J22/3/ECONO/SP2/ENG/TZ0/XX
Economics‌
Standard l‌evel‌
Paper‌2
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Instructions‌t‌ o‌c
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Do not open this paper until instructed to do so.
You are permitted access to a calculator for this paper.
Unless otherwise stated in the question, all numerical answers must be given exactly
or correct to two decimal place.
You must show all your working.
Answer the compulsory question.
Use fully labelled diagrams and references to the text/data where appropriate.
The maximum mark for this examination paper is [40 marks] .
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Answer the compulsory question
1. Read the extracts and answer the questions that follow.
Text A - Chile Overview
1. Chile has been one of Latin America’s fastest-growing economies in recent decades
thanks to a solid macroeconomic framework, which enabled the country to cushion the
effects of a volatile international context and reduce the population living in poverty (on
US$ 5.5 per day) from 30 percent in 2000 to 3.7 percent in 2017. However, more than
30% of the population is economically vulnerable and income inequality remains high.
2. In the context of social unrest, GDP growth decreased from 3.9 percent in 2018 to 1.1
percent in 2019. The disruptions in economic activity resulted in an increase in
unemployment, from 7.1 in December 2018 to 7.4 percent in December 2019. Social
unrest caused a change in the composition of public spending away from an investment
promotion agenda and towards higher social expenditures. It also induced the
government to call for a constitutional referendum currently scheduled for October 25,
2020.
3. The fiscal deficit increased from 1.5 percent of GDP in 2018 to 2.7 percent in 2019 due to
additional spending in response to the civil unrest and the economic slowdown,
dampened tax revenues and lower copper exports on revenues. The deficit was partially
financed with fiscal buffers, but public debt increased from 26 to 28 percent, mainly
domestic debt.
4. The social unrest reflected widely spread frustration with high and persistent inequality of
opportunities that prevailed despite significant improvements in social outcomes. Chile
had reduced poverty, but inequality of incomes, as measured by the Gini coefficient
among the highest in the region. The growing middle class perceives high inequality of
opportunities due to segmented service provision in education and health care and
segregated labor markets. Jobs and higher wage premiums have largely gone to skilled
workers, while workers with fixed-term contracts support a greater workload, have less
job security, and have not been traditionally entitled to severance pay or unemployment
insurance, though some of this has been addressed in economic measure to mitigate the
impacts of COVID-19 on vulnerable populations.
5. The balance of risks is tilted to the downside due to uncertainty about the impact of
COVID-19 and the fluid domestic political context. Chile is exposed to lower than
expected copper prices and longer subdued export demand resulting from the pandemic.
Additionally, prolonged social distancing measures will likely impact on economic activity
despite fiscal and monetary stimulus. Similarly, political uncertainty around the
constitutional reform could weaken private sector confidence, dampening the recovery.
6. In the medium term, Chile needs to reach political consensus on a policy response to
social demands, while not eroding Chile’s traditionally sound macroeconomic
management. Chile also should promote productivity gains at the bottom of the income
distribution, including by fostering innovation, enhancing The link between education and
the labor market, and promoting female labor participation. Reducing inequality of
opportunity will be crucial to eliminate the persistent pockets of poverty and ensure social
stability.
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Text B - Chile and copper
1. With the price of copper reaching a 10-year high thanks in no small part to China's
insatiable appetite, Chile, the world's leading producer, faces a "unique" opportunity,
experts told AFP. Copper rose to US$9,614 a tonne on the London Metal Exchange on
Wednesday, meaning it has doubled its price since March 2020. Now experts believe its
price, spurred by demand from China, could beat all records in the coming weeks,
surpassing its previous high of $9,700 in February 2011 and potentially rising above
$10,000 a tonne.
2. "The intensity of consumption of primary commodities in China has intensified due to the
(coronavirus) pandemic," Juan Carlos Guajardo, director of the Plusmining consultancy,
told AFP. The Asian giant, which buys almost half of the world's copper production, is
trying to become the "true factory of the world," he said. On top of Chinese demand,
copper purchases are also on the rise due to its use in renewable energy and electric
mobility. In addition, a weakened US dollar means raw materials priced in the American
currency are cheaper for investors using other currencies, and stimulus packages to
reboot economies ravaged by the pandemic have flooded the global market with liquidity.
3. At the same time, there has been a reduction in investment in the supply side of the
mining industry since the "boom" years of 2003-13 and the subsequent lack of new
expansion plans of existing mines has meant less copper on the market and higher prices
for Chile. All in all, the conditions have created a favorable scenario for Chile's main
export. Chile produces close to a third of the world's copper and copper represents
10-15 percent of national GDP.
4. "The rise in the copper price gives Chile a unique opportunity to keep developing the
mining sector, increase production capacity and thus meet the expected rising demand,"
said Mining and Energy Minister Juan Carlos Jobet. The increase in price "could mobilize
more investment in the mining sector and that could mean greater employment" during a
year in which Chile will be hoping to return to economic growth after a tough 2020 that
saw GDP fall by six percent due to the pandemic, Finance Minister Rodrigo Cerda said.
5. Chile's 2020 recession would have been a lot more painful had the copper industry been
forced to shut down like many other sectors during a coronavirus-imposed lockdown. But
given the main mining sites were far from the infection hot spots, the copper industry was
spared the painful closures that hit commercial centers, restaurants, bars and cinemas,
amongst other businesses.
6. However, Chile must be wary of a rising supply in copper, according to Marcela Vera, an
academic at the University of Santiago. Given its use in renewable energies and
potentially limited supplies, it would be counterproductive for Chile to supply greater
amounts of copper that bring down prices when the metal could become so precious in
the future. "What Chile needs to do sovereignly is to generate a reduction in the supply so
the prices adjust," said Vera. Increased production would lead to falling prices and a
shorter lifespan for the metal. "Copper is not a renewable product and it won't be around
forever," Vera said.
7. The Environmental Superintendent said it had received various public complaints over a
mining waste spill caused by a storm in April 2016, and the alleged contamination of river
water by waste discharged by the Codelco, the state mining company. It said the events
indicated breaches of its waste management plan. Mining waste spill spills can
sometimes be disastrous. Last year, the collapse of a mining waste dam operated by
Brazilian mining firm Vale SA, the world’s largest iron ore producer, released a torrent of
sludge that killed about 270 people.
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Table 1: Economic Data for Chile
2018
2019 data
3.94
1.05
GDP/capita (US$, PPP)
24 420
25 920
Unemployment rate (%)
7.32
7.29
6.6 (2015)
3.6
Inflation rate (%)
2.43
2.56
Central bank interest rate (%)
4.00
3.75
GDP (real growth rate, %)
Poverty rate ($5.50/day, % of population)
Table 2: Development data for Chile
2015
2020
Human Development Index (HDI)
0.842
0.851
Gini index
44.4
44.4
Life expectancy at birth (years)
79.5
80
Adult literacy rate (% ages 15 and over)
96.2
96.4
(Question 1 continued)
(a)
(i)
Define the term unemployment indicated in bold (Text A: paragraph 4)
(ii) Define the term recession indicated in bold (Text B: paragraph 5)
(b)
(c)
(d)
(e)
(i)
Calculate the change in GDP/capita for Chile from 2018 to 2019
[2]
[2]
[3]
(ii) Draw a business cycle diagram and mark the point at where Chile was in
the business cycle in 2019 (Table 1)
[2]
Using an appropriate diagram, explain how a "mining waste spill” is an
example of market failure in copper mining (Text B, paragraph 7)
[4]
Using a supply and demand diagram, explain how “demand from China” and
“reduction in investment” have increased price and revenues for copper (text B)
[4]
Using a Lorenz curve diagram, explain how “higher social expenditure” may
reduce “the Gini coefficient and inequality” (Text A; paragraphs 2 and 5).
[4]
(f)
Using an appropriate diagram, explain how Chile is “one of Latin America’s fastest
growing economies”, but not affected by high inflation (Text A, paragraph 1).
[4]
(g)
Using information from the text/data and your knowledge of economics, discuss
methods that the Chilean government might employ to achieve greater economic
growth and/or economic development.
[15]