ASEAN (Association of Southeast Asian Nations),
natural gas to China. China will benefit as manufacturers initially consisted of Brunei, Indonesia, Malaysia, Singapore, the
satisfy their growing demand for raw materials imports, Philippines, and Thailand, and were later joined by Cambodia, Laos,
while materials exporters similarly benefit from export Myanmar and Vietnam.
growth.
Source: ‘Asia free-trade zone raises hopes, and some fears about
3 However, the FTA also carries dangers. Some poorer China’ in The New York Times, 31 December 2009;‘ACFTA offers
ASEAN countries may not be ready to compete with opportunities for Indonesia: WB’ in The Jakarta Post, 9 April 2010.
more efficient and lower cost producers in China, and

Question A.21 the view that ‘the FTA is a gold mine for growth’

(a) (i) Define the term trading bloc identified in (paragraph 4)? [8 marks]

bold in the text (paragraph 1). [2 marks] Question A.22

(ii) Define the term structural unemployment (a) (i) Define the term free trade area identified in
identified in bold in the text (paragraph 3).
[2 marks] bold in the text (paragraph 1). [2 marks]

(b) Using a tariff diagram, explain why Cambodian (ii) Define the term merit good identified in bold

textile producers are fearful of the Chinese garment in the text (paragraph 4). [2 marks]

industry (paragraph 3). [4 marks] (b) Using a trade protection diagram of your choice,

(c) (higher level) Draw a diagram illustrating explain why formation of a free trade area increases

economies of scale and use it to explain how competition among producers in the trading bloc

countries forming a free trade area can gain from (paragraph 2). [4 marks]

economies of scale (paragraph 2). [4 marks] (c) Using a tariff or quota diagram, explain why the

(c) (core) Using a supply and demand diagram, FTA is likely to lead to lower prices for consumers

explain how ‘access to cheaper inputs and (paragraph 2). [4 marks]

materials from China’ will help producers’ export (d) Using information in the text and your knowledge
of economics, discuss the view that the costs
competitiveness (paragraph 2). [4 marks] of CAFTA membership may be greater than the
benefits for CAFTA’s poorer member countries.
(d) Using information in the text and your knowledge [8 marks]
of economics, to what extent would you support

© Cambridge University Press 2012 Economics for the IB Diploma 16

Exam practice: paper 2 (SL and HL)

Text/data 10

Africa’s main trading bloc works on customs union

1 Leaders from Africa’s largest trading bloc, the Common in income levels, giving rise to concerns that some weaker 6
Market for Eastern and Southern Africa (COMESA*), economies could face deteriorating economic conditions 7
met to discuss steps toward greater economic integration due to increased competition, as well as due to loss of tariff
between its 19 member countries. The member countries revenues on which they are highly dependent.
of COMESA are home to 400 million people, representing (higher levela)The evidence suggests that while COMESA
half of Africa’s population, with a total GDP of over has given rise to some trade creation effects, it has not led
US$270 billion. to much trade diversion.
There are hopes that monetary union will eventually
2 Founded in 1994, COMESA replaced a preferential trade include Africa’s other two major trading blocs, the East
agreement that was in place since 1981. Though called African Community (EAC**) and the Southern Africa
a ‘common market’ from the outset, economic integration Development Community (SADC***). As of 2008, there
began through the gradual formation of a free trade area, has been agreement to harmonise trading arrangements
established in 2000 when nine of the member-states among the three blocs, with a view to creating a free trade
eliminated their tariffs on products originating within area that will include all the member states, with the goal
COMESA. COMESA plans to form a customs union in of eventually establishing a single customs union.
2012, and to complete monetary union by 2018.
a SL students can ignore this paragraph and answer the questions
3 COMESA is actively working on issues of tariff alignment below marked as ‘core’ based on the rest of the text.
among the member countries. As noted by its secretary- * COMESA includes Burundi, Comoros, the Democratic Republic of
general, ‘Member-states are obliged to act collectively as Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar,
any unilateral action by a member state would undermine Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda,
the very essence of the Customs Union.’ Zambia and Zimbabwe
** EAC includes Burundi, Kenya, Rwanda, Tanzania, Uganda.
4 COMESA is also working on improving transport and *** SADC includes Angola, Botswana, Democratic Republic of
communications infrastructure and administration in order Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique,
to facilitate the movement of goods, services and people Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and
between the member countries; creating a legal framework Zimbabwe.
to encourage private sector growth; establishing a secure
investment environment; and harmonising macroeconomic Source: COMESA website (http://about.comesa.int); ‘Historic first
and monetary policies throughout the region. EAC-SADC-COMESA Tripartite Summit’ in The African Executive, 5
November 2008; ‘Comesa all set to usher in new era’ in Mmegi, 25
5 The establishment of the customs union is expected to September 2009; J. W. Musila (2005) ‘The intensity of trade creation
boost regional trade and investment among participating and trade diversion in COMESA, ECCAS and ECOWAS: a compara-
countries and promote their economic growth. However, tive analysis’ in Journal of African Economies, Vol. 14(1).
several countries have not yet participated in the free
trade area. There are broad differences among countries

Question A.23 (c) (core) Distinguish between a customs union and a

(a) (i) Define the term economic integration common market. [4 marks]
identified in bold in the text (paragraph 1).
[2 marks] (d) Using information in the text and your knowledge

of economics, evaluate the desirability of monetary

(ii) Define the term GDP identified in bold in the union for COMESA members. [8 marks]

text (paragraph 1). [2 marks]

(b) Using an AD-AS diagram, explain how loss of Question A.24
revenues from tariffs may have serious negative
effects on some COMESA economies (paragraph 5) (a) (i) Define the term preferential trade
. [4 marks]
agreement identified in bold in the text

(c) (higher level) Using the concept of trade creation, (paragraph 2). [2 marks]

explain how increased trade links between the (ii) Define the term economic growth identified
in bold in the text (paragraph 5). [2 marks]
member countries of COMESA could benefit their

economies (paragraph 6). [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 17

Exam practice: paper 2 (SL and HL)

(b) Comment on the point that COMESA was called a (c) (core) Distinguish between a free trade area and a

‘common market’ before it became a free trade area customs union. [4 marks]

(paragraph 2). [4 marks] (d) Using information in the text and your knowledge

(c) (higher level) Explain the importance of the of economics, compare and contrast different types
statement that COMESA ‘has not led to much trade
diversion’ for COMESA members (paragraph 6). of trading blocs. [8 marks]
[4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 18

Exam practice: paper 2 (SL and HL)

Text/data 11

Mexico’s membership in NAFTA

1 The Mexican economy is expected to experience its most Under NAFTA, Mexican farmers are unable to compete 5
serious contraction in real GDP since the Great Depression of with tariff-free imports of food from the United States. 6
the 1930s. Consumer confidence has fallen to very low levels. Many are forced to hold other jobs in addition to farming 7
to make ends meet. Domestic industries were wiped out as
2 While Mexico’s central bank had avoided pursuing an multinational corporations (MNCs) began to import inputs
expansionary monetary policy for fear of inflation, which rather than buy from local suppliers. Also, as lower-price
had reached an eight-year high, fears of a major recession Chinese goods flooded the US markets, Mexico lost much
prompted the central bank to lower interest rates in the hope of its competitive advantage it had gained through NAFTA.
of stimulating the economy. This was supplemented by an Many millions of Mexicans who live and work in the
injection of government spending, including investment United States are losing their jobs, and are sending less
in public goods and merit goods (roads, railways and oil money home (worker remittances), causing consumption
wells, increased medical care) and transfer payments, expenditure to fall further. A massive return of Mexican
as well as temporary jobs for unemployed workers and workers from the United States would additionally increase
support for small businesses. unemployment in Mexico.
Expectations of falling Mexican exports to the United
3 However, Mexican government officials do not believe States caused a huge depreciation of the peso (the Mexican
that these policies will be enough to help the economy in currency) of 25%, leading to fears of cost-push inflation.
its severe deflationary gap (recessionary gap). Mexico is To avoid a peso collapse, the central bank intervened
highly dependent upon the United States for its exports, due heavily in the foreign exchange market, spending US
to the North American Free Trade Agreement (NAFTA), dollar reserves to buy pesos. On the other hand, a lower
a free trade area that includes Mexico, the United States peso could encourage American tourism in Mexico, and
and Canada. About 80% of Mexican exports are directed could help stop the downward trend in exports.
to the United States. As a result of a sharp downturn in the
US, Mexican exports to the US fell sharply, leading to an Source: Adapted from: ‘Damage control: a Latin American country
increase in unemployment and lower incomes in Mexico. softens recession with counter-cyclical policies’ in The Economist,
22 January 2009; ‘The financial crisis world markets: Mexico moves
4 Whereas Mexico has signed trade agreements with other to secure peso’ in the Houston Chronicle, 11 October 2008; Reuters,
countries as well, it has ignored these, focusing its attention “‘Mexico recession shows downside of close US links’4 August
on exports to the US. In addition, it has not made necessary 2009; ‘Nafta’s promise unfulfilled’ in the New York Times,
investments in education and infrastructure, and has not 23 March 2009.
pursued an industrial policy. Other Latin American
countries (like Chile and Brazil), which are less dependent
on the US for exports, have fared better than Mexico.

Question A.25 Question A.26

(a) (i) Define the term deflationary gap identified (a) (i) Define the term consumer confidence
in bold in the text (paragraph 3). [2 marks] identified in bold in the text (paragraph 1).
[2 marks]
(ii) Define the term industrial policy identified
in bold in the text (paragraph 4). [2 marks] (ii) Define the term transfer payments
identified in bold in the text (paragraph 2).
(b) Explain how a fall in Mexico’s exports affects its [2 marks]
balance of payments, and through what account.
[4 marks] (b) Using an AD-AS diagram, explain how an
economic downturn in the United States can cause
(c) Using an AD-AS diagram, explain the impact on a recession in Mexico (paragraph 4). [4 marks]

Mexico’s deflationary gap of an increase in US

tourism in Mexico due to a lower value of the peso (c) Using an exchange rate diagram, explain how a

(paragraph 7). [4 marks] drop in worker remittances has affected the value

(d) Using information in the text and your knowledge of the peso (paragraph 5). [4 marks]

of economics, discuss the role of Mexico’s (d) Using information in the text and your knowledge

membership in NAFTA on Mexico’s export of economics, discuss the possible consequences

performance and economy. [8 marks] on the Mexican economy of a collapsing peso

(paragraph 6). [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 19

Exam practice: paper 2 (SL and HL)

Text/data 12

Non-oil commodity prices in developing countries
Higher level

1 Developing countries specialising in the export of non- countries is very low, resulting in low responsiveness of 7
oil primary commodities tend to experience long-term supply of agricultural products to increases in demand, 8
deteriorating terms of trade (extract 1) and short-term thus increasing price volatility.
fluctuating terms of trade (extract 2). Growing use of food grains for ethanol production. It is 9
estimated that 20–30% of the increase in commodity prices 10
Extract 1 Deteriorating terms of trade in the commodity boom was due to increasing demand for
ethanol, a biofuel made of grains (corn and wheat) as well
2 Empirical evidence shows that many developing countries as other agricultural products.
that specialise in the production and export of non-oil During 2009, following the commodity price declines,
commodities have been experiencing a deterioration in the value of non-oil exports of least developed countries
their terms of trade over many decades. This suggests that dropped by nearly 9%. At the same time, export volumes
countries should make efforts to diversify their production increased by nearly 6%, suggesting large drops in export
and exports to avoid further deterioration. prices. During 2009, the terms of trade of less developed
countries declined against their major partners by 16–
Extract 2 Commodity prices: ‘boom and bust’ 36%, relative to 2006. ‘Overall, the findings support the
observation that the post-crisis context for LDCs is one in
3 Commodity prices reached a 30-year peak in the middle which they are ‘exporting “more for less”.’
of 2008. With the beginning of the global financial crisis The World Trade Organization predicts that export
in late 2008, prices dropped significantly. By the second levels will continue to increase. However, ‘such an
half of 2009, prices had increased again, though they were accomplishment is of limited value if those export earnings
much below their peaks of 2008. ‘These dramatic price only buy a smaller quantity of imports.’
swings represented the latest ‘boom and bust’ cycle in According to UNCTAD*, ‘The recent commodities boom
commodity markets.’ They also represent major short-term has demonstrated that rather than being an opportunity, the
fluctuations in the terms of trade of commodity-exporting commodities boom has become the greatest obstacle to
countries. Important factors leading to the rapid price achieving [development goals] …’
increases until mid-2008 were:
* United Nations Conference on Trade and Development, a United
4 Supply shocks, including crop failures in Australia and Nations agency specialising in trade and development issues.
lower agricultural outputs in Europe.
Source (extract 1): Adapted from José Antonio Ocampo and María
5 Speculation. Speculators buy commodities on the Angela Parra, ‘The commodity terms of trade and their strategic
expectation that prices will rise, so they can sell later at importance for development’ in International Trade, 3 March 2004.
a profit. Speculators’ buying actions work to increase Source: (extract 2): UNCTAD, ‘Report of the Multi-year Expert
commodity prices; later their selling actions work to reduce Meeting on Commodities and Development on its second session’,
them. Excessive speculation greatly increased commodity Geneva, 24–25 March 2010; International Trade Centre, ‘LDCs Terms
price volatility. of Trade During Crisis and Recovery’, ITC Trade Map Factsheet #3, 1
June 2010.
6 Lack of investments in agriculture over the previous two
decades. Investment in the agricultural sector of developing

Question A.27 (higher level) supply (such as crop failures in Australia or lower

(a) (i) Define the term investment identified in bold agricultural outputs in Europe; paragraph 4)

in the text (paragraph 6). [2 marks] can contribute to short-term fluctuations in the

(ii) Outline the meaning of primary terms of trade of a country exporting agricultural

commodities identified in bold in the text commodities. [4 marks]

(paragraph 1). [2 marks] (d) Using information in the text and your knowledge

(b) Explain the meaning of deteriorating terms of of economics, evaluate the view that countries that

trade (paragraph 2). [4 marks] have a comparative advantage in the production of

(c) Using the concept of price elasticity of demand, agricultural commodities should specialise in the
draw a diagram to explain why changes in
production and export of these.b [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 20

Question A.28 (higher level) Exam practice: paper 2 (SL and HL)

(a) (i) Outline one objective of the World Trade deterioration in a country’s terms of trade on
its current account, using the concepts of price
Organization (paragraph 9). [2 marks] elasticity of demand for exports and imports.

[8 marks]

(ii) Define the term demand identified in bold in

the text (paragraph 6). [2 marks] Question A.30 (higher level)

(b) Using the concept of price elasticity of supply, (a) (i) State the equation for calculating the terms of
draw a diagram to explain how changes in demand
(such as growing use of food grains for ethanol trade. [2 marks]
production contribute; paragraph 7) can contribute
to short-term fluctuations in the terms of trade of (ii) Define the term supply identified in bold in
a country exporting agricultural commodities.
[4 marks] the text (paragraph 6). [2 marks]

(c) Distinguish between a deterioration and an (b) According to paragraph 7 growing use of food
improvement in the terms of trade. [4 marks] grains (for use in ethanol production) contributed
to the rapid increase in agricultural commodity
(d) Using information in the text and your knowledge prices, suggesting that exporters of these
of economics, to what extent do you agree commodities experienced an improvement in their
with the statement by UNCTAD that the recent terms of trade. Using a diagram, show the likely
commodity boom was more of an obstacle than impact of the terms of trade improvement on the
an opportunity for developing countries to pursue current accounts of commodity exporters.
development goals (paragraph 10)?b [8 marks] [4 marks]

Question A.29 (higher level) (c) According to paragraph 4 supply shocks,
including crop failures in Australia and lower
(a) (i) Outline one reason why the terms of trade may agricultural outputs in Europe, also contributed
to the rapid increases in agricultural commodity
change over the short term. [2 marks] prices, suggesting a terms of trade improvement
of the exporters of these commodities. Using a
(ii) Outline one reason why the terms of trade may diagram, show the likely impact of the terms of
trade improvement on the current accounts of
change over the long term. [2 marks] commodity exporters.
[4 marks]
(b) Using the concept of income elasticity of demand,

explain why many developing countries experience (d) Using information in the text and your

deteriorating terms of trade over the long term knowledge of economics, discuss the significance

(paragraph 2). [4 marks] of deteriorating terms of trade for developing

(c) Explain how long-term changes in the terms of countries.b [8 marks]

trade can result in a redistribution of income

among trading partners. [4 marks] b You should respond to these questions again after you have studied
Chapter 17.
(d) Using information in the text and your knowledge
of economics, examine the likely effects of a

© Cambridge University Press 2012 Economics for the IB Diploma 21

Exam practice: paper 2 (SL and HL)

Paper 2 section B: Economic development

Chapter 16 Understanding economic development

Text/data 13

Comparing and contrasting economic and development
indicators

Use the data in the table below to answer the question that follows.

UK (1) (2) (3) (4) (5) (6)
Japan GDP per GNI per GDP per GNI per HDI rank Human
Brazil capita (US$) capita (US$) capita (US$ capita (US$ development
Georgia (2007) (2007) PPP) (2007) PPP) (2007) (2010) index (2010)

45 901 43 970 35 130 36 050 26 0.849
11
34 264 37 770 33 632 34 700 73 0.844
74
7 185 6 100 9 567 9 600 0.699

2 318 2 090 4 662 4 730 0.698

Source: World Bank, World Development Indicators; United Nations Development Programme, Human Development Reports.

Question B.1 (c) Considering the figures in columns 2 and 4,

(a) Comparing columns 1 and 2 in the table, outline explain why the difference between the highest-
one factor that could be responsible for:
income and the lowest-income countries is smaller

(i) lower GNI per capita than GDP per capita in column 4 than in column 2. [4 marks]
figures for the UK, Brazil and Georgia.
[2 marks] (d) Using information in the table and your

knowledge of economics, evaluate the use of

(ii) higher GNI per capita than GDP per capita GDP per capita and GNI per capita as the basis for

for Japan. [2 marks] measuring economic development, and as the

(b) Comparing columns 1 and 3 (or columns 2 and 4 basis for making comparisons of standards of living
for GNI), explain why GDP per capita in US$ PPP is
lower than GDP per capita in US$ for the UK and across countries. [8 marks]
Japan, and higher for Brazil and Georgia.
[4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 22

Exam practice: paper 2 (SL and HL)

Chapter 16 Understanding economic development
Chapter 17 Topics in economic development

Text/data 14

Economic growth and development in Sri Lanka

1 In spite of nearly 30 years of civil war (which ended in The deputy finance minister of Sri Lanka notes that the 4
2009), Sri Lanka has been remarkably successful in its government wants to ensure more equitable growth to help 5
human development. According to the UNDP country poor people improve their standards of living, especially in
director, Sri Lanka has been able to achieve high human rural areas. Much of the country’s economy and growth are 6
development levels due to steady investments made in concentrated in the western province where Colombo (the
education and health over two decades. capital) is located.
Micro-credit is one area being examined to deal with
2 Yet the last two decades have also seen growing income regional disparities. According to the deputy finance
inequalities, and disparities in income distribution are minister, the development of lagging, underdeveloped
high. The UNDP country director notes that there is room areas and markets requires financial institutions in rural
for improvement in this area. Speaking for Asia as a whole, areas, particularly to help the poorest of the poor. One
the Asian Development Bank has noted that there is a need million Sri Lankan workers live abroad, and are known
to limit ‘the very real danger that concentrations of income for their hard work and enterprise. When they return home
and wealth pose for social cohesion and growth-promoting ‘they are mentally ready. They need capital – they are a
policies and institutions’. large reservoir of people who are already pre-disposed to
efficient rural activity. So we must now find structures and
3 According to the World Bank, Sri Lanka must make policies that can generate growth through these people.’
efforts to reduce regional disparities in living standards, The following table shows the HDI rank, human development
health and education across provinces. In spite of the index and several other indicators for Sri Lanka and other
impressive achievements in health and education, countries, in order of increasing HDI rank.
there remain gaps in geographical regions and among
vulnerable groups.

HDI rank Human GNI per Life Mean years Expected % of population Gini
(2010) development capita expectancy of schooling years of living below PPP coefficient
(PPP $) at birth (2010) (2010) schooling $1.25 a day (2000- (2000-10)
index (2010) (2009*) (2010)
73.5 7.5 08) 41.5
China 89 0.663 6890 72.0 7.7 11.4 46.9
El Salvador 90 0.659 74.4 8.2 15.9 41.1
Sri Lanka 91 0.658 6420 69.3 6.6 12.1 42.5
Thailand 92 0.654 61.3 7.5 6.4 41.5
Gabon 93 0.648 4720 12.0
14
7640 13.5
<2
12 450 12.7
4.8

Source: United Nations Development Programme, Human Development Report 2010.
* The World Bank, World Development Indicators (http://data.worldbank.org/data-catalog/world-development-indicators).

Source (extract): ‘Lanka has made rapid progress despite conflict: UNDP’ in the Daily Mirror (Colombo), 8 November 2010; The World Bank,
‘Connecting people to prosperity and improving basic services are key to Sri Lanka’s economic prosperity, says World Bank’ press release,
9 August 2010; ‘Inequality a danger for Asia: ADB’ in Business Daily Update, 10 August 2007.

Question B.2 (ii) Outline why economic development is a multi-

(a) (i) Outline how we can tell which country of dimensional process. [2 marks]

those appearing in the table is most advanced (b) Explain which indicators account for Sri Lanka’s

with respect to achieving human development HDI rank in relation to its relatively low GNI

objectives. [2 marks] per capita. [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 23

Exam practice: paper 2 (SL and HL)

(c) Referring to the difference between GNI measured Question B.3

in $ PPP and GNI converted into $ by use of (a) (i) Using examples, identify one advantage of
composite indicators over single indicators.
market exchange rates, explain why it is useful to [2 marks]

use GNI per capita measured in PPP $ in the table

above. [4 marks] (ii) Outline one Millennium Development Goal.
[2 marks]
(d) Using information in the text and table, and your

knowledge of economics, examine how a more (b) Explain what measures are used to construct the

equal distribution of income can make a positive human development index. [4 marks]

impact on Sri Lanka’s economic growth and (c) Explain what accounts for Sri Lanka’s achievement

development process. [8 marks] of an HDI rank comparable to the ranks of the

other countries in the table, even though it has a

much lower GNI per capita. [4 marks]

(d) Using information in the text and your knowledge

of economics, evaluate the potential contributions

of micro-credit to Sri Lanka’s economic growth and

development. [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 24

Exam practice: paper 2 (SL and HL)

Text/data 15 sector, in spite of lower wages, risk of sexual exploitation 5
and poorer conditions. 6
Women in Cambodia The UN fears that many families will resort to fewer, 7
smaller and less nutritious meals, to cutting back on health
1 The United Nations Development Programme (UNDP) is care, much of which is paid for privately, to removing
expressing fears that severe recession in Cambodia will children from school in order to send them out to work,
have serious negative effects on women, who make up the and to selling their property such as land.
bulk of the labour force. According to the UN resident co- Acute malnutrition is on the rise, and infant and maternal
ordinator, ‘We know that when women’s incomes are lost, mortality are unacceptably high; five women per day die in
the whole family suffers, especially the children.’ childbirth. Poorer nutrition and lower access to health care
due to lower incomes will increase these mortality rates
2 Falling demand from United States and European Union further.
markets led to major job losses in the clothing sector. The government of Cambodia and the United Nations in
Further job losses are expected due to reduced foreign Cambodia are designing a system of social protection that
direct investment and declines in the tourism industry. will protect Cambodia’s most vulnerable groups. A UN
Migrant workers in neighbouring Korea, Malaysia and spokesperson says ‘Investment in women and children
Thailand are expected to return back home to Cambodia is the best way to ensure long-term prosperity.’ Public
due to rising unemployment in these counties as well, provision of health care services, education, food and work
which could work to lower GNI per capita. ‘can help break the poverty cycle and we must not lose
sight of this focus.’
3 About one third of Cambodia’s population live in absolute
poverty, and the absence of a social protection system Source: Adapted from ‘In Cambodia, women and children hit hard-
(including unemployment insurance, pensions, free health est by economic crisis’, United Nations Development Programme
care and education, etc.) means that the economic crisis Newsroom, 8 April 2009.
will push many more women and children into extreme
poverty and hunger.

4 A large part of the rural population depends for their
income on money sent to them by urban workers (mostly
women). Yet many urban unemployed are returning to
their villages where possibilities for work are very limited.
Others are turning increasingly to the urban informal

Question B.4 Question B.5

(a) (i) State two consequences of poverty. [2 marks] (a) (i) Define the term urban informal sector
identified in bold in the text (paragraph 4).
(ii) Define the term poverty cycle identified in [2 marks]

bold in the text (paragraph 7). [2 marks]

(b) Using a diagram, explain some positive (ii) Define the term absolute poverty identified
in bold in the text (paragraph 3). [2 marks]
consumption externalities that arise from the

education of women. [4 marks] (b) Explain how public provision of health care

(c) Explain the difference between GNI per capita and services and education might help Cambodia break

GDP per capita. [4 marks] out of the poverty cycle. [4 marks]

(d) Using information in the text and your (c) Explain why the return of migrant workers to

knowledge of economics, examine the potential Cambodia from neighbouring countries could

contributions of education and health to economic work to reduce GNI per capita. [4 marks]

development. [8 marks] (d) Using information in the text and your knowledge
of economics, evaluate the United Nation’s
argument that ‘Investment in women and children
is the best way to ensure long-term prosperity.’
[8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 25

Exam practice: paper 2 (SL and HL)

Chapter 17 Topics in economic development

Text/data 16

Two views on trade liberalisation

Two very well-known US economists write about trade are designed to make it more difficult for developing 5
liberalisation and economic growth. countries to move up the value-added chain. The prevailing 6
mantra is ‘trade liberalisation leads to economic growth’.
Part 1 Anne O. Krueger, ‘Trade, jobs and The fact that so many have been hurt by trade liberalisation 7
contradicts this claim. 8
growth: why you can’t have one without Mexico’s very poor performance under the free trade area
NAFTA* does not help the case for trade liberalisation.
the other’ While NAFTA opened up for Mexico the largest market in
the world (the United States), growth in Mexico has been
1 History shows that free trade is an engine for growth. slower than before, while the poorest in the country, the corn
The General Agreement on Tariffs and Trade (GATT) farmers, have been especially hurt by US-subsidised corn.
that preceded the WTO was based on the principle of There are some circumstances when trade liberalisation
gradual liberalisation of trade. The results of the new trade brings enormous benefits – when there is full employment
framework exceeded expectations of economic prosperity, and when an economy is mature. Full employment means that
as the postwar period was a golden age for much of the world a worker who becomes unemployed can easily find another
economy. While several factors played a role in accelerating job; otherwise, s/he remains unemployed. Developing
economic growth, increased trade due to trade liberalisation countries cannot compete in modern, industrial sectors
was one of the most important. Most of the Asian economies without protection; therefore, when they liberalise they cannot
grew at annual rates of more than 7% since the 1970s, while industrialise and they are condemned to remain in low value-
China has been growing at more than 10% a year. In growth added, low-growth production. Thirty-five years ago, South
terms, South Korea achieved in a decade what Britain had Korea was told to stick with rice farming. But South Korea
done in the whole of the 19th century. knew that even if it improved productivity in rice farming, it
would remain a poor country. It had to industrialise.
2 One of the key benefits of free trade is that it leads to job We know which countries have grown the fastest. They
gains, especially in export industries as these expand. were the countries of East Asia (including South Korea),
However, it will result in some job losses, as some firms which actively pursued industrial policies and strongly
lose out from the greater competition. This is why social intervened in markets, and whose growth was based on
safety nets are important, to help the unemployed get export promotion, not liberalised trade and free markets.
financial assistance and job training. Trade liberalisation has brought enormous benefits to
some countries, but not to all. Some have even been made
3 In low-income countries, economic growth has a direct – worse off, because of an unfair global trade regime. The
and beneficial – impact on people’s daily lives. We can see World Trade Organization (WTO) must be reformed to
improvements in the quality of life around the world. Infant make trade fair.
mortality rates have declined sharply; literacy rates have
risen worldwide; and there has been a major increase in * North American Free Trade Agreement.
life expectancy. Poverty reduction can only be achieved and
sustained over a long period by growth, and to maximise Source: Adapted from Address by Anne O. Krueger, ‘Trade, jobs and
growth opportunities, trade liberalisation is vital. growth: why you can’t have one without the other’, International
Monetary Fund, 15 June 2004; Joseph Stiglitz, ‘Social justice and
Part 2 Joseph Stiglitz, ‘Social justice global trade’ in Economist’s View, 19 March 2006.

and global trade’

4 The history of recent trade meetings shows that something
is wrong with the global trading system. Tariff structures

Question B.6 (b) Explain the difference between export promotion

(a) (i) Define the term free trade area identified in and import substitution as two different strategies

bold in the text (paragraph 5). [2 marks] for growth and development. [4 marks]

(ii) Define the term industrial policies (c) Using a diagram of your choice, explain why trade
identified in bold in the text (paragraph 7).
[2 marks] liberalisation leads to job losses. [4 marks]

(d) Using information in the text and your knowledge
of economics, discuss trade liberalisation as a
strategy for growth and development. [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 26

Exam practice: paper 2 (SL and HL)

Text/data 17

Coffee, trade and development

1 The Secretary-General of UNCTAD*, in a speech on coffee factor in the downward pressure on coffee prices has been 6
issues in developing countries, stated that low-income, an increase in productivity and technological change in 7
coffee-exporting countries must respond to challenges and the coffee sector. 8
opportunities offered by the global coffee market. Some coffee-producing countries have achieved
diversification of their production and exports; however,
2 Coffee is the most valuable tropical agricultural product, many remain highly dependent on coffee exports (e.g. Burundi
produced in over 50 countries in Africa, Asia and Latin 52%, Ethiopia 31%, Honduras 23%). For such countries, an
America, contributing substantially to job creation, additional problem involves tariff escalation on processed
export earnings, and economic growth and development. coffee (higher tariffs on processed goods), preventing full
Moreover, as coffee production is labour-intensive, it is access of processed coffee exports to foreign markets.
especially important for creating jobs that contribute to UNCTAD and the International Coffee Organization
poverty reduction. (ICO) argue that the most urgent area that coffee-
producing countries should address is the promotion
3 Coffee offers opportunities for developing countries also of a sustainable coffee economy. Coffee production is
because global consumption has been growing at an annual likely to be increasingly affected by climate change,
rate of 2.5%, and is expected to continue growing. Most requiring the development of new technologies that adapt
consumption is concentrated in the developed countries coffee production to new climatic conditions, while the
of western Europe and North America, though the highest demands of sustainability will require the development of
rates of growth in demand for coffee are in developing environmentally friendly technologies.
countries, including the producing countries themselves. Other areas that require attention include improvements
in coffee quality and marketing systems, research
4 Yet in spite of this growth, coffee prices are very volatile. and development (R&D) in new technologies, and
The most recent coffee crisis occurred in 2000–4, when diversification of production and exports.
many coffee producers could not cover their costs of
production, and only continued to produce because they * United Nations Conference on Trade and Development, a UN
had no alternative. This resulted in losses of coffee- organisation that promotes the integration of developing countries
producing countries of over $30 billion. In 2005, coffee into the world economy.
prices began to recover and rose substantially, only to fall
again by 20% just in the last six months of 2008 due to Source: Statements by Supachai Panitchpakdi, Secretary-General
falling demand caused by the financial crisis. of UNCTAD, Office of the Secretary-General of UNCTAD, 8 April
2009. The figures quoted in the speech were accurate at the time
5 Also, the price of coffee tends to fall over the longer term, of publication in April 2009.
resulting in deteriorating terms of trade, particularly for
countries whose exports are dominated by coffee. One

Question B.7 (c) (core) Draw a diagram and use it to explain why

(a) (i) Define the term volatile (prices) identified in the price of coffee has fallen over the longer term,

bold in the text (paragraph 4). [2 marks] even though the demand for coffee has been

increasing (paragraphs 3 and 5). [4 marks]

(ii) Define the term diversification identified in (d) Using information in the text and your knowledge
of economics, evaluate UNCTAD’s and the ICO’s
bold in the text (paragraph 6). [2 marks] statement that promotion of a sustainable coffee
economy is the most urgent issue facing coffee-
(b) Explain whether coffee production is likely to use producing countries (paragraph 7). [8 marks]

technologies that are appropriate to the factor

market conditions of low-income developing

countries (paragraph 2). [4 marks]

(c) (higher level) Explain why deteriorating terms Question B.8
of trade over the long term can be a barrier to
economic growth and development (paragraph 5). (a) (i) Define the term productivity identified in
[4 marks]
bold in the text (paragraph 5). [2 marks]

(ii) Define the term sustainability identified in

bold in the text (paragraph 7). [2 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 27

(b) Using an AD-AS diagram, explain why limited Exam practice: paper 2 (SL and HL)
access to international markets, caused by tariff
escalation, works to reduce economic growth in (c) (core) Using the concept of price elasticity of
coffee-exporting countries (paragraph 6). demand (PED) or price elasticity of supply (PES),
[4 marks] draw a diagram and use it to explain why coffee
prices are highly volatile (paragraph 4).
(c) (higher level) Assuming a perfectly competitive [4 marks]

market for coffee, draw a diagram and use it to (d) Using information in the text and your knowledge
of economics, evaluate the desirability of
explain why decreases in coffee prices lead to losses diversification of production and exports of
countries that specialise in coffee production.
for coffee producers (paragraph 4). [4 marks] [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 28

Exam practice: paper 2 (SL and HL)

Text/data 18

European Union bilateral trade agreements with
Colombia and Peru

1 The European Union (EU) concluded controversial NGO representatives argue that such agreements have a 5
bilateral trade agreements with Colombia and Peru, amid strategic importance for the EU, which aims to bypass 6
opposition by NGOs (non-governmental organisations) the stalemate of the Doha Round of World Trade
that fear the agreements may not be in the interests of the Organization’s (WTO) multilateral trade negotiations.
two countries. They point out that the EU had begun regional trade
negotiations with the Andean Community (a regional
2 The agreements provide for complete trade liberalisation trade block in Latin America), which failed because
in manufactured products, agricultural goods, and services the EU was unwilling to compromise. The EU then
on both sides, as well as liberalisation of investment. They switched to pursue bilateral agreements. Ecuador was
foresee initial tariff-free trade in 80% of industrial products a potential candidate for such an agreement, but it then
with Peru and 65% with Colombia, with the remaining withdrew because of concerns that liberalisation was
tariffs to be removed at a later time. going too far.
Peru and Colombia, for their part, are interested in the
3 NGOs worry that producers in Peru and Colombia may bilateral agreements because they expect better export
be unable to compete with EU products following trade opportunities and increased foreign direct investment.
liberalisation.
Source: ‘EU concludes trade agreements with Colombia and Peru’ in
4 In response to NGO concerns, the EU has agreed to provide D+C, Vol. 51(4), November 2010; ‘EU completes trade talks with Peru
Colombia and Peru with aid to help modernise their and Colombia’, euobserver.com, 2 March 2011.
economies and take advantage of the trade agreements.
In addition, the agreements include a clause requiring that
environmental and human rights concerns are respected.
However, NGOs are doubtful about its effectiveness.

Question B.9 (c) Using a diagram, explain the possible effects

of increased exports to the EU on Peru’s and

(a) (i) Define the term trade liberalisation Colombia’s economic growth. [4 marks]
identified in bold in the text (paragraph 2).
[2 marks] (d) Using information in the text and your knowledge
of economics, evaluate Colombia’s and Peru’s
(ii) Define the term multilateral trade bilateral trade agreements with the EU as an
identified in bold in the text (paragraph 5). alternative to WTO trade liberalisation agreements.
[2 marks] [8 marks]

(b) Using a diagram, explain why ‘producers in Peru

and Colombia may be unable to compete with EU

products following trade liberalisation’

(paragraph 3). [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 29

Exam practice: paper 2 (SL and HL)

Chapter 17 Topics in economic development
Chapter 18 Foreign sources of finance and foreign debt

Text/data 19 preferential treatment had allowed relatively inefficient 6
producers to compete with huge MNCs in Latin America. 7
Banana trade wars Some ACP countries are so dependent on bananas for trade
that a sudden decline in exports would cause a huge shock
1 In a settlement overseen by the World Trade Organization to their economy. The ACP countries are among the poorest
(WTO), the European Union (EU) agreed to reduce tariffs in the world, many with high levels of unemployment and
on bananas from €176 per tonne to €114 over a seven-year underemployment, extreme poverty and high levels of
period, ending a 17-year-long trade dispute between the indebtedness. There are fears that increased competition
EU, and the United States and Latin America. with the US multinationals may endanger their growth
and development objectives. To compensate them for the
2 Since 1993, according to a preferential trade agreement reduction of their preferential access to EU markets, the
called the Lomé Convention, the EU granted preferential EU promised an additional 190 million of development
access to the banana exports of its former colonies in assistance to help them restructure their economies.
Africa, the Caribbean and Pacific region (ACP) through Banana production methods followed by most MNCs are
tariff-free entry of bananas and banana import quotas for not consistent with environmental sustainability. Although
ACP bananas, while imposing tariffs on non-ACP banana there are international environmental standards, many
imports. Latin-American countries complained on the banana-producing MNCs do not follow them. Workers on
grounds that they produce bananas at a far lower cost than banana plantations are often forced to work 10–12-hour
ACP countries, and that the EU was unfairly discriminating days, though they are paid for eight, doing very heavy and
against them. sometimes dangerous work due to exposure to chemicals.
WTO rules do not permit importing countries to refuse
3 In its final ruling on the case, the WTO declared that the imports based on producer violations of environmental
tariff-free entry of ACP bananas into the EU was violating standards or due to poor treatment of workers.
WTO rules.
Source: ‘Banana politics’ in the Financial Express (India),
4 The United States is not a major banana exporter. However, 25 December 2009; Rebecca Cohen, ‘Global issues for breakfast:
it sided with Latin-American countries because several US the banana industry and its problems’ in The Science Creative
multinational corporations (MNCs), including Chiquita, Quarterly, 2011.
Dole and Del Monte, dominate banana plantations in
countries like Colombia, Costa Rica and Panama. The
United States therefore wanted to protect the global market
share of US MNC subsidiaries.

5 Caribbean bananas are grown on small family farms,
averaging about one hectare in size, with the result that
they cannot be produced cheaply in large quantities. The

Question B.10 (c) (higher level) Using a diagram, explain why larger
plantations can achieve lower average costs of
(a) (i) Define the term multinational corporation production than smaller ones (paragraph 5).
identified in bold in the text (paragraph 4). [4 marks]
[2 marks]
(c) (core) Explain how overspecialisation in bananas
(ii) Define the term development assistance
identified in bold in the text (paragraph 5). may be a barrier to economic growth and
[2 marks]
development in ACP countries. [4 marks]
(b) Using a diagram, explain the effects on Latin-
American banana producers that result from the (d) Evaluate the roles of the WTO and the EU–ACP
EU’s lower tariffs on banana imports (paragraph 1). regional preferential trade agreement as strategies
[4 marks] for economic growth and development.
[8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 30

Exam practice: paper 2 (SL and HL)

Question B.11 (c) (higher level) Explain why the EU’s imposition of

tariffs on banana imports from non-ACP countries

(a) (i) Define the term quota identified in bold in may be a case of trade diversion. [4 marks]

the text (paragraph 2). [2 marks] (c) (core) Using a diagram, explain the effects on EU

(ii) Define the term underemployment consumers arising from the reduction of tariffs on
identified in bold in the text (paragraph 5).
[2 marks] bananas. [4 marks]

(b) Explain why the tariff-free entry of ACP bananas (d) Discuss the possible effects of the EU’s reduction of
tariffs on banana imports from non-ACP countries
into the EU was considered to be a violation of on the economies of ACP countries. [8 marks]

WTO rules. [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 31

Exam practice: paper 2 (SL and HL)
Text/data 20

Appropriate technology in rural Africa

1 In rural areas in Africa, where the majority of the population communities in Zimbabwe grow tomatoes and fruits, but 4
lives, people still do not have access to simple appropriate have no technologies to cane or dry these. They therefore 5
technologies. throw away agricultural produce before it goes bad, thus 6
losing valuable tomato and fruit output.
2 In Nyamapanda (Zimbabwe), a group of 15 women run Reasons for the lack of appropriate rural technologies
a soap-making and oil-pressing enterprise, set up as a include the absence of institutions for technology diffusion,
type of project aid provided by a Zimbabwean NGO lack of funding, poor links between rural communities and
(non-governmental organisation) called Edit Trust. The scientific institutions, and weak science and technology
donation of an oil-pressing machine and provision of policies.
training have helped the women find practical solutions to In addition, the dual economy of the country poses
important problems. They can now earn a living by selling challenges to the system of innovation, as there is a
soap, cooking oil and paraffin. This kind of rural project gap between research on simple technologies needed
can help improve people’s income-earning potential by by disadvantaged people, and research on advanced
increasing food production, diversifying income sources, technologies in line with international scientific centres.
creating employment, and developing entrepreneurship. Another major problem concerns the hardships faced by
With more training in commercial production, packaging, poor rural people in securing food and health. Without
marketing and distribution, the women can produce for these, they cannot express an interest in appropriate
local markets and for export. When rural communities technology. This is an important factor that contributes to
start their own businesses using simple technologies, this excluding poor people from access to simple appropriate
has ripple effects on the economy. These include greater technologies.
economic growth and more possibilities for development.
Source: Sifelani Tsiko, ‘Rural access to appropriate technologies
3 The lack of appropriate technologies is contributing to vital’, International Forum for Rural Transport and Development
Africa’s lack of sustained economic growth and very slow (IFRTD), 2009.
economic development. This process involves wasted
opportunities as well as resources. For example, most rural

Question B.12 Question B.13

(a) (i) Define the term entrepreneurship identified (a) (i) Describe the meaning of project aid
in bold in the text (paragraph 2). [2 marks] identified in bold in the text (paragraph 2).
[2 marks]
(ii) Define the term dual economy identified in

bold in the text (paragraph 5). [2 marks] (ii) Define the term economic development
identified in bold in the text (paragraph 3).
(b) Explain two common characteristics that are often [2 marks]

shared by economically less developed countries,

and two factors that create diversity between (b) Using a diagram, explain how improved access to

them. [4 marks] appropriate technologies by poor people can lead

(c) Explain which are the most important sources of to economic growth. [4 marks]

economic growth in economically less developed (c) Using a diagram, explain the positive production

countries. [4 marks] externalities that may arise from the use of

(d) Using information in the text and your knowledge appropriate technologies. [4 marks]

of economics, examine the potential contribution (d) Using information in the text and your knowledge

of use of appropriate technology by poor of economics, evaluate the effectiveness of foreign

rural people in Africa’s economic growth and aid extended by non-governmental organisations

development. [8 marks] (NGOs). [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 32

Exam practice: paper 2 (SL and HL)

Chapter 18 Foreign sources of finance and foreign debt

Text/data 21

Chinese direct investment in Zambia

1 Chinese direct investment in Zambia was more than $1 Detlef Kotte of the United Nations Conference on Trade 3
billion in 2010, creating more than 15 000 jobs, and is and Development (UNCTAD) notes that the government of 4
expected to exceed $1 billion again in 2011. China, a Zambia must discover a way of getting a share of the profits 5
leader in the race for Africa’s resources, has invested resulting from record-high copper prices. He adds that foreign
billions of dollars in African states including Zambia, the direct investment in copper mining on its own does not help
continent’s largest copper producer, in the hope of securing the economy in the long term, unless a mechanism is found
the resources it needs for its booming economy. The to transfer benefits from the mining sector to other sectors.
recent agreement with China’s privately owned Zhougui Some members of the Zambian parliament argued that a
Mining Group is expected to attract more than $5 billion windfall tax* in the mining sector should be re-imposed,
into Zambia’s mining sector over the next few years. This as this is the only way that Zambians, especially in rural
project is one of the largest foreign direct investments in areas, can benefit from the extraction of their own natural
Zambia, and will employ over 1000 Zambians. resources. It is meaningless to talk about growth if benefits
do not trickle down to the poor.
2 George Fang, head of Standard Bank’s Mining and Metals The government decided not to re-impose the windfall
China, said, ‘The number of deals that China is initiating tax. Supporters of this decision argued that this would
has grown exponentially on every continent, but especially kill investments in the mining sector. There were also
Africa.’ He noted that as Africa is resource-rich and has recommendations that other taxes in the mining sector be
a growing educated population, it will prove to be the lowered to improve investor confidence, and that mining
engine that will provide growth to world economies for legislation should be re-evaluated with a view to making it
decades, with clear benefits for itself. Africa has low- more investor friendly.
cost providers of natural resources that have benefited
from high commodity prices due to the increase in Asian * A windfall tax is a tax imposed when economic conditions result in
demand for these, and will benefit from the development above-average economic profits. They are often used in businesses
of physical infrastructure by foreign direct investors involved with commodities, which sometimes experience very high
like the Chinese. This infrastructure is essential for the profits due to high prices resulting from a commodity boom.
development of agriculture, manufacturing, services, trade
and even human capital improvements. Rising incomes Source: ‘Windfall tax scrapping gets mines chamber backing’ in
and rapid industrialisation drive demand for electricity, the Times of Zambia, 19 October 2010; ‘Chinese investment
transport, telecoms and housing. Therefore, resource and reaches $1 billion in 2010’ in Tradeinvest, 11 February 2011;
infrastructure investment will drive economic growth in ‘Zambia – UNCTAD urges raise in mine taxes in Zambia’ in
Africa and ultimately benefit the people. Tendersinfo (Mumbai, India), 30 December 2010; ‘China to spur
Africa growth’ in the Tehran Times, 10 February 2011.

Question B.14 Question B.15

(a) (i) Define the term infrastructure identified in (a) (i) Describe the nature of foreign direct

bold in the text (paragraph 2). [2 marks] investment (paragraph 1). [2 marks]

(ii) Define the term human capital identified in (ii) State two characteristics of economically less

bold in the text (paragraph 2). [2 marks] developed countries that attract foreign direct

(b) Distinguish between economic growth and investment. [2 marks]

economic development. [4 marks] (b) Explain the reasons why multinational corporations
(MNCs) are interested in directly investing in
(c) ‘Economic development cannot occur in the economically less developed countries. [4 marks]

absence of economic growth.’ Comment on this

statement. [4 marks] (c) Using a diagram, explain how rapid economic

(d) Using information in the text and your knowledge growth in China has led to increases in

of economics, discuss the possible effects of foreign commodity prices. [4 marks]

direct investment in copper mining on Zambia’s (d) ‘Economic development is the natural outcome of

growth and development process. [8 marks] economic growth.’ Using information in the text

and your knowledge of economics, evaluate this

statement. [8 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 33

Exam practice: paper 2 (SL and HL)

Text/data 22 address to the US Congress, Shah noted that USAID is 4
re-evaluating how it distributes aid with a view to becoming 5
Foreign aid more effective.
One factor that seriously limits aid effectiveness is the
1 In 2002, rich donor countries promised to make practice of tied aid. Relief organisations estimate that as
contributions of at least 0.7% of GDP to development much as 75% of foreign aid by rich countries is tied, and
assistance in order to help meet the MDGs (Millennium is intended to promote rich-country exports of goods and
Development Goals). The only countries that have met this services. In the United States, for example, due to pressures
goal are Denmark, Luxembourg, the Netherlands, Norway on the government by farmer interest groups, most of food
and Sweden. Some of the richest countries in the world, aid (a type of development aid) requires recipients of aid
including Germany, Japan and the United States, have to buy food from US agribusiness firms. This practice does
fallen far short of that. On average, development assistance not encourage poor farmers to become self-reliant food
averages 0.31% of GDP of developed countries. growers.
At a recent UN meeting, President Obama announced
2 In the United States, there is pressure by a group of reform of US foreign aid programmes. Using food aid
members of the House of Representatives (a part of the US as an example of change, he said that the new approach
government) to reduce funding for USAID*, which delivers would seek to empower communities to meet their own
US bilateral official development assistance (ODA). food needs, rather than continuing with old models that
They argue that the United States spends large amounts just provided food for decades. That’s not development,’
on foreign aid, which is fiscally irresponsible in view of he said, ‘that’s dependence.’
the large US budget deficit. However, public opinion polls
show that the US public believes that an amount that would * United States Agency for International Development.
be fiscally responsible for the US to spend on aid is 21 times
greater than the amount actually spent. Private donations Source: ‘Cutting USAID’s budget threatens national security’ in
by Americans to non-governmental organisations (NGOs) Grand Rapids Examiner (MI), 26 January, 2011; ‘Obama at UN summit:
abroad are three times as large as ODA, and it is very likely foreign aid is “core pillar” of American power’ in Christian Science
that this trend will continue. Monitor, 22 September 2010; ‘Missed goals’ in The New York Times,
23 September 2010; ‘Aid versus trade’ in South Asia Investor Review,
3 Rajiv Shah, head of USAID, argues that cuts in funding 23 May 2009.
would have negative consequences for US national
security. Projects in several countries focus on economic
development as a means to prevent extremist activities.
Lack of opportunities for employment and education, and
lack of food security lead to resentful populations. In an

Question B.16 (b) Explain the role of NGOs as aid organisations in
the process of economic development. [4 marks]
(a) (i) Define the term official development
(c) Explain the motivations of countries that extend
assistance identified in bold in the text aid. [4 marks]

(paragraph 2). [2 marks] (d) Using information in the text and your knowledge
of economics, examine the effectiveness of foreign
(ii) Describe the meaning of tied aid identified in aid in promoting economic development.
[8 marks]
bold in the text (paragraph 4). [2 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 34

Exam practice: paper 2 (SL and HL)

Text/data 23

Aid for Indonesia and South Africa

Use the information in the tables below to answer the questions that follow.
Table 1: Statistics for Indonesia and South Africa, 2010 (unless otherwise noted)

HDI rank Human GNI per Life Mean Expected ODA Net ODA Population
development capita expectancy years of years of received receipts (million)
index ($ PPP) schooling schooling per capita (2009)
at birth (US$
(years) 12.7 (US$) million)
13.4 (2009) (2009)

Indonesia 108 0.600 3957 71.5 5.7 4.6 1050 230.0
8.2
South Africa 110 0.597 9812 52.0 21.9 1078 49.3

Table 2: Percentage of bilateral ODA by sector (2008–9)*

Education Health Other Economic Production Multi- Humanitarian Other
social infrastructure sector aid
sectors and services
23 28
Indonesia 13 7 17 23 7 4 0.5 1.5

South Africa 5 55 18 14 2

* Percentages are approximate.

Table 3: Top ten donors of ODA to Indonesia and South Africa, US$ million (2008–9 average)

To Indonesia To South Africa 451
Japan 1370 United States 159
IDA* 369 EU 130
Australia 334 Germany 93
France 263 United Kingdom 43
United States 256 Netherlands 42
Germany 198 Global Fund 35
Netherlands 165 France 27
AsDF** 120 Norway
24
United Kingdom 88 Denmark 22
EU 84 Ireland

* International Development Association, a branch of the World Bank that offers concessional loans to very low-income countries.
** Asian Development Fund, an international development organisation whose objective is to reduce poverty and improve standards of living in
its member countries.

Source (Table 1): United Nations Development Programme, Human Development Report 2010; The World Bank, Development Co-operation
Directorate (DCD-DAC).
Source (Tables 2 and 3): Development Cooperation Directorate (DCD-DAC).

© Cambridge University Press 2012 Economics for the IB Diploma 35

Exam practice: paper 2 (SL and HL)

Question B.17 (c) Explain what accounts for the very similar

(a) (i) Define the term humanitarian aid identified HDI ranks and human development indices of

in bold in Table 2. [2 marks] Indonesia and South Africa. [4 marks]

(ii) Define the term concessional loan identified (d) Using information in the tables and your
in bold in the footnote below Table 3.
[2 marks] knowledge of economics, compare and contrast

the extent, nature and sources of ODA to Indonesia

(b) Explain whether GNI per capita is a reliable and South Africa in relation to their level of

indicator for separating countries into human development. [8 marks]

‘economically less developed’ and ‘economically

more developed’. [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 36

Exam practice: paper 2 (SL and HL)

Text/data 24 sustainable development. It is clear that trade and 5
investment bring greater opportunity for wealth creation. 6
Aid versus trade Africa welcomes investment, and Rwanda is no exception
… This call for investment and trade rather than traditional
Part 1 aid does not mean the latter’s contribution to addressing
poverty is not recognised. However, the fundamental
1 In 2000, leaders of rich and poor countries promised to problem with the current development aid practice is the
create a better world by 2015, committing themselves danger countries face as they become perpetually reliant
to financial contributions in the form of foreign aid that on handouts.
would help achieve the Millennium Development Goals ‘The primary purpose of aid should be to work itself out,
(MDGs). At a United Nations meeting ten years later, leaving a positive legacy behind. Aid should also be used
world leaders admitted progress ‘falls far short of what is to create opportunities for trade, enhance self-sufficiency
needed’ to meet the targets. Rich nations have not been and assist with the development of a robust private sector
contributing the foreign aid needed to meet the MDGs. to attract investment …
‘Ultimately, Africa’s relationship with its international
2 According to Helen Clark, UNDP administrator, ‘For those counterparts should be redefined. For too long, we have
living in poverty, the MDGs have never been abstract or not been able to trade fairly with Europe and the US …
aspirational targets. They have offered a pathway to a particularly in agriculture. Investment and trade with
better life – a life with access to adequate food and income; willing countries helps the continent to build a much-
to basic education and health services; to clean water and needed culture of entrepreneurship and development.’
sanitation; and to empowerment for women. Put simply,
advancing the MDGs is an important milestone in our Source: ‘Why Africa welcomes the Chinese’ in the Guardian, 2
quest for a more just and peaceful world . . . November 2009; ‘What will it take to achieve the Millennium
Development Goals? An International Assessment’, United Nations
3 ‘[T]he international community does need to deliver on its Development Programme Newsroom, 17 June 2010; ‘Missed goals’ in
commitments to provide development assistance as well as The New York Times, 23 September 2010.
improve the predictability and effectiveness of aid.’

Part 2

4 Paul Kagame, president of Rwanda, writes the following.
‘Development aid … has long been a key source of income
for the continent. While helpful, aid has not delivered

(c) Explain the meaning of the statement that Africa

Question B.18 has ‘not been able to trade fairly with Europe and

(a) (i) Define the term foreign aid identified in bold the US’ (paragraph 6). [4 marks]

in the text (paragraph 1). [2 marks] (d) Using information in the text and your knowledge
of economics, compare and contrast the roles of
(ii) Identify two groups of donors of aid (sources of aid and trade in economic development.
aid) to economically less developed countries. [8 marks]
[2 marks]

(b) Using examples, distinguish between development

aid and humanitarian aid. [4 marks]

© Cambridge University Press 2012 Economics for the IB Diploma 37