Unit 1 Introduction to economics
Paper 2 Exam practice question 1.1
Economics is considered as a social science because it studies human behaviour in relation to
the choices about economic well-being. Economics examines the choices of economic agents
(such as consumers, producers and governments) by using appropriate concepts, principles,
models and theories. These are based on assumptions of the rational behaviour of economic
agents as well as the use of empirical evidence to support these claims.
Award 1–2 marks for an answer that shows some understanding of the demands of the question,
although knowledge and understanding are limited in areas.
Award 3–4 marks for an answer that shows good understanding of the demands of the question,
explaining why economics is considered as a social science, similar to the example above.
Paper 2 Exam practice question 1.2
While microeconomics and macroeconomics are both disciplines of economics as a social
science, macroeconomics has greater emphasis on the use of empirical data and key economic
indicators, such as rates of economic growth, inflation and unemployment. It also considers the
outcomes of economic decisions on a national, regional and global scale. By contrast,
microeconomics examines the actions and decisions of economic agents in individual markets
as part of the domestic economy.
Award 1–2 marks for an answer that shows some understanding of the demands of the question,
although knowledge and understanding are limited in areas.
Award 3–4 marks for an answer that shows good understanding of the demands of the question,
explaining the differences between microeconomics and macroeconomics, similar to the
example above.
Paper 2 and Paper 3 Exam practice question 1.3
Equity is about the economics of perceived fairness, such as people with higher qualifications,
employment experience and those who work harder should be rewarded accordingly. This
justifies the use of the price mechanism to rationalize the allocation of scarce resources; for
example, pilots are paid more than air stewards owing to the relatively higher demand and lower
supply of pilots.
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1 What is economics?
Award 2 marks for a sound response that shows good understanding of the demands of the
question, similar to the example above.
Paper 3 Exam practice question 1.4
The firm gains 1,000 units of Product Y (from 5,000 to 6,000) at the opportunity cost of 2,000
units of Product X (from 10,000 to 8,000). Hence, the opportunity cost of producing one extra
unit of Product Y is 2,000:1,000 = 2:1 = 2 units of Product X.
Award 1 mark for stating the correct answer (2 units of Product X) and 1 mark for showing
appropriate working out.
Paper 2 and Paper 3 Exam practice question 1.5
For each extra 3m kg of strawberries, the economy sacrifices 9m kg of potatoes. This gives an
opportunity cost ratio of 3:9, that is, the opportunity cost of producing 1 kg of strawberries is 3
kg of potatoes.
Award 1 mark for the correct answer and 1 mark for appropriate working out.
Paper 2 and Paper 3 Exam practice question 1.6
For every additional 4,000 kg of carrots, the farmer sacrifices 6,000 kg of corn, that is, a ratio of
4:6 or 1:1.5. This means that the opportunity cost of producing 1 kg of carrots is 1.5 kg of corn.
Award 1 mark for the correct answer and 1 mark for appropriate working out.
Paper 2 and Paper 3 Exam practice question 1.7
Growth in production possibilities is caused by increased productivity of existing resources
(land, labour, capital and/or enterprise), whereas actual growth is caused by an increase in the
economy’s productive capacity over time.
Award 1 mark for a limited response that shows some understanding of the demands of the
question.
Award 2 marks for a sound response that shows good understanding of the demands of the
question, similar to the example above. Note that there is no need or expectation for candidates
to illustrate the difference through the use of a PPC diagram.
2 How do economists approach the world?
Paper 2 Exam practice question 2.1
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Award 1 mark for a limited response that shows some understanding of the demands of the
question.
Answers may include:
This is a positive economic statement that can be tested through the use of empirical evidence to
either refute or accept the claim. Logically, it makes sense that if the price falls, more people are
able and/or willing to purchase strawberries. Economists can test the statement by seeing if the
amount of money spent by consumers on strawberries actually increases in reality, following a
fall in the price. These data enable economists to prove or disprove the statement, as it is not
based on feelings, emotions or beliefs, which are subjective.
Award 1–2 marks for a limited response that shows some understanding of the demands of the
question.
Award 3–4 marks for an explanation that shows good understanding of the demands of the
question, similar to the example above. There is appropriate reference to how economists might
go about testing statements of ‘what is’ in an objective way.
Paper 1 Exam practice question 2.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: ceteris paribus and economic models/theories.
•
Explanation: how the ceteris paribus assumption might work in economics, with
reference to the simplification of the models/theories of economics, such as the circular
flow of income model or any school of economic thought from the eighteenth century
to the twenty-first century, including the Marxist critique of classical economic thought
and/or the growing role of behavioural economics.
•
Diagram: possible diagrams could include the circular flow of income and/or the
circular economy.
Paper 1 Exam practice question 2.3
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: normative economics, positive economics and social science.
•
Explanation: the role and significance of normative and positive economics for the
study/discipline of economics, such as the purpose of value judgements and the
concepts of equality versus equity in decision-making and policymaking.
•
Explanations could include references to behavioural economics, and the role of
emotions and social and cultural factors that influence choices and decisions.
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Use the assessment criteria on page 64 of the IB Economics Guide – External assessment
markbands for Paper 2 (SL/HL). Award up to the maximum marks as indicated.
Explanations should also consider the role and significance of positive economics in the
use of economic hypotheses, models and theories.
•
Diagram: not needed for this particular question.
Paper 2 Exam practice question 2.4
Possible reasons could include:
•
Consumers do not always have the time to think about all the factors needed to make a
rational decision, such as the array of options for mobile (cell) phone service plans.
•
Consumers might opt for a satisfactory outcome (suboptimal) from a buying decision
rather than making the necessary effort to always maximize their satisfaction (utility).
•
Consumers do not always have the means to purchase the best option, perhaps due to
limited income (ability) and/or the lack of access to information (asymmetric
knowledge).
Award 1–2 marks for an answer that shows some understanding of the demands of the question,
although the response may lack clarity and/or detail in areas.
Award 3–4 marks for an answer that shows good understanding of the demands of the question,
with two distinct reasons or factors outlined in a way similar to the examples above.
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•
Unit 2 Microeconomics
Paper 2 Exam practice question 3.1
The income effect means that as the price of a good or service falls, the real income of
consumers will rise, so they are able to purchase more products due to the relatively lower price.
By contrast, the substitution effect means as the price of a product falls, it becomes relatively
more appealing to consumers so they are more likely to substitute it for alternative products that
they might have previously bought.
Award 1 mark for a limited understanding of the demands of the question.
Award 1 mark for a good understanding of the demands of the question, similar to the example
above.
Paper 3 Exam practice question 3.2
a Assuming domestic holidays are a substitute product for overseas holidays, a significant
increase in the average price of the former will lead to an increase in the latter. Hence, the
demand curve for overseas holidays will subsequently shift to the right, ceteris paribus.
Award 1–2 marks for a written response that is limited. The diagram shows a rightwards shift of
the demand curve for overseas holidays and a subsequent increase in the equilibrium price and
quantity OR the written response explaining the substitution effect of the significant higher
price of domestic holidays.
Award 3–4 marks for a written response that shows good understanding of the demands of the
question. The diagram shows a rightwards shift of the demand curve for overseas holidays and a
subsequent increase in the equilibrium price and quantity AND the written response explains
the substitution effect of the significant higher price of domestic holidays.
b Unemployment is likely to cause a fall in real disposable income, which will cause the
demand curve for foreign holidays to shift to the left. The impact is a subsequent fall in the
quantity and the equilibrium price of overseas holidays.
Award 1–2 marks for a written response that is limited. The diagram shows a leftwards shift of
the demand curve for overseas holidays and a subsequent fall in the equilibrium price and
quantity OR there is a written explanation of the income effect of the unexpected rise in
unemployment.
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3 Demand
Paper 1 Exam practice question 3.3
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition(s): demand and/or demand curve, shift of the demand curve (for a product)
and a movement along the demand curve.
•
Explanation: a shift in the demand curve for a good or service being caused by changes
in non-price factors that affect the demand for the product. Explanation that a
movement along the demand curve for a product is caused by changes in prices only –
an increase in price causes a contraction in quantity demanded, while a price reduction
causes demand to expand, ceteris paribus.
•
Diagram: demand curve diagram showing shifts in the demand curve (due to changes in
non-price factors that affect the demand of a product) and movements along a demand
curve (due to changes in the price of the good or service).
Although the question does not specifically require the use of real-world examples, some
students might choose to use appropriate examples to explain their answers. If this is the case,
they should be awarded accordingly.
4 Supply
Paper 2 and Paper 3 Exam practice question 4.1
a The per unit subsidy will reduce the cost of producing laptops. Hence, the per unit subsidy
leads to lower costs for producers, and hence greater supply of laptops. This reduces the
equilibrium price and raises the supply of laptops in the economy. This is illustrated by a
rightwards shift of the supply curve for laptops.
Award 1–2 marks for a written response that is limited. The diagram shows a rightwards shift of
the supply curve for laptops OR there is a written explanation of why equilibrium price is likely
to fall and why supply is likely to increase.
Award 3–4 marks for a written response that shows good understanding of the demands of the
question. The diagram shows a rightwards shift of the supply curve for laptops AND there is a
written explanation of why equilibrium price is likely to fall and why supply is likely to
increase.
b The increase in the average wage rate for workers at laptop manufacturing firms will cause
the supply curve of laptops to shift to the left. This is because higher wages in the industry
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Award 3–4 marks for a written response that shows good understanding of the demands of the
question. The diagram shows a leftwards shift of the demand curve for overseas holidays and a
subsequent fall in the equilibrium price and quantity AND there is a written explanation of the
income effect of the unexpected rise in unemployment.
Award 1–2 marks for a written response that is limited. The diagram shows a leftwards shift of
the supply curve for laptops OR there is a written explanation of why equilibrium price is likely
to rise and why supply is likely to fall.
Award 3–4 marks for a written response that shows good understanding of the demands of the
question. The diagram shows a leftwards shift of the supply curve for laptops AND there is a
written explanation of why equilibrium price is likely to rise and why supply is likely to fall.
Paper 1 Exam practice question 4.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition(s): supply and/or supply curve, and shift of the supply curve (for a product).
•
Explanation: any two factors that can cause a shift in a firm’s supply curve; these must
be changes in non-price factors that affect the supply of a product, such as:
o
a reduction in indirect taxes
o
the introduction or increase in the use of government subsidies
o
improved technologies that reduce production times
o
favourable weather conditions.
•
The explanation is also likely to refer to the importance of the ceteris paribus
assumption.
•
Diagram: supply curve diagram showing an outwards/rightwards shift of the supply
curve due to changes in non-price factors that are beneficial to the supply of a good or
service.
Although the question does not specifically require the use of real-world examples, some
students might choose to use appropriate examples to explain their answers. If this is the case,
they should be awarded accordingly.
Paper 1 Exam practice question 4.3
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition(s): supply and/or supply curve, shift of the supply curve (for a product) and a
movement along the supply curve.
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cause an increase in production costs for firms. This means the firms are less able and/or
willing to supply laptops, ceteris paribus. Therefore, equilibrium price will rise and
equilibrium quantity will fall.
Explanation: a shift in the supply curve for a good or service being caused by changes
in non-price factors that affect the supply of the product. Explanation that a movement
along the supply curve of a product is caused by changes in prices only – an increase in
price causes an expansion in supply, while a price reduction causes supply to contract,
ceteris paribus.
•
Diagram: supply curve diagram showing shifts in the supply curve (due to changes in
non-price factors that affect the supply of a product) and movements along a supply
curve (due to changes in price).
Although the question does not specifically require the use of real-world examples, some
students might choose to use appropriate examples to explain their answers. If this is the case,
they should be awarded accordingly.
5 Competitive market equilibrium
Paper 2 and Paper 3 Exam practice question 5.1
Competitive market equilibrium is the condition that holds when a market free of any
government intervention is cleared of any shortages (excess demand) or surplus (excess supply).
Hence, it occurs at the price where the quantity demanded for a product is equal to the quantity
supplied.
Award 1–2 marks for a written response that is limited. The diagram is accurately drawn,
including appropriate axes labels, showing excess demand and excess supply OR the response
includes an explanation of shortages and surpluses at prices other than the market equilibrium.
Award 3–4 marks for a written response that shows good understanding of the demands of the
question. The diagram is accurately drawn, including appropriate axes labels, showing excess
demand and excess supply AND the response includes an explanation of shortages and
surpluses at prices other than the market equilibrium.
Paper 2 and Paper 3 Exam practice question 5.2
Excess supply means that a surplus is created as the quantity supplied of a product exceeds the
quantity demanded because the price is higher than the market equilibrium price. By contrast,
excess demand occurs when the price of a good or service is set below the equilibrium, that is, a
shortage exists. This is because at a price below the equilibrium, quantity demanded exceeds the
quantity supplied – consumers are more willing and able to buy more of the product at lower
prices, yet there are fewer incentives for firms to supply the product.
Award 1–2 marks for a written response that is limited. The diagram is accurately drawn,
including appropriate axes labels, showing competitive market equilibrium OR the response
includes an explanation of competitive market equilibrium existing when there is no excess
demand or excess supply at the market clearing price.
Award 3–4 marks for a written response that shows good understanding of the demands of the
question. The diagram is accurately drawn, including appropriate axes labels, showing
competitive market equilibrium AND the response includes an explanation of competitive
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market equilibrium existing when there is no excess demand or excess supply at the market
clearing price.
Paper 3 Exam practice question 5.3
a From the diagram, it can be seen that the equilibrium price is $20, and the equilibrium
quantity is 40,000 units.
Award 1–2 marks for a diagram that is generally plotted accurately, although there may be
errors and/or omissions in parts.
Award 3–4 marks for a diagram that is plotted accurately, including all labels. The equilibrium
price and quantity have been clearly and correctly stated.
b From the diagram, it can be seen that:
•
If price is $10, demand = 60,000 and supply = 20,000 so there is excess demand of
40,000 units.
•
At a price of $40, demand = 0 and supply = 80,000 so there is excess supply of 80,000
units.
Award 1 mark for each correct answer, up to the maximum of 2 marks.
Paper 2 and Paper 3 Exam practice question 5.4
•
Consumer surplus exists when consumers are charged a lower price that they would be
willing and able to pay for a product. The lower the price, the greater the consumer
surplus will be. This means the consumer’s marginal utility of consumption is greater
than the market price.
•
By contrast, producer surplus occurs when firms are able to charge a higher price than
they are willing and able to supply at. Thus, they are able to earn greater profit margins.
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Award 3–4 marks for a written response that shows good understanding of the demands of the
question. The diagram is accurately drawn, including appropriate axes labels, showing the
existence of consumer and producer surplus at competitive market equilibrium AND the
response includes an accurate explanation of both consumer and producer surplus.
Paper 3 Exam practice question 5.5
a
Award 1 mark each for the following: y-axis label, x-axis label, supply curve and demand curve
(which must be plotted accurately and labelled accordingly), up to the maximum of 4 marks.
There is no need to include a title for this diagram.
b At a price of $40, consumer surplus is shown by the triangular area under the demand curve
and above the competitive market equilibrium price.
Hence, the value of consumer surplus is [($80 – $40) × 20,000] ÷ 2 = $400,000.
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Award 1–2 marks for a written response that is limited. The diagram is accurately drawn,
including appropriate axes labels, showing the existence of consumer and producer surplus at
competitive market equilibrium OR the response includes an appropriate explanation of both
consumer and producer surplus.
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Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
c The value of producer surplus at $20 is [($20 – $0) × 10,000] ÷ 2 = $100,000.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
d From the graph in Question 5.5(b), it can be seen that:
•
If price is $20, then quantity demanded = 30,000 and quantity supplied = 10,000.
•
Hence, there is excess demand of 30,000 – 10,000 = 20,000 units.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
e From the graph in Question 5.5(b), it can be seen that:
•
At a price of $60, quantity demanded = 10,000 units and supply = 30,000 units.
•
Thus, there is excess supply of 20,000 units.
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Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
6 Critique of the maximizing behaviour of
consumers and producers (HL only)
Paper 1 Exam practice question 6.1
a Answers may include:
•
Definitions: behavioural economics and rational consumer choice.
•
Explanation: any two sources of potential limitations: biases, bounded rationality
theory, bounded self-control, bounded selfishness and the existence of imperfect
information.
•
Diagram: not needed for this question.
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Accept answers that focus only on biases that limit rational decision-making, that is, rule of
thumb, anchoring, framing and availability.
Award the use of relevant and explained examples where provided.
b Answers may include:
•
Definitions: choice architecture and nudge theory.
•
Explanation: how choice architecture and nudge theory can help economic agents to
make more informed/better choices. Counter arguments explaining or questioning the
limitations of choice architecture and nudge theory in influencing choice.
•
Diagram: demand and supply diagram showing the intended impact of choice
architecture and nudges on the demand and/or supply of certain products.
•
Synthesis (evaluate): strengths and limitations of using choice architecture (default,
restricted and mandated choices) as well as nudges to help economic agents to make
better (more informed) choices. Consideration of the validity of the assumptions of the
model (such as consumer rationality, utility maximization and access to perfect
information) in order to examine behavioural economics in action.
•
Examples: real-world examples where choice architecture and nudge theory have been
used to help economic agents to make better/worse decisions (choices), including
examples of nudges used by businesses to encourage buyers to choose to buy a certain
good or service.
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
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Paper 2 and Paper 3 Exam practice question 7.1
•
The percentage change in quantity demanded = 30 – 25 ÷ 25 = +20%
•
The percentage change in price = 350 – 400 ÷ 400 = −12.5%
•
Hence the PED = +20 ÷ −12.5 = −1.6
•
This means the demand for the earrings is price elastic, that is, customers are highly
responsive to the change in price. The fall in price (12.5%) has caused a greater than
proportional increase (20%) in the quantity demanded.
Paper 2 and Paper 3 Exam practice question 7.2
•
First, calculate the percentage change in the quantity demanded, that is, demand falls by
10% from 50,000 to 45,000 match tickets per week.
•
Next, calculate the percentage change in the price of match tickets, that is, prices
increased by 20% from $50 to $60 per match ticket.
•
Then, substitute these figures into the PED formula to give: −10 ÷ +20 = −0.5.
As the PED for match tickets is less than 1 (ignoring the minus sign), the demand for football
match tickets is price inelastic, that is, football fans are not highly responsive to the increase in
match ticket prices. Subsequently, there is a smaller fall in the quantity demanded (10%)
compared to the price rise (20%).
Paper 1 Exam practice question 7.3
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: price elasticity of demand (PED) and linear demand curve.
•
Explanation: why the PED value varies along the length of a linear demand curve, that
is, an explanation of the factors that cause the PED value to rise as the price of a
product continues to increase. Reasons could include: (1) the price accounting for a
larger proportion of average household disposable incomes, and (2) the incentive to
search for alternative (substitute) products if the price continues to rise.
•
Diagrams: linear, downward sloping demand curve showing the values from PED =
infinity where the demand curve intersects the y-axis (that is, when price is so high that
the quantity demanded falls to zero), PED = 1 (the midpoint of the linear demand curve)
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7 Elasticity of demand – price elasticity of
demand (PED)
Paper 1 Exam practice question 7.4
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: price elasticity of demand (PED), including the formula.
•
Explanation: why the price elasticity of demand (PED) for allergy tablets is likely to be
highly price inelastic. The explanation includes reference to the determinants of PED,
such as limited suitable substitutes for those with allergies and a high degree of
necessity for the tablets (medication).
•
Explanation of the relatively high PED value for overseas holidays, based on
determinants such as the proportion of household income spent on overseas holidays,
the degree of necessity versus luxury expenditure, and the number of available
substitutes (such as domestic holiday destinations). Holidaymakers can also easily
compare prices, especially with online price comparison websites.
•
Diagrams: relatively price inelastic demand curve for allergy tablets (medication), and
relatively price elastic demand for overseas holidays.
Paper 2 and Paper 3 Exam practice question 7.5
These commodities lack real substitutes and are essential products for output. Hence, their PED
value is relatively low, that is, price inelastic or unresponsive to changes in price. By contrast,
the PED for manufactured goods is relatively high because there are far more substitutes
available for customers to choose from.
8 Elasticity of demand – income elasticity of
demand (YED)
Paper 3 Exam practice question 8.1
a
•
The YED is known to be −0.25 while household income has increased.
•
This means demand must have fallen.
•
Substituting the known values into the YED formula gives: x ÷ +3% = −2.5.
•
Hence, x = −7.5%, that is, the demand for sausages has fallen by 7.5%.
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and PED = 0, when the price is so low (zero) that there is no change in the quantity
demanded.
b The increase in household income (+3%) has caused a greater than proportionate change in
the quantity demanded (−7.5%). This means the demand for sausages is income elastic and
that sausages are inferior goods.
Award 1 mark for identifying that sausages are inferior goods and 1 mark for a suitable
explanation.
Paper 1 Exam practice question 8.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: income elasticity of demand (YED), normal goods and inferior goods.
•
Explanation: that in the case of necessity goods and luxury goods the quantity
demanded will rise as real incomes rise (although this will depend on the positive value
of YED). Award the use of relevant examples where used. When the demand for a
product increases with a rise in real income, it is called a normal good. Examples
include both necessities (such as food, clothing and housing) and luxury products (such
as jewellery, sports cars and overseas holidays).
•
Explanation of a fall in the demand for inferior goods as real income rises, vice versa.
Award the use of relevant examples where used. An inferior good has a negative
relationship between real income and quantity demanded; that is, consumers switch to a
superior (luxury) product as their real income rises over time, for example, canned food
products versus fresh food products.
•
Diagram: Engel curves to show the relationship between real income and quantity
demanded in relation to normal goods and inferior goods.
9 Elasticity of supply
Paper 2 and Paper 3 Exam practice question 9.1
•
The percentage change in quantity supplied = (10,500 – 10,000) ÷ 10,000 = +5%.
•
The percentage change in price = ($2.20 – $2.0) ÷ $2.0 = +10%.
•
Hence, PES = 5% ÷ 10% = 0.5, that is, supply is price inelastic.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 9.2
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Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
10 Role of government in microeconomics
Paper 3 Exam practice question 10.1 (HL only)
a Old consumer surplus = a+b+f.
New consumer surplus = a+b+c.
Hence, the change in consumer surplus = f–c.
b Old producer surplus = c+g+d.
New producer surplus = d.
Hence, the change in producer surplus = (c+g+h) – d, that is, the loss of area c+g.
c The previous sales revenue = c+g+h+d+e+i.
The new revenue = d+e.
Hence, the firm loses areas c+g+h+i.
The change in sales revenue is therefore = the loss of area c+g+h+i.
d The shortage (excess demand) = Q3 – Q1.
Note: there is no need to show any working out for these questions; the above is shown for
illustrative purposes only.
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The supply curve for Angry Birds games is perfectly price elastic because Rovio can supply an
extra unit of output at zero cost as there is no additional cost of production (consumers simply
download the games app). Hence, an increase in demand from D1 to D2 causes an increase in the
quantity supplied from Q1 to Q2 but without any impact on the market price of Pe.
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Award 1 mark for each correct answer, up to the maximum of 4 marks.
Paper 3 Exam practice question 10.2 (HL only)
For each question award 1 mark for the correct answer and 1 mark for showing appropriate
working out.
a At the minimum price of $3, there will be excess supply of 4,000,000 kilograms (or 4m
kg). This is because at $3, output will be 7m kg whereas demand will only be 3m kg.
b Consumers used to spend $2 × 5m = $10m.
At the higher price of $3, consumers now spend $3 × 3m = $9m.
Therefore, the change in consumer spending = –$1m.
c Producers used to earn $2 × 5m units = $10m.
At the higher price of $3, they now earn:
•
From consumers: $3 × 3m = $9m.
•
From the government: $3 × 4m excess supply = $12m.
•
Thus, total earnings are now $21m.
•
Therefore, the change in producer revenue = $21m – $10m = +$11m.
d The total amount spent on buying the excess supply = $3 × 4m = $12m.
If the government exports the excess supply, it receives $2 × 4m = $8m.
Hence, taxpayers pay for the difference, that is, $4m.
Paper 3 Exam practice question 10.3 (HL only)
a
•
Per unit tax = $20 – $10 = $10.
•
New price = $20 and old price = $15, so producers absorb $5 of the per unit tax.
•
Quantity traded = 30,000 units.
•
Hence, total tax incidence for producers = $5 × 30,000 = $150,000.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
b
•
Per unit tax = $20 – $10 = $10.
•
Equilibrium quantity traded = 30,000 units.
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Hence, the total tax revenue = $10 × 30,000 = $300,000.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
c
•
Consumers used to spend $15 × 40,000 units = $600,000.
•
They now spend $20 × 30,000 units = $600,000.
•
Therefore, there is no change in total consumer spending after the tax.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
d
•
The welfare loss is the shortfall of consumer surplus and producer surplus following the
imposition of the indirect tax.
•
This is equal to the triangular area [($20 – $10) × (40,000 – 30,000)] ÷ 2 = $50,000.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
e
•
Producer surplus is the difference between what suppliers receive ($10 after imposition
of the indirect tax) above the price they are willing and able to supply.
•
The new producer surplus is shown by the triangular area above the supply curve,
below the horizontal price received by the firm ($10).
•
Hence, producer surplus = ($10 × 10,000) + [($10 – $0) × (30,000 – 10,000)] ÷ 2 =
$100,000 + $100,000 = $200,000.
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•
f
•
Previous consumer surplus = [($35 – $15) × 40,000] ÷ 2 = $400,000.
•
New consumer surplus = [($35 – $20) × 30,000] ÷ 2 = $225,000.
•
Hence, the change in consumer surplus = $400,000 – $225,000 = $175,000.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 1 Exam practice question 10.4
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: government intervention and price.
•
Explanation: any two ways in which a government can intervene in markets to
influence the price of a certain good or service, for example:
o
Price controls – price ceilings (maximum prices) and price floors (minimum prices),
such as the imposition of a minimum wage to encourage more people to find work, or
price floors to encourage farmers to increase their agricultural output.
o
Indirect taxes – such taxes can be used to increase the costs of producing certain goods
or services that are deemed to be socially undesirable (demerit goods), thereby forcing
the price to rise.
o
Subsidies – Used to lower production costs of certain goods and services (such as
healthcare and education) and therefore the price for consumers.
o
Direct provision of services – the government can be directly involved in providing
certain products, such as healthcare, education and/or public housing services, thereby
making these services more accessible to the general public.
•
Diagram: any two of the following (if referred to above) – price ceiling (maximum
price), price floor (minimum price), indirect tax and/or subsidy.
Paper 2 Exam practice question 10.5 (HL only)
a A subsidy is a form of financial assistance given by the government to certain firms or
individuals in order to reduce their costs of production. This helps to reduce their financial
burden and to encourage output to benefit society as a whole.
Award 1 mark for a definition that shows limited understanding of subsidies.
Award 2 marks for a clear definition that shows good understanding of subsidies, similar to the
example above.
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Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
•
The per unit subsidy is the vertical distance between the two supply curves.
•
The equilibrium quantity increases from Q1 to Q2.
•
Hence, the cost of the subsidy = A+B+C+D+E+F+G.
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b
Award 1 mark for the correct answer and 1 mark for showing appropriate working out or
explanation.
c
•
Consumers used to pay a price of P1 but now pay P2 due to the subsidy. However, the
per unit subsidy is P3 to P1.
•
Therefore, producers gain P2 to P3 per unit from the subsidy.
•
So, the total amount of the subsidy retained by producers = A+B+C+D.
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Award 1 mark for the correct answer and 1 mark for showing the working out or explanation.
11 Market failure – externalities and
common pool (common access) resources
Paper 2 Exam practice question 11.1
a The private costs of driving include: the purchase cost of the motor vehicle, petrol (fuel),
insurance, parking fees and maintenance costs.
The external costs (negative externalities) imposed on others in society include: pollution
costs, traffic congestion and possible road accidents.
Award 1 mark for a relevant private cost and 1 mark for a relevant external cost.
b The social costs of building a new high-speed railway system include both the private costs
and external costs (negative externalities).
Private costs of building a new high-speed railway system include:
•
manufacturing costs of building the railway system
•
labour costs, such as the wages or salaries of construction workers and engineers
•
compensation paid to landowners for the land needed to construct the railroads
•
insurance costs.
External costs of building a new high-speed railway system include:
•
noise and air pollution to residents living in nearby villages, towns and cities
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additional traffic/congestion/traffic jams for people living near the new railway stations
• the loss of landscape and natural habitats
•
damage to/destruction of natural ecosystems
•
risks of accidents and the subsequent impacts on local communities
•
a possible fall in house prices for those living in areas located to the construction sites
and new railroads.
Award 1–2 marks for an answer that shows some understanding of the demands of the question,
although the explanation may be limited in demonstrating knowledge of social costs.
Award 3–4 marks for an explanation that demonstrates a clear understanding of social costs,
written in the context of the construction of a new high-speed railway system.
Paper 1 Exam practice question 11.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: market failure.
•
Explanation: congestion zone charging as a form of indirect taxation used to correct
market failures.
•
Explanation: that the (over)use of motor vehicles in city centres creates negative
consumption externalities (private vehicles) or production externalities (commercial
vehicles), both with spillover effects on third parties due to congestion and/or pollution.
•
Explanation: that the MSB < MPB of consumption or the MSC > MPC of production.
•
Explanation: that the use of congestion zone charging can help to internalize the
negative externalities of motor vehicle use in city centres.
•
Diagram: market failure diagram showing the MSB curve below the MPB curve
(negative externalities of consumption) or the MPC curve below the MSC curve
(negative externalities of production).
Candidates are not required to use the MSB/MPB approach and the MSC/MPC approach for
full marks. However, they are expected to use a correctly labelled diagram to be rewarded full
marks.
Paper 1 Exam practice question 11.3
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
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•
Definitions: merit goods and market failure.
•
Explanation: that merit goods can be provided in a free market economy but would be
under-consumed at market prices despite MSB of consumption > MPB of consumption.
•
Explanation: that merit goods have positive externalities of consumption and
production, so are under-consumed and under-produced without government
intervention.
•
Diagram(s): to show market failures associated with merit goods.
Award the relevant use of examples of merit goods, such as education, healthcare, and training
and development (human capital).
12 Market failure – public goods
Paper 1 Exam practice question 12.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: public goods and market failure.
•
Explanation: that public goods are under-provided or not provided at all in a free market
economy because they are non-excludable (due to the free-rider problem) and nonrivalrous (the marginal cost of provision is zero once it has been provided).
•
Explanation: that public goods create positive externalities of production and
consumption, so are under-consumed and under-produced without government
intervention.
•
Diagram: market failure diagram to illustrate the suboptimal output of public goods in a
free market economy without government intervention.
Award relevant examples of public goods.
Paper 2 Exam practice question 12.2
•
Answers are likely to refer to the two characteristics of public goods: non-rivalrous and
non-excludable, and the free-rider problem.
•
As there are no incentives for firms in the private sector to provide public goods, this
represents a type or cause of market failure. Hence, public sector provision is required
in order to correct the market’s inability to provide public goods.
Award 1–2 marks for an answer that shows some understanding of the demands of the question.
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•
Alternative approaches may be taken in response to the 4-mark question that uses an AO2
command term. If an alternative approach is valid, then full credit should be given.
Paper 2 and Paper 3 Exam practice question 12.3
•
Public goods are products that are both non-rivalrous and non-excludable. Examples
include street lighting, lighthouses, law and order, and national defence.
•
Public goods are considered as economic goods as they are limited in supply (the
concept of scarcity) and there is an opportunity cost in providing such goods – unlike
free goods.
•
Although public goods may be provided for ‘free’ at the point of use, this does not
mean they are free goods because public goods are funded using limited or finite
government tax revenues, so their provision incurs an opportunity cost to society.
Award 1–2 marks for an answer that shows some understanding of the demands of the question.
Award 3–4 marks for an answer that shows good understanding of the demands of the question,
explaining why public goods are economic goods.
Alternative approaches may be taken in response to the 4-mark question that uses an AO2
command term. If an alternative approach is valid, then full credit should be given.
Paper 1 Exam practice question 12.4
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: social costs and social benefits.
•
Explanation: social benefits, such as time savings for daily commuters and passengers,
more efficient deliveries, reduced pollution (due to fewer traffic jams and less
congestion), and saved lives (due to freely flowing traffic).
•
Explanation: social costs of the major road expansion, such as the loss of natural
habitats, noise and air pollution during construction, destruction of ecosystems,
additional road congestion and delays, and maintenance costs (road repairs).
•
Diagram: market failure diagram to show the under-provision of major road projects (to
show the social benefits of improved infrastructure, for example).
13 Market failure – asymmetric information
(HL only)
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Award 3–4 marks for an answer that shows good understanding of the demands of the question,
explaining why public goods tend to be provided by the public sector.
a Asymmetric information refers to the imbalance of information that exists between buyers
and sellers in a particular market, such as insurance. The asymmetry gives one party an
unfair advantage over the other in an economic transaction.
Award 1 mark for a definition that shows limited understanding.
Award 2 marks for an accurate definition that shows good understanding, similar to the example
above.
b When a person takes out (purchases) an insurance policy (for their home, a holiday or motor
vehicle, for example), the insurance company makes a decision based on the information
provided by the customer. If the customer chooses to not to be entirely truthful, in an
attempt to reduce their insurance premium (cost), then the insurer makes a decision based on
false, inaccurate or incomplete information in this asymmetric situation. Customers may be
offered insurance when they might not if all the necessary information were to be disclosed
or they should be charged a higher premium for the additional risks. Hence, the asymmetry
of information means the buyer has an unfair advantage, which leads to a suboptimal
outcome from society’s perspective.
Award 1–2 marks for a limited response that shows some understanding of the demands of the
question.
Award 3–4 marks for a response that shows good understanding of the demands of the question
and uses appropriate terminology throughout the answer, similar to the example above.
Paper 1 Exam practice question 13.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: asymmetric information and market failure.
•
Explanation: that the existence of asymmetric information between buyers and sellers in
a market results in market failures and inefficiencies as social surplus (the sum of
consumer and producer surplus) is not maximized. Explanations and/or examples could
include opportunistic behaviour (adverse selection and moral hazard).
•
Diagram: not needed for this question but could include a market failure diagram to
show suboptimal output due to imperfect information or the loss of consumer and/or
producer surplus due to asymmetric information in a particular market.
14 Market failure – market power (HL only)
Paper 3 Exam practice question 14.1 (HL only)
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Paper 2 Exam practice question 13.1
TVC = $12 × 3,500 = $42,000
TFC = Rent + Salaries = $29,000
Hence, TC = $71,000
Award 1 mark for the correct answer and 1 mark for appropriate working out.
b Profit = Total Revenue – Total Cost
TR = $25 × 3,500 = $87,500
Profit = TR – TC = $87,500 – $71,000 = $16,500
Award 1 mark for the correct answer, and 1 mark for appropriate working out.
Paper 3 Exam practice question 14.2 (HL only)
a The profit-maximizing monopolist produces at the output level where MC = MR, that is,
0G.
Award 1 mark for the correct answer. There is no need for an explanation – this has been
included for illustrative purposes only.
b The profit-maximizing price is shown on the y-axis corresponding to the profit-maximizing
level of output (where MC = MR). Hence, the price charged by the monopolist is 0A.
Award 1 mark for the correct answer.
c The total cost = AC × Q, that is, 0B × 0G. Hence, the total cost for the monopolist is the
area 0BDG.
Award 1 mark for the correct answer.
d The amount of (abnormal) profit earned by the profit-maximizing monopolist is the
difference between its price (0A) and average cost (0B) multiplied by the amount of output
(0G). Hence, the firm’s profit is shown by the area ACDB.
Award 1 mark for the correct answer.
Note that there is no need to explain the answers above or to show any working out. These have
been included for illustrative purposes only.
Paper 1 Exam practice question 14.3 (HL only)
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: monopoly, abnormal profit and long run.
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a Total Cost = Total Fixed Cost + Total Variable Cost
Explanation: how monopolies are able to maintain high barriers to entry that prevent
competition or the threat of new entrants in the market. Explanation of the firm’s ability
to set prices, so that AR > MC (market power) and AR > AC (abnormal profit). The
explanation might also refer to price inelastic demand for a monopolist’s product (the
lack of substitutes), thereby enabling it to earn abnormal profit in the long run.
•
Diagram: profit-maximizing monopoly diagram showing abnormal profit at the profitmaximizing level of output.
Award answers that take a different approach in addressing the demands of the question, such as
consideration of the nature of high barriers to entry and/or imperfect knowledge in the
monopolistic industry.
Paper 3 Exam practice question 14.4 (HL only)
•
The HHI for Industry A = 302 + 252 + 102 = 1,625
•
The HHI for Industry B = 252 + 202 + 202 = 1,425
Industry A has the higher Herfindahl-Hirschman Index value (1,625), so is more concentrated
(oligopolistic) than Industry B (1,425), even though they both have the same three-firm
concentration ratio (65%).
Award 1 mark for stating that Industry A is more oligopolistic and 1 mark for the explanation or
reasoning.
Paper 1 Exam practice question 14.5 (HL only)
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: product differentiation, demand curve and monopolistic competition.
•
Explanation: that heterogeneous (differentiated) products require different prices as raw
material costs are different. Explanation that despite these firms having a degree of
price-setting power, they engage in price competition and product differentiation due to
the intensity of rivalry in the industry. Explanation of the law of demand, that is, why
the demand curve is downward sloping.
•
Diagram: short run and/or long run monopolistic competition diagram demonstrating
downward sloping AR and MR curves.
Paper 1 Exam practice question 14.6 (HL only)
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
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•
Definitions: monopolistic competition and perfect competition.
•
Explanation: the main characteristics of these market structures (in terms of price,
output and efficiency). Explanation that allocative efficiency in perfect competition
leads to lower prices in the short run and long run, and that productive efficiency in the
long run is unachievable by monopolistically competitive firms. Explanation that
monopolistically competitive firms have a small degree of price-setting power, so the
demand curve of these firms is less price elastic than that of perfectly competitive firms.
Explanation that there are a lack of economies of scale and market power in both
models, due to the nature of barriers to entry in these market structures.
•
Diagram: perfect competition diagram (showing normal profit and efficiency in the long
run) and monopolistic competition diagram (showing inefficiency in the long run).
•
Synthesis (evaluate): the ability of markets to change, either becoming more
competitive or less competitive (dynamic, not static analysis). Consideration of
theoretical limitations of the models (perfect competition in particular). A judgement
about the overall similarities and differences between the models, in terms of output and
prices (in the short run and long run), the nature of entry barriers, market power, price
elasticity of demand and economic efficiency.
•
Examples: real-world examples of perfect competition (such as small fruit and
vegetable markets) and monopolistic competition (such as hairdressers and suburban
restaurants).
15 The market’s inability to achieve equity
(HL only)
Paper 1 Exam practice question 15.1 (HL only)
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: free market economy and equal distribution of income and wealth.
•
Explanation: that the free market economy may result in disparities in the distribution of
income and wealth due to factor resources not being allocated equitably. Explanations
may include references to wage differentials, rental income from property, interest from
savings and profits to shareholders as sources of income. Explanation that in a free
market economy the fundamental questions of what, how and for whom production
should take place are based on those who are willing and able to pay to obtain goods
and services, rather than those with fewer economic opportunities (low-income
earners).
•
Diagram: circular flow model. Students may opt to use a Lorenz curve diagram.
If used correctly, the diagram should be awarded as appropriate.
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•
16 Measuring economic activity and
illustrating its variations
Paper 1 Exam practice question 16.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: circular flow model and national income (accounting).
•
Explanation: the income (Y), output (O) and expenditure (E) approaches to measuring
national income. Explanation that national income is the return from generating national
output that has been purchased by national expenditure, using the factor incomes
generated from domestic production. Explanation of the circular flow of income model
that shows that Y = O = E, including the interactions between decision makers, leakages
(withdrawals) and injections.
•
Diagram: circular flow of income diagram to demonstrate the equivalence of the three
approaches to measuring national income (economic activity).
Paper 2 and Paper 3 Exam practice question 16.2
•
Nominal GDP = C + I + G + (X – M)
•
GDP = 185 + 60 + 40 + (66 – 58) = $293 billion
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 16.3
GDP = C + I + G + (X – M), where net exports = (X – M)
Consumption (C)
=
$372
Investment expenditure (I)
=
$52
Government expenditure (G)
=
$66
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$477
As GDP
=
C + I + G + (X – M)
477
=
372 + 52 + 66 + (X – M)
477
=
490 + (X – M)
Hence, net exports (X – M) = −$13 billion (that is, there is a deficit as X < M).
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 16.4
Nominal GDP = C + I + G + (X – M)
Private consumer expenditure (C)
= $2,650
Gross domestic fixed capital formation (I)
= $995
Government consumption expenditure (G)
= $480
Domestic exports of goods (X)
= $550
Domestic exports of services (X)
= $880
Imports of goods (M)
= $680
Imports of services (M)
= $500
Hence, GDP at market prices = 2,650 + 995 + 480 + 550 + 880 – 680 – 500 = $4,375 million
(or $4.375 billion).
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 16.5
Nominal GNI = C + I + G + (X – M) + Net income property from abroad
Nominal GNI = 235 + 110 + 78 + (68 – 102) + −32
Hence, nominal GNI = $357 billion.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 16.6
•
The nominal GNI in 2021 = $835.5bn but the GNI deflator needs to be applied to get
the real value of GNI.
•
Hence, 835.5 ÷ 1.0450 = $799.52 billion
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Gross domestic product (GDP) =
Similarly, nominal GNI in 2022 is found by:
877.28 ÷ 1.1286 = $777.32 billion
•
Therefore, although nominal GNI has increased by $41.775bn (or 5%), the rate of
inflation (of 8% between 2021 and 2022) has deflated the real value of GNI (by about
3%).
Award up to 2 marks for the calculations, with appropriate working out. Award up to 2 marks
for the explanation, outlining why real GNI has fallen despite nominal GNI having risen.
Paper 2 and Paper 3 Exam practice question 16.7
•
To calculate the GDP per capita, divide the GDP by the population:
Year
•
Population (million)
2020
GDP
(US$bn)
526.861
23.59
GDP per capita
(US$)
22,334.08
2021
509.724
23.55
21,644.33
The percentage change in GDP per capita is therefore:
(21,644.33 – 22,334.08 ÷ 22,334.08) = −3.09% (accept answers that show 3.1%)
Award up to 2 marks for the calculations, with appropriate working out. Award up to 2 marks
for the explanation, outlining that despite the 3.25% decline in nominal GDP, the much smaller
percentage change in the population size has led to GDP per capita declining by a lower amount
(around 3.09%).
Paper 2 and Paper 3 Exam practice question 16.8
a To calculate the real GDP in 2021, deflate the nominal GDP by the GDP deflator for that
year:
(230.2 ÷ 107.8) × 100 = $213.54bn
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
b To calculate the real average income in 2022, deflate the nominal salary by the GDP
deflator for that year:
($24,000 ÷ 109.8) × 100 = $21,857.92 or $21,858
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
c
Year
Nominal GDP
($bn)
GDP deflator
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•
228.0
106.0
215.09
2021
230.2
107.8
213.54
2022
232.4
109.8
211.66
•
Nominal GDP has increased by $4.4bn (from $228bn to $232.4bn) or around 1.93%
between 2020 and 2022.
•
However, the rate of inflation has been higher during this time (an increase of around
3.58%).
•
Hence, inflation has eroded the real value of GDP in the country from $215.09bn in
2020 to $211.66bn in 2022 (a decline of around 1.59%).
Award 1 mark for an answer that shows limited understanding of the demands of the question.
Award 2 marks for an answer that shows some understanding of the demands of the question,
although there is limited use of the data in the table.
Award 3 marks for an answer that shows good understanding of the demands of the question,
with effective use of the data in the table.
Paper 1 Exam practice question 16.9
a Answers may include:
•
Definitions: taxation (T), government spending (G) and national income.
•
Explanation: that a cut in taxation and an increase in government spending are examples
of injections into the circular flow of an economy. Ceteris paribus, these would lead to
an increase in the level of economic activity and hence national income in the economy.
•
Diagram: circular flow of income diagram to demonstrate the impact of a cut in taxation
and an increase in government spending.
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
b Answers may include:
•
Definitions: real gross domestic product per capita and standard of living.
•
Explanation: how an increase in real GDP per capita can be used as a measure or
indicator of improved standards of living in a country. Explanation of other measures or
indicators of standards of living, including quantitative factors (such as the cost of
living in a country, literacy rates or the number of doctors per 1,000 people in the
population) as well as qualitative factors (such as the degree of political stability,
freedom of speech, freedom of religion and gender equality).
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2020
Diagram: although not necessarily yet covered (if the syllabus is taught in a linear way),
candidates can use an AD–AS diagram to illustrate how an increase in real GDP per
capita is often associated with an increase in living standards of the country, such as
greater consumption and investment spending, both of which generate higher levels of
employment in the long run.
•
Synthesis (evaluate): strengths and limitations of using real GDP per capita figures to
measure living standards in a country. Consideration of the validity of assumptions or
limitations of the model (such as income distribution and cost of living in the country)
as well as other factors or measures (such as sustainability, intergenerational equity
and/or indices such as the HDI or BLI) to examine the connections between income and
living standards.
•
Examples: real-world examples where high real GDP per capita brings about relatively
high standards of living for the average citizen in a country. Examples of the
opportunity costs of achieving higher real GDP per capita, which can diminish
standards of living, such as highly congested and polluted cities, resource depletion,
environmental degradation and climate change.
Note: Definitions, theory and examples that have already been given in part (a), and then
referred to in part (b), should be rewarded.
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Paper 1 Exam practice question 16.10
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: the Better Life Index (BLI), the Happy Planet Index (HPI) and well-being.
•
Explanation: of these indices as alternative measures of well-being other than relying on
using national income statistics such as real GDP or GNI per capita. Explanation of the
OECD’s Better Life Index (BLI) – although candidates are not expected to explain all
11 components of the index. Explanation of the Happy Planet Index (HPI), with
reference to well-being, life expectancy, inequality of outcomes and ecological
footprint. The explanation should also make clear distinctions between the two indices,
perhaps with reference to their limitations, such as the subjective nature of happiness
and what contributes to its measurement.
•
Diagram: not needed for this question.
17 Variations in economic activity –
aggregate demand and aggregate supply
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•
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: shift, movement and short run aggregate supply (SRAS).
•
Explanation: of non-price factors that can cause a shift in the SRAS curve, such as: (1)
changes in costs of factors of production, such as changes in wage rates and rents, (2)
changes in business tax rates, and (3) changes in indirect taxes.
•
Explanation: of movements along the SRAS curve caused by factors that shift the
aggregate demand (AD) curve, thereby triggering a change in the average price level.
•
Accept explanations about supply-side shocks (such as war, devastating natural
disasters and/or the outbreak of infectious diseases) and/or subsidies for firms in certain
industries.
•
Diagram: SRAS diagram illustrating shifts and movements.
Paper 2 and Paper 3 Exam practice question 17.2
An explanation that a reduction in indirect taxes will lower costs of production so will shift the
SRAS curve to the left, ceteris paribus. This causes some inflation (an increase in the general
price level from PL1 to PL2) and a reduction in the national output level (real GDP) from Y1 to
Y2.
Award 1–2 marks for an answer that shows a correct diagram OR an accurate written response.
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Paper 1 Exam practice question 17.1
Paper 2 and Paper 3 Exam practice question 17.3
a Aggregate demand (AD) is the sum of planned spending on consumption (C), investment
(I), government (G) and net exports (X – M) at different average price levels for a given
time period.
Award 1 mark for a definition that shows some understanding.
Award 2 marks for a definition that shows good understanding, similar to the example above.
b An increase in investment expenditure will shift an economy’s aggregate demand curve
rightwards, ceteris paribus. Although this increases national output (real GDP), from Y1 to
Y2, the impact on the general price level is dependent on the slope of the aggregate supply
curve. In this particular case, the increase in AD causes the general price level to rise from
PL1 to PL2.
Award 1–2 marks for an answer that shows a correct diagram OR an accurate written response.
Award 3–4 marks for an answer that shows a correct diagram AND an accurate written response
that explains the impact of an increase in investment expenditure.
Paper 1 Exam practice question 17.4
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: recession and short run macroeconomic equilibrium.
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Award 3–4 marks for an answer that shows a correct diagram AND an accurate written response
that explains the impact of a reduction in indirect taxes on an economy’s short run aggregate
supply (SRAS).
Explanation: that, in general, a recession causes both the level of national output (real
GDP) and the general price level to decline. The explanation is likely to consider the
various components of aggregate demand, that is, AD = C + I + G + (X – M) and
reference to a deflationary (or recessionary) gap.
•
Diagram: the situation can be depicted on an AD–AS diagram by a leftwards shift of the
aggregate demand curve (due to lower consumption, government spending, investments
and/or net exports) or the aggregate supply curve (due to the fall in the ability and
willingness of firms to supply output during a recession). Most answers are likely to
feature a shift of the AD curve to the left, although accept diagrams that show a
leftwards shift of the AS curve with a suitable explanation.
Paper 2 Exam practice question 17.5
It is likely that both aggregate demand and aggregate supply increase. The cut in income tax
boosts consumption due to an increase in household after-tax income, ceteris paribus. Hence,
national output will increase. In addition, the cut in corporation tax will tend to increase profits
of firms and hence their ability to increase productive capacity. Depending on the relative size
of the shift in SRAS and AD, the price level may increase or decrease.
Award 1–2 marks for an answer that shows a correct diagram OR an accurate written response.
Award 3–4 marks for an answer that shows a correct diagram AND an accurate written
response, explaining the change in the short run equilibrium position of the economy, that is, an
increase in real GDP as well as the impact on the general price level. The magnitude of these
changes will depend on how ‘temporary’ are the tax cuts applied.
18 Macroeconomic objectives – economic
growth
Paper 2 and Paper 3 Exam practice question 18.1
a
Year
2016
Nominal national
output ($bn)
205.28
Nominal ∆GDP
($bn)
2017
223.78
18.50
2018
245.21
21.43
2019
261.92
16.71
2020
271.16
09.24
Vietnam’s nominal GDP increased the most in 2018 when it grew from $223.78bn in the
previous year to $245.21bn, a gain of $21.43bn.
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•
b Annual rate of growth = Nominal GDP in a year – Nominal GDP of previous year × 100 ÷
Nominal GDP of previous year
In this case, Vietnam experienced its highest growth rate in 2018 when its GDP increased
from $223.78 billion in the previous year to $245.21 billion, that is, a gain of 9.58%.
Year
2016
Nominal national
output ($ billion)
205.28
Growth rate
(%∆GDP)
2017
223.78
9.01
2018
245.21
9.58
2019
261.92
6.81
2020
271.16
3.53
Award 1 mark for the correct answer, that is, 2018. Award 1 mark for showing appropriate
working out.
Paper 2 and Paper 3 Exam practice question 18.2
a GDP per capita is calculated by dividing the nominal GDP of a country by the size of its
population.
Country
China
Nominal GDP
($bn) (2021)
14,723
Population
(million) (2021)
1,444.0
Nominal GDP
per capita ($)
10,195.98
Japan
05,065
0126.0
40,198.41
USA
20,937
0329.0
63,638.30
UK
02,708
0067.2
40,297.62
•
The USA has the highest nominal GDP per capita of $63,638.30.
•
China has the lowest nominal GDP per capita, valued at $10,195.98.
Award 1 mark for each correct answer, up to 2 marks.
Award 1 mark for showing appropriate working out.
b Nominal GDP per capita is a better indicator of standards of living than just referring to
nominal income in absolute terms. When looking at the absolute value of nominal GDP,
China is the second largest economy, with a nominal GDP of $14.723 trillion. However,
when dividing this amount by the population size, it becomes apparent that GDP per capita
is significantly lower than in the other three countries.
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Award 1 mark for the correct answer, that is, 2018. Award 1 mark for showing appropriate
working out.
Award 1–2 marks for an answer that shows some understanding of the demands of the question,
although there is limited application of the data.
Award 3–4 marks for an answer that shows a good understanding of the demands of the
question, with appropriate use of the data.
Paper 3 Exam practice question 18.3 (HL only)
Year
Nominal
GDP ($bn)
GDP
deflator
Real GDP
($bn)
Real growth
rate (%)
120.00
Nominal
growth rate
(%)
–
2020
120.0
100.0
2021
126.5
102.8
123.05
5.41
2.54
2022
136.2
106.4
128.00
7.67
4.02
–
Award 1 mark for each correct answer, up to the maximum of 6 marks.
The notes below are for reference only.
•
With 2020 as the base year, the nominal GDP is the same as the real GDP for that year
(2020), that is, $120bn.
•
With inflation running at 2.8% in 2021 (as the GDP deflator is 102.8), real GDP in
2020 = $126.5bn ÷ 102.8 = $123.05bn.
•
The real growth rate between 2020 and 2021 = (123.05 – 120.0) ÷ 120 = 2.54%. Note
that growth in nominal GDP is higher: (126.5 – 120) ÷ 120 = 5.41%.
•
Similarly, the nominal GDP for 2022 = ($136.2bn ÷ 106.4) = $128.0bn.
•
The real growth rate between 2021 and 2022 = (128.0 – 123.05) ÷ 123.05 = 4.02%.
•
Again, note that the growth in nominal GDP is higher: (136.2 – 126.5) ÷ 126.5 =
7.67%.
19 Macroeconomic objectives – low
unemployment
Paper 2 and Paper 3 Exam practice question 19.1
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Based on their income alone, the average person in China has the lowest living standard of
the four countries because the average person in China earns less than the average person in
the UK, Japan and the USA. Ceteris paribus, the average Chinese person earning
$10,195.98 per annum cannot access as many goods and services to meet their needs and
wants as the average person in the USA who earns around $63,638.30 per year.
The total number of people classified as unemployed = 8% of 45 million (not everyone
of working age is willing and able to work).
•
Total number of unemployed people = 45m × 0.08 = 3.6 million people.
Paper 2 and Paper 3 Exam practice question 19.2
•
First, calculate the size of the labour force:
o
Employed population = 75% of 100 million = 75m
o
Number of unemployed people = 15m
o
Labour force = 75m + 15m = 90m
•
Then, use this figure to calculate the unemployment rate:
15m ÷ 90m = 16.67% (accept answers that show 16.7%)
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 3 Exam practice question 19.3 (HL only)
The labour market is in equilibrium at a real wage rate of W1 and N1 workers employed.
However, at the higher real wage rate of W2 the aggregate supply of labour (N3) exceeds the
demand for labour (N2). Hence, there is real wage (or classical) unemployment caused by the
real wage rate being higher than the equilibrium wage rate.
Award 1–2 marks for an answer that shows a correct diagram OR an accurate written response.
Award 3–4 marks for an answer that shows a correct diagram AND an accurate written
response.
Paper 2 Exam practice question 19.4
a Nominal GDP is the total value of all final goods and services produced in a country over a
given period of time, usually one year. It is expressed in current prices, that is, not adjusted
for inflation.
Award 1 mark for a response that shows some understanding of the demands of the question.
Award 2 marks for a definition that shows good understanding of the term nominal gross
domestic product, similar to the example above.
b Possible reasons include an explanation of:
•
Different interpretations of the meaning of ‘unemployment’, and therefore how it is
measured – even the ILO has four different ways to calculate the unemployment rate.
Other considerations include: are part-time workers classed as unemployed? Does this
depend on how ‘part-time’ they are? What is classed as the ‘working age’ in different
countries?
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•
Time lags in collecting unemployment data.
•
The data collected are only estimates and not exact – Pakistan is one of the world’s
most populated countries, with around 221 million people.
•
Unreported or illegal employment activities in the economy.
Accept any other relevant reason that is clearly explained.
Mark as a 2 + 2.
Award 1–2 marks for a written response that shows limited understanding of the demands of the
question. Award up to 2 marks if only one reason is explained.
Award 3–4 marks for a written response that is accurate in addressing the demands of the
question, with two reasons that are well explained.
Alternative approaches may be taken in response to the 4-mark question that uses an AO2
command term. If an alternative approach is valid, then full credit should be given.
c Consequences of low unemployment for the Pakistani economy may include:
•
Higher rates of economic growth as the employed population have greater consumer
spending power, which boosts aggregate demand in the economy.
•
Improved standards of living in the economy as more households are able to meet their
needs and wants.
•
Increased pressure on the general price level, that is, inflationary pressures, are likely to
mount due to the higher levels of consumption expenditure and the increase in AD as
more people are in employment.
•
Wages are likely to rise in response to the higher levels of derived demand for labour. A
shortage of available labour will also tend to raise the average wage rate.
Accept any other reasonable consequence that is clearly explained.
Award 1–2 marks for a written response that shows limited understanding of the demands of the
question. Award up to 2 marks if only one reason is explained.
Award 3–4 marks for a written response that is accurate in addressing the demands of the
question, with two well-explained consequences of low unemployment for the Pakistani
economy.
Alternative approaches may be taken in response to the 4-mark question that uses an AO2
command term. If an alternative approach is valid, then full credit should be given.
20 Macroeconomic objectives – low and
stable rate of inflation
Paper 2 and Paper 3 Exam practice question 20.1
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•
1
Inflation rate (%)
A
2.5
Wage increase (%)
B
3.0
Real wage increase (%) =
B–A
+0.5
2
3.1
3.5
+0.4
3
2.9
3.1
+0.2
Year
The largest increase in real wages occurred in Year 1 when workers received a 3% nominal pay
rise while inflation was 2.5%, that is, the average worker enjoyed a 0.5% real wage rise.
Workers received a higher 3.1% nominal pay rise in Year 3, but this is actually worth less (due
to the higher rate of inflation at 2.9%) than in Year 1 (when inflation was only 2.5%).
Award 1 mark for identifying the correct year, that is, Year 1.
Award a further 1 mark for a written explanation that is limited. Award a further 2 marks for a
written explanation that is accurate, similar to the above example.
b Despite the wage increase being higher in Year 2 (at 3.5%) than in Year 3 (3.1%), the
average wage rate still increased in Year 3, but by a smaller amount. This is true even in real
terms, with real wages increasing by 0.4% in Year 2 but increasing by another 0.2% in Year
3, that is, average wages increased, albeit by a smaller amount than in the two previous
years.
Award 1 mark for a written response that is limited.
Award 2 marks for a written response that shows some understanding with the use of the data.
Award 3 marks for a written response that is accurate and uses the data, similar to the example
above.
Paper 2 and Paper 3 Exam practice question 20.2
a The inflation rate is an indicator of the cost of living in an economy, as measured by the
consumer price index. For example, an inflation rate of 2.5% means that the cost of living
for the average household increased by that amount within the past 12 months.
Award 1 mark for a vague definition that shows some understanding of the term inflation.
Award 2 marks for an accurate definition of inflation, similar to the example above.
b Although the rate of inflation was highest in the first year (2.5%) and lowest in the second
year (1.7%), prices were highest in the third year as there has been inflation throughout the
period. Although the rate of inflation fell in the second year (disinflation), this only means
that prices in general increased at a slower rate; prices were still higher on average.
Award 1 mark for a limited response that shows some understanding of the demands of the
question.
Award 2 marks for an accurate response that shows good understanding of the demands of the
question, similar to the example above.
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a
The rate of inflation = (128.45 ÷ 125) × 100 = 102.76 or (128.45 – 125) ÷ 125 × 100 = 2.76%
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 20.4
The CPI = 138.5 × 1.028 = 142.38
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 20.5
The inflation rate = (136.29 – 132.0) ÷ 132.0 = 3.25%
Hence, the price of the basket = $2,400 × 1.0325 = $2,478.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 3 Exam practice question 20.6 (HL only)
Item
Food and drink
Price index Statistical
weight
120
25
Weighted
index
30
Transportation
110
15
16.5
Leisure and entertainment
115
20
23
Housing
140
40
56
Consumer price index
125.5
Note: The non-weighted average price index = (120 + 110 + 115 + 140) ÷ 4 = 121.25.
However, the weighted price index is higher as it accounts for the relatively higher costs of
housing (with a statistical weight of 40).
Award up to 2 marks for the correct methodology and working out and a further 1 mark for the
correct answer for the weighted price index.
Paper 2 and Paper 3 Exam practice question 20.7
(HL only)
a A consumer price index (CPI) is used to calculate the rate of inflation by using a
representative basket of goods and services purchased by a typical household in the country,
per period of time.
Award 1 mark for a vague definition that shows some understanding of the consumer price
index (CPI).
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Paper 2 and Paper 3 Exam practice question 20.3
b The statistical weights for housing and food are 30 and 20, respectively. This means the
average household spends 30% of its income on housing costs and 20% on food. Hence, the
typical household in the country spends more money on housing than on food. Collectively,
spending on these two items account for 50% of average household spending.
Award 1 mark for a written response that is limited.
Award 2 marks for a written response that is accurate, similar to the example above.
c
Item
Clothing
Price index
115
Weight
15
Weighted index
115 × 0.15 = 17.25
Food
120
20
120 × 0.2 = 24
Housing
130
30
130 × 0.3 = 39
Others
120
35
120 × 0.35 = 42
100
122.25
Weighted RPI
Deduct 1 mark for each error but apply the own figure rule (error carried forward), as
appropriate.
Paper 1 Exam practice question 20.8
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: demand-pull inflation and cost-push inflation.
•
Explanation: how demand-pull inflation is caused by prices being higher due to excess
demand for goods and services in the economy. For example, lower interest rates and/or
lower tax rates increase household real incomes, which will tend to increase
consumption expenditure and aggregate demand in the economy.
•
Explanation: how cost-push inflation is caused by prices being forced (pushed) up due
to escalating production costs. For example, higher prices of imported raw materials
and components for production will result in higher costs for domestic producers.
•
Diagrams: AD–AS diagrams showing the differences between cost-push and demandpull inflation: shifting the AD curve for demand-pull inflation and the SRAS curve for
cost-push inflation.
Paper 1 Exam practice question 20.9
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Award 2 marks for an accurate definition of the consumer price index (CPI), similar to the
example above.
Answers may include:
•
Definition: deflation and deflationary gap.
•
Explanation: deflation referring to a fall in the general price level (a negative rate of
inflation), with examples of how this might come about.
•
Explanation: a deflationary gap referring to the economy operating below its full
capacity so there is low or negative economic growth. This does not necessarily mean
deflation because, even in a recession with falling national output, there can still be a
very low rate of inflation.
•
Diagrams: AD–AS diagrams showing the differences between and causes of deflation
and a deflationary gap.
Paper 2 Exam practice question 20.10
a Deflation is the sustained fall in the general price level in an economy over time, that is, the
inflation rate is negative.
Award 1 mark for a limited definition that shows some understanding of the term deflation.
Award 2 marks for an accurate definition of deflation, similar to the example above.
b The graph suggests that Ecuador experienced disinflation prior to 2018, when the rate of
change in the average price level was above zero but in decline. Ecuador also experienced
deflation in 2018 and 2021, when the inflation rate was actually negative. This means that
prices, on average, would have been falling during these periods.
Award 1–2 marks for a written explanation that shows limited understanding.
Award 3–4 marks for a written explanation that is accurate, with reference to the dates and
inflation rates shown in the graph.
c The impacts of prolonged deflation for the Ecuadorian economy could include:
•
Reduced aggregate demand, with consequences such as cyclical unemployment and
lower economic growth for Ecuador.
•
Lower prices and lower levels of consumption during times of prolonged deflation will
lead to a decline in profits for businesses. This can also lead to bankruptcies and a
protracted economic downturn.
•
Similarly, investment expenditure is likely to fall, limiting any potential growth in the
productive capacity of the Ecuadorian economy.
•
Lending from commercial banks and other financial institutions falls as borrowers
would return less in real terms (due to the declining value of money). Interest rates will
be low or close to zero during deflationary periods, which creates further disincentives
for banks to lend money.
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Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Award 1–2 marks for a written response that is limited in meeting the demands of the question.
Award 3–4 marks for a written response that is accurate in meeting the demands of the question.
Alternative approaches may be taken in response to the 4-mark question that uses an AO2
command term. If an alternative approach is valid, then full credit should be given.
Paper 1 Exam practice question 20.11
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: low and stable rate of inflation and macroeconomic objective.
•
Explanation: the need to control inflation as a macroeconomic objective, that is, if not
controlled, inflation can result in major macroeconomic problems for a country, such
as:
o
Inflation causes an undesirable effect on the purchasing power of money due to the fall
in its real value.
o
Inflation has a negative impact on savings, which therefore causes a fall in the funds
available for investment expenditure, and long-term damaging effects on growth and
employment.
o
Higher prices will tend to reduce the international competitiveness of the country,
which can lead to negative growth and further job losses.
•
Diagram: AD–AS diagram(s) to show cost-push and/or demand-pull inflation.
21 Macroeconomic objectives – sustainable
level of government (national) debt (HL only)
Paper 3 Exam practice question 21.1 (HL only)
Country
Government debt ($)
Nominal GDP ($)
Spain
1,329,687,275,000
1,460,000,000,000
Debt to GDP
ratio (%)
91.07
Brazil
1,109,207,000,000
2,020,000,000,000
54.91
Spain has a smaller nominal GDP than Brazil ($1.46 trillion and $2.02 trillion respectively).
When national debt is expressed as a percentage of nominal GDP, Spain’s debt to GDP ratio is
over 91% whereas for Brazil it is just below 55%. Hence, Brazil has far more affordable debt
than Spain.
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Accept any other impact of prolonged deflation, using the stimulus data.
Award 3–4 marks for a response that shows good understanding of the demands of the question,
including the correct calculation and commentary of the debt to GDP ratio for Spain and Brazil.
Paper 1 Exam practice question 21.2 (HL only)
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: budget deficit and government debt.
•
Explanation: how a budget deficit occurs when the government’s annual expenditure
exceeds its tax revenues (G > T) and any other sources of public sector proceeds.
•
Explanation: government debt being the sum of budget deficits in previous years, on
which loan interest is charged. Hence, government debt is the aggregate value of budget
deficits accumulated over time.
•
Explanation: that while budget deficits might be affordable and perhaps necessary in the
short run, they are unlikely to be sustainable in the long run. After all, government debts
(or national debts) must be managed in an affordable and viable way and must
eventually be repaid.
•
Diagram: not needed for this question, although some students may choose to use an
AD–AS diagram to show a deflationary gap, which suggests a budget deficit as
government spending may exceed tax revenues (G > T) during such times.
Paper 1 Exam practice question 21.3 (HL only)
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: budget deficit and government debt.
•
Explanation: a budget deficit means the government spends more than the government’s
tax revenue (G > T).
•
Explanation: that government debt is the sum of money owed by the central government
of the country to lending institutions, such as commercial banks or other countries.
•
Explanation: that government debt is the total value of budget deficits accrued over
time, and an explanation of how the level of government debt is determined by budget
balances in previous years. The amount of the budget deficit will automatically increase
the government debt of the country by the same amount. However, if there is a
reduction in the budget deficit, it does not mean that there will be a fall in the national
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Award 1–2 marks for a limited response that shows some understanding of the demands of the
question.
•
Diagram: not needed for this question, although some students may choose to use an
AD–AS diagram to show the cause-and-effect relationship between budget deficits and
government debt.
22 Macroeconomic objectives – potential
conflict between macroeconomic objectives
Paper 1 Exam practice question 22.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: conflict, economic growth and low inflation.
•
Explanation: the ways in which high economic growth can be achieved, such as
expansionary fiscal policies and/or loose monetary policies used to stimulate aggregate
demand.
•
Explanation: that such policies are likely to cause demand-pull inflation and therefore
the economy is unable to simultaneously achieve both high economic growth and low
inflation, at least in the short run.
•
Accept alternative explanations, such as striving to achieve low inflation can come at
the opportunity cost of lower economic growth.
•
Diagram: AD–AS diagram(s) to show the potential conflict between methods used to
achieve high rates of economic growth at the opportunity cost of higher inflation.
Paper 1 Exam practice question 22.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: conflict, low inflation, low unemployment and short run.
•
Explanation: the ways in which low inflation can be achieved (such as contractionary
fiscal policies and/or tight monetary policies) as well as the opportunity costs of this.
•
Explanation: that low unemployment may not be achieved in the short run if there is
low inflation due to the contractionary macroeconomic policies used to lower the rate of
inflation.
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debt by the same amount. Essentially, a budget deficit, whatever the amount, will tend
to increase the value of national debt.
Accept alternative explanations, such as striving to achieve low unemployment can
come at the opportunity cost of lower inflation, perhaps through the use of expansionary
macroeconomic policies.
•
Diagram: AD–AS diagram(s) to show the potential conflict between policies used to
achieve low inflation at the opportunity cost of higher unemployment. Alternatively,
HL students could use the short run Phillips curve (SRPC) to demonstrate the potential
conflict between low inflation and low unemployment.
23 Economics of inequality and poverty
Paper 1 Exam practice question 23.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: Lorenz curve, Gini coefficient and income distribution.
•
Explanation: the distribution of income in the economy is shown by the cumulative
percentages (or share of national income) against the total population of the economy
(arranged in quintiles).
•
Explanation: that the line of equality is shown by a 45 degree line, representing that
each quintile or cumulative percentage of the population earns the same income.
•
Explanation: that the Gini coefficient can have a value between 0 (which represents
perfect income equality) and 1 (which represents the highest degree of income
inequality).
•
Explanation: that the Lorenz curve is used to measure the Gini coefficient, which is the
ratio of the area above the Lorenz curve and below the line of equality.
•
Diagram: Lorenz curve showing a 45 degree line, indicating perfect income equality
and a curved line showing the cumulative percentage of income earned by cumulative
percentage of the population in a country (such as representing the richest 20% and
poorest 20% and their share of incomes, along with other quintiles).
Paper 1 Exam practice question 23.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: tax policies, welfare benefits, inequalities in income and wealth, and
poverty.
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•
Explanation: methods that can be used to address poverty and inequalities in income
and wealth, such as transfer payments, direct provision, subsidizing goods and services
that are under-consumed and under-provided, using different market intervention
initiatives (such as a price floor, price ceiling and minimum wages), Universal Basic
Income (UBI), and direct and indirect tax policies.
•
Explanation: different direct and indirect taxes, along with reference to proportional,
progressive and regressive taxation policies.
•
Diagram: Lorenz curve showing income inequality of a country, OR an outwards shift
of the production possibility curve (PPC) to show economic growth and development
due to improved equality in income and wealth, OR a shift of the AD and LRAS curves
to show greater consumption expenditure arising from the achievement of higher real
incomes and less poverty in the economy.
•
Synthesis (evaluate): strengths and limitations of different government taxation and
welfare benefits policies to address poverty and inequalities in the distribution of
income and wealth. Consideration of short run demand-side initiatives versus long run
supply-side policies to address poverty and inequalities. Discussion of the meaning of
‘the most effective ways of addressing poverty and inequalities’, and how this might be
different for different countries depending on their contexts, such as whether they are
experiencing an economic recession or inflationary pressures. Similarly, there could be
evaluation of how government policies are different for ELDCs and MEDCs.
•
Examples: real-world examples of country-specific government tax and welfare benefit
policies, such as the various responses during the global COVID-19 pandemic. Realworld examples of various government responses in tackling the issues of poverty and
inequalities in their respective countries could also be considered.
Paper 3 Exam practice question 23.3 (HL only)
a Tax A is progressive as the tax rate paid per year increases with an increase in income (for
example, 10% tax on $10,000 compared to 18% tax on $25,000).
Award 1 mark for the correct answer. There is no need to include an explanation – the above is
for reference only.
b Tax B is proportional as the amount of tax paid per year increases by the same rate as
income increases (10% charged on all income levels).
Award 1 mark for the correct answer. There is no need to include an explanation – the above is
for reference only.
c Under a system of regressive taxes, those with a higher ability to pay are charged a lower
rate of tax. By contrast, under a system of progressive taxes, the percentage of tax paid
increases with higher levels of income, that is, the marginal tax rate exceeds the average tax
rate.
Award 1 mark for a limited response that shows some understanding of the demands of the
question.
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•
Paper 3 Exam practice question 23.4 (HL only)
The country uses a proportional system of income tax as $5,800 (tax) is 10% of $58,000
(income), while $1,800 (tax) is also 10% of $18,000 (income). Hence, the government uses a
flat rate tax of 10% on people’s incomes.
Mark as a 1 + 1.
Award 1 mark for the correct answer and 1 mark for the explanation with reference to numerical
information.
Paper 3 Exam practice question 23.5 (HL only)
a
Income level
($)
Up to $10,000
Tax rate
(%)
0%
First $10,000 is tax free = $0
$10,001–$40,000
10%
Next $30,000 is taxed at 10% = $3,000
$40,001 and above
20%
Remaining $20,000 is taxed at 20% = $4,000
Total tax:
Amount of tax paid ($)
$7,000
Award 1 mark each for the correct calculation of the amount of tax paid at each income level,
up to the maximum of 3 marks, plus 1 mark for the correct calculation of total tax paid. Apply
the own figure rule (error carried forward) as appropriate.
b The average tax rate is calculated by the formula: T ÷ Y.
Average tax rate = (Total amount of tax paid ÷ Total income) × 100
Average tax rate = ($7,000 ÷ $60,000) × 100 = 11.67%
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 3 Exam practice question 23.6 (HL only)
a The marginal rate of tax = 20% as this is the rate paid on the last dollar earned from the
individual who earns $50,000.
Award 1 mark for the correct answer. There is no need to include an explanation – the above is
for reference only.
b The total amount of tax paid on total income of $50,000 by the individual is shown in the
table below.
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Award 2 marks for a clear distinction, demonstrating a good understanding of the difference
between a regressive and progressive tax, similar to the example above.
Tax rate (%)
Taxable
income ($)
Amount of tax
paid ($)
First $10,000
0
Next $20,000
10
20,000
2,000
Next $20,000
20
20,000
4,000
Thereafter
25
–
–
50,000
6,000
Total tax paid
10,000
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Income tier
0
This consists of:
•
$0 paid on the first $10,000 (the personal tax allowance or non-taxable income)
•
$2,000 paid on the first $20,000 of taxable income at 10%
•
$4,000 paid on the final $20,000 of taxable income, charged at 20%
•
Total tax = $6,000
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
c The average tax rate (ATR) is calculated by the formula: T ÷ Y.
•
Average tax rate = (Total amount of tax paid ÷ Total income) × 100
•
ATR = (6,000 ÷ 50,000) × 100 = 12%
Award 1 mark for the correct answer and 1 mark for showing appropriate working out. Apply
the own figure rule from Question 23.5(b) where appropriate.
d The average rate of tax for the second individual who earns $100,000 is shown in the table
below:
Income tier
Tax rate (%)
00
Taxable
income ($)
10,000
Amount of tax
paid ($)
00,000
First $10,000
Next $20,000
10
20,000
02,000
Next $20,000
20
20,000
04,000
Thereafter
25
50,000
12,500
80,000
18,500
Total tax paid
It is calculated as follows:
•
$10,000 taxed at 0% = $0
•
$20,000 taxed at 10% = $2,000
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$20,000 taxed at 20% = $4,000
•
$50,000 taxed at 25% = $12,500
•
Total tax paid = $18,500
•
Hence, the average tax rate = ($18,500 ÷ $100,000) × 100 = 18.5%
Despite this second individual earning twice as much as the first individual, the progressive
tax system ensures a higher average tax rate applies to those earning higher incomes (12%
and 18.5% respectively). This is brought about by the second individual paying most of
their taxable income at the highest marginal tax rate of 25 per cent.
Award 1 mark for the correct answer (the average tax rate) and 1 mark for appropriate working
out. Award up to an additional 2 marks for the commentary, similar to the example above.
24 Demand management (demand-side
policies) – monetary policy
Paper 1 Exam practice question 24.1 (HL only)
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: central bank, money supply and interest rates.
•
Explanation: any two factors a central bank may consider when setting interest rates,
which could include:
o
The state of the economy – For example, a deflationary gap may require a reduction in
interest rates in order to prevent the economy from going into a deeper recession.
o
The rate of growth of nominal wages – For example, higher labour costs usually result
in firms having to increase their prices. Higher interest rates might then be used to
combat inflationary pressures (cost-push inflation).
o
Business confidence levels – Lower interest rates tend to create incentives for
investment expenditure due to the lower costs of financing such expenditure and the
risks of investment.
o
House prices – In many countries, house prices (the most valuable asset of a typical
household) have a direct impact on the level of consumer confidence and hence the
value of consumption expenditure and potential economic growth in the economy.
Higher house prices signify a booming economy and hence may require interest rates to
be increased to avoid high rates of inflation in the economy.
o
The exchange rate – For example, lower interest rates might be needed to reduce the
demand for the domestic currency on the foreign exchange market. Doing so tends to
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•
•
Diagram: demand and supply of money to show the determination of equilibrium
interest rates.
Accept any other relevant factor that is fully explained.
Paper 2 and Paper 3 Exam practice question 24.2
Year
Inflation rate
(%)
2018
Consumer
price
index
(CPI)
100
2019
105
(105 – 100) ÷ 100 = 5.00
4.5
−0.50
2020
110
(110 – 105) ÷ 105 = 4.76
4.0
−0.76
2021
105
(105 – 110) ÷ 110 = −4.55
2.5
7.05
Nominal
interest rate
(%)
Real interest
rate (%)
4.0
Award 1 mark for each correct answer, up to the maximum of 3 marks. Apply the own figure
rule (error carried forward) where appropriate.
Paper 2 Exam practice question 24.3
The contrasting use of interest rate policies in New Zealand and Venezuela are likely to be
linked to the respective economic conditions in these countries. For example, New Zealand’s
steady decline in interest rates suggests the economy has been contracting, but in a stable and
controllable way.
By contrast, the Venezuelan economy is likely to have suffered from high rates of inflation, so
the use of higher interest rates (almost tripling between 2020 and 2021) has been used to tackle
such macroeconomic problems – in fact, Venezuela has experienced hyperinflation rates for
several consecutive years.
Award 1–2 marks for an answer that shows limited understanding of the demands of the
question. There is limited, if any, reference to the data.
Award 3–4 marks for an answer that shows good understanding of the demands of the question.
The explanation considers the use of interest rate policies to tackle economic issues, such as
unemployment or inflation. There is effective use of the given data.
Paper 2 and Paper 3 Exam practice question 24.4
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encourage the sale of exports, which is favourable for growth and employment in the
long run.
Award 1–2 marks for an answer that shows a correct diagram OR an accurate written response.
Award 3–4 marks for an answer that shows a correct diagram AND an accurate written
response, similar to the example above.
Paper 1 Exam practice question 24.5
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: monetary policy and economic activity.
•
Explanation: that increasing interest rates, as part of contractionary monetary policy,
can be used to restrict economic activity if there are inflationary pressures (vice versa).
•
Explanation: that higher interest rates and a subsequent rise in the value of the domestic
currency can deflate the economy during times of rapid economic boom as the demand
for exports falls (vice versa).
•
Explanation: that increasing the money supply during times of an economic downturn
can help to improve liquidity in the economy (although this may have inflationary
effects).
•
Explanation: that lower interest rates also tend to lead to a lower exchange rate, thus
causing an increase in the demand for the country’s exports.
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Contractionary monetary policy (by increasing interest rates) helps to reduce the level of
aggregate demand in the economy from AD1 to AD2, ceteris paribus. In theory, this reduces real
national income from Y1 to Yf, thereby restoring real GDP at its full employment level. Hence,
this removes the inflationary gap, while the general price level falls from PL1 to PL2.
•
Explanation: that monetary policy is used to achieve macroeconomic objectives such as
economic growth. For example, reducing interest rates to stimulate economic activity
means that:
o
Households and firms with outstanding loans have lower interest payments to
make, thus have more disposable income to spend, so consumption and
investment expenditures increase.
o
Savers have less of an incentive to deposit their money in banks, so are more
likely to spend their money. This raises the level of aggregate demand in the
economy, ceteris paribus.
Diagram: appropriate use of an AD–AS diagram(s) to show the effects of the above
explanations.
25 Demand management – fiscal policy
Paper 1 Exam practice question 25.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: fiscal policy and aggregate demand.
•
Explanation: that fiscal policy will directly affect the government spending (G),
investment (I) and consumption (C) components of aggregate demand. Depending on
the type of fiscal policy used, there can also be a direct impact on exports (X) and
imports (M).
•
Explanation: that fiscal policy can be used to either boost or reduce aggregate demand,
depending on where the economy is in its business cycle.
•
Diagram: appropriate AD–AS diagram(s) to illustrate the impact of expansionary and/or
contractionary fiscal policy on the economy, with reference to real national output,
employment and the general price level.
Paper 1 Exam practice question 25.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: expansionary fiscal policy and aggregate supply (AS).
•
Explanation: the various sections of the SRAS curve, that is, the perfectly price elastic,
upward sloping, and perfectly price inelastic sections of the SRAS curve.
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•
Explanation: the impact of these different sections of the SRAS curve on the level of
real GDP and the general price level.
•
Explanation: that fiscal measures used to increase aggregate demand (AD) have no
impact on the general level of prices if the economy has spare capacity and unemployed
resources, that is, it is operating along the horizontal section of the AS curve.
•
Explanation: that if the economy operates along the upward sloping section of its SRAS
curve, fiscal measures to increase AD will increase real GDP but cause some inflation.
This limits the effectiveness of expansionary fiscal policy to some extent.
•
Explanation: that fiscal stimulus which expands AD beyond the full employment level
of output is simply inflationary and ineffective in increasing real GDP.
•
Diagram: appropriately drawn and correctly labelled AD–AS diagram with explanations
of the various sections of the AS curve.
Paper 3 Exam practice question 25.3 (HL only)
a The Keynesian multiplier = 1 ÷ (MPS + MPT + MPM) = 1 ÷ (0.2 + 0.25 + 0.3) = 1 ÷ 0.75 =
1.33
b $500m × 1.33 = $665 million
Hence, the initial change of an extra $500m injected into the economy leads to a final rise in
real GDP by $165m (from $500m to $665m).
Paper 3 Exam practice question 25.4 (HL only)
a The Keynesian multiplier shows by how much each additional dollar injected into the
economy raises aggregate demand (AD). Calculating the value of the Keynesian multiplier
can support government decisions about fiscal policy (the size of any change in government
spending and/or taxation policy given their likely impacts on real GDP, average price levels
and employment).
Award 1 mark for a response that shows limited understanding of the demands of the question.
Award 2 marks for a clear explanation of how knowledge of the value of the Keynesian
multiplier for an economy can support government policies and decision-making, similar to the
example above.
b Keynesian multiplier = 1 ÷ (1 – MPC) = 1 ÷ (1 – 0.8) = 5
Change in value of real GDP = $11.5bn × 5 = $57.5bn
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
c ∆G × [1 ÷ (1 – MPC)] = 25 × (1 – 0.75) = $6.25bn
Hence, an injection of $6.25 billion is sufficient to close the $25bn deflationary gap as the
Keynesian multiplier is 1 ÷ (1 – 0.75) = 4. In other words, $6.25bn × 4 = $25bn.
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•
d ∆GDP = ∆T × [MPC ÷ (1 – MPC)] = 40 × (0.8 ÷ 0.2) = $160bn total withdrawal from the
economy due to the negative Keynesian multiplier effect.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
26 Supply-side policies
Paper 1 Exam practice question 26.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: market-based supply-side policies and macroeconomic objectives.
•
Explanation: could include coverage of any two examples of market-based supply-side
policies: deregulation, privatization, trade liberalization, anti-monopoly regulation,
reducing the power of labour unions, reducing unemployment benefits, abolishing
minimum wages, personal income tax cuts, or cuts in business tax and capital gains tax.
•
Example: privatization is the sale or transfer of state-owned assets and operations to the
private sector. In theory, the private sector is more efficient in running the previously
state-owned enterprise because private sector firms have a profit motive. This
encourages privatized enterprises to reduce production costs, become more efficient and
develop improved goods and services, thereby freeing up privatized industries and
improving market incentives. Hence, privatization can increase the productive capacity
or potential output of the economy.
•
Diagram: appropriately drawn and correctly labelled AD–AS diagram with explanations
of the various sections of the AS curve.
Paper 1 Exam practice question 26.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: demand-side (AD), supply-side (AS) and direct taxes.
•
Explanation: that lower direct taxes, as a form of expansionary fiscal policy, can
increase consumption (C) in the short run as households have a higher amount of
disposable income, thereby increasing aggregate demand (AD) in the economy.
•
Explanation: that cuts in direct taxes can incentivize businesses to invest in the
economy as business tax rates fall. Explanation that this can also attract foreign direct
investment (FDI).
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Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Explanation: that cuts in direct taxes can help to increase an economy’s aggregate
supply in the long run (LRAS).
•
Diagram: AD–AS diagram to show that a cut in direct taxes will, in theory, boost
aggregate demand in the short run and/or an AD–AS diagram to show a cut in taxes can
create incentives to invest in the economy, creating supply-side benefits in the long run.
Paper 1 Exam practice question 26.3
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: supply-side policies and macroeconomic objectives (economic growth, low
unemployment and a sustainable low rate of inflation).
•
Explanation: supply-side policies (such as tax reforms, education and training,
healthcare, research and development, and infrastructure) and how these policies can
increase economic growth, reduce unemployment and achieve a sustainably low rate of
inflation in the long run.
•
Explanation: the limitations of supply-side policies, especially in the short run when
demand-side policies might be more appropriate and more effective in achieving the
government’s macroeconomic objectives.
•
Diagram: AD–AS diagram showing the impact of supply-side policies on the economy,
with reference to real GDP, employment levels and the general price level.
•
Synthesis (evaluate): strengths and limitations of using supply-side policies to achieve
the macroeconomic objectives of economic growth, low unemployment and stable
prices. Consideration of the validity of the assumptions of the effectiveness of the
supply-side policies discussed.
•
Examples: real-world examples of the use of supply-side policies and their level of
effectiveness in addressing macroeconomic objectives (economic growth, low
unemployment and a stable average price level).
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•
Unit 4 The global economy
Paper 3 Exam practice question 27.1 (HL only)
a With the world price set at $0.3, the quantity of excess mangoes (which are exported) is
600,000 kg – 200,000 kg = 400,000 kg.
Hence, the total value of mango exports from Country X = $0.3 × 400,000 = $120,000 per
month.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
b Social surplus is the sum of consumer surplus and producer surplus.
Consumer surplus = [($0.4 – $0.3) × 200,000] ÷ 2 = $10,000
Producer surplus = [($0.3 – $0.0) × 600,000] ÷ 2 = $90,000
Social surplus = $10,000 + $90,000 = $100,000
Award 1 mark for the correct answer and up to 2 marks for showing appropriate working out of
consumer surplus and producer surplus. Apply the own figure rule where appropriate.
c Domestic demand at the world price of $0.3 = 200,000 kg
Hence, total value of domestic consumption = $0.3 × 200,000 = $60,000
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 3 Exam practice question 27.2 (HL only)
a Country X
We can see this as Country X can produce 10,000 boats whereas Country Y can produce only a
maximum of 8,000 boats.
Award 1 mark for identifying the correct country. Note that there is no need for an explanation
in this question.
b Country X should produce automobiles because there is a much larger opportunity cost if it
stops (gives up) the production of these goods. Country Y needs to give up only 0.5 units of
automobiles to produce additional 1 unit of boats whereas Country K has to give up more
(0.8 units) of automobiles to gain the same amount (1 unit) of boats.
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Alternatively, if Country Y gives up 1 unit of automobiles it can gain 2 units of boats. By
contrast, Country X only gains 1.25 units of boats by giving up (the same) 1 unit of
automobiles:
Country X
Country Y
Automobiles
(units)
8,000
Boats
(units)
0
0
10,000
4,000
0
0
8,000
Opportunity
cost
1:1.25
1:2
Award 1 mark for the correct answer (Country Y) and 1 mark for appropriate working out or a
brief explanation that shows why Country Y should produce automobiles.
(8,000 ÷ 4,000) × 8 = 16 units
c
Country X
Country Y
Automobiles Boats
(units)
(units)
8,000
0
Opportunity
cost ratio
8:10
0
10,000
4,000
0
4:8 or
0
8,000
8:16
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 3 Exam practice question 27.3 (HL only)
•
Country B should specialize in (and export) socks as it gives up 1 unit of shoes to gain 4
units of socks.
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By contrast, Country A gains only 2.5 units of socks if it gives up the same unit of
shoes.
Country
A
Socks
(millions)
1,500
Shoes (millions) Opportunity
cost
600
2.5:1
B
2,000
500
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•
4.0:1
Notes for reference:
•
Country A has the absolute advantage in the output of shoes (600 versus 500).
•
Country B has the absolute advantage in the production of socks (2,000 versus 1,500).
•
As can be seen in the diagram, the opportunity cost of Country B giving up production
of socks is greater than the opportunity cost of Country A giving up production of
shoes.
28 Types of trade protection
Paper 1 Exam practice question 28.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: tariff and stakeholder groups.
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Explanation: how the increase in price is caused by the introduction of a tariff. This
should include reference to the change in consumer surplus, producer surplus,
government expenditure and welfare loss.
•
Explanation: that domestic consumers pay more for fewer goods and services while
existing inefficient domestic firms supply more due to trade protection and/or new but
inefficient domestic firms enter the industry.
•
Explanation: foreign producer revenue falling.
•
Diagram: tariff diagram demonstrating the impact on different stakeholders, including
reference to changes in efficiency in terms of output and price.
Paper 1 Exam practice question 28.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: trade protection, along with any particular type of trade control measure
introduced by the candidate.
•
Explanation: could include consideration of protection of infant industries, national
security, health and safety, environmental standards, anti-dumping, unfair competition,
balance of payments correction, protection of jobs and/or diversification in ELDCs.
•
Explanation: the potential gains from trade, such as increased competition, lower prices,
greater choice, access to larger markets, economies of scale and more efficient
production.
•
Diagram: any trade protection diagram demonstrating the economic impacts of trade
protection.
•
Synthesis (evaluate): strengths and limitations of various forms of trade protection.
Arguments relating to the loss of efficiency and inefficient producers due to measures
of trade protection. Understanding that the extent to which trade protection is beneficial
could depend on the duration and purpose (strategic or retaliatory) of using protectionist
measures, as well as the extent to which there is anti-competitive practices such as
dumping.
•
Examples: real-world examples of trade protection measures, and their economic
impacts, such as the prolonged trade war between China and the USA with tariffs being
imposed on steel, solar panels, tyres and so on, and their impacts on different
stakeholder groups.
Paper 1 Exam practice question 28.3
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
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•
•
Definitions: quota and stakeholders.
•
Explanation: the increase in price caused by the introduction of a quota as a result of
less supply in the market.
•
Explanation: inefficiencies due to the quota and that the domestic supply curve will
shift outwards by the amount of the quota. With reference to the quota diagram, it is
important to explain that domestic consumers pay more for fewer goods and services
while inefficient domestic producers are attracted to the industry (or existing firms in
the industry are incentivized to supply more).
•
Explanation: that foreign producers will earn less revenue (depending on the value of
PED for the product).
•
Diagram: quota diagram showing the economic impacts on various stakeholders, with
reference to the change in price, quantity supplied, producer surplus and consumer
surplus.
Paper 1 Exam practice question 28.4
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: producer subsidy, stakeholder groups and trade protection.
•
Explanation: the reduced costs of production for domestic producers. With reference to
the subsidy diagram, there should be an explanation that the domestic supply curve will
shift outwards by the amount of the subsidy.
•
Explanation: the change in producer and consumer surplus following the imposition of
the subsidy.
•
Explanation: that there will be an increase in domestic producer revenue and a decrease
in foreign producer revenue (as a result of fewer imports).
•
Diagram: subsidy diagram showing the impact of a producer subsidy and the impacts on
various stakeholders, with reference to changes in price, output and welfare loss.
Paper 3 Exam practice question 28.5 (HL only)
a Consumer surplus before the imposition of the tariff = [($7 – $2) × 50m] ÷ 2 = $125m
Award 1 mark for the correct answer and 1 mark for appropriate working out.
b Producer surplus before the imposition of the tariff = [($2 – $1) × 10m] ÷ 2 = $5m
Award 1 mark for the correct answer and 1 mark for appropriate working out.
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Answers may include:
Award 1 mark for the correct answer and 1 mark for appropriate working out.
d Producer surplus after the imposition of the tariff = [($3 – $1) × 20m] ÷ 2 = $20m
Award 1 mark for the correct answer and 1 mark for appropriate working out.
e Revenue to the government after the imposition of the tariff = ($3 – $2) × (40m – 20m) =
$20m
Award 1 mark for the correct answer and 1 mark for appropriate working out.
f The welfare loss after the imposition of the tariff = [($3 – $2) × (20m – 10m)] ÷ 2 + [($3 –
$2) × (50m – 40m)] ÷ 2 = $10m
Award 1 mark for the correct answer and 1 mark for appropriate working out.
Paper 3 Exam practice question 28.6 (HL only)
a The cost of the subsidy to the government = ($20 – $10) × 15m = $150 million
Award 1 mark for the correct answer and 1 mark for appropriate working out.
b The volume of imports before government intervention = 30m – 5m = 25 million kilograms
Award 1 mark for the correct answer and 1 mark for appropriate working out.
c The volume of imports after government intervention = 30m – 15m = 15 million kilograms
Award 1 mark for the correct answer and 1 mark for appropriate working out.
d The total amount spent by domestic consumers under free trade = $10 × 30m = $300
million
Award 1 mark for the correct answer and 1 mark for appropriate working out.
e The total amount spent on imports after the imposition of the subsidy = 30m – 15m × $10 =
$150 million
Award 1 mark for the correct answer and 1 mark for appropriate working out.
29 Arguments for and against trade
control/protection
Paper 1 Exam practice question 29.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
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c Consumer surplus after the imposition of the tariff = [($7 – $3) × 40m] ÷ 2 = $80m
Definitions: economically least developed country (ELDC) and trade protection.
•
Explanation: that ELDCs face structural barriers and low levels of human capital, as
well as being highly vulnerable to economic and environmental shocks as they can be
highly specialized in the production of a few primary sector goods.
•
Explanation: protection for firms in infant industries in ELDCs.
•
Explanation: trade protection use to enable ELDCs to diversify their production without
fear of loss from intense foreign competition.
•
Explanation: that trade protection enables firms in ELDCs to achieve economies of
scale and compete in export markets, thus creating jobs and export-led growth in the
future.
•
Diagram: any trade control diagram explained in the context of the question.
Paper 2 Exam practice question 29.2
Use the assessment criteria on page 64 of the IB Economics Guide – External assessment
markbands for Paper 2 (SL/HL). Award up to the maximum marks as indicated.
The 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:
•
Definitions: trade war and tariff.
•
Explanation: tariffs as a common form of trade protection during trade disputes, such as
in the case study.
•
Explanation: how trade wars are economic and political conflicts that result from
extreme measures of trade protection between two or more countries, by imposing
reciprocal restrictions to international trade.
•
Explanation: the loss in economic efficiency due to trade disputes/trade wars.
•
Diagram: tariff diagram explained in the context of the stimulus material from the
text/data.
Discussions may include:
•
Economic outcomes in Scotland:
o
Loss of ‘thousands of jobs’ in Scotland due to the ongoing trade dispute.
o
Loss of profits to Scotch whisky producers (‘company’s profits being hit’).
o
Loss of jobs in rural areas of Scotland (longer-term unemployment of a
structural nature).
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•
•
Economic outcomes in the USA:
o
Higher prices for consumers of Scotch whisky in the USA (lower supply of
whisky, at a higher price).
o
Loss of consumer surplus in the whisky market in the USA.
o
Government revenue from the tariff of Scotch whisky.
o
Inefficient production of whisky in the USA (as domestic firms are protected by
the 25 per cent tariff).
o
Improved balance of payments (reduced current account deficit), ceteris
paribus.
Other discussion points might include:
o
Duration and magnitude of the trade war.
o
Scale and severity of retaliation (ongoing trade war) between Scotland and the
USA.
o
The severity of the enforcement of tariffs in the USA.
Any other reasonable discussion that directly addresses the question.
30 Economic integration
Paper 1 Exam practice question 30.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: free trade area (FTA), customs union and economic integration.
•
Explanation: that a free trade area (FTA) is a formal agreement between two or more
countries to remove/eliminate barriers to trade, and that members of the FTA are free to
maintain their own trade policies with other nations (non-members).
•
Explanation: that a customs union is a binding trade agreement between two or more
countries to remove/eliminate tariffs and non-tariff barriers to trade, but members of the
union are obliged to establish a common external barrier (CET) towards non-member
countries.
•
Diagram: not required for this question.
Award the use of relevant examples of FTAs and customs unions, which are likely to be used,
although this is not a formal requirement of the question.
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•
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definition: common market and monetary union.
•
Explanation: that a common market is a form of economic integration that occurs when
a group of countries agree to extend their free trade agreement (regarding trade in goods
and services that is free from tariff and non-tariff barriers) to include the free movement
of capital and labour resources. Explanation that monetary union is the ultimate form of
economic integration whereby two or more countries unify their monetary system by
using the same currency and establishing a common central bank.
•
Diagram: not required for this question.
Award the use of relevant examples, such as the European Union with its European Central
Bank, although this is not a formal requirement of the question.
Paper 1 Exam practice question 30.3 (HL only)
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: monetary union and economic integration.
•
Explanation: the advantages of being part of a monetary union, such as: (1) greater price
stability, (2) price transparency, (3) stable exchange rates (due to monetary union and/or
a stronger single currency), (4) interest rate convergence, and (5) increased cross-border
trade deals and investments between and beyond member states.
•
Explanation: the disadvantages of being part of a monetary union, such as: (1) loss of
economic sovereignty (given monetary policy is devolved to the central bank of the
monetary union), (2) loss of exchange rate flexibility, (3) asymmetric impacts of
monetary policy on different member states, (4) convergence costs (to the use of a
single currency), and (5) time lags in the implementation of monetary policy as there
are more governments/member states involved in decision-making.
•
Diagram: not required for this question.
31 Exchange rates
Paper 2 and Paper 3 Exam practice question 31.1
As £1 = $1.45, then a $45,200 car = (1 ÷ 1.45) × $45,200 = £31,172.41
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Paper 1 Exam practice question 30.2
Paper 2 and Paper 3 Exam practice question 31.2
a $70 × 0.85 = €59.50
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
b $70 × 0.80 = £56.00
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Note: As the USD has depreciated in value against the EUR, it is relatively cheaper for those
from eurozone countries who purchase items priced in USD.
Paper 2 and Paper 3 Exam practice question 31.3
a As £1 = $1.73 and $1 = €0.67, then £1 = 1.73 × 0.67 = €1.1591
Hence, the exchange rate is £1 = €1.16.
Accept answers that show that €1 = £0.86.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
b As AED1 = HKD2.12, then 24,550 × 2.12 = 52,046
Therefore, the price of the jewellery = HKD52,046.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 31.4
Possible reasons could include an explanation of:
•
An increase in the demand for Kuwaiti exports by Nigerian households and firms,
which would lead to an increase in the demand for the Kuwaiti currency. This causes an
appreciation of the KWD from 1,200 to 1,365 NGN.
•
An increase in investment in Kuwait by Nigerian nationals and firms, such as savings in
Kuwaiti bank accounts, which requires Nigerian households and firms to purchase
Kuwaiti dinars. This will increase the demand for the Kuwaiti dinar, causing an
appreciation of KWD from 1,200 to 1,365 NGN.
•
An increase in interest rates in Kuwait relative to those in Nigeria.
•
A significant rise in the number of Nigerian tourists visiting Kuwait.
Award 1–2 marks for a written response that is limited, or if only one reason is explained.
Award 3–4 marks if the written response is accurate, with two reasons explained. There is
effective use of terminology throughout the response.
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Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
a ($141,810m ÷ $3,214,700m) × 100 = 4.41%
Award 1 mark for the correct answer.
b Explanations could include:
•
To facilitate China’s growing dominance in international trade – an increase in foreign
trade would require the use of local (foreign) currencies including the yuan and dollar.
•
China’s current account surplus relative to that of the USA – an increase in foreign
currency reserves may simply reflect China’s larger current account surplus.
•
China’s desire for the central bank to hold foreign reserves in order to intervene in the
foreign exchange market (in order to provide a more favourable economic environment
for the country).
•
To support China’s monetary policy objectives.
Award 1–2 marks for a limited response that shows some understanding of the demands of the
question, or a response that explains only one reason.
Award 3–4 marks for a response that shows good understanding of the demands of the question,
with two reasons clearly explaining the possible reasons for China’s huge foreign currency
reserves relative to those of the USA.
Paper 1 Exam practice question 31.6
a Answers may include:
•
Definitions: exchange rate and appreciation.
•
Explanation: an appreciation as a sustained increase in the value of a currency relative
to another currency or basket of currencies, under a freely floating exchange rate
system.
•
Diagram: exchange rate diagram showing a rise in demand or fall in supply of a
currency, thereby causing an appreciation of the currency.
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
b Answers may include:
•
Definitions: currency depreciation and macroeconomic consequences (on the
economy’s macroeconomic objectives).
•
Explanation: the possible consequences of a currency depreciation, including the impact
on employment (from an increase in the demand for exports), export-driven growth,
inflation (demand-pull and/or imported inflation), and the current account balance.
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Paper 3 Exam practice question 31.5 (HL only)
•
Diagram: AD–AS diagram demonstrating an increase in aggregate demand following
the currency depreciation, along with the impact on real GDP and the general price
level.
•
Synthesis (evaluate): discussion of the extent to which a currency depreciation will
impact the economy, which will depend on factors such as the magnitude of the
currency depreciation, its duration and the country’s specific trading partners.
HL candidates may also consider the role of the Marshall-Lerner condition (price
elasticity of demand).
•
Examples: real-world examples of falling currencies and macroeconomic consequences
of these.
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
32 Balance of payments
Paper 2 and Paper 3 Exam practice question 32.1
Balance of trade for Country X ($billion)
Exports
98
Goods
67
Services
31
Imports
88 + 23 = 111
Goods
88
Services
23
Balance of trade in goods
67 – 88 = −21
Balance of trade in services
31 – 23 = 8
Trade balance
−21 + 8 = −13
Award 1 mark for each correct answer, up to the maximum of 4 marks. Note that there is no
requirement to show the working out.
Apply the own figure rule (error carried forward) where appropriate.
Paper 2 and Paper 3 Exam practice question 32.2
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HL candidates may also consider the relevance of the Marshall-Lerner condition.
Award 1 mark for a definition that shows limited understanding.
Award 2 marks for an accurate definition that shows a good understanding of net income,
similar to the example above.
b Balance of trade = Trade in goods – Trade in services (or X – M)
Balance of trade = −$28.3bn + $31.85bn = +$3.55bn
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
c Current account = Balance of trade + Net income + Net transfers
Current account = $3.55bn + $1.3bn + −$1.45bn = $3.4bn
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 32.3
a Current account = (Exports of goods – Imports of goods) + (Exports of services – Imports of
services) + Net income + Net current transfers
•
= (235 – 440) + (320 – 235) + 20 – 30
•
= −205 + 85 + 20 – 30 = −130
•
= −$130 billion
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
b Financial account = Net direct investment + Net portfolio investment
•
= 65 + 38 = 103
•
= $103 billion
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
c Capital account = Capital transfers + Trade in non-produced, non-financial assets
•
= 26 + 20 = 46
•
Hence, the capital account balance is $46 billion.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
d The balance of payments must balance, so:
•
Current account = (Financial account + Capital account + Errors and omissions)
•
−$130bn = $103bn + $46bn + x
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a Net income refers to the overall investment income (rent, wages, profit and interest) earned
from assets owned and located overseas. It is recorded in the current account of the balance
of payments.
−$130bn = $149bn + x
•
x = −$19bn
•
Hence, errors and omissions for Country Z = −$19 billion.
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•
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Summary (for illustrative purposes only):
$billions
$billions
Exports of
goods
235
Net current
transfers
−30
Exports of
services
320
Net direct
investment
65
Imports of
goods
−440
Net portfolio
investment
38
Imports of
services
−235
Capital transfers
26
20
Trade in nonproduced, nonfinancial assets
20
Net income
Bold = used to calculate the current account balance
Underlined = used to calculate the financial account
Italic = used to calculate the capital account
Paper 2 Exam practice question 32.4
a The balance of trade is the difference between the value of a country’s total export earnings
and its total import expenditure on both goods and services (X – M). It is the largest
component of a country’s current account on the balance of payments.
Award 1 mark for an answer that shows some understanding of the term balance of trade.
Award 2 marks for a definition that shows a good understanding of the term balance of trade,
similar to the example above.
b For the entire five-year period shown, France has experienced a balance of trade deficit.
Possible causes of this persistent deficit include:
•
Deteriorating international competitiveness, leading to a fall in exports from France. For
example, the price and/or quality of cars from Germany, the USA and Japan are more
attractive for customers in France.
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Appreciation of the currency (euro), which reduces the demand for exports from Asia
and the USA.
•
Higher prices of imported raw materials and essential products such as crude oil and
foodstuffs.
•
Intense competition from other countries supplying medicines, thereby reducing
France’s competitiveness in exporting these goods.
•
The value of France’s expenditure on car imports is far greater than the export revenues
from selling medicines.
•
A decline in tourism revenues due to external shocks to the French economy, include
multiple terrorist attacks, domestic protest (the yellow vest movement) and the global
outbreak of the coronavirus.
Accept any other relevant possible cause that is explained in the context of France.
Award 1–2 marks if the written response is limited or only one reason is explained.
Award 3–4 marks if the written response is accurate. Two reasons are given and accurately
explained.
33 Sustainable development
Paper 2 Exam practice question 33.1
a The international poverty line refers to people living below the minimum income necessary
to satisfy basic human needs (including food, clothing and shelter). The World Bank has set
the international poverty line at $1.90 per day.
Award 1 mark for a limited response that shows understanding of the demands of the question.
Award 2 marks for a clear definition that shows good understanding of the demands of the
question, similar to the example above.
b The Gini index (or Gini coefficient) is a measure of the degree of income inequality in a
country. Diagrammatically, the Gini index is calculated as the area between the Lorenz
curve for the country and the 45 degree line of perfect equality divided by the entire area
under the line of perfect equality. The calculation ranges from zero (perfect income
equality) to one (perfect inequality).
Award 1 mark for a limited response that shows understanding of the demands of the question.
Award 2 marks for a clear definition that shows good understanding of the demands of the
question, similar to the example above.
c The gender gap is the difference between the opportunities of women and men as reflected
in social, political, intellectual, cultural and economic activities, attitudes and prospects.
Reducing or closing gender inequality can facilitate sustainable population growth, as more
women focus on their professional careers rather than other priorities expected by society.
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Award 1–2 marks if the written response is limited and descriptive, partially explaining the
relationship between gender inequality and sustainable development.
Award 3–4 marks if the written response is comprehensive and accurate, similar to the example
above, written in the context of the Rwandan case study.
d Answers may include:
•
Definition: sustainable economic growth and development.
•
Explanation: differences and similarities between economic growth and economic
development showing an understanding of the source(s) of growth and development,
especially in the context of Rwanda.
•
Explanation: possible interventionist policies to achieve sustainable development, in the
form of investments in education, the reduction of interest rates to encourage capital
investment, and/or offering subsidies in the energy sector as the high cost of energy has
been a major constraint on private investments in Rwanda.
•
Explanation: market-based policies to achieve sustainable development, such as a
reduction in direct taxes, improvements in governance, eradicating corruption, exportled growth strategies, import substitution policies, encouraging foreign direct
investment (FDI) and diversification.
•
Explanation: possible supply-side policies to improve the quality/quantity of factors of
production to achieve sustainable development in Rwanda.
•
Explanation: how Rwanda’s income inequality, in the midst of rapid economic growth,
could worsen further.
•
Diagram: showing the long run aggregate supply (LRAS) curve shifting to the right or
an outwards shift of the production possibility curve indicating development in the long
run.
•
Synthesis (evaluate): the strengths and limitations of using market-based and
interventionist policies to achieve sustainable development, written in the context of
Rwanda. Acknowledgement and consideration of how economic growth alone does not
lead to sustainable development. Consideration of unregulated growth, which would
lead to Rwanda experiencing a more unequal distribution of income and wealth.
Reference to other policies that may be more (or less) effective to achieve sustainable
development.
•
Examples: using the stimulus material (real-world examples from the text and/or the
candidate’s knowledge of economics, written in the context of Rwanda).
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In Rwanda ‘women tend to be engaged in work such as water collection, growing and
harvesting of crops, transportation of agricultural output to market stalls’ but still have ‘the
highly demanding task of raising children and looking after the family’. There are usually
no direct financial returns for doing any of this, so most of this vital work is unaccounted for
in official economic statistics. A significant number of Rwanda’s 12.4m people could come
out of extreme poverty if women were given equal access rights to productive resources and
economic opportunities.
Note that ‘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.
The explanations should focus on how to achieve sustainable development, written in the
context of Rwanda.
34 Measuring development
Paper 2 and Paper 3 Exam practice question 34.1
a Real GDP per capita = Real GDP ÷ Population:
Real gross domestic product
Country A
$29.76 billion
Country B
$273.75 billion
Population
12.4 million
7.5 million
Real GDP per capita
$2,400
$36,500
Award 1 mark for the correct answers and 1 mark for showing appropriate working out.
b
•
Pre-growth income gap = $36,500 – $2,400 = $34,100
•
Post-growth income gap = ($36,500 × 1.025) – ($2,400 × 1.025) = $37,412.5 – $2,460
= $34,952.5
•
Hence, the change in the income gap = $34,952.5 – $34,100 = $852.5.
•
This means the income gap has widened by an extra $852.5, despite the workers
receiving the same percentage increase of 2.5% in per capita income.
•
Alternatively, this can be explained by showing that workers in Country B receive an
extra $912.5 (2.5% of $36,500) in income whereas those in Country A receive only an
extra $60 (2.5% of $2,400).
Award 1 mark for a limited understanding of the demands of the question.
Award 2 marks for a response that shows a good understanding of the demands of the question,
outlining why the income gap widens.
Paper 2 and Paper 3 Exam practice question 34.2
a The Human Development Index (HDI) is a composite indicator of living standards and
economic development in a country by measuring three dimensions of development:
education, healthcare and income.
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Use the assessment criteria on page 64 of the IB Economics Guide – External assessment
markbands for Paper 2 (SL/HL). Award up to the maximum marks as indicated.
Award 2 marks for an accurate definition of the term Human Development Index, similar to the
example above.
b
Country
HDI
Country
HDI
Greece
0.888
Mozambique
0.456
Germany
0.947
Thailand
0.777
•
Germany is most likely to have an HDI of 0.947 as the high HDI suggests it has the
highest standards of living/human development (as measured by the composite indices
of healthcare, education and income levels).
•
Similarly, Mozambique is likely to have the lowest HDI of 0.456 as it has the lowest
standards of living of the four listed countries.
•
Greece being relatively more economically developed than Thailand is likely to have a
HDI of 0.888 compared to Thailand’s HDI of 0.777.
Award 1 mark for each correctly identified and explained answer, up to 4 marks.
Note that there is no requirement to explain the HDI for all four countries because the lines of
argument/reasoning will be similar.
Paper 2 and Paper 3 Exam practice question 34.3
As the exchange rate is €1 to $1.18, then €3.5 = $4.13 for there to be PPP.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
Paper 2 and Paper 3 Exam practice question 34.4
a
•
Pre-population growth in GNI per capita = $49bn ÷ 71m = $690.14
•
Post-population growth in GNI per capita = $53bn ÷ 72m = $736.11
•
Hence, the change in real GNI per capita is an increase of approximately $45.97.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
b
•
Alternatively, pre-population growth in GNI per capita is $690.14 ÷ 365 = $1.89 per
day.
•
Post-population growth in GNI per capita is $736.11 = $2.02 per day.
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Award 1 mark for a vague definition that shows some understanding.
Despite the average person in the ELDC no longer being defined as living below the
international poverty line (of $1.90 per day as set by the World Bank), the total change
in real GNI per capita is an increase of only approximately $45.97. This equates to less
than $0.13 per day, so is highly unlikely to make much difference to the average
person’s quality of life in the ELDC.
Award 1 mark for a limited response that shows some understanding of the demands of the
question.
Award 2 marks for a response that shows good understanding of the demands of the question,
with appropriate use of the data.
35 Barriers to growth and/or economic
development
Paper 1 Exam practice question 35.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: economic growth, economic development and economic barriers to
development.
•
Explanations: any two economic barriers to growth and/or economic development: (1)
rising economic inequality, (2) lack of access to infrastructure and appropriate
technology, (3) low levels of human capital (that is, a lack of access to healthcare and
education), (4) over-dependence on primary sector production, (5) lack of access to
international markets, (6) the informal economy, (7) capital flight, (8) indebtedness, (9)
geography (including landlocked countries), and (10) tropical climates and endemic
diseases.
•
Diagram: not needed for this question, although some candidates may choose to use an
AD–AS, LRAS or PPC diagram to demonstrate economic growth and development.
Paper 1 Exam practice question 35.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: economic growth, development, as well as political and social barriers to
development.
•
Explanations: any two political and social barriers to growth and/or economic
development: (1) a weak institutional framework (including the legal system,
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•
•
Diagram: not needed for this question, although some candidates may opt to use an
AD–AS diagram to show the impacts of using taxation policies to influence economic
growth and economic development.
36 Economic growth and/or economic
development strategies
Paper 1 Exam practice question 36.1
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: market-based strategies, economic growth and economic development.
•
Explanation: any two market-based strategies, such as: (1) trade liberalization, (2)
privatization, and (3) deregulation.
•
Explanation: that trade liberalization refers to growth and development policies that
encourage free trade and the free movement of capital flows by removing barriers to
trade, such as tariffs, quotas, subsidies and administrative barriers.
•
Explanation: that privatization is used to achieve growth and development by selling or
transferring public sector assets to the private sector in order to stimulate competition
and incentives.
•
Explanation: that deregulation is the reduction or removal of statutory barriers to entry
in certain industries, thereby enabling the price mechanism to allocate resources more
effectively.
•
Diagram: AD–AS diagram showing a rightwards shift of the aggregate demand (AD)
curve, increasing real national income. An alternative diagram is an outwards shift of
the production possibility curve (PPC) as a result of effective market-based strategies.
Paper 1 Exam practice question 36.2
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: intervention, merit goods, economic growth and economic development.
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ineffective taxation structures, banking system and property rights), (2) gender
inequality, (3) the lack of good governance/corruption, and (4) unequal political power
and status.
Explanation: that despite their social benefits, merit goods such as education
programmes, healthcare programmes and infrastructure are under-provided and underconsumed in the free market (in the absence of government intervention), yet the
consumption of such goods and services create positive benefits to society.
•
Explanation: that providing merit goods, such as educational programmes, ensures there
are spillover benefits to the country because the social benefits accrued from education
and training exceed the private benefits in the long run, thereby creating opportunities
for economic growth and development.
•
Explanation: that a good healthcare system not only enables the workforce of the
country to be healthy and productive, but also helps to minimize absenteeism from
work.
•
Explanation: that investments in infrastructure (such as transportation networks,
telecommunications networks and public utilities) are vital for growth and development.
•
Diagram: AD–AS diagram showing a rightwards shift of the long run aggregate supply
(LRAS) curve, indicating an increase in real GDP. An alternative approach is to use a
production possibility curve (PPC), showing an outwards shift as a result of investment
in the provision of merit goods.
Paper 1 Exam practice question 36.3
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Note that ‘discuss’ requires students 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:
•
Definitions: interventionist approaches and market-based approaches to economic
growth and development.
•
Explanation: different forms of market-based policies that an economy can use to
achieve economic growth and/or development.
•
Explanation: the benefits of interventionist policies such as the provision of essential
infrastructure, investments in human capital, the provision of a social safety net, and an
ability to tackle income and wealth inequalities.
•
Explanation: the limitations of interventionist policies, such as excessive bureaucracy
and poor planning leading to corruption, inefficiencies and delays in production.
•
Explanation: the strengths of market-based policies to achieve economic growth and
development, such as higher levels of efficiency, improved competitiveness, the gains
from free trade and better investment opportunities.
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•
Explanation: the limitations of using market-based policies to achieve economic growth
and development, including market failures, development of a dual economy, as well as
income and wealth inequalities.
•
Diagram: AD–AS diagram showing a rightwards shift of the long run aggregate supply
(LRAS), illustrating an increase in real GDP. An alternative approach is to use a
production possibility curve (PPC) diagram, showing an outwards shift of the PPC as a
result of interventionist policies such as investments on merit goods.
•
Synthesis (evaluate): strengths and limitations of both market-based and interventionist
policies in achieving growth and development. Consideration of contexts in which these
policies may succeed or fail, and why this may be so.
•
Examples: real-world examples which may include:
•
o
Countries making significant investments in infrastructure, such as China,
Turkey and Australia.
o
Countries making significant investments in social capital, such as Singapore,
Hong Kong, South Korea and Ireland.
o
Countries with a high Corruption Perceptions Index (CPI), such as Somalia,
South Sudan or North Korea.
o
Countries that are pro-business economies, with a high Ease of Doing Business
ranking from the World Bank, such as New Zealand, Singapore and Hong
Kong.
o
Countries with high income inequalities, such as Zambia, Honduras and South
Africa.
o
Countries with the least wealth inequalities, such as Norway and Sweden.
Real-world examples could also include countries adopting different strategies during
emergency crises like the COVID-19 pandemic.
Paper 1 Exam practice question 36.4
Use the assessment criteria on page 63 of the IB Economics Guide – External assessment
markbands for Paper 1 (SL/HL). Award up to the maximum marks as indicated.
Answers may include:
•
Definitions: trade strategies, economic growth and development.
•
Explanation: any two trade strategies, such as (1) import substitution, (2) export
promotion, and (3) economic integration.
•
Explanation: that import substitution is an inward-looking growth and development
strategy that encourages domestic production and the purchase of domestic output
through protectionist policies such as tariffs and quotas.
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•
Explanation: that export promotion is an outward-looking strategy used to achieve
economic growth and development that focuses on greater international trade.
•
Explanation: that economic integration is the process of countries becoming more
interdependent and economically unified, mainly through the reduction and removal of
barriers to trade, that is, through the partial or full abolition of tariff and non-tariff
barriers.
•
Diagram: AD–AS diagram showing a rightwards shift of the aggregate demand (AD)
curve resulting from policies that promote trade, thereby increasing real GDP.
Alternatively, candidates may choose to use a production possibility curve (PPC)
showing an outwards shift as a result of such trade strategies.
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•