International Baccalaureate
Diploma Programme
Economics
Higher level paper 2
(For first teaching 2011, first examinations 2013)
Script
I
J
Question
1
HL P2 economics specimen paper exemplar scripts
Marks
Notes
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HL P2 SAMPLE I
Question One
(a)
(i)
It is when the amount exported is more than the amount imported.
(ii)
Growth is when Gross Domestic product increases in a given time period.
(b)
In the above diagram, the contraction in the deficit causes demand for the rand to increase, causing
the price to increase to P2. This is because there are less imports and more exports.
(c)
A strong rand will mean that the rand has appreciated. This will make exports more expensive and
as a result AD will shift to the left. This will reduce the price level, reducing "upward pressure on
inflation".
(d)
The South African government should attempt to weaken the rand because if it does not do so, it
would make "exports uncompetitive and encourage imports". This could widen the current
account deficit, which was 7.4% of GDP last year. This would be bad for the economy. However, a
weaker currency might "reduce the official interest rate too far, sparking a repeat of the consumer
boom which left households heavily in debt".
A strong rand is bad news for local factories, as local goods become more expensive. This will cause
unemployment. Therefore, the government should try to weaken the currency to make exports
more competitive.
Question Two
(a)
(i)
A recession is a fall in output over a six-month period.
(ii)
The WTO aims to reduce barriers to trade between the world's economies.
(b)
In the diagram below, the effect of a tariff on candles can be seen. The price of imported candles
increases from Pw to Pw+t. This causes imports to fall from Q1Q2 to Q3Q4. As a result, Polish
candle-makers increase output from Q1 to Q3.
(c)
Dumping is one of the barriers to trade. Therefore, anti-dumping reduces barriers and so increases
free trade.
(d)
Although the EU says it is "committed to free trade", it is clear from the text that this is not so. A
"tariff of up to 60%" will be placed on Chinese candles. Also, it has placed a range of "anti-dumping
tariffs" on wire, iron and steel pipes and aluminium foil from Brazil, China and Armenia. This is not
all. Besides tariffs, the EU has imposed new health and safety standards on a range of products,
clearly going against the principle of free trade. In services such as banking the EU has several
barriers.
The table shows that the EU has imposed 152 new barriers between 2008 and 2009.
In evaluation, even though the EU says it is committed to free trade, it is clearly not, as the above
points prove.
Question Three
(a)
(i)
One MDG is to reduce poverty.
(ii)
This means that people are very poor and cannot survive.
(b)
The government of Laos has increased economic growth to 7.9% and has reduced the number living
in poverty. In the diagram, this has increased aggregate demand, causing an improvement in the
distribution of income as there is less poverty.
(c)
A low level of education will reduce the economic development of Laos. If children are unable to
get a good education, they will not be able to obtain qualifications and therefore they will not be
able to get good jobs and increase their standards of living. If they cannot read and write then they
will not be able to do professional jobs such as engineering.
(d)
Laos has made considerable progress towards reaching development goals, but there is still some
way to go. Although there have been improvements in health and education, there is still income
inequality and child malnutrition. Other countries such as Thailand and Malaysia have much higher
national income, better education and more internet use. This shows that they have been able to
achieve economic development through the market mechanism, so perhaps Laos should do the
same.
However, both Thailand and Malaysia have much higher pollution than Laos, and this could be due
to a lack of government control. Also, without some government control, income inequality may
get worse, as this is a disadvantage of using the market mechanism.
Therefore, in evaluation, Laos should use the market mechanism but with some government
intervention.
Question Four
(a)
(i)
To get cheap labour and to avoid pollution laws.
(ii)
The difference between imports and exports in a given time period.
(b)
Due to the global economic recession, the demand for metal and oil has decreased, causing prices
to fall from $9000 to $3000 per tonne. In the diagram below the demand decreases from D to D1,
causing a fall in price. As a result, growth in Zambia will decrease.
(c)
Mining leads to pollution, which is a negative externality of production. In the diagram below the
MSC is above the MPC, and so the metal is over-produced and under-priced.
(d)
Multinational corporations make a significant contribution to the growth and development of LDCs.
Foreign direct investment can fill the savings gap and creates demand for the country's products.
This leads to higher incomes, greater employment, more output and therefore higher living
standards. Thus FDI can contribute to growth and development. In addition, it allows technology
transfer to the LDC and makes a wider range of goods available. If the products are exported, the
current balance will improve. MNCs pay taxes which can be used by LDC governments to improve
infrastructure.
However, it may be the case that the technology introduced by the MNC is “inappropriate" leading
to few extra jobs. Also, profits might be repatriated, leaving little benefit for the host country.
Natural resources may be over-used, and pollution may result. Such production would be
unsustainable.
In conclusion, FDI by MNCs may make a very big contribution to growth and development, but
there are also several possible disadvantages which must be considered.
HL P2 SAMPLE J
Question One
(a)
(i)
Current Account Deficit - when the value of exports of goods and services is lower than the
value of imports of goods and services.
(ii)
An increase in the output of an economy over time, measured by real GDP.
(b)
A contraction in the current account deficit is caused by more exports or less imports. More
exports will lead to a greater demand for the rand as firms in other countries need rand to buy
South African products. As the demand for rand shifts to the right, the price of the rand (the
exchange rate) increases, leading to an appreciation of the rand.
(c)
A strong rand will mean that the price of South African exports will be high (and the price of
imports into South Africa will be low). This will cause less demand for exports and more demand
for imports, causing aggregate demand to decrease as (X-M) is a component of Aggregate Demand.
This can be seen in the diagram below. The AD curve will shift to the left, reducing equilibrium
income and price level. The fall in the general price level "reduces upward pressure on inflation".
(d)
It can be argued that the South African government should attempt to weaken the rand because of
the disadvantages of having a strong currency. As stated in paragraph 2, a strong rand would make
“exports uncompetitive and encourage imports". This would weaken the current balance (it is
already "7.4% of GDP") and reduce aggregate demand, causing lower profits, unemployment and
slower growth in South Africa. This would reduce living standards.
Furthermore, the upcoming World Cup and possibility of a higher world price for gold would
increase the value of exports, making the currency even stronger. This adds to the argument that
the South African government should take action.
However, a policy to weaken the rand would also have disadvantages. First, it would increase
inflationary pressure, as import prices would rise, increasing costs of production for companies
importing raw materials. Also, the prices of imported finished goods would rise.
In addition, if the government reduces interest rates in order to weaken the currency, this could
"spark a repeat of the consumer boom" by encouraging households to borrow for spending and
leaving them heavily in debt.
Therefore, the government should sell rand in order to weaken the exchange rate (see diagram
below).
Question Two
(a)
(i)
A recession is a fall in real GDP over two successive quarters.
(ii)
To encourage countries to trade without barriers such as tariffs and non-tariff
barriers.
(b)
The diagram below illustrates the effect of the tariff on the revenues of Polish candle makers.
Without the tariff, candles would be imported at Pw, with Q1Q2 imported and domestic (EU) output
at Q1. With the tariff, the price of imports will increase to Pw+t, causing imports to fall to Q3Q4 and
EU output to increase to Q3. As a result of increased output, the revenues of EU/Polish candle
producers will increase.
(c)
Although the "anti-dumping measures" are barriers to trade, they are designed to retaliate against
dumping, which is a barrier to trade, and so could be seen as being in favour of free trade.
Therefore, the EU spokesperson argued that the measures would encourage other countries to
stop dumping, and that therefore they would actually promote free trade.
(d)
The EU says it is committed to free trade, but much of the evidence suggests that it is not. For
example, a "tariff of up to 60%" will be placed on Chinese candles. This goes directly against free
trade, which states that countries should be able to trade without barriers and gain from
comparative advantage.
Furthermore, it has imposed tariffs on "wire, iron and steel pipes and aluminium foil". The table
shows that 152 new tariffs have been imposed since 2008, proving that the EU is not really
committed to free trade. Non-tariff barriers, such as health and safety regulations and controls on
banking, have also been raised.
However, the EU might argue that although it is committed to free trade, barriers may be necessary
for a number of reasons. For example, the tariff on candles might be intended to prevent Chinese
candles flooding the European market, causing significant structural unemployment in Europe. It
might also be argued that "anti-dumping" tariffs are necessary because trading partners are giving
unfair advantage to their exporters, and this goes against free trade.
The health and safety regulations might be needed to ensure the health of EU citizens, while the
banking measures would ensure the quality of banking services.
Thus, while the EU might be committed to free trade as a long term goal, it might justify barriers in
the short term to ensure the interests of its citizens. Therefore, depending on how necessary these
barriers seem to be, the EU claim could be supported or dismissed.
Question Three
(a)
(b)
(i)
To increase equality.
(ii)
Absolute poverty means that people do not have enough income (eg $2 per day) to obtain
the basic necessities needed for survival.
The Lorenz curve below illustrates the change in the distribution of income in Laos. Line a is the
line of perfect equality. The movement from b to c shows that the poorer are receiving a lower
percentage of national income, and so "income inequality is getting worse". Those affected most
are those in the countryside.
(c)
In order to achieve economic development, Laos needs to increase the quantity and/or quality of
its factors of production. Education and training increase the quality of the labour force, allowing it to be
more productive and therefore contributing more to economic growth. In turn, economic growth usually
leads to
higher incomes and more government spending on essential services such as
health and
education, leading to an improvement in living standards. Therefore, a low level of education restricts the
economic development of Laos.
(d)
Although Laos has made "considerable progress towards reaching the MDGs", it is clear that there
is still much to be done, especially with regard to "child malnutrition and mortality rates".
Therefore, the government must decide whether to follow the free market or to intervene.
The table shows that its neighbours, Thailand and Malaysia, have achieved high levels of GNP
through the market mechanism. This might be because allowing the free market to work increases
incentives to work, to set up businesses and to be efficient. Therefore, Laos would be well-advised
to use the free market approach.
Allowing FDI can help fill the savings gap, allowing increased output, incomes and employment via
the multiplier effect. The diagram below illustrates the effect of FDI.
In conclusion, it could be argued that the use of the market mechanism is likely to promote
economic growth. However, this may not lead to development, because of pollution and profits
being wasted. Therefore, the government might be wise to encourage private enterprise via the
market mechanism, but should also intervene to ensure the externalities are accounted for, that
income inequality is addressed and that essential services are provided.
Question Four
(a)
(b)
(i)
To obtain cheap labour and so reduce production costs to obtain resources such as
minerals.
(ii)
A measure of the ratio of a country's export prices in relation to its import prices.
A fall in copper prices will reduce the value of Zambia's exports. Exports are a component of
Aggregate Demand, so AD will decrease. We can see in the diagram below that a decrease in AD
will lead to a lower price level and a reduction in national income, thus reducing Zambia's economic
growth.
(c)
Mining can lead to pollution, which is an externality as it affects local residents (third parties) rather
than the producer or consumer. The externality can be illustrated above by the vertical difference
between the marginal private cost and the marginal social cost. The social equilibrium is where
MSC = MSB, and so with the externality the products produced by mining are overconsumed/produced and under-priced.
(d)
Mineral-rich countries often rely on MNCs to help extract the minerals and earn income. MNCs can
supply the skills and technology to extract the materials effectively, allowing the host country to
earn tax revenues which can be spent on essential services and infrastructure. Also, the MNC is
likely to provide jobs, allowing local citizens to earn income which can be used to raise living
standards.
A country like Zambia, for which copper accounts for 80% of exports earnings, may rely heavily on
MNCs to earn the foreign exchange which allows the country to import goods and services. In this
case MNCs may play a major role in the growth and development of a developing country.
However, the extract highlights some ways in which the host country may not benefit. For
example, MNCs were "able to demand (and get) huge tax benefits before they would invest”. This
would reduce the benefit to the host country, as the government would not receive tax revenues.
This would reduce the ability of the government to provide necessary merit goods, such as
education and health care, thus reducing their ability to promote economic development.
Also, over-reliance on MNCs and their production of minerals may make the LDC very vulnerable to
economic shocks such as the recession, "reducing the workforce". It has often been the case that
the revenue earned from mining has "gone abroad or been wasted, leaving many in poverty".
Finally, MNCs may not pay much regard to the environment, causing pollution and land in need of
regeneration.
It may also be the case that MNCs may exert undue influence over the host government and may
exploit labour, paying very low wages and forcing workers to suffer unsafe conditions.
In conclusion, there is no doubt that MNCs can assist mineral-rich countries to extract resources
which can be sold, contributing to the nation's growth and development. However, this FDI is not
an unmixed blessing, and it is up to the government of the host country and the management of
the MNC to determine the extent of the benefit. In many cases MNCs have greater bargaining
power than the governments in the countries in which they produce. This may restrict the gains for
the government and thus their ability to achieve development. If the MNC makes a genuine effort
to be socially responsible, then the benefits are likely to outweigh the costs.