HL P2 2023 [160 marks]
1a. [2 marks]
Text A — Overview of North Macedonia
1.
North Macedonia is a small, landlocked nation that shares borders with five countries,
including Bulgaria and Greece. Bulgaria and Greece are members of the European Union
(EU) common market, which North Macedonia hopes to join soon. Since the country
began negotiating for EU membership, trade with the EU has increased rapidly and now
accounts for 75 % of North Macedonia’s exports and 62 % of its imports.
2.
Despite its small market, with a population of approximately 2 million, North Macedonia’s
proximity to the EU, low wages and expected entry into the common market have
attracted foreign investors. Greece, its richest neighbour, was its third highest source of
foreign investment in 2019. The lower cost of living also appeals to Greek tourists.
3.
EU companies have invested in the financial, telecommunication, energy and food
processing industries in North Macedonia. Many of the most profitable companies are
from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may
increase as firms located in North Macedonia will be allowed to bypass all custom checks
and enjoy tariff-free trade within the common market. One particular challenge for North
Macedonia, however, is that most of the profits of foreign companies are likely to be
repatriated (sent back to the companies’ home countries).
4.
In 2018, North Macedonia’s export revenue was US$7.57 billion and its import
expenditure was US$9.56 billion. The country’s main exports are iron and steel, clothing
and accessories, and food products. Food, livestock and consumer goods account for 33 %
of imports while the remainder are machinery, petroleum and other materials needed for
the industrial production process.
5.
The manufacturing sector, which now employs 31 % of the labour force, has gained more
importance. The agricultural sector remains strong, contributes over 10 % of North
Macedonia’s gross domestic product (GDP) and employs about 16 % of the country’s
workforce.
6.
The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However,
youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty
line. Unemployment and poverty contribute to high rates of emigration. More than 20 %
of the North Macedonian population have emigrated since 1994, mostly to the EU. As a
member of the EU, North Macedonia will enjoy free movement of labour which will make
it easy for its citizens to live and work in other EU countries.
Text B — North Macedonia’s economic reforms
1.
To be considered for EU membership, North Macedonia implemented a series of supplyside policies to reform its economy. The EU imposes strict requirements for membership
but provides financial assistance to countries preparing for membership. North
Macedonia has received 633 million euros (the currency of the EU) to help with the
reforms.
2.
Most of the supply-side policies seek to improve the international competitiveness of
North Macedonia’s industries. The authorities are increasing access to education and
training for workers. The expansion of the transport network and other infrastructure is
also expected to increase efficiency.
3.
Protection of the environment is also on the list of requirements for EU membership.
North Macedonia aims to reduce its dependence on coal and to instead promote the use of
solar, wind and hydropower technologies. These low-carbon energy sources would help
decrease its air pollution, which is among the worst in Europe.
4.
The reforms, which started in 2014, have shown progress. Exports and manufacturing
output are more diversified and more concentrated on high-value products. To attract
FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the
region. The central bank also prevents the denar (North Macedonia’s currency) from
appreciating against the euro through managing foreign reserves. However, skill
shortages and a mismatch of skills with those required by companies discourage foreign
firms from investing. Important investment gaps in public infrastructure also remain.
Text C — North Macedonia’s trade agreements
North Macedonia participates in five free trade agreements (FTAs), that together cover 95 %
of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports
of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net
importer of agricultural and food products. All protectionist measures on EU products would
be removed upon entry into the common market.
Table 1: Consumer Price Index (CPI) for North Macedonia (base year = 2010)
Table 2: Economic data for North Macedonia
[Text A: World Bank Data Bank, n.d. North Macedonia economy briefing: Prospects for
Macedonian-Greek Economic
Relations After the Prespa Agreement [online] Available at:
https://data.worldbank.org/country/north-macedonia
[Accessed 20 April 2021]. Source adapted.]
Text C: World Trade Organization, n.d. WT/TPR/S/390 • The Republic of North
Macedonia [online] Available at:
https://www.wto.org/english/tratop_e/tpr_e/s390_sum_e.pdf [Accessed 20 April 2021].
Source adapted.
Table 1 and 2: Data from The World Bank [online] Available at: https://data.worldbank.org/
[Accessed 20 April 2021]. Source adapted.]
Define the term foreign direct investment (FDI) indicated in bold in the text (Text A, paragraph
[3]).
Markscheme
1b. [2 marks]
Define the term unemployment rate indicated in bold in the text (Text A, paragraph [6]).
Markscheme
1c. [2 marks]
Using information from Table 1, calculate North Macedonia’s annual rates of inflation
between 2016 and 2019.
Markscheme
Inflation in 2017:
[(110.9 – 109.4)/109.4] x 100 = 1.37%
Inflation in 2018:
[(112.5 – 110.9)/110.9] x 100 = 1.44%
Inflation in 2019:
[(113.4 – 112.5)/112.5] x 100 = 0.8%
Award [1] for any valid working but incorrect inflation rates calculated or for figures rounded to
less than 2 dp or figures without the % sign.
Award [2] for correct inflation rates (with or without workings).
1d. [1 mark]
Using your answer to part (b)(i), identify the year disinflation set in.
Markscheme
Award [1] for identifying 2019 as the year disinflation sets in (“after 2018” or “between 2018 and
2019” are also valid answers).
OFR applies.
1e. [2 marks]
Using information from Text A, paragraph [4], calculate North Macedonia’s net exports in
2018.
Markscheme
7.57 − 9.56
Any valid working should be rewarded with [1]
= −(US)$1.99 billion
An answer of –(US)$1.99 billion, (US)$1.99 billion, –1.99, 1.99 or a deficit of 1.99 without
workings is sufficient for [1].
1f. [4 marks]
Using an AD/AS diagram, explain the likely impact of North Macedonia’s supply-side policies
on its full employment level of output (Text B, paragraph [2]).
Markscheme
Candidates who label diagrams incorrectly can be awarded a maximum of [3].
For AD/AS, the vertical axis may be Average (General) Price Level, or Price Level. The horizontal
axis may be real output, real national output, real income, real national income, real GDP or real
Y. Any abbreviation of the previous terms is acceptable. A Keynesian AS is acceptable. A title is
not necessary.
1g. [4 marks]
Using an externalities diagram, explain how dependence on coal could be a source of market
failure (Text B, paragraph [3]).
Markscheme
Candidates who label diagrams incorrectly can be awarded a maximum of [3].
The y axis may be labelled price or P and/or costs and/or benefits, and the x axis labelled
quantity or Q. A title is not necessary.
1h. [4 marks]
Using a PPC diagram, explain the potential impact of the lack of FDI in North Macedonia (Text
B, paragraph [4]).
Markscheme
PPC showing underutilization of resources. Point below the curve
1i. [4 marks]
Using a supply and demand diagram, explain the likely impact of the removal of export
taxes on North Macedonia’s production of wine (Text C).
Markscheme
Supply curve should shift to the right increasing quantity and reducing prices.
1j. [15 marks]
Using information from the texts/data and your knowledge of economics, discuss the likely
economic effects on North Macedonia of its entry into the European Union (EU) Common
Market.
Markscheme
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range
of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and
supported by appropriate evidence.
Responses may include:
•
•
•
•
•
•
•
•
The impact on the unemployment rate may be mixed:
–
it could be argued that the inflows of FDI (Text A, paragraph [2]; Table 2) and
greater exports to the EU could lead to job creation.
–
The lower wages may attract EU firms which may help reduce the high
unemployment rate (Text A, paragraph [6]; Table 2).
–
Jobs may be lost in the agricultural sector (Text C) which still employs 16 % of the
population (Text A, paragraph [5]).
–
Funds from the EU have helped increase access to education and workers’ training
which could help reduce the skills mismatch (Text B, paragraph [4]) and hence
reduce the high (structural) unemployment rate (Text A, paragraph [6]).
The impact on economic growth:
–
the increase in trade could close the current account (balance of trade) deficit
(Table 2, answer to b(ii)), lead to increase in AD and hence actual growth.
–
more trade may raise efficiency in North Macedonia through increased
competition, economies of scale from larger markets, and improved resource
allocation
–
it could be argued that trade may not increase significantly since North Macedonia
is already enjoying free trade with the EU over most goods and services (Text C).
–
as North Macedonia currently suffers a deficit in the balance of trade (Text A,
paragraph [4], answer to b(ii)) and a current account deficit (Table 2), the
removal of quotas may worsen its balance of trade position and could lead to a fall
in AD.
–
the various supply-side policies needed to meet the requirements for EU
membership have allowed potential growth and kept the inflation rate low (Table
1).
–
the net FDI inflow throughout the 4-year period (Table 2) reflects potential
growth.
Access to seaports would be easier since North Macedonia is landlocked (Text A,
paragraph [1]). This would further attract investment.
The free movement of labour which comes with the common market may worsen the
emigration problem and contribute to a ‘brain drain’ problem (Text A, paragraph [6]).
The EU is providing North Macedonia with financial assistance to finance supply-side
policies, which will allow them to become more globally competitive (Text B, paragraph
[1]).
Increased trade with the EU has allowed for diversification (Text B, paragraph [4]) and
the growth of the manufacturing sector (Text A, paragraph [5]).
Once North Macedonia no longer receives financial assistance from the EU, it may have
difficulties financing government expenditure.
The removal of quotas may have some impact on the local agricultural sector (Text C)
which could worsen the incidence of poverty (Text A, paragraph [6]) and lead to over-
•
•
•
•
•
•
reliance on other countries for food security since North Macedonia is already a net
importer of food (Text C).
As a member of the EU common market, North Macedonia will continue to have
unrestricted access to imported capital goods, enhancing productivity and potential
growth (Text A, paragraph [4]).
North Macedonia will have to adopt EU external tariffs which may negatively impact its
trade position with non-members (3 neighbouring countries are not part of the common
market - Text A, paragraph [1]).
The repatriation of foreign firms’ profits (Text A, paragraph [3]) may lead to a worsening
of the balance of payments and a shortage of financial capital.
There could be a loss of sovereignty as North Macedonia will need to give unrestricted
access to EU firms which have already invested in essential services (Text A, paragraph
[3])
Compliance with EU standards for environmental protection could lead to less pollution
and an improved quality of life (Text B, paragraph [3]).
Greater competition due to exposure to foreign firms may lead to innovation.
Examiners should be aware that candidates may take a different approach which, if appropriate,
should be rewarded.
2a. [2 marks]
Text D — Overview of Sierra Leone
1.
Sierra Leone is located on the west coast of Africa. Economic activity is concentrated on
agriculture and mining, which together contribute 70 % of gross domestic product
(GDP) and 77 % of export revenue.
2.
Economic growth rates fluctuated from +20.1 % in 2013 to −21.5 % in 2015. The
economic slowdown in China contributed to a significant drop in mining activities and a
fall in Sierra Leone’s export revenue. China is Sierra Leone’s largest market for exported
minerals.
3.
Economic growth rates in Sierra Leone have improved in recent years due to increased
activity in agriculture, mining and construction. Increased employment in these labourintensive sectors could help reduce poverty, which remains widespread in the country.
Sierra Leone’s ranking in the Inequality adjusted Human Development Index (IHDI) is
very low.
4.
The fall in export revenue has led to a 50 % depreciation of the leone (Sierra Leone’s
currency) over the past five years. Even recent increases in the price of commodities have
not been sufficient to offset the high import expenditure on food, medication, cars and
capital equipment.
5.
The depreciation of the leone has led to inflationary pressures. The removal of a fuel
subsidy resulted in an increase in the price of fuel and pushed the inflation rate from
16.8 % in 2018 to 17.2 % in 2019.
6.
To make matters worse, access to essential, life-saving health care services in Sierra
Leone is often disrupted by regional conflicts. Healthcare in Sierra Leone is generally
charged for and is provided by a mixture of government, private and non-governmental
organizations (NGOs). NGOs are relied on to protect the health and wellbeing of citizens.
NGOs help to achieve this by distributing medicine and teaching families about hygiene
and proper sanitation.
7.
Another area of concern is the government debt, which stood at 62 % of GDP in 2019. The
government has reduced its budget deficit from 5.7 % to 3.4 % of GDP by minimizing nonpayment of taxes and implementing cost-saving measures such as the automation of some
government services.
8.
The newly elected government has made good progress in its fight against corruption, but
it is facing many macroeconomic challenges. Foreign aid has been reduced, infrastructure
is inadequate and many economic activities remain untaxed. Youth unemployment is also
high due to low literacy rates and a lack of skills required in the job market.
Text E — Sierra Leone’s new development plan
1.
In 2019, the government of Sierra Leone introduced a new five-year development plan.
The plan includes policies aimed at increasing the welfare of Sierra Leone’s citizens by
working towards the Sustainable Development Goals.
2.
The development plan ensures access to free primary and secondary education in all
public schools. The cost of education is the main reason that many households are not
sending their children, particularly girls, to school. For those paying private education
fees, switching to public education would allow more of their household income to be
spent on other essential services and farming equipment.
3.
The expected increase in human capital should facilitate economic activities and lead to
investment. Schools now teach modern farming practices, such as those involving the use
of farm machinery and fertilizers. These would benefit rice farmers and help achieve food
security (ensuring people have access to enough food).
4.
The provision of technical education should not only increase agricultural output but also
allow for the diversification of the economy. The manufacturing sector contributes only
2 % of the country’s GDP and could provide an alternative source of employment. The
five-year plan also addresses the lack of infrastructure, in particular for electricity
generation, which has so far restricted the development of the manufacturing sector.
Text F — Investment in Sierra Leone
1.
The World Bank ranked Sierra Leone 160th among 190 countries in 2018 for the ease of
doing business, citing difficulties in accessing electricity and in obtaining loans and
business permits. Government borrowing from the banking sector has increased in recent
years, resulting in high interest rates and limited credit availability for the private sector.
Foreign investors, however, usually bring capital from abroad.
2.
Despite the challenges, Sierra Leone offers significant opportunities for investment.
Foreign investors are involved in the energy sector, infrastructure, agriculture, tourism,
and natural resources. Reduced tax rates on corporate income are offered for investments
in agriculture and tourism.
Table 3: Economic data for Sierra Leone
[Text E: Sustainable Development Goals Knowledge Platform, n.d. [online] Available at:
https://sustainabledevelopment.
un.org/memberstates/sierraleone [Accessed 20 April 2021]. Source adapted.
Text F: U.S. Department of State, n.d. 2018 Investment Climate Statements: Sierra Leone [online]
Available at:
https://www.state.gov/reports/2018-investment-climate-statements/sierra-leone/
[Accessed 20 April 2021].
Source adapted.
Table 3: Data from The World Bank [online] Available at: https://data.worldbank.org/
[Accessed 20 April 2021]. Source adapted.]
Define the term gross domestic product (GDP) indicated in bold in the text (Text D, paragraph
[1]).
Markscheme
2b. [2 marks]
List two dimensions of the Inequality adjusted Human Development Index (IHDI) (Text D,
paragraph [3]).
Markscheme
2c. [3 marks]
Using the information in Table 3, calculate the change in Sierra Leone’s current account
balance from 2017 to 2018.
Markscheme
Current account balance in 2017 = 974 − 1796 − 101 + 400 = –523 [1]
Current account balance in 2018 = 714 − 1603 – 112 + 324 = −677 [1]
Change = (−677−(−523)) = −(US)$154 million [1]
An answer of −(US)$154 million or “a wider deficit (US)$154 million” without workings is
sufficient for [1].
OFR applies provided at least one of the current account balances is correct.
2d. [2 marks]
Using the information in Table 3, calculate Sierra Leone’s rate of economic growth between
2017 and 2018.
Markscheme
(3617 − 3497)/3497 × 100 % [1]
Any valid working should be rewarded with [1]
= 3.43 % [1]
Award [1] for the correct economic growth rate without workings or without the % sign or for a
figure rounded to less than 2 dp.
2e. [4 marks]
Using an exchange rate diagram, explain how the fall in export revenue contributed to the
depreciation of the leone (Text D, paragraph [4]).
Markscheme
Candidates who label diagrams incorrectly can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of the leone in US$,
US$/leone or US$ per leone. The horizontal axis should be quantity, or quantity of leones. A title is
not necessary.
2f. [4 marks]
Using an AD/AS diagram, explain how the increase in the price of fuel might have contributed
to inflation (Text D, paragraph [5]).
Markscheme
Candidates who label diagrams incorrectly can be awarded a maximum of [3].
For AD/AS, the vertical axis may be Average (General) Price Level, or Price Level. The horizontal
axis may be real output, real national output, real income, real national income, real GDP or real
Y. The SRAS curve may be labelled AS. Any abbreviation of the previous terms is acceptable. A
title is not necessary.
2g. [4 marks]
Using a poverty cycle diagram, explain how the provision of free primary and secondary
education may help households break the poverty cycle (Text E, paragraph [2]).
Markscheme
2h. [4 marks]
Using a demand and supply diagram, explain how modern farming practices could affect the
market for rice (Text E, paragraph [3]).
Markscheme
Candidates who label diagrams incorrectly can be awarded a maximum of [3].
The use of P and Q on the axes is sufficient for a demand and supply diagram. A title is not
necessary.
2i. [15 marks]
Using information from the texts/data and your knowledge of economics, evaluate the impact
of government intervention in promoting economic growth and economic development in
Sierra Leone.
Markscheme
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and
limitations. Opinions and conclusions should be presented clearly and supported with
appropriate evidence and sound argument.
Responses may include:
•
•
•
•
a definition of economic growth.
a definition of economic development.
an explanation of the sources of economic growth and development.
an explanation of the link between economic growth and development.
Budget deficit (Text D, paragraph [7])
•
•
•
•
The government has reduced the budget deficit, and this will slow the increase in the
government debt, reducing the future debt burden (Text D, paragraph [7]).
The reduction in the budget deficit could mean that there will be less government
spending on social welfare negatively impacting economic development.
The government maintains a budget deficit and this could have an expansionary impact
on AD, leading to economic growth since injections (government spending) remain higher
than withdrawals (taxes). Economic growth may lead to development.
The government is still borrowing from banks and this leads to crowding out (Text F,
paragraph [1]). However, this would not affect foreign investment.
Removal of fuel subsidy (Text D, paragraph [5])
•
•
•
•
•
This will have a disproportionate impact on those in poverty who are already adversely
affected by the high inflation rate (Text D, paragraph [5]).
This may lead to cost-push inflation.
It will help reduce government spending and close the budget deficit (Text D, paragraph
[7])
This would help reduce the negative externalities/market failure associated with the
burning of fossil fuels and reduce pollution.
This could lead to higher energy and transportation costs for businesses and may dampen
efforts to diversify the economy.
Provision of healthcare services in tandem with the private sector and NGOs (Text D,
paragraph [6])
•
•
It improves access to, and quality of public health and increases the productivity of
workers.
Reliance on the private sector and NGOs avoids adding to the mounting public debt (Text
D, paragraph [7]).
Fight against corruption (Text D, paragraph [8])
•
This will help bring in foreign investment and may make the country more credible in
taking loans with multilateral organisations such as the World Bank and the IMF. This
would help increase access to foreign aid (Text D, paragraph [8]).
Free primary and secondary education, inclusive of technical education (text E,
paragraph 2 and 4)
•
•
•
•
•
This will help households break the poverty trap as more income can be used to spend on
necessities and capital equipment (Text E, paragraph [2]).
This will have an impact on the empowerment of women (Text E, paragraph [2]).
Productivity will increase in the agricultural sector, ensuring food security (Text E,
paragraph [3]) and reduce the price of rice and other food items (Text E, paragraph [4]).
This will promote diversification (Text E, paragraph [4]) and reduce structural
unemployment, particularly amongst youths (Text D, paragraph [8]).
This may worsen the budget deficit and increase government debt in the short term (Text
D, paragraph [7]).
Improvement in infrastructure
•
•
•
This will help attract MNCs (Text F, paragraph [1]) and allow for the development of the
manufacturing sector (Text E, paragraph [4]), which could help achieve diversification.
This would reduce volatility in export revenue and promote economic growth (Text D,
paragraph [2]) and it may help reduce the current account deficit (Table 3).
This reduces unemployment (Text D, paragraph [8]) and prevents rural-urban migration
if manufacturing takes place in rural areas.
This could worsen the budget deficit and increase the government debt (Text D,
paragraph [7]).
Tax benefits for foreign investment
•
•
•
•
This would help diversify the economy by developing the tourism sector (Text F,
paragraph [2]).
Excessive reliance on foreign investment might lead to a loss of sovereignty as many
essential services are provided by MNCs (Text F, paragraph [2]).
MNCs might exploit resources (Text F, paragraph [2]) and labour.
The increase in FDI inflows could help compensate for the current account deficit (Table
3, answer to (b)(i)) through the financial account. MNCs would also provide an export
market which would increase the export revenue and reduce the current account deficit.
The overall increase in the balance of payments could prevent further depreciation of the
currency.
However, the repayment of profit and interest might widen the deficit on the net income
account (Table 3).
Examiners should be aware that candidates may take a different approach which, if appropriate,
should be rewarded.
3a. [2 marks]
Text A — Overview of Vietnam
1.
Economic reforms in Vietnam during the past 30 years have led to rapid economic
growth, which has transformed a poor nation into a lower middle-income economy. The
percentage of the population with an income of less than US$1.90 a day declined from
38 % in 2002 to below 2 % in 2018.
2.
Vietnam used to be a food-insecure nation, in which many people sometimes lacked
access to affordable food, but it is now a leading exporter of basic food commodities. It
also aims to become an exporter of high quality and processed food products. However,
agricultural production only accounts for 18 % of gross domestic product (GDP), although
it uses 40 % of the land and employs 43 % of the labour force. Due to the growing rural
population, land is often divided up between a greater number of farmers, causing some
farms to become smaller. These farms have fewer opportunities to benefit from
economies of scale and lower average costs of production.
3.
Vietnam’s rapid growth and industrialization, focused on export-oriented manufacturing,
have had a harmful impact on the environment. Electricity consumption has tripled since
2010, growing faster than GDP. Electricity generation, which mainly uses fossil fuels,
accounts for approximately 60 % of Vietnam’s carbon emissions. Demand for water
continues to increase. Unsustainable exploitation of natural resources, such as land,
fisheries, and timber, could negatively affect prospects for long-term growth. In addition,
Vietnam’s primary sector is highly vulnerable to the climate and is therefore subject to
supply shocks.
4.
Vietnam has signed several free trade agreements (FTAs). Its first FTA was a partnership
with Japan in 2008. Both Vietnam and Japan are members of the Comprehensive and
Progressive Agreement for Trans-Pacific Partnership (CPTPP), which took effect at the
beginning of 2019. These FTAs also promote inward foreign direct investment (FDI). In
addition, Vietnam has introduced policies to attract foreign investment, such as tax
incentives and spending on infrastructure.
5.
Japan is the biggest provider of foreign aid to Vietnam and the largest source of FDI.
Japanese firms and aid agencies are jointly financing large-scale projects, including port
infrastructure and a high-speed railway, which will reduce the Hanoi to Ho Chi Minh
journey time from about 35 hours to under six hours. Other Japanese-funded aid projects
are in the areas of health care, education, and the environment.
Text B — Trade and investment flows between Vietnam and Japan
1.
Japan imports seafood and consumer products such as textiles, leather shoes and
processed foods from Vietnam, because Vietnam has a comparative advantage in such
items. Conversely, Vietnam imports machinery, technology, and raw materials for
production from Japan. Gradually barriers to trade are being removed. In 2020, Vietnam
began exporting lychees (a luxury fruit) to Japan after five years of negotiations on quality
standards. The improved access to the Japanese market has increased the number of
consumers and the revenue earned by Vietnamese lychee farmers.
2.
Japanese firms invest in Vietnam, particularly in urban areas, because wages are low and
they can export from Vietnam to other CPTPP members and to China and Indonesia.
Panasonic, a Japanese multinational company (MNC), relocated a major factory, which
manufactures refrigerators and washing machines, from Thailand to Vietnam in 2020.
The construction of a coal-fired power plant is mainly funded by Japanese firms. The
Japanese government is promoting further investment by subsidizing over 30 firms that
are relocating from China to Vietnam. Most of these firms are food processors or
producers of manufactured goods (for example, medical equipment).
Text C — Roles of the central bank in Vietnam
1.
The central bank in Vietnam has been lowering interest rates since mid-2019. However, it
has kept the minimum reserve requirement at 3 % of commercial bank deposits, despite
suggestions that this requirement could be lowered.
2.
The central bank also regulates the exchange rate of the dong (Vietnam’s currency). It
actively intervenes in the foreign exchange market to stabilize the rate when necessary. In
April 2020, there was downward pressure on the dong due to the lower interest rates and
fewer foreign tourists. However, the central bank has a large amount of reserve assets,
which were used to prevent the dong from depreciating.
Table 1: Economic data for Vietnam
Table 2: Development data for Vietnam
Text A The World Bank, 2020.The World Bank in Vietnam [online] Available at:
https://www.worldbank.org/en/country/vietnam/overview [Accessed July 2020]. Source
adapted.
Food and Agricultural Organization of the United Nations, 2018. Small Family Farms Country
factsheet: Vietnam [online] Available at:
http://www.fao.org/publications/card/en/c/I8358EN/ [Accessed July 2020]. Source adapted.
Text B Hoang Tien, N., 2020. Analysis of Japan’s international trade and investment activities in
Vietnam [online]
Available at:
https://www.researchgate.net/publication/338719794_Analysis_of_Japan’s_international_tra
de_and_
investment_activities_in_Vietnam [Accessed July 2020]. Source adapted.
Minh, A., 2020. After years of negotiations, Vietnam finally sells lychees to Japan [online]
Available at: https://e.vnexpress.net/news/business/economy/after-years-of-negotiationsvietnam-finally-sells-lychees-to-japan-4119587.html [Accessed July 2020]. Source adapted.
Table 1 World Bank Data Bank, World Development Indicators, n.d. [online] Available at:
https://databank.worldbank.org/reports.aspx?source=2&country=VNM [Accessed July 2020].
Source adapted.
Table 2 World Bank Data Bank, World Development Indicators, n.d. [online] Available at:
https://databank.worldbank.org/reports.aspx?source=2&country=VNM [Accessed July 2020].
Source adapted.
Define the term debt servicing indicated in bold in Table 1.
Markscheme
3b. [2 marks]
Define the term Gini coefficient indicated in bold in Table 2.
Markscheme
3c. [3 marks]
Sketch a demand and supply diagram to show the effect on revenue earned by Vietnamese
farmers with improved access to the Japanese market (Text B, paragraph [1]).
Markscheme
The diagram has three requirements:
•
•
•
correctly labelled demand and supply diagram
a shift of the demand curve to the right
effect on revenue correctly indicated on diagram.
Candidates who incorrectly label diagrams can be awarded a maximum of [2].
For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis
should be quantity or q. A title is not necessary.
The increase in revenue could alternatively be indicated by labelling the corners of the revenue
boxes or by referring in writing an increase in revenue from P x Q to P1 x Q1.
3d. [2 marks]
Using information from Table 1, calculate the change in the surplus on Vietnam’s balance of
trade in goods with Japan between 2015 and 2019.
Markscheme
2015: (15 141 − 12 531)
2019: (22 475 − 16 484)
2610
5991
any valid working should be rewarded with [1]
(Change in surplus) (US)$ 3381 million
An answer of 3 381, without workings or without units, is sufficient for [1].
Own figure rule applies.
3e. [4 marks]
Explain two economies of scale which may not be available to smaller farms (Text A,
paragraph [2]).
Markscheme
N.B. Alternatively, if a student answers in terms of the economies of scale that large farms can
get, the answer may be fully rewarded.
3f. [4 marks]
Using a production possibilities curve (PPC) diagram to show comparative advantage, explain
why Vietnam would export seafood to Japan while Japan would export machinery to Vietnam
(Text B, paragraph [1]).
Markscheme
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For a diagram showing comparative advantage, the PPC lines could be linear or curved and they
could intersect or be non-intersecting. They should show that Japan has a comparative
advantage in machinery production while Vietnam has a comparative advantage in seafood
production. However, the labelling could be reversed from the examples below. Either one of the
examples below is satisfactory or two diagrams can be drawn, with one for Vietnam and one for
Japan, but the PPCs should have different slopes that correctly convey the comparative
advantages. A title is not necessary.
3g. [4 marks]
Using a demand and supply of money diagram, explain the likely effect on interest rates of a
reduction in the minimum reserve requirement for banks (Text C, paragraph [1]).
Markscheme
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For a money demand and supply diagram, the vertical axis should be labelled interest rate, i, ir or
r. The horizontal axis may be labelled Quantity (Q) or Q of Money. A title is not necessary.
3h. [4 marks]
Using an exchange rate diagram, explain how the central bank in Vietnam could prevent the
dong from depreciating by using its reserve assets (Text C, paragraph [2]).
Markscheme
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of dong in another
currency, other currency/dong or other currency per dong. The horizontal axis should be
quantity, or quantity of dong. A title is not necessary.
Alternatively, a candidate may draw a diagram showing the dong depreciating (due to S shifting
right or D shifting left) and the D curve then shifting right to restore the exchange rate to its
initial level. If explained properly, this can be fully rewarded.
3i. [15 marks]
Using information from the texts/data and your knowledge of economics, discuss the view
that trade with Japan is more beneficial for Vietnam’s economic development than foreign
direct investment (FDI) from Japan.
Markscheme
Answers that only deal with trade or only deal with FDI should be rewarded a maximum of level
3.
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range
of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and
supported by appropriate evidence.
Answers may include:
•
•
•
definition of development
definition of trade
definition of foreign direct investment.
Economic models / theories may include:
•
•
•
•
•
•
AD/AS
poverty cycle
PPC
trade creation / diversion
comparative advantage
free trade / protectionism.
Points that support the view that trade is more beneficial:
Benefits of trade with Japan:
•
•
•
•
trading based on comparative advantage enables Vietnam to consume beyond its
production possibilities curve therefore could increase living standard in Vietnam (Text
B, paragraph [1])
create more employment in export industries leading to improved living standard for the
workers employed in these industries (Table 1)
more exports of agricultural goods enable farms to earn and invest more, leading to more
efficiency (Text A, paragraph [2] or Text B, paragraph [1])
incomes are rising and will rise more in rural areas ( Text B, paragraph [1] or Table 1).
Costs of FDI from Japan:
•
•
•
•
because Japanese factories tend to locate in urban areas, inequality is increasing as shown
by the rise in the Gini coefficient (Table 2)
Japanese firms are taking advantage of low-cost labour (Text B, paragraph [2])
environmental impact of more factories and coal-fired power plants and its effects on
economic development (Text A, paragraph [3] or Text B, paragraph [2])
foreign firms are getting preferential tax treatment and the government is spending on
infrastructure, which has an opportunity cost of possibly less government spending on
health and education (Text A, paragraph [4]).
Points that support the view that FDI is more beneficial:
Benefits of FDI from Japan:
•
•
more jobs are available leading to improving indicators for health and life expectancy
(Table 2) and rising incomes (Text A, paragraph [1] and Table 1)
Japanese FDI also results in Japanese aid directed at required infrastructure. This
improves Vietnam's economic capacity (Table 2 and Text A, paragraph [5])
•
•
Japanese firms are introducing more technology leading to improved human capital and
enabling more exports of manufactured goods leading to more growth and consequential
improvement in economic development (Text B, paragraph [2])
FDI enables Vietnam to add more value to the primary products it produces. This helps
avoid economic problems attached to specializing in primary product exports and
therefore may increase living standards in rural areas (Text B, paragraph [2]).
Costs of trade with Japan:
•
•
because Vietnam is specializing in primary goods, trade with Japan may be disrupted by
supply shocks (particularly due to the climate) and volatile prices (due to inelastic
demand and supply) restricting economic development in rural areas (Text A, paragraph
[3] and Text B, paragraph [1])
land and fisheries and forests are being unsustainably used (Text A, paragraph [3]).
Synthesis of relative benefits of trade vs FDI:
•
•
trade and FDI are not substitutes for each other but together may have a significant
impact on economic development, because more FDI allows Vietnam to start exporting
manufactured and higher value-added goods (Text B, paragraph [2])
both are contributing to development, but both have drawbacks.
Examiners should be aware that candidates may take a different approach which, if appropriate,
should be rewarded.
4a. [2 marks]
Text D — Overview of Malawi
1.
Malawi is a landlocked country in southern Africa. Its development plans contain 169
targets, based on the Sustainable Development Goals. Ineffective institutions and
inequalities, however, make it difficult to reach every target. Although poverty in urban
areas has declined, the level of absolute poverty has been increasing in rural areas where
85 % of the population lives. Causes of poverty include land degradation (80 % of the land
is eroded or lacks nutrients), poor healthcare and rapid population growth. There is also a
lack of human capital, which is often due to the difficulties that households have in
obtaining loans for education or training. Approximately 75 % of households do not have
access to formal banking services.
2.
Aid agencies are providing assistance. The World Bank’s Human Capital Project will
increase investment and encourage reforms, such as promoting the education of teenage
girls. In 2020, the World Bank also approved US$157 million (50 % as a loan and 50 % as
a grant) for a government project. This project aims to increase sustainable land
management practices and build water-related infrastructure, such as small dams and
irrigation schemes.
3.
The government has encouraged the establishment of microfinance groups that act as
rural banks. They provide some finance and guidance for programmes that introduce new
types of crops and techniques in order to improve agricultural efficiency.
4.
Although 2019 was a difficult year due to drought, insect infestations, and a tropical
cyclone, Malawi’s real gross domestic product (GDP) grew by 4.5 %. There is a large
budget deficit and the amount of government debt (at approximately 60 % of GDP) is
considered to be too high. Therefore, the government has announced plans to reduce its
spending. Inflation had been forecast to increase to 14 % in 2020. Due to the planned
contractionary fiscal policies, however, inflation may fall below 10 % from 2021 onwards.
5.
Export revenues account for over 30 % of GDP. Malawi aims to increase its exports of
cotton, nuts, tea and sugar. Rising exports and lower fuel import prices could reduce the
current account deficit. Despite the persistent trade deficit, Malawi is resisting calls for
further trade protection. It has signed bilateral trade agreements with both South Africa
and Zimbabwe. Tariffs are gradually being reduced, while other indirect and direct taxes
are being raised.
Text E — Agricultural Production
1.
Approximately 80 % of the labour force is employed in agriculture, with few job
opportunities available in manufacturing and services. Agricultural productivity is low for
many reasons. The government promotes manufacturing industries and cultivation of
crops for export by large-scale farms. However, small-scale and subsistence farmers have
received little support in the past. Farmers use less fertilizer and irrigation than is typical
in other countries. Only 3 % of cultivated land is irrigated, compared to the global average
of 21 %. Other challenges are the inadequate road and rail links to markets and the
limited availability of electricity and fuel.
2.
Maize is the most important staple food in Malawi. The government uses price controls
when trying to ensure that maize is available at affordable prices for low-income
households. However, the maximum price set by the government is often too low to
persuade farmers to supply the maize or to provide them with sufficient revenue. In 2020,
the maximum price was raised from 250 to 310 kwacha per kilogram. Even at the higher
price, shortages remain.
3.
The government is planning to invest in commercial agriculture to improve productivity
and promote diversification. The 2020 budget includes subsidies on fertilizer for 4.3
million small-scale farmers, which could possibly double maize output but may also
pollute waterways. The support given to farmers will improve the nutrition of Malawians
and stimulate the rural economy.
Text F — Tobacco Exports
Tobacco is Malawi’s major export, providing over 50 % of foreign currency earnings. Due to
lower global demand and the purchasing policies of multinational tobacco firms, prices paid to
farmers in Malawi are low and falling. To reduce costs, farmers resort to using child labour.
Following allegations of labour exploitation, the United States has restricted tobacco imports
from Malawi. There is concern that other importing countries might also impose restrictions.
Table 3: Economic data for Malawi
Table 4: Development data for Malawi
Text D United Nations Department of Economic and Social Affairs, 2020. Malawi 2020
Voluntary National Review Report For Sustainable Development Goals (SDGs) [online] Available
at:
https://sustainabledevelopment.un.org/content/documents/26180Main_Messages_Malawi.p
df [Accessed July 2020]. Source adapted.
The World Bank, 2020. World Bank Approves $157 Million to Protect Malawi’s Watersheds and
Improve Rural
Livelihoods [online] Available at: https://www.worldbank.org/en/news/pressrelease/2020/07/06/world-bank-approves-157-million-to-protect-malawis-watersheds-andimprove-rural-livelihoods [Accessed July 2020]. Source adapted.
Text E Chilunga, Z., 2020. Government increases maize prices from K250 to K310 per kg [online]
Available at: https://www.nyasatimes.com/government-increases-maize-prices-from-k250to-k310-per-kg/ [Accessed July 2020]. Source adapted.
Fabricius, P., 2020. Malawi sets stellar example with push for food security [online] Available at:
https://www.
businesslive.co.za/bd/opinion/2020-07-13-peter-fabricius-malawi-sets-stellar-example-withpush-for-food-security/ [Accessed July 2020]. Source adapted.
Text F AFP, 2019. US restricts tobacco imports from Malawi over labour abuses [online]
Available at: https://www.
theeastafrican.co.ke/business/US-restricts-tobacco-imports-from-Malawi-over-labourabuses/2560-5369826vhw4q7z/index.html [Accessed July 2020]. Source adapted.
Table 3 World Bank Data Bank, World Development Indicators n.d. [online] Available at:
https://databank.worldbank.org/reports.aspx?source=2&country=MW [Accessed July 2020].
Source adapted.
Table 4 World Bank Data Bank, World Development Indicators, n.d. [online] Available at:
https://databank.worldbank.org/
reports.aspx?source=2&country=MW [Accessed July 2020]. Source adapted.
List two of the Sustainable Development Goals (Text D, paragraph [1]).
Markscheme
4b. [2 marks]
Define the term tariffs indicated in bold in the text (Text D, paragraph [5]).
Markscheme
4c. [3 marks]
Sketch a production possibilities curve (PPC) diagram to show the effect of improved human
capital on Malawi’s potential output (Text D, paragraph [2]).
Markscheme
The diagram has three requirements:
•
•
•
correctly labelled PPC diagram
two PPC curves drawn
shift to the right is clearly shown
Candidates who incorrectly label diagrams can be awarded a maximum of [2].
For a PPC diagram, there must be two goods or groups of goods competing for the same
resources on the axes. Good X and Good Y are appropriate, but simply X and Y are not sufficient. A
title is not necessary.
Clear labelling of the PPC curves such as PPC1 PPC2 is sufficient to indicate the shift to the
right.
Labelling PPC diagram with P and Q or PL and RGDP are fundamental errors thus zero marks.
4d. [2 marks]
Using information from Table 3, calculate real GDP (at 2010 prices) in 2019 using the price
deflator.
Markscheme
29 882
389.6
× 100= 7669.92
Any valid working should be rewarded with [1]
(US)$ 7669.92 million
An answer of 7 669.92, without workings, without units or incorrect units, is sufficient for [1].
If the answer is rounded up, it cannot be awarded [1]. It has to be given correctly to 2 decimal
places (in line with the examination “Instructions to candidates”).
4e. [4 marks]
Using a poverty cycle diagram, explain how an increase in funds for the education of teenage
girls could break the poverty cycle (Text D, paragraph [2]).
Markscheme
The wording in the boxes may be different, so long as it is equivalent. No title is necessary.
4f. [4 marks]
Using an AD/AS diagram, explain how a reduction in government spending may reduce
inflation (Text D, paragraph [4]).
Markscheme
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For AD/AS diagram, the vertical axis may be Average (general) price level or price level. The
horizontal axis may be real output, real national output, real national income, real GDP or real Y.
Any abbreviation of the previous terms is acceptable. A title is not necessary.
An answer may alternatively draw a Keynesian AS curve, with the original intersection of AD and
AS being in the upward sloping portion of the AS curve. Alternatively, the original intersection
may be in the horizontal section of the AS curve and the PL may not fall. This can receive full
marks if the explanation states that due to high unemployment/spare capacity in Malawi,
contractionary fiscal policy will not be able to reduce inflation.
4g. [4 marks]
Using a supply and demand diagram, explain how a reduction in export taxes would
impact Malawi's exports of cotton, nuts, tea and sugar (Text D, paragraph [5]).
Markscheme
Supply for all those items would shift to the right... decreasing the price of equilibrium and
increasing the quantity produced.
4h. [4 marks]
Using a demand and supply diagram, explain how the rise in the maximum price of maize
would change the welfare loss associated with the maximum price (Text E, paragraph [2]).
Markscheme
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis
should be quantity or q. A title is not necessary.
Accept any annotation that clearly shows the change in welfare loss.
4i. [15 marks]
Using information from the texts/data and your knowledge of economics, evaluate the
government’s policies to promote economic growth and economic development in Malawi.
Markscheme
N.B. Answers that only deal with development or only deal with growth should be awarded a
maximum of level 3.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and
limitations. Opinions and conclusions should be presented clearly and supported with
appropriate evidence and sound argument.
Answers may include:
•
•
definition of development
definition of growth.
Economic Models / theories may include
•
•
•
•
•
•
an explanation of the links between growth and development
an AD/AS diagram
a poverty cycle diagram
a diagram showing the effects of lowering tariffs
PPC
indicators of development.
Examiners should be aware that candidates may take a different approach which, if appropriate,
should be rewarded.
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