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Exam practice:
paper 2 (SL and HL)

Introduction to paper 2
Paper 2 has the same structure for both
standard and higher levels.
Paper 2: SL and HL
Duration of paper 2 1 hour and 30 minutes
Focus and structure of paper 2 Section A focuses on section 3 of the syllabus (international economics), though
students may be required to draw on other parts of the syllabus. Students must answer
one question from a choice of two.
Section B focuses on section 4 of the syllabus (development economics), though

students may be required to draw on other parts of the syllabus. Students must answer
one question from a choice of two.
Structure of questions and marks Paper 2 consists of data response questions. Each question consists of four parts, (a),
earned in paper 2 (b), (c) and (d), which are based on a text/data provided. Students must answer all
parts.
Part (a) is subdivided into two parts, (i) and (ii), each of which is worth 2 marks;
therefore, part (a) is worth a maximum of 4 marks.
Part (b) is worth a maximum of 4 marks.
Part (c) is worth a maximum of 4 marks.
Part (d) is worth a maximum of 8 marks.
Therefore, each question earns a maximum of 20 marks.
Assessment objectives in paper 2 Part (a) of the questions examines assessment objective 1.
Part (b) of the questions examines assessment objectives 1, 2 and 4.
Part (c) of the questions examines assessment objectives 1, 2 and 4.
Part (d) of the questions examines assessment objectives 1, 2 and 3.
Maximum marks earned in paper 2, Since the student must answer two questions, Paper 2 earns a maximum of 40 marks.
and percentage in total IB Economics
grade Paper 2 accounts for 40% of the student’s overall grade at standard level, and 30% of
the student’s overall grade at higher level.
© Cambridge University Press 2012 Economics for the IB Diploma 1

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

Paper 2 section A: International economics

Chapter 13 International trade
Text/data 1
Removing quotas on United States textiles

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

(a) (i) Define the term dumping identified in bold (a) (i) Define the term quotas identified in bold in
in the text (paragraph 4) [2 marks] the text (paragraph 2). [2 marks]
(ii) Define the term subsidies identified in bold in (ii) Define the term anti-dumping
the text (paragraph 4) [2 marks] tariffs identified in bold in the text
(b) Draw a diagram and use it to explain how the (paragraph 5). [2 marks]
removal of the US quotas on Chinese textiles will (b) Using an appropriate diagram, explain the effects
affect Chinese exports to the US. [4 marks] of subsidies granted to Chinese textiles on Chinese
(c) Draw a diagram and use it to explain the effects of producers and consumers (paragraph 4).
the remaining US tariffs on Chinese products on US [4 marks]
producers, consumers and workers (paragraph 6). (c) (higher level) Explain why the theory of
[4 marks] comparative advantage is a more powerful
(d) Using information in the text and your knowledge explanation of the benefits of trade than the
of economics, discuss the benefits that might arise theory of absolute advantage. [4 marks]
from free-trade between the United States and
China. [8 marks]

(c) (core) Using an appropriate diagram, explain [2 marks + 2 marks]
how US consumers and producers are likely to be (b) Draw a diagram and use it to explain what type of
affected once the import quotas on textiles are unemployment increased in the United States by
removed (paragraph 6). [4 marks] the loss of 55 000 jobs (paragraph 2). [4 marks]
(d) Using information in the text and your knowledge (c) Draw a demand and supply diagram and use it
of economics, discuss arguments for and against to explain the likely effects on Central American
trade protection policies for the textile industry in clothing products of the US removal of quotas on
the United States. [8 marks] Chinese textiles. [4 marks]
(d) Using information in the text and your knowledge
Question A.3 of economics, compare and contrast the effects
of tariffs and quotas, considering their effects on
(a) (i) and (ii) Outline two objectives or functions of
stakeholders and the US and Chinese economies.
the World Trade Organization (paragraph 5).
[8 marks]

Text/data 2
Corporate fraud: free trade

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

Question A.4 of economics, to what extent do you support the
(a) (higher level) (i) and (ii) Describe two sources of author’s perspective on the point that the United
comparative advantage, using examples. States should impose trade barriers to protect jobs
[2 marks + 2 marks] and avoid recession in the United States?
(a) (core) (i) and (ii) Outline two benefits (gains) that [8 marks]
can be expected to arise from international trade.
[2 marks + 2 marks]
Question A.5
(b) (higher level) Assuming Mexico exports avocadoes
(a) (i) and (ii) Describe two administrative barriers
and Maine exports blueberries, draw a diagram
that can be used as a method of trade protection
and use it to explain the theory of comparative
(paragraph 5). [2 marks + 2 marks]
advantage. [4 marks]
(b) (higher level) Assuming Mexico exports avocadoes
(b) (core) Using a supply and demand diagram,
and Maine exports blueberries, draw a diagram and
explain how the use of ‘cheap labour’ by
use it to explain the theory of absolute advantage
manufacturers may lead to increased export
(paragraph 2). [4 marks]
competitiveness (paragraph 2).
(b) (core) Draw a diagram illustrating a type of trade
(c) Draw an appropriate diagram and use it to explain
protection of your choice, and use it to explain the
how US subsidies on agricultural products result
meaning of ‘trade wars’ (paragraph 6). [4 marks]
in ‘low-cost products’ sold to other countries
(paragraph 3) [4 marks]

(c) Using an appropriate diagram, explain how (d) (core) Using information in the text and your
removal of tariffs in the United States may lead to knowledge of economics, discuss the possible
job losses. [4 marks] consequences of a US policy involving increased
(d) (higher level) Using information in the text trade protection measures, as suggested by the
and your knowledge of economics, evaluate the author. [8 marks]
author’s perspective on the point that economists
should advise the government to ignore the theory
of comparative advantage. [8 marks]

Chapter 14 Exchange rates and the balance of payments
Text/data 3
Vietnam tries to deal with trade deficit

1 Vietnam’s currency, the dong, is pegged to the US dollar. interest) are expected to double in the next six years. An
Following two devaluations in the past six months, the important reason behind the growing foreign debt burden
dong’s exchange rate has reached its lowest value in the is the need to finance the large trade deficit.
last seven years. Recently, the central bank bought US$1 Economic policy makers are at the same time determined 4
billion by selling dong in order to maintain the value of to maintain a high rate of growth, forecast to be 6.5% this
the currency at the lower level. However, some economists year. To achieve this goal, they are pursuing expansionary
claim that the dong is still overvalued. fiscal policy and monetary policy. This increases the
2 Vietnam is having difficulties achieving macroeconomic likelihood of inflation and also puts a downward pressure
stability. It has a persistent current account deficit (due on the value of the dong.
to a trade deficit), which is very large and growing, and The dong devaluations are likely to help boost exports, but 5
which is putting a downward pressure on the value of the they will also make imports more expensive. This means that
dong. Vietnam is also threatened by inflation. The dong prices of imports of machinery, equipment and other imported
devaluations indicate that the government and central bank inputs will increase, hurting export competitiveness, and also
are attaching greater importance to tackling the problem increasing inflationary pressures. Much of Vietnam’s growth
of the current account deficit rather than the problem of is based on exports. Yet exports appear to be slowing down.
inflation. ‘The risk from the trade and balance of payments A slowdown in export growth will create difficulties for
deficits remains,’ said Hung, from one of Vietnam’s larger policy-makers concerned about the widening trade deficit.
brokerage firms. ‘A weaker dong is needed to spur exports
and to stabilise the foreign-currency market.’ Analysts say Source: ‘Vietnam may weaken dong to support exports, SS I says’
the dong may be devalued again in order to bring Vietnam’s in Bloomberg Businessweek, 20 May 2010; ‘Not all that it seems in
trade deficit under control. the Vietnamese economy’ in The Nation (Thailand), 19 August 2010;
3 Vietnam also faces a large and growing foreign debt. Its ‘A cheap dong may prove costly for Vietnam’ in The Straits Times
payments for debt servicing (repayment of loans plus (Singapore), 2 December 2009.
Question A.6 (d) (core) Using information in the text and your
(a) (i) Define the term overvalued (exchange rate) knowledge of economics, discuss the effects
identified in bold in the text (paragraph 1). of expansionary fiscal and monetary policies
[2 marks] on Vietnam’s trade deficit and the Vietnamese
(ii) Define the term monetary policy identified economy. [8 marks]
in bold in the text (paragraph 4). [2 marks]
Question A.7
(b) Using a foreign exchange diagram, explain the
(a) (i) Define the term current account deficit
effects of the central bank’s purchase of dollars
identified in bold in the text (paragraph 2).
(sale of dongs) on the value of the dong
[2 marks]
(ii) Define the term inflation identified in bold in
(c) Using an AD-AS diagram, explain how a
the text (paragraph 2). [2 marks]
devaluation can affect the rate of inflation in
Vietnam (paragraphs 2 and 5). [4 marks] (b) Using an exchange rate diagram, explain how the
pegged (fixed) dong is maintained relative to the
(d) (higher level) Using information in the text
dollar. [4 marks]
and your knowledge of economics, evaluate the
effectiveness of expenditure-reducing policies that (c) Explain why the devaluations suggest that the
the Vietnamese government and/or central bank central bank is more interested in the size of
could use to correct Vietnam’s persistent current the current account deficit than in controlling
account deficit. [8 marks] inflation (paragraph 2). [4 marks]

(d) (higher level) Using information in the text
and your knowledge of economics, evaluate the Question A.9
effectiveness of expenditure-switching policies that (a) (i) Define the term devaluation identified in
the Vietnamese government and/or central bank bold in the text (paragraph 1). [2 marks]
could use to correct Vietnam’s persistent current
(ii) Define the term fiscal policy identified in
account deficit. [8 marks]
bold in the text (paragraph 4). [2 marks]
(d) (core) Using information in the text and your
(b) Explain two possible consequences of an
knowledge of economics, discuss the possible
overvalued dong (paragraph 1). [4 marks]
effects of a new devaluation of the dong
(paragraph 2). [8 marks] (c) Explain why a deficit in the current account results
in a downward pressure on the value of the dong
Question A.8 (d) (higher level) Using information in the text and
(a) (i) Outline the role of the balance of payments your knowledge of economics, discuss the possible
(paragraph 2). [2 marks] consequences of Vietnam’s persistent current
(ii) Define the term exchange rate identified in account deficit on the Vietnamese economy.
bold in the text (paragraph 1). [2 marks] [8 marks]
(b) Using an exchange rate diagram, explain why (d) (core) Using information in the text and your
expansionary monetary policy puts a downward knowledge of economics, evaluate the policy of
pressure on the value of dong (paragraph 4). government intervention to influence the value of
[4 marks] the dong. [8 marks]
(c) Distinguish between a current account deficit and

a current account surplus. [4 marks]
of economics, discuss the possible effects of a
hypothetical policy decision to move from a
pegged (fixed) dong to a freely floating dong.
[8 marks]

Text/data 4
China’s trade surplus

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

(a) (i) Define the term current account surplus (a) (i) Define the term undervalued (exchange rate)
identified in bold in the text (paragraph 1). identified in bold in the text (paragraph 4).
[2 marks] [2 marks]
(ii) Define the term recession identified in bold in (ii) Referring to China’s balance of payments, state
the text (paragraph 3). [2 marks] one item that enters as a debit and one that
(b) Explain two possible consequences of an enters as a credit in China’s current account.
undervalued yuan (paragraph 4). [4 marks] [2 marks]
(c) Draw an exchange rate diagram and use it to (b) Explain why a surplus in the current account
explain one way that the Chinese government or results in an upward pressure on the value of the
central bank can use to ‘push down the value of yuan (paragraph 4). [4 marks]
the yuan’ (paragraph 4). [4 marks] (c) Draw an AD-AS diagram and use it to explain
(d) (higher level) Using information in the text and why the global recession caused an increase in
your knowledge of economics, discuss the possible unemployment in southern China (paragraph 4)
consequences of China’s persistent current account . [4 marks]
surplus (paragraph 4). [8 marks] (d) Using information in the text and your knowledge
(d) (core) Using information in the text and your of economics, evaluate the policy option to lower
knowledge of economics, to what extent do you the value of the yuan (paragraph 4). [8 marks]
support the view that China should revalue the
yuan (paragraph 4)? [8 marks]

Text/data 5
Sri Lanka’s reserve assets fall to dangerously low levels

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

(a) (i) Using information in the text, state one item (a) (i) Define the term central bank identified in
that enters as a credit and one item that enters bold in the text (paragraph 1). [2 marks]
as a debit, in Sri Lanka’s balance of payments (ii) Define the term depreciation identified in
accounts. [2 marks] bold in the text (paragraph 4). [2 marks]
(ii) Define the term reserve assets identified in (b) Using an exchange rate diagram, explain the effect
bold in the text (paragraph 1). [2 marks] of outflows of portfolio investments on the value
(b) Using an exchange rate diagram, explain how the of the rupee (paragraph 6). [4 marks]
rupee would reach ‘its freely floating exchange rate (c) Explain how a managed float (managed exchange
value’ (paragraph 5). [4 marks] rate) operates (paragraph 5). [4 marks]
(c) Using a diagram, analyse the effects of the (d) Using information in the text and your knowledge
shortage of skilled workers on textile firms’ export of economics, discuss the policy options available
competitiveness (paragraph 3). [4 marks] to the government and central bank of Sri Lanka
(d) Using information in the text and your knowledge to avoid a rapid depreciation of the rupee.
of economics, evaluate the central bank’s decision [8 marks]
to avoid a rapid depreciation of the rupee

Text/data 6
Mauritius’ policy dilemma

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

Question A.14 does not appear to apply in the case of Mauritius
(a) (i) Define the term appreciation identified in (paragraph 3). [4 marks]
bold in the text (paragraph 1). [2 marks] (c) (core) Explain the kind of exchange rate system in
(ii) Outline the meaning of productivity use in Mauritius. [4 marks]
identified in bold in the text (paragraph 6). (d) (higher level) Using information in the text and
[2 marks] your knowledge of economics, compare and
(b) (higher level) Using the Marshall–Lerner condition, contrast the effectiveness of expenditure-reducing
explain the effects of the rupee depreciation of policies and supply-side policies to increase
2003–6 on Mauritius’ current account competitiveness that the Mauritius government
(paragraph 2). [4 marks] and/or central bank could use to correct the
(b) (core) Use a supply and demand diagram to suggest current account deficit. [8 marks]
a possible reason why the rupee appreciation after (d) (core) Using information in the text and your
2007 did not lead to a decrease in the volume of knowledge of economics, discuss the policy option
exports (paragraph 5). [4 marks] to allow the value of the rupee to depreciate.
[8 marks]

Text/data 7
Riverland’s balance of payments problems

Riverland’s economy faces several problems. It has a reaching an expected 0.7% for the current year (2010). It
relatively high rate of inflation at 8%, which is expected has a poverty rate of 25%. Further, it has a highly inflexible
to rise further due to cost factors, including increases labour market.
in the price of its oil and other commodity imports. Riverland has also been experiencing balance of payments
Unemployment is estimated to be 11%, though this is difficulties over many years. The table below presents its
likely to be an underestimate because of the presence of balance of payments accounts for the year 2010.
extensive hidden unemployment. Its public debt is high
(at 75% of GDP). Its rate of growth has been falling,
Balance of payments accounts for Riverland, 2010 (billions of Rvl)
1 Current account
2 Balance of trade in goods −230

3 Balance of trade in services −25
4 Income +55
5 Current transfers +37
6 Balance on current account −163
7 Capital account
8 Capital transfers +12

9 Transactions in non-produced, non-financial assets +15
10 Balance on capital account +27
11 Financial account
12 Direct investment +67

13 Portfolio investment +12
14 Reserve assets +40
15 Balance on financial account +119
16 Errors and omissions +17
(c) Referring to item 4 (income) in Riverland’s balance

Question A.15 of payments accounts, explain what was likely to
(a) (i) Outline the meaning of balance of trade in be larger in Riverland in 2010: GNI per capita or
goods (row 2 in the table). [2 marks] GDP per capita. [4 marks]
(ii) Outline the meaning of direct investment (d) (higher level) Using information in the text and
(row 12 in the table). [2 marks] table, and your knowledge of economics, compare
and contrast the use of demand-side policies
(b) Using the concepts of debits and credits, explain
and supply-side policies as methods to correct
which of the three accounts has a surplus and
Riverland’s balance of payments problems.
which has a deficit. [4 marks]
[8 marks]

(d) (core) Using information in the text and table, (b) Draw an exchange rate diagram and use it to show
and your knowledge of economics, evaluate the effect of the change in reserve assets (row 14 in
possible economic consequences of depreciation/ the table) on the value of the Rvl. [4 marks]
devaluation of the Rvl. [8 marks] (c) Explain what would likely happen to the value of
the Rvl if Riverland switched to a freely floating
Question A.16 exchange rate system. [4 marks]
(a) (i) Outline the meaning of balance of trade in (d) Using information in the text and table, and your
services (row 3 in the table). [2 marks] knowledge of economics, examine the possible
(ii) Outline the meaning of capital transfers consequences of an overvalued Rvl. [8 marks]
(row 8 in the table). [2 marks]
(b) Considering the entry for reserve assets (row 14 in Question A.18
the table), explain what type(s) of exchange rate (a) (i) Outline the meaning of current transfers
system Riverland could have. [4 marks] (row 5 in the table). [2 marks]
(c) Explain what item in Riverland’s balance of (ii) Outline the meaning of transactions in
payments accounts is most likely to have led to its non-produced, non-financial assets
balance of payments difficulties. [4 marks] (row 9 in the table). [2 marks]
(d) Using information in the text and table, and your (b) Using the concepts of debits and credits and the
knowledge of economics, compare and contrast information in the table, explain how the current
the likely effectiveness of alternative exchange account, capital account, financial account and
rate systems in addressing Riverland’s economic errors and omissions are related to each other.
problems. [8 marks] [4 marks]
(c) Using information in the table, explain why the
Question A.17
Rvl might be overvalued. [4 marks]
(a) (i) Outline the meaning of income (row 4 in the
(d) Using information in the text and table, and
table). [2 marks]
your knowledge of economics, examine the
(ii) Outline the meaning of portfolio interdependence of Riverland’s current account
investment (row 13 in the table). [2 marks] and financial account. [8 marks]

Text/data 8
Dilemmas facing the Turkish economy

The Turkish economy went through a major currency on financial capital inflows. High interest rates have caused
and banking crisis in 2001, but with assistance from the the lira (the Turkish currency) to appreciate, making exports
International Monetary Fund (IMF) that imposed restrictive less competitive. It has a high rate of unemployment.
fiscal and monetary policies, it has made substantial While the rate of inflation (measured by the consumer
progress toward achieving macroeconomic stability. It has price index) fell dramatically in 2003–4, it still remains
a market-oriented economy which has experienced high high compared to the OECD average. In addition, there
rates of economic growth, above the OECD* average (see is high inequality in income distribution. According to the
the diagrams below), it has diversified its exports and the OECD, Turkey should pursue fiscal restraint by avoiding
rate of inflation has come down. However, it is still faced large budget deficits, in view of its large public debt.
with problems that the government must address. It has a Also, it should adopt supply-side policies to encourage
large current account deficit, and therefore relies heavily competition, including labour market reforms.
GDP, annual % increase Consumer prices, annual % increase
10 25
Turkey Turkey
8 20
6 15
4 10
2 OECD 5
OECD
0 0
2003 04 05 06 07 08 09 2003 04 05 06 07 08 09
Unemployment as % of labour force

Current account deficit as % of GDP 12
Turkey
0 10
2 8
4 6
6 OECD
4
8 2
2003 04 05 06 07 08 09
2003 04 05 06 07 08 09
Figure cs.1 Turkey
Source: Data from OECD.
* The OECD is the Organisation for Economic Co-operation and

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


(a) (i) Define the term budget deficit identified in (a) (i) Outline the meaning of public debt
bold in the text. [2 marks] identified in bold in the text. [2 marks]
(ii) Define the term consumer price index (ii) Outline the meaning of labour market
identified in bold in the text. [2 marks] reforms identified in bold in the text.
(b) Explain why Turkey’s large current account deficit [2 marks]
makes it dependent on financial capital inflows. (b) Using an AD-AS diagram, explain the likely
[4 marks] effects of supply-side policies on Turkey’s export
(c) Using an exchange rate diagram, analyse the likely competitiveness. [4 marks]
impact of Turkey’s relatively high rate of inflation (c) Using an exchange rate diagram, analyse the
on the value of the lira. [4 marks] impact of Turkey’s high interest rates on the value
(d) Using information in the text, the diagrams of the Turkish lira. [4 marks]
and your knowledge of economics, discuss the (d) (higher level) Using information in the text, the
likely effects of lira appreciation on the Turkish diagrams and your knowledge of economics, justify
economy. [8 marks] two policies you would recommend to the Turkish
government to reduce the current account deficit.
[8 marks]
(d) (core) Using information in the the text, the
diagrams and your knowledge of economics,
evaluate the OECD’s policy recommendation that
Turkey should pursue supply-side policies.
[8 marks]

Chapter 15 Economic integration and the terms of trade
Text/data 9
Asia free trade zone raises hopes and fears

1 At the stroke of midnight on the last day of 2009, China may be flooded by cheaper Chinese imports, resulting in
and ASEAN (a trading bloc of ten nations in southeast the closure of small domestic firms and higher structural
Asia*) launched the world’s largest free trade area (FTA) unemployment. Cambodian textile producers are fearful
in terms of population (1.9 billion people) and the third of the Chinese garment industry. Vietnamese consumer
largest in terms of combined GDPs. The FTA is known as goods production could also be damaged. In Indonesia,
CAFTA (China-ASEAN Free Trade Area). The agreement worries are focused on the textile and steel industries. On
will result in lower tariffs on 90% of traded goods. the other hand, it is also possible that Chinese farmers may
2 CAFTA is expected to lead to large increases in trade be affected by increased agricultural product imports from
between members. For ASEAN countries, increased Malaysia, Thailand and Vietnam.
access to the Chinese market of 1.3 billion people will Supporters of the FTA agree that while it is likely to bring 4
produce benefits including more opportunities to achieve about benefits, governments should pursue policies to
economies of scale, improved efficiency in production due ensure broad participation in the benefits of growth. The
to greater competition, lower prices and increased choices World Bank argues that the FTA is a gold mine for growth,
for consumers. Producers may benefit from greater choice but governments must make more investments in public
and access to cheaper inputs and materials from China, as goods and merit goods, and ensure that growth improves
well as increased exports. For example, Malaysia could standards of living for all citizens.
gain from increases in exports of palm oil, rubber and * The countries of ASEAN (Association of Southeast Asian Nations),
natural gas to China. China will benefit as manufacturers initially consisted of Brunei, Indonesia, Malaysia, Singapore, the
satisfy their growing demand for raw materials imports, Philippines, and Thailand, and were later joined by Cambodia, Laos,
while materials exporters similarly benefit from export Myanmar and Vietnam.
growth.
3 However, the FTA also carries dangers. Some poorer Source: ‘Asia free-trade zone raises hopes, and some fears about
ASEAN countries may not be ready to compete with China’ in The New York Times, 31 December 2009;‘ACFTA offers
more efficient and lower cost producers in China, and opportunities for Indonesia: WB’ in The Jakarta Post, 9 April 2010.
Question A.21 the view that ‘the FTA is a gold mine for growth’
(a) (i) Define the term trading bloc identified in (paragraph 4)? [8 marks]
Question A.22
(ii) Define the term structural unemployment
identified in bold in the text (paragraph 3). (a) (i) Define the term free trade area identified in
[2 marks] bold in the text (paragraph 1). [2 marks]
(b) Using a tariff diagram, explain why Cambodian (ii) Define the term merit good identified in bold
textile producers are fearful of the Chinese garment in the text (paragraph 4). [2 marks]
industry (paragraph 3). [4 marks] (b) Using a trade protection diagram of your choice,
(c) (higher level) Draw a diagram illustrating explain why formation of a free trade area increases
economies of scale and use it to explain how competition among producers in the trading bloc
countries forming a free trade area can gain from (paragraph 2). [4 marks]
economies of scale (paragraph 2). [4 marks] (c) Using a tariff or quota diagram, explain why the
(c) (core) Using a supply and demand diagram, FTA is likely to lead to lower prices for consumers
explain how ‘access to cheaper inputs and (paragraph 2). [4 marks]
materials from China’ will help producers’ export (d) Using information in the text and your knowledge
competitiveness (paragraph 2). [4 marks] of economics, discuss the view that the costs
(d) Using information in the text and your knowledge of CAFTA membership may be greater than the
of economics, to what extent would you support benefits for CAFTA’s poorer member countries.
[8 marks]

Text/data 10
Africa’s main trading bloc works on customs union

1 Leaders from Africa’s largest trading bloc, the Common in income levels, giving rise to concerns that some weaker
Market for Eastern and Southern Africa (COMESA*), economies could face deteriorating economic conditions
met to discuss steps toward greater economic integration due to increased competition, as well as due to loss of tariff
between its 19 member countries. The member countries revenues on which they are highly dependent.
of COMESA are home to 400 million people, representing (higher levela)The evidence suggests that while COMESA 6
half of Africa’s population, with a total GDP of over has given rise to some trade creation effects, it has not led
US$270 billion. to much trade diversion.
2 Founded in 1994, COMESA replaced a preferential trade There are hopes that monetary union will eventually 7
agreement that was in place since 1981. Though called include Africa’s other two major trading blocs, the East
a ‘common market’ from the outset, economic integration African Community (EAC**) and the Southern Africa
began through the gradual formation of a free trade area, Development Community (SADC***). As of 2008, there
established in 2000 when nine of the member-states has been agreement to harmonise trading arrangements
eliminated their tariffs on products originating within among the three blocs, with a view to creating a free trade
COMESA. COMESA plans to form a customs union in area that will include all the member states, with the goal
2012, and to complete monetary union by 2018. of eventually establishing a single customs union.
3 COMESA is actively working on issues of tariff alignment a
SL students can ignore this paragraph and answer the questions
among the member countries. As noted by its secretary-
below marked as ‘core’ based on the rest of the text.
general, ‘Member-states are obliged to act collectively as * COMESA includes Burundi, Comoros, the Democratic Republic of
any unilateral action by a member state would undermine Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar,
the very essence of the Customs Union.’ Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda,
4 COMESA is also working on improving transport and Zambia and Zimbabwe
communications infrastructure and administration in order ** EAC includes Burundi, Kenya, Rwanda, Tanzania, Uganda.
to facilitate the movement of goods, services and people *** SADC includes Angola, Botswana, Democratic Republic of
Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique,
between the member countries; creating a legal framework Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and
to encourage private sector growth; establishing a secure Zimbabwe.
investment environment; and harmonising macroeconomic
and monetary policies throughout the region.
5 The establishment of the customs union is expected to Source: COMESA website (http://about.comesa.int); ‘Historic first
EAC-SADC-COMESA Tripartite Summit’ in The African Executive, 5
boost regional trade and investment among participating November 2008; ‘Comesa all set to usher in new era’ in Mmegi, 25
countries and promote their economic growth. However, September 2009; J. W. Musila (2005) ‘The intensity of trade creation
several countries have not yet participated in the free and trade diversion in COMESA, ECCAS and ECOWAS: a compara-
trade area. There are broad differences among countries tive analysis’ in Journal of African Economies, Vol. 14(1).
Question A.23 (c) (core) Distinguish between a customs union and a

(a) (i) Define the term economic integration common market. [4 marks]
identified in bold in the text (paragraph 1). (d) Using information in the text and your knowledge
[2 marks] of economics, evaluate the desirability of monetary
(ii) Define the term GDP identified in bold in the union for COMESA members. [8 marks]
text (paragraph 1). [2 marks]
(b) Using an AD-AS diagram, explain how loss of Question A.24
revenues from tariffs may have serious negative
(a) (i) Define the term preferential trade
effects on some COMESA economies (paragraph 5)
agreement identified in bold in the text
. [4 marks]
(c) (higher level) Using the concept of trade creation,
(ii) Define the term economic growth identified
explain how increased trade links between the
in bold in the text (paragraph 5). [2 marks]
member countries of COMESA could benefit their
economies (paragraph 6). [4 marks]

(b) Comment on the point that COMESA was called a (c) (core) Distinguish between a free trade area and a
‘common market’ before it became a free trade area customs union. [4 marks]
(paragraph 2). [4 marks] (d) Using information in the text and your knowledge
(c) (higher level) Explain the importance of the of economics, compare and contrast different types
statement that COMESA ‘has not led to much trade of trading blocs. [8 marks]
diversion’ for COMESA members (paragraph 6).
[4 marks]

Text/data 11
Mexico’s membership in NAFTA

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

(a) (i) Define the term deflationary gap identified (a) (i) Define the term consumer confidence
in bold in the text (paragraph 3). [2 marks] identified in bold in the text (paragraph 1).
(ii) Define the term industrial policy identified [2 marks]
in bold in the text (paragraph 4). [2 marks] (ii) Define the term transfer payments
(b) Explain how a fall in Mexico’s exports affects its identified in bold in the text (paragraph 2).
balance of payments, and through what account. [2 marks]
[4 marks] (b) Using an AD-AS diagram, explain how an
(c) Using an AD-AS diagram, explain the impact on economic downturn in the United States can cause
Mexico’s deflationary gap of an increase in US a recession in Mexico (paragraph 4). [4 marks]
tourism in Mexico due to a lower value of the peso (c) Using an exchange rate diagram, explain how a
(paragraph 7). [4 marks] drop in worker remittances has affected the value
(d) Using information in the text and your knowledge of the peso (paragraph 5). [4 marks]
of economics, discuss the role of Mexico’s (d) Using information in the text and your knowledge
membership in NAFTA on Mexico’s export of economics, discuss the possible consequences
performance and economy. [8 marks] on the Mexican economy of a collapsing peso

Text/data 12
Non-oil commodity prices in developing countries

Higher level
1 Developing countries specialising in the export of non- countries is very low, resulting in low responsiveness of
oil primary commodities tend to experience long-term supply of agricultural products to increases in demand,
deteriorating terms of trade (extract 1) and short-term thus increasing price volatility.
fluctuating terms of trade (extract 2). Growing use of food grains for ethanol production. It is 7
estimated that 20–30% of the increase in commodity prices
Extract 1 Deteriorating terms of trade in the commodity boom was due to increasing demand for
ethanol, a biofuel made of grains (corn and wheat) as well
2 Empirical evidence shows that many developing countries as other agricultural products.
that specialise in the production and export of non-oil During 2009, following the commodity price declines, 8
commodities have been experiencing a deterioration in the value of non-oil exports of least developed countries
their terms of trade over many decades. This suggests that dropped by nearly 9%. At the same time, export volumes
countries should make efforts to diversify their production increased by nearly 6%, suggesting large drops in export
and exports to avoid further deterioration. prices. During 2009, the terms of trade of less developed
countries declined against their major partners by 16–
Extract 2 Commodity prices: ‘boom and bust’ 36%, relative to 2006. ‘Overall, the findings support the
observation that the post-crisis context for LDCs is one in
3 Commodity prices reached a 30-year peak in the middle which they are ‘exporting “more for less”.’
of 2008. With the beginning of the global financial crisis The World Trade Organization predicts that export 9
in late 2008, prices dropped significantly. By the second levels will continue to increase. However, ‘such an
half of 2009, prices had increased again, though they were accomplishment is of limited value if those export earnings
much below their peaks of 2008. ‘These dramatic price only buy a smaller quantity of imports.’
swings represented the latest ‘boom and bust’ cycle in According to UNCTAD*, ‘The recent commodities boom 10
commodity markets.’ They also represent major short-term has demonstrated that rather than being an opportunity, the
fluctuations in the terms of trade of commodity-exporting commodities boom has become the greatest obstacle to
countries. Important factors leading to the rapid price achieving [development goals] …’
increases until mid-2008 were:
4 Supply shocks, including crop failures in Australia and * United Nations Conference on Trade and Development, a United
Nations agency specialising in trade and development issues.
lower agricultural outputs in Europe.
5 Speculation. Speculators buy commodities on the
expectation that prices will rise, so they can sell later at Source (extract 1): Adapted from José Antonio Ocampo and María
a profit. Speculators’ buying actions work to increase Angela Parra, ‘The commodity terms of trade and their strategic
commodity prices; later their selling actions work to reduce importance for development’ in International Trade, 3 March 2004.
Source: (extract 2): UNCTAD, ‘Report of the Multi-year Expert
them. Excessive speculation greatly increased commodity
Meeting on Commodities and Development on its second session’,
price volatility. Geneva, 24–25 March 2010; International Trade Centre, ‘LDCs Terms
6 Lack of investments in agriculture over the previous two of Trade During Crisis and Recovery’, ITC Trade Map Factsheet #3, 1
decades. Investment in the agricultural sector of developing June 2010.
Question A.27 (higher level) supply (such as crop failures in Australia or lower
(a) (i) Define the term investment identified in bold agricultural outputs in Europe; paragraph 4)
in the text (paragraph 6). [2 marks] can contribute to short-term fluctuations in the
(ii) Outline the meaning of primary terms of trade of a country exporting agricultural
commodities identified in bold in the text commodities. [4 marks]
(paragraph 1). [2 marks] (d) Using information in the text and your knowledge
(b) Explain the meaning of deteriorating terms of of economics, evaluate the view that countries that
trade (paragraph 2). [4 marks] have a comparative advantage in the production of
(c) Using the concept of price elasticity of demand, agricultural commodities should specialise in the
draw a diagram to explain why changes in production and export of these.b [8 marks]

deterioration in a country’s terms of trade on

Question A.28 (higher level) its current account, using the concepts of price
(a) (i) Outline one objective of the World Trade elasticity of demand for exports and imports.
Organization (paragraph 9). [2 marks] [8 marks]
(ii) Define the term demand identified in bold in
the text (paragraph 6). [2 marks]
Question A.30 (higher level)
(b) Using the concept of price elasticity of supply,
(a) (i) State the equation for calculating the terms of
draw a diagram to explain how changes in demand
trade. [2 marks]
(such as growing use of food grains for ethanol
production contribute; paragraph 7) can contribute (ii) Define the term supply identified in bold in
to short-term fluctuations in the terms of trade of the text (paragraph 6). [2 marks]
a country exporting agricultural commodities. (b) According to paragraph 7 growing use of food
[4 marks] grains (for use in ethanol production) contributed
(c) Distinguish between a deterioration and an to the rapid increase in agricultural commodity
improvement in the terms of trade. [4 marks] prices, suggesting that exporters of these
commodities experienced an improvement in their
terms of trade. Using a diagram, show the likely
of economics, to what extent do you agree
impact of the terms of trade improvement on the
with the statement by UNCTAD that the recent
current accounts of commodity exporters.
commodity boom was more of an obstacle than
[4 marks]
an opportunity for developing countries to pursue
development goals (paragraph 10)?b [8 marks] (c) According to paragraph 4 supply shocks,
including crop failures in Australia and lower
agricultural outputs in Europe, also contributed
Question A.29 (higher level) to the rapid increases in agricultural commodity
(a) (i) Outline one reason why the terms of trade may prices, suggesting a terms of trade improvement
change over the short term. [2 marks] of the exporters of these commodities. Using a
diagram, show the likely impact of the terms of
(ii) Outline one reason why the terms of trade may
trade improvement on the current accounts of
change over the long term. [2 marks]
commodity exporters.
(b) Using the concept of income elasticity of demand, [4 marks]
explain why many developing countries experience
(d) Using information in the text and your
deteriorating terms of trade over the long term
knowledge of economics, discuss the significance
of deteriorating terms of trade for developing
(c) Explain how long-term changes in the terms of countries.b [8 marks]
trade can result in a redistribution of income
b
among trading partners. [4 marks] You should respond to these questions again after you have studied
Chapter 17.
of economics, examine the likely effects of a

Paper 2 section B: Economic development
Chapter 16 Understanding economic development
Text/data 13
Comparing and contrasting economic and development

indicators
Use the data in the table below to answer the question that follows.
(1) (2) (3) (4) (5) (6)

GDP per GNI per GDP per GNI per HDI rank Human
capita (US$) capita (US$) capita (US$ capita (US$ (2010) development
(2007) (2007) PPP) (2007) PPP) (2007) index (2010)
UK 45 901 43 970 35 130 36 050 26 0.849
Japan 34 264 37 770 33 632 34 700 11 0.844
Brazil 7 185 6 100 9 567 9 600 73 0.699
Georgia 2 318 2 090 4 662 4 730 74 0.698
Source: World Bank, World Development Indicators; United Nations Development Programme, Human Development Reports.
Question B.1 (c) Considering the figures in columns 2 and 4,

(a) Comparing columns 1 and 2 in the table, outline explain why the difference between the highest-
one factor that could be responsible for: income and the lowest-income countries is smaller
(i) lower GNI per capita than GDP per capita in column 4 than in column 2. [4 marks]
figures for the UK, Brazil and Georgia. (d) Using information in the table and your
[2 marks] knowledge of economics, evaluate the use of
(ii) higher GNI per capita than GDP per capita GDP per capita and GNI per capita as the basis for
for Japan. [2 marks] measuring economic development, and as the
(b) Comparing columns 1 and 3 (or columns 2 and 4 basis for making comparisons of standards of living
for GNI), explain why GDP per capita in US$ PPP is across countries. [8 marks]
lower than GDP per capita in US$ for the UK and
Japan, and higher for Brazil and Georgia.
[4 marks]

Chapter 16 Understanding economic development

Chapter 17 Topics in economic development
Text/data 14
Economic growth and development in Sri Lanka

1 In spite of nearly 30 years of civil war (which ended in The deputy finance minister of Sri Lanka notes that the 4
2009), Sri Lanka has been remarkably successful in its government wants to ensure more equitable growth to help
human development. According to the UNDP country poor people improve their standards of living, especially in
director, Sri Lanka has been able to achieve high human rural areas. Much of the country’s economy and growth are
development levels due to steady investments made in concentrated in the western province where Colombo (the
education and health over two decades. capital) is located.
2 Yet the last two decades have also seen growing income Micro-credit is one area being examined to deal with 5
inequalities, and disparities in income distribution are regional disparities. According to the deputy finance
high. The UNDP country director notes that there is room minister, the development of lagging, underdeveloped
for improvement in this area. Speaking for Asia as a whole, areas and markets requires financial institutions in rural
the Asian Development Bank has noted that there is a need areas, particularly to help the poorest of the poor. One
to limit ‘the very real danger that concentrations of income million Sri Lankan workers live abroad, and are known
and wealth pose for social cohesion and growth-promoting for their hard work and enterprise. When they return home
policies and institutions’. ‘they are mentally ready. They need capital – they are a
3 According to the World Bank, Sri Lanka must make large reservoir of people who are already pre-disposed to
efforts to reduce regional disparities in living standards, efficient rural activity. So we must now find structures and
health and education across provinces. In spite of the policies that can generate growth through these people.’
impressive achievements in health and education, The following table shows the HDI rank, human development 6
there remain gaps in geographical regions and among index and several other indicators for Sri Lanka and other
vulnerable groups. countries, in order of increasing HDI rank.
HDI rank Human GNI per Life Mean years Expected % of population Gini
(2010) development capita expectancy of schooling years of living below PPP coefficient
index (2010) (PPP $) at birth (2010) (2010) schooling $1.25 a day (2000- (2000-10)
(2009*) (2010) 08)
China 89 0.663 6890 73.5 7.5 11.4 15.9 41.5
El Salvador 90 0.659 6420 72.0 7.7 12.1 6.4 46.9
Sri Lanka 91 0.658 4720 74.4 8.2 12.0 14 41.1
Thailand 92 0.654 7640 69.3 6.6 13.5 <2 42.5
Gabon 93 0.648 12 450 61.3 7.5 12.7 4.8 41.5
Source: United Nations Development Programme, Human Development Report 2010.

* The World Bank, World Development Indicators (http://data.worldbank.org/data-catalog/world-development-indicators).
Source (extract): ‘Lanka has made rapid progress despite conflict: UNDP’ in the Daily Mirror (Colombo), 8 November 2010; The World Bank,
‘Connecting people to prosperity and improving basic services are key to Sri Lanka’s economic prosperity, says World Bank’ press release,
9 August 2010; ‘Inequality a danger for Asia: ADB’ in Business Daily Update, 10 August 2007.
Question B.2
(ii) Outline why economic development is a multi-
(a) (i) Outline how we can tell which country of dimensional process. [2 marks]
those appearing in the table is most advanced
(b) Explain which indicators account for Sri Lanka’s
with respect to achieving human development
HDI rank in relation to its relatively low GNI
objectives. [2 marks]
per capita. [4 marks]

(c) Referring to the difference between GNI measured

Question B.3
in $ PPP and GNI converted into $ by use of (a) (i) Using examples, identify one advantage of
market exchange rates, explain why it is useful to composite indicators over single indicators.
use GNI per capita measured in PPP $ in the table [2 marks]
above. [4 marks] (ii) Outline one Millennium Development Goal.
(d) Using information in the text and table, and your [2 marks]
knowledge of economics, examine how a more (b) Explain what measures are used to construct the
equal distribution of income can make a positive human development index. [4 marks]
impact on Sri Lanka’s economic growth and (c) Explain what accounts for Sri Lanka’s achievement
development process. [8 marks] of an HDI rank comparable to the ranks of the
other countries in the table, even though it has a
much lower GNI per capita. [4 marks]
of economics, evaluate the potential contributions
of micro-credit to Sri Lanka’s economic growth and
development. [8 marks]

Text/data 15
Women in Cambodia
1 The United Nations Development Programme (UNDP) is sector, in spite of lower wages, risk of sexual exploitation
expressing fears that severe recession in Cambodia will and poorer conditions.
have serious negative effects on women, who make up the The UN fears that many families will resort to fewer, 5
bulk of the labour force. According to the UN resident co- smaller and less nutritious meals, to cutting back on health
ordinator, ‘We know that when women’s incomes are lost, care, much of which is paid for privately, to removing
the whole family suffers, especially the children.’ children from school in order to send them out to work,
2 Falling demand from United States and European Union and to selling their property such as land.
markets led to major job losses in the clothing sector. Acute malnutrition is on the rise, and infant and maternal 6
Further job losses are expected due to reduced foreign mortality are unacceptably high; five women per day die in
direct investment and declines in the tourism industry. childbirth. Poorer nutrition and lower access to health care
Migrant workers in neighbouring Korea, Malaysia and due to lower incomes will increase these mortality rates
Thailand are expected to return back home to Cambodia further.
due to rising unemployment in these counties as well, The government of Cambodia and the United Nations in 7
which could work to lower GNI per capita. Cambodia are designing a system of social protection that
3 About one third of Cambodia’s population live in absolute will protect Cambodia’s most vulnerable groups. A UN
poverty, and the absence of a social protection system spokesperson says ‘Investment in women and children
(including unemployment insurance, pensions, free health is the best way to ensure long-term prosperity.’ Public
care and education, etc.) means that the economic crisis provision of health care services, education, food and work
will push many more women and children into extreme ‘can help break the poverty cycle and we must not lose
poverty and hunger. sight of this focus.’
4 A large part of the rural population depends for their
income on money sent to them by urban workers (mostly
women). Yet many urban unemployed are returning to Source: Adapted from ‘In Cambodia, women and children hit hard-
their villages where possibilities for work are very limited. est by economic crisis’, United Nations Development Programme
Others are turning increasingly to the urban informal Newsroom, 8 April 2009.
Question B.4 Question B.5

(a) (i) State two consequences of poverty. [2 marks] (a) (i) Define the term urban informal sector
(ii) Define the term poverty cycle identified in identified in bold in the text (paragraph 4).
(b) Using a diagram, explain some positive (ii) Define the term absolute poverty identified
consumption externalities that arise from the in bold in the text (paragraph 3). [2 marks]
education of women. [4 marks] (b) Explain how public provision of health care
(c) Explain the difference between GNI per capita and services and education might help Cambodia break
GDP per capita. [4 marks] out of the poverty cycle. [4 marks]
(d) Using information in the text and your (c) Explain why the return of migrant workers to
knowledge of economics, examine the potential Cambodia from neighbouring countries could
contributions of education and health to economic work to reduce GNI per capita. [4 marks]
development. [8 marks] (d) Using information in the text and your knowledge
of economics, evaluate the United Nation’s
argument that ‘Investment in women and children
is the best way to ensure long-term prosperity.’
[8 marks]

Text/data 16
Two views on trade liberalisation

Two very well-known US economists write about trade are designed to make it more difficult for developing
liberalisation and economic growth. countries to move up the value-added chain. The prevailing
mantra is ‘trade liberalisation leads to economic growth’.
Part 1 Anne O. Krueger, ‘Trade, jobs and The fact that so many have been hurt by trade liberalisation
growth: why you can’t have one without contradicts this claim.
the other’ Mexico’s very poor performance under the free trade area 5
NAFTA* does not help the case for trade liberalisation.
1 History shows that free trade is an engine for growth.
While NAFTA opened up for Mexico the largest market in
The General Agreement on Tariffs and Trade (GATT)
the world (the United States), growth in Mexico has been
that preceded the WTO was based on the principle of
slower than before, while the poorest in the country, the corn
gradual liberalisation of trade. The results of the new trade
farmers, have been especially hurt by US-subsidised corn.
framework exceeded expectations of economic prosperity,
There are some circumstances when trade liberalisation 6
as the postwar period was a golden age for much of the world
brings enormous benefits – when there is full employment
economy. While several factors played a role in accelerating
and when an economy is mature. Full employment means that
economic growth, increased trade due to trade liberalisation
a worker who becomes unemployed can easily find another
was one of the most important. Most of the Asian economies
job; otherwise, s/he remains unemployed. Developing
grew at annual rates of more than 7% since the 1970s, while
countries cannot compete in modern, industrial sectors
China has been growing at more than 10% a year. In growth
without protection; therefore, when they liberalise they cannot
terms, South Korea achieved in a decade what Britain had
industrialise and they are condemned to remain in low value-
done in the whole of the 19th century.
added, low-growth production. Thirty-five years ago, South
2 One of the key benefits of free trade is that it leads to job
Korea was told to stick with rice farming. But South Korea
gains, especially in export industries as these expand.
knew that even if it improved productivity in rice farming, it
However, it will result in some job losses, as some firms
would remain a poor country. It had to industrialise.
lose out from the greater competition. This is why social
We know which countries have grown the fastest. They 7
safety nets are important, to help the unemployed get
were the countries of East Asia (including South Korea),
financial assistance and job training.
which actively pursued industrial policies and strongly
3 In low-income countries, economic growth has a direct –
intervened in markets, and whose growth was based on
and beneficial – impact on people’s daily lives. We can see
export promotion, not liberalised trade and free markets.
improvements in the quality of life around the world. Infant
Trade liberalisation has brought enormous benefits to 8
mortality rates have declined sharply; literacy rates have
some countries, but not to all. Some have even been made
risen worldwide; and there has been a major increase in
worse off, because of an unfair global trade regime. The
life expectancy. Poverty reduction can only be achieved and
World Trade Organization (WTO) must be reformed to
sustained over a long period by growth, and to maximise
make trade fair.
growth opportunities, trade liberalisation is vital.
* North American Free Trade Agreement.
Part 2 Joseph Stiglitz, ‘Social justice
and global trade’ Source: Adapted from Address by Anne O. Krueger, ‘Trade, jobs and
growth: why you can’t have one without the other’, International
4 The history of recent trade meetings shows that something Monetary Fund, 15 June 2004; Joseph Stiglitz, ‘Social justice and
is wrong with the global trading system. Tariff structures global trade’ in Economist’s View, 19 March 2006.
Question B.6
(b) Explain the difference between export promotion
(a) (i) Define the term free trade area identified in and import substitution as two different strategies
bold in the text (paragraph 5). [2 marks] for growth and development. [4 marks]
(ii) Define the term industrial policies (c) Using a diagram of your choice, explain why trade
identified in bold in the text (paragraph 7). liberalisation leads to job losses. [4 marks]
[2 marks]
of economics, discuss trade liberalisation as a
strategy for growth and development. [8 marks]

Text/data 17
Coffee, trade and development

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

Question B.7
the price of coffee has fallen over the longer term,
(a) (i) Define the term volatile (prices) identified in even though the demand for coffee has been
bold in the text (paragraph 4). [2 marks] increasing (paragraphs 3 and 5). [4 marks]
(ii) Define the term diversification identified in (d) Using information in the text and your knowledge
bold in the text (paragraph 6). [2 marks] of economics, evaluate UNCTAD’s and the ICO’s
(b) Explain whether coffee production is likely to use statement that promotion of a sustainable coffee
technologies that are appropriate to the factor economy is the most urgent issue facing coffee-
market conditions of low-income developing producing countries (paragraph 7). [8 marks]
countries (paragraph 2). [4 marks]
(c) (higher level) Explain why deteriorating terms Question B.8
of trade over the long term can be a barrier to (a) (i) Define the term productivity identified in
economic growth and development (paragraph 5). bold in the text (paragraph 5). [2 marks]
[4 marks]
(ii) Define the term sustainability identified in

(b) Using an AD-AS diagram, explain why limited (c) (core) Using the concept of price elasticity of
access to international markets, caused by tariff demand (PED) or price elasticity of supply (PES),
escalation, works to reduce economic growth in draw a diagram and use it to explain why coffee
coffee-exporting countries (paragraph 6). prices are highly volatile (paragraph 4).
[4 marks] [4 marks]
(c) (higher level) Assuming a perfectly competitive (d) Using information in the text and your knowledge
market for coffee, draw a diagram and use it to of economics, evaluate the desirability of
explain why decreases in coffee prices lead to losses diversification of production and exports of
for coffee producers (paragraph 4). [4 marks] countries that specialise in coffee production.
[8 marks]

Text/data 18
European Union bilateral trade agreements with

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

Question B.9 of increased exports to the EU on Peru’s and
(a) (i) Define the term trade liberalisation Colombia’s economic growth. [4 marks]
identified in bold in the text (paragraph 2). (d) Using information in the text and your knowledge
[2 marks] of economics, evaluate Colombia’s and Peru’s
(ii) Define the term multilateral trade bilateral trade agreements with the EU as an
identified in bold in the text (paragraph 5). alternative to WTO trade liberalisation agreements.
[2 marks] [8 marks]
(b) Using a diagram, explain why ‘producers in Peru
and Colombia may be unable to compete with EU
products following trade liberalisation’


Chapter 18 Foreign sources of finance and foreign debt
Text/data 19
Banana trade wars

1 In a settlement overseen by the World Trade Organization preferential treatment had allowed relatively inefficient
(WTO), the European Union (EU) agreed to reduce tariffs producers to compete with huge MNCs in Latin America.
on bananas from €176 per tonne to €114 over a seven-year Some ACP countries are so dependent on bananas for trade
period, ending a 17-year-long trade dispute between the that a sudden decline in exports would cause a huge shock
EU, and the United States and Latin America. to their economy. The ACP countries are among the poorest
2 Since 1993, according to a preferential trade agreement in the world, many with high levels of unemployment and
called the Lomé Convention, the EU granted preferential underemployment, extreme poverty and high levels of
access to the banana exports of its former colonies in indebtedness. There are fears that increased competition
Africa, the Caribbean and Pacific region (ACP) through with the US multinationals may endanger their growth
tariff-free entry of bananas and banana import quotas for and development objectives. To compensate them for the
ACP bananas, while imposing tariffs on non-ACP banana reduction of their preferential access to EU markets, the
imports. Latin-American countries complained on the EU promised an additional 190 million of development
grounds that they produce bananas at a far lower cost than assistance to help them restructure their economies.
ACP countries, and that the EU was unfairly discriminating Banana production methods followed by most MNCs are 6
against them. not consistent with environmental sustainability. Although
3 In its final ruling on the case, the WTO declared that the there are international environmental standards, many
tariff-free entry of ACP bananas into the EU was violating banana-producing MNCs do not follow them. Workers on
WTO rules. banana plantations are often forced to work 10–12-hour
4 The United States is not a major banana exporter. However, days, though they are paid for eight, doing very heavy and
it sided with Latin-American countries because several US sometimes dangerous work due to exposure to chemicals.
multinational corporations (MNCs), including Chiquita, WTO rules do not permit importing countries to refuse 7
Dole and Del Monte, dominate banana plantations in imports based on producer violations of environmental
countries like Colombia, Costa Rica and Panama. The standards or due to poor treatment of workers.
United States therefore wanted to protect the global market
share of US MNC subsidiaries. Source: ‘Banana politics’ in the Financial Express (India),
5 Caribbean bananas are grown on small family farms, 25 December 2009; Rebecca Cohen, ‘Global issues for breakfast:
averaging about one hectare in size, with the result that the banana industry and its problems’ in The Science Creative
they cannot be produced cheaply in large quantities. The Quarterly, 2011.
Question B.10 (c) (higher level) Using a diagram, explain why larger
(a) (i) Define the term multinational corporation plantations can achieve lower average costs of
identified in bold in the text (paragraph 4). production than smaller ones (paragraph 5).
[2 marks] [4 marks]
(ii) Define the term development assistance (c) (core) Explain how overspecialisation in bananas
identified in bold in the text (paragraph 5). may be a barrier to economic growth and
[2 marks] development in ACP countries. [4 marks]
(b) Using a diagram, explain the effects on Latin- (d) Evaluate the roles of the WTO and the EU–ACP
American banana producers that result from the regional preferential trade agreement as strategies
EU’s lower tariffs on banana imports (paragraph 1). for economic growth and development.
[4 marks] [8 marks]

(c) (higher level) Explain why the EU’s imposition of

Question B.11 tariffs on banana imports from non-ACP countries
(a) (i) Define the term quota identified in bold in may be a case of trade diversion. [4 marks]
the text (paragraph 2). [2 marks] (c) (core) Using a diagram, explain the effects on EU
(ii) Define the term underemployment consumers arising from the reduction of tariffs on
identified in bold in the text (paragraph 5). bananas. [4 marks]
[2 marks] (d) Discuss the possible effects of the EU’s reduction of
(b) Explain why the tariff-free entry of ACP bananas tariffs on banana imports from non-ACP countries
into the EU was considered to be a violation of on the economies of ACP countries. [8 marks]
WTO rules. [4 marks]

Text/data 20
Appropriate technology in rural Africa

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

(a) (i) Define the term entrepreneurship identified (a) (i) Describe the meaning of project aid
in bold in the text (paragraph 2). [2 marks] identified in bold in the text (paragraph 2).
(ii) Define the term dual economy identified in [2 marks]
bold in the text (paragraph 5). [2 marks] (ii) Define the term economic development
(b) Explain two common characteristics that are often identified in bold in the text (paragraph 3).
shared by economically less developed countries, [2 marks]
and two factors that create diversity between (b) Using a diagram, explain how improved access to
them. [4 marks] appropriate technologies by poor people can lead
(c) Explain which are the most important sources of to economic growth. [4 marks]
economic growth in economically less developed (c) Using a diagram, explain the positive production
countries. [4 marks] externalities that may arise from the use of
(d) Using information in the text and your knowledge appropriate technologies. [4 marks]
of economics, examine the potential contribution (d) Using information in the text and your knowledge
of use of appropriate technology by poor of economics, evaluate the effectiveness of foreign
rural people in Africa’s economic growth and aid extended by non-governmental organisations
development. [8 marks] (NGOs). [8 marks]

Text/data 21
Chinese direct investment in Zambia

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

(a) (i) Define the term infrastructure identified in (a) (i) Describe the nature of foreign direct
bold in the text (paragraph 2). [2 marks] investment (paragraph 1). [2 marks]
(ii) Define the term human capital identified in (ii) State two characteristics of economically less
bold in the text (paragraph 2). [2 marks] developed countries that attract foreign direct
(b) Distinguish between economic growth and investment. [2 marks]
economic development. [4 marks] (b) Explain the reasons why multinational corporations
(c) ‘Economic development cannot occur in the (MNCs) are interested in directly investing in
absence of economic growth.’ Comment on this economically less developed countries. [4 marks]
statement. [4 marks] (c) Using a diagram, explain how rapid economic
(d) Using information in the text and your knowledge growth in China has led to increases in
of economics, discuss the possible effects of foreign commodity prices. [4 marks]
direct investment in copper mining on Zambia’s (d) ‘Economic development is the natural outcome of
growth and development process. [8 marks] economic growth.’ Using information in the text
and your knowledge of economics, evaluate this
statement. [8 marks]

Text/data 22
Foreign aid
1 In 2002, rich donor countries promised to make address to the US Congress, Shah noted that USAID is
contributions of at least 0.7% of GDP to development re-evaluating how it distributes aid with a view to becoming
assistance in order to help meet the MDGs (Millennium more effective.
Development Goals). The only countries that have met this One factor that seriously limits aid effectiveness is the 4
goal are Denmark, Luxembourg, the Netherlands, Norway practice of tied aid. Relief organisations estimate that as
and Sweden. Some of the richest countries in the world, much as 75% of foreign aid by rich countries is tied, and
including Germany, Japan and the United States, have is intended to promote rich-country exports of goods and
fallen far short of that. On average, development assistance services. In the United States, for example, due to pressures
averages 0.31% of GDP of developed countries. on the government by farmer interest groups, most of food
2 In the United States, there is pressure by a group of aid (a type of development aid) requires recipients of aid
members of the House of Representatives (a part of the US to buy food from US agribusiness firms. This practice does
government) to reduce funding for USAID*, which delivers not encourage poor farmers to become self-reliant food
US bilateral official development assistance (ODA). growers.
They argue that the United States spends large amounts At a recent UN meeting, President Obama announced 5
on foreign aid, which is fiscally irresponsible in view of reform of US foreign aid programmes. Using food aid
the large US budget deficit. However, public opinion polls as an example of change, he said that the new approach
show that the US public believes that an amount that would would seek to empower communities to meet their own
be fiscally responsible for the US to spend on aid is 21 times food needs, rather than continuing with old models that
greater than the amount actually spent. Private donations just provided food for decades. That’s not development,’
by Americans to non-governmental organisations (NGOs) he said, ‘that’s dependence.’
abroad are three times as large as ODA, and it is very likely * United States Agency for International Development.
that this trend will continue.
3 Rajiv Shah, head of USAID, argues that cuts in funding
would have negative consequences for US national Source: ‘Cutting USAID’s budget threatens national security’ in
security. Projects in several countries focus on economic Grand Rapids Examiner (MI), 26 January, 2011; ‘Obama at UN summit:
foreign aid is “core pillar” of American power’ in Christian Science
development as a means to prevent extremist activities. Monitor, 22 September 2010; ‘Missed goals’ in The New York Times,
Lack of opportunities for employment and education, and 23 September 2010; ‘Aid versus trade’ in South Asia Investor Review,
lack of food security lead to resentful populations. In an 23 May 2009.
Question B.16 (b) Explain the role of NGOs as aid organisations in

(a) (i) Define the term official development the process of economic development. [4 marks]
assistance identified in bold in the text (c) Explain the motivations of countries that extend
(paragraph 2). [2 marks] aid. [4 marks]
(ii) Describe the meaning of tied aid identified in (d) Using information in the text and your knowledge
bold in the text (paragraph 4). [2 marks] of economics, examine the effectiveness of foreign
aid in promoting economic development.
[8 marks]

Text/data 23
Aid for Indonesia and South Africa

Use the information in the tables below to answer the questions that follow.
Table 1: Statistics for Indonesia and South Africa, 2010 (unless otherwise noted)
HDI rank Human GNI per Life Mean Expected ODA Net ODA Population
development capita expectancy years of years of received receipts (million)
index ($ PPP) at birth schooling schooling per capita (US$ (2009)
(years) (US$) million)
(2009) (2009)
Indonesia 108 0.600 3957 71.5 5.7 12.7 4.6 1050 230.0
South Africa 110 0.597 9812 52.0 8.2 13.4 21.9 1078 49.3
Table 2: Percentage of bilateral ODA by sector (2008–9)*
Education Health Other Economic Production Multi- Humanitarian Other

social infrastructure sector aid
sectors and services
Indonesia 13 7 17 23 7 23 2 8
South Africa 5 55 18 14 2 4 0.5 1.5

* Percentages are approximate.
Table 3: Top ten donors of ODA to Indonesia and South Africa, US$ million (2008–9 average)
To Indonesia To South Africa

Japan 1370 United States 451
IDA* 369 EU 159
Australia 334 Germany 130
France 263 United Kingdom 93
United States 256 Netherlands 43
Germany 198 Global Fund 42
Netherlands 165 France 35
AsDF** 120 Norway 27
United Kingdom 88 Denmark 24
EU 84 Ireland 22
* International Development Association, a branch of the World Bank that offers concessional loans to very low-income countries.
** Asian Development Fund, an international development organisation whose objective is to reduce poverty and improve standards of living in
its member countries.
Source (Table 1): United Nations Development Programme, Human Development Report 2010; The World Bank, Development Co-operation
Directorate (DCD-DAC).
Source (Tables 2 and 3): Development Cooperation Directorate (DCD-DAC).

Question B.17 (c) Explain what accounts for the very similar
(a) (i) Define the term humanitarian aid identified HDI ranks and human development indices of
in bold in Table 2. [2 marks] Indonesia and South Africa. [4 marks]
(ii) Define the term concessional loan identified (d) Using information in the tables and your
in bold in the footnote below Table 3. knowledge of economics, compare and contrast
[2 marks] the extent, nature and sources of ODA to Indonesia
(b) Explain whether GNI per capita is a reliable and South Africa in relation to their level of
indicator for separating countries into human development. [8 marks]
‘economically less developed’ and ‘economically
more developed’. [4 marks]

Text/data 24
Aid versus trade

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

November 2009; ‘What will it take to achieve the Millennium
4 Paul Kagame, president of Rwanda, writes the following. Development Goals? An International Assessment’, United Nations
‘Development aid … has long been a key source of income Development Programme Newsroom, 17 June 2010; ‘Missed goals’ in
for the continent. While helpful, aid has not delivered The New York Times, 23 September 2010.
(c) Explain the meaning of the statement that Africa

Question B.18 has ‘not been able to trade fairly with Europe and
(a) (i) Define the term foreign aid identified in bold the US’ (paragraph 6). [4 marks]
in the text (paragraph 1). [2 marks] (d) Using information in the text and your knowledge
(ii) Identify two groups of donors of aid (sources of of economics, compare and contrast the roles of
aid) to economically less developed countries. aid and trade in economic development.
[2 marks] [8 marks]
(b) Using examples, distinguish between development
aid and humanitarian aid. [4 marks]

Chapter 19 Consequences of economic growth and the balance between markets
and intervention
Text/data 25
Malawi’s foreign debt and human development

1 Malawi, one of the poorest countries in the world, net exporter of maize to other countries. The World Bank
has benefited enormously from debt relief, though its criticised this policy as being ‘better for food security but
experience shows that the Heavily Indebted Poor Countries worse for market development’.
(HIPC) Initiative of the World Bank and International In 2006, $2.3 billion of Malawi’s debt was cancelled. Its 7
Monetary Fund (IMF) is not without flaws. remaining debt is 25% of national income, and its debt
2 Malawi accumulated much of its debt during the 1970s repayments have fallen to about $30 million a year. This
and 1980s when rich-country commercial banks and has allowed Malawi to greatly increase social spending. It
governments lent large sums to developing countries as has abolished primary school fees, helping more than one
the price of oil increased and the value of their exports million children go to school. In spite of its low income
fell. During the 1980s and 1990s, though Malawi spent levels, Malawi is making good progress with respect to
an average of $100 million per year on debt repayment, human development. Also, debt cancellation has helped
its foreign debt as a share of national income rose from the economy grow. Economic growth was 8.5% per year
70% in 1980 to 150% in 2000. The economy stagnated, in 2006–9, compared to 2.5% in 2002–5.
and GNI per capita fell.
3 Malawi entered the HIPC programme in 2000 but did not GNI per capita
receive cancellation of some of its debts until 2006. During (US $ ppp)
this period, debt repayments amounted to $440 million,
involving a huge opportunity cost. By 2005, Malawi
was spending 9.6% of national income on foreign debt Adult access to
servicing and only 4.6% on public provision of health care, literacy rate improved
while 74% of the population lived on less than $1 a day. (% ages sanitation
4 One reason for the delay in debt cancellation was that 16 and older) facilities
Malawi had to fulfill several requirements imposed by the (% of population)
World Bank and IMF in order to qualify for debt relief.
This included privatisation of state-owned enterprises, Maternal
elimination of agricultural subsidies and cuts in public mortality rate
spending. (per 100,000 live births)
5 In 2001–2 and again in 2004–5, the removal of support for Malawi
farmers together with drought resulted in a serious food Average for countries in same income group
crisis in which thousands of people died of hunger and
millions suffered. Due to food shortages, Malawi had to
Development diamond for Malawi
import maize at a much higher cost than the cost of the Source: The World Bank, World Development Report, 2010.
original agricultural subsidies.
6 In the mid-2000s the government went against World
Bank and IMF demands and re-introduced seed and Source : ‘Malawi’, Jubilee Debt Campaign (http://www.jubileedebt-
campaign.org.uk).
fertiliser subsidies, with the result that Malawi became a
Question B.19 (b) Explain why foreign debt servicing has opportunity
(a) (i) Describe the meaning of foreign debt costs. [4 marks]
identified in bold in the text (paragraph 2). (c) Explain why the burden of debt has led to pressure
[2 marks] in favour of debt cancellation for heavily indebted
(ii) Outline one reason why countries borrow from countries. [4 marks]
foreign creditors. [2 marks]

(d) Using information in the text and your (b) Explain why the servicing of foreign debt causes
knowledge of economics, discuss the potential problems for the balance of payments. [4 marks]
effects of Malawi’s debt relief on its growth and (c) Using a diagram, explain why drought and the
development. [8 marks] removal of subsidies caused a food crisis
Question B.20
(a) (i) Outline why Malawi’s debt relief was a type of of economics, discuss the strengths and weaknesses
‘conditional assistance’. [2 marks] of interventionist policies in economic growth and
(ii) Outline the meaning of privatisation development. [8 marks]
[2 marks]

Text/data 26
Ending Tanzania’s vicious cycle of poverty

1 Fifty years after its independence, Tanzania remains one of condition that the government reduces public spending,
the poorest countries in Africa, with 33% of the population privatises state enterprises and pursues market-oriented
living in extreme poverty. The country is still in a vicious reforms.
cycle of poverty, with low incomes, low saving and low The World Bank is very active in Tanzania with loans 6
investment. in various sectors including health, higher education,
2 Tanzania is one of the largest recipients of Official transport, electricity provision and food security. The IMF
Development Assistance (ODA) in the form of grants, is stepping up lending for the country’s balance of payments
concessional loans and debt relief. About 35% of difficulties that have emerged due to the financial crisis.
government spending depends on foreign aid. It claims that its approach to poor countries has changed
3 The government is trying to attract foreign direct investment and that it no longer imposes unreasonable conditions that
(FDI) to support broad-based economic growth that is prevent governments from spending on merit goods like
needed to achieve poverty reduction targets. However, education. However, according to a recent report, ‘It is still
FDI to date has been concentrated mainly in mining and imposing conditions to this very day and these conditions
tourism, which do not offer the necessary linkages with the continue to block spending on education.’
rest of the economy, and therefore have had little impact on The World Bank and IMF consider Tanzania to be a 7
economic growth. success story. Inflation has fallen, real GDP is growing
4 In the mid-1960s the government had begun a programme rapidly, exports are increasing, and its public finances
of self-reliance and import substitution, aimed at are under control. As a result, it is also becoming more
promoting heavy industry and self-sufficiency in food. interesting to foreign direct investors. Critics argue that
This involved the expansion of infrastructure and state- these successes have come at a huge human cost in terms
owned, capital-intensive industries that by the mid-1970s of continued poverty and deprivations in large portions
were the main importers and exporters in a highly state- of the population, and there are questions over whether
regulated economy. By the mid-1980s Tanzania faced economic growth is affecting the poor. Regarding the
hyperinflation, huge budget deficit and trade deficit, and Millennium Development Goals (MDGs), progress has
a very heavy dependence on foreign aid. been made in school enrolment, gender equality and
5 In contrast to countries such as the East Asian Tigers that gender empowerment, but little progress has been achieved
successfully moved from import substitution to export with infant and under-five mortality rates, which remain
promotion strategies, Tanzania, like many other African very high. Maternal deaths are rising due to poor health
countries, went straight into market and trade liberalisation services.
policies from the mid-1980s. Tanzania lowered import
barriers, leading to de-industrialisation and loss of jobs,
as inefficient domestic firms were unable to compete with
Source: ‘Breaking the vicious cycle of poverty’ in Business Times, 20
imported goods from Asia (often subsidised) and from
August 2010; ‘IMF: Dr. Death? Case study of how the global banker’s
Europe where there were economies of scale and lower shock therapy helps economies but hammers the poor’ in Time
costs of production. Since the mid-1990s its policies have Magazine, 17 April 2000; ‘Overview of aid in Tanzania’, Development
been determined by the World Bank and International Partners Group ( http://www.tzdpg.or.tz/); ‘Hungry children do not
Monetary Fund (IMF), which have extended loans on make good learners’ in the Guardian, 28 April 2009.
Question B.21 (c) Explain why countries borrow from the

(a) (i) Define the term grant identified in bold in the International Monetary Fund. [4 marks]
text (paragraph 2). [2 marks] (d) Using information in the text and your
(ii) Define the term budget deficit identified in knowledge of economics, compare and contrast
bold in the text (paragraph 4). [2 marks] the effectiveness of import substitution and
(b) Explain the possible role of foreign direct export promotion policies as strategies to achieve
investment in helping a poor country break out of economic growth and development. [8 marks]
the poverty cycle. [4 marks]


(a) (i) Define the term concessional loan identified (a) (i) Define the term inflation identified in bold in
in bold in the text (paragraph 2). [2 marks] the text (paragraph 7). [2 marks]
(ii) Define the term trade deficit identified in (ii) State two types of market-oriented reforms.
(b) Explain how the poverty cycle is transmitted from (b) Explain the difference between foreign aid and
generation to generation. [4 marks] multilateral development assistance. [4 marks]
(c) Explain whether the capital-intensive production (c) Explain why economic growth, while necessary for
methods often used in import-substitution economic development to occur over long periods
strategies are likely to represent a type of of time, may not lead to economic development.
appropriate technology in economically less [4 marks]
developed countries. [4 marks] (d) Using information in the text and your knowledge
(d) Using information in the text and your knowledge of economics, examine the view that the World
of economics, discuss the strengths and weaknesses Bank and International Monetary Fund (IMF) have
of market-oriented policies in economic growth played a role in making Tanzania’s growth and
and development. [8 marks] development ‘a success story’ (paragraph 7).
[8 marks]

Chapter 19 Consequences of economic growth and the balance between markets and
intervention
Text/data 27
Economic growth and development in Latin America

1 In 1672, Potosi, Bolivia, a major centre of Spanish silver democratisation and the rising revenues made possible by
mining, was one of the largest and richest cities in the the commodity boom, have transformed Latin American
world. Today, it is poor and beset by conflict. This is but economies. Increasing revenues have also led to stronger
one example of commodity booms gone bust, showing that social policies aiming to strengthen the social safety net
quick riches made possible by rising commodity prices do and to reduced inequalities.
not seem to last. Poverty has been falling almost everywhere, and income 7
2 In Latin America, 93% of the population and 97% of distribution is becoming less unequal in many countries,
economic activity are concentrated in countries that are though it still remains more unequal than in any other
commodity exporters. It is therefore important that World continent. Poverty has been falling due to more rapid
Bank economists discovered some trends suggesting that economic growth and better social policies. Transfer
the most recent commodity boom may have more positive payment programmes (cash transfers) have become more
results than in the past. widespread, and there are about 110 million people in the
3 An important reason for this expectation is good continent benefiting from these. There is evidence that
governance. National governments and financial these have increased school enrolment and attendance, and
institutions in Latin America today have greatly improved have also increased maternal health care and vaccinations.
their ability to manage commodity windfalls, using them The cash transfer programmes have helped reduce income
for long-term growth rather than for short-term gains. inequality, while better-educated workers earn higher
4 For example, in Chile, where exports are dominated incomes.
by commodities (75%), the decision was made years In addition, living standards have improved because birth 8
ago by its leaders to save a large percentage of earnings rates have fallen dramatically, allowing the family’s income
from the copper boom and to spend the rest wisely. to go a longer way in satisfying material needs. Also, trade
Chile’s investments in innovation have increased by 24% liberalisation has led to lower prices for consumers.
annually over the past five years, and it has also invested Yet progress is still fragile. The goal of economic 9
heavily in education. development requires more reforms, including building
5 Another reason for optimism is that commodity further on the social safety net, improving the equality
production in Latin America is changing. While in the past of opportunity for the less privileged, improving the
multinational corporations benefited the most, extracting a tax system, parts of which are regressive, building
country’s resources and leaving it poorer, today commodity infrastructure, reforming public health care and improving
extraction is linked to activities that benefit the country. For the quality of public education. Average spending per pupil
example, in Peru an extensive network of local businesses remains very low compared to the levels of developed
is tied to the operations of a gold mine. countries.
6 Latin America pursued strong market-oriented reforms
during the 1980s and 1990s, involving abandoning
Source: ‘A special report on Latin America: a Latin American
import-substitution in favour of trade liberalisation decade?’ in The Economist, 11 September 2010; ‘A special report
policies, lowering restrictions on foreign direct on Latin America: societies on the move’, in The Economist,
investments and reducing state-ownership of firms. 11 September 2010; ‘Latin America’s commodity dependence’ in
These changes, together with macroeconomic stability, the Japan Times, 5 October 2010.
Question B.24
(c) Draw a diagram and use it to explain how the
(a) (i) Define the term social safety net identified use of health care services gives rise to positive
in bold in the text (paragraph 6). [2 marks] consumption externalities. [4 marks]
(ii) Define the term economic growth identified (d) Using information in the text and your knowledge
in bold in the text (paragraph 7). [2 marks] of economics, evaluate the use of interventionist
(b) Explain why good governance is important in policies in efforts to achieve economic
economic development. [4 marks] development. [8 marks]

(c) Explain why economic growth may have either

Question B.25 positive or negative effects on income distribution.
(a) (i) Define the term transfer payments [4 marks]
[2 marks]
of economics, discuss the view that the pursuit of
(ii) Define the term regressive identified in bold economic development should involve a balance
in the text (paragraph 9). [2 marks] of interventionist and market-oriented policies.
(b) Explain import substitution as a trade strategy for [8 marks]
economic growth and development. [4 marks]

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Exam practice:

paper 2 (SL and HL)

Duration of paper 2 1 hour and 30 minutes

Section B focuses on section 4 of the syllabus (development economics), though

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

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

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

Therefore, each question earns a maximum of 20 marks.

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

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

Part (d) of the questions examines assessment objectives 1, 2 and 3.

© Cambridge University Press 2012 Economics for the IB Diploma 1

© Cambridge University Press 2012 Economics for the IB Diploma 2

Paper 2 section A: International economics

Removing quotas on United States textiles

Question A.1 Question A.2

© Cambridge University Press 2012 Economics for the IB Diploma 3

© Cambridge University Press 2012 Economics for the IB Diploma 4

Corporate fraud: free trade

(d) Using information in the text and your knowledge

© Cambridge University Press 2012 Economics for the IB Diploma 5

© Cambridge University Press 2012 Economics for the IB Diploma 6

Chapter 14 Exchange rates and the balance of payments

Vietnam tries to deal with trade deficit

© Cambridge University Press 2012 Economics for the IB Diploma 7

(c) Distinguish between a current account deficit and

© Cambridge University Press 2012 Economics for the IB Diploma 8

China’s trade surplus

Question A.10 Question A.11

© Cambridge University Press 2012 Economics for the IB Diploma 9

Sri Lanka’s reserve assets fall to dangerously low levels

Question A.12 Question A.13

© Cambridge University Press 2012 Economics for the IB Diploma 10

Mauritius’ policy dilemma

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

© Cambridge University Press 2012 Economics for the IB Diploma 11

Riverland’s balance of payments problems

Balance of payments accounts for Riverland, 2010 (billions of Rvl)

2 Balance of trade in goods −230

8 Capital transfers +12

12 Direct investment +67

16 Errors and omissions +17

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

© Cambridge University Press 2012 Economics for the IB Diploma 12

© Cambridge University Press 2012 Economics for the IB Diploma 13

Dilemmas facing the Turkish economy

GDP, annual % increase Consumer prices, annual % increase

Unemployment as % of labour force

* The OECD is the Organisation for Economic Co-operation and

© Cambridge University Press 2012 Economics for the IB Diploma 14

Question A.19 Question A.20

© Cambridge University Press 2012 Economics for the IB Diploma 15

Chapter 15 Economic integration and the terms of trade

Asia free trade zone raises hopes and fears

© Cambridge University Press 2012 Economics for the IB Diploma 16

Africa’s main trading bloc works on customs union

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

© Cambridge University Press 2012 Economics for the IB Diploma 17

© Cambridge University Press 2012 Economics for the IB Diploma 18