ECONOMICS FOR THE IB DIPLOMA: MARKSCHEMES

Paper 2 (SL and HL)

markschemes
Question 1
a i East Asia because it has the highest PED, meaning that for any change in price the change in
quantity demanded is proportionately greater than in any other region.
Marks allocation
For appropriate use of the PED concept [1]
For identifying East Asia [1]
ii European Other because it has the lowest YED, meaning that for any change in income the
change in demand is proportionately lower than in any other region.
Marks allocation
For appropriate use of the YED concept [1]
For identifying European Other [1]
b i An explanation that it is two of the following:
•• Permits issued by an authority to firms, granting permission to pollute
•• The permits can be traded in a market
•• The total amount of pollutants emitted is limited
Marks allocation
For a correct identification of each one of two of the above [1]
ii Percentage increase in price of meat = (18−15)/15 × 100 = 20%
% ∆Q % ∆Q
PED = therefore 0.49 = = 9.80 % = percentage decrease in quantity of meat demanded
% ∆P 20%
Marks allocation
For some valid working [1]
For the correct answer [2]
c Marks allocation
For a correctly labelled market failure diagram showing a negative consumption externality, with MSB
below MPB, overprovision and overconsumption in the market, with welfare loss. [2]
For explaining that consumption of too much meat leads to external costs to third parties
involving diseases with health care costs, therefore the social benefits of meat consumption are
less than the private benefits. [2]
d The imposition of an indirect tax on meat to reduce meat consumption would raise the price of meat.
The lower the PED (the more inelastic the demand) the lower the responsiveness of quantity demanded to

1 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021
 ECONOMICS FOR THE IB DIPLOMA: MARKSCHEMES

the increase in price. Therefore the region that would have to impose the highest indirect tax is the
one that has the lowest PED, which is Oceania.
Marks allocation
For correctly identifying Oceania [1]
For a correct explanation [3]
e Marks allocation
For a correctly labelled Lorenz curve diagram, with cumulative percentage of the population on
the horizontal axis and cumulative percentage of the population on the vertical axis and two
Lorenz curves, with the one furthest away from the line of perfect equality representing income
distribution after the tax. [2]
For explaining that a tax on meat is an indirect tax which is regressive, meaning that the fraction of income
paid as indirect tax increases as income decreases. Therefore people on lower incomes would have to
pay a higher fraction of their income to buy meat than people on higher incomes, making income
distribution more unequal. [2]
f Marks allocation
For a correctly labelled diagram showing a subsidy granted on organic or less environmentally harmful
food products, showing the increase in quantity produced which is sold at a lower price due to the
subsidy. [2]
For explaining that the lower price creates incentives for consumers to switch to these products, which
would result in a decrease in demand for environmentally harmful livestock products, thus reducing
the GHG emissions of livestock.  [2]
g Answers may include:
•• An explanation that both negative consumption and negative production externalities are involved.
•• Policies to deal with the negative production externalities:
•• An indirect tax on meat, but given the low PED this would have to be high; also it is regressive,
making it politically unpopular
•• Use of tax revenues to help livestock producers restructure their production, but these have
opportunity costs
•• A tradable permits scheme on methane, though there may be practical difficulties with the
distribution of permits to farmers and with setting the upper limit on permissible methane
emissions
•• Policies to deal with the negative consumption externalities:
•• An indirect tax on meat; this is the same policy noted above
•• Lower taxes on environmentally less harmful meat substitutes to induce consumers to switch to
these
•• Subsidies on environmentally less harmful food products, though there may be difficulties in
selecting what to subsidise, with opportunity costs for the government
•• Education and awareness creation for consumers, with opportunity costs for the government
•• Nudges (HL), though there may be difficulties in designing effective ones
Any other reasonable argument.
For full marks the response must:
•• fully address the demands of the question
•• fully explain the relevant economic theory
•• use economic terms correctly
•• if relevant use diagrams effectively
•• contain effective synthesis or evaluation
•• use information from the text or data appropriately to support the arguments

2 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021
 ECONOMICS FOR THE IB DIPLOMA: MARKSCHEMES

Question 2
a i A trade strategy where a country encourages the development of manufacturing for the domestic
market by imposing protective trade barriers in order to prevent the entry of imports that compete with
domestically produced goods.
Marks allocation
For the idea that it tries to increase domestic production [1]
For the idea that it involves the use of trade protection [1]
ii A demand management policy where the central bank increases interest rates in order to discourage
investment and consumption spending so as to reduce aggregate demand.
Marks allocation
For the idea that it involves the use of higher interest rates [1]
For the idea that it is intended to result in lower AD through lower consumption and investment [1]
b i Since GDP (current US$) = GDP per capita (current US $) × population,
250.9 billion = 2549.1 × population, therefore
population = 250.9 billion / 2549.1 = 98.43 million
If GNI figures are used the population is calculated to be 98.36 million
Marks allocation
For some valid workings [1]
For the correct answer [1]
ii GNI = GDP + income received from abroad – income sent abroad
Therefore GNI is greater because income received from abroad is greater than income sent abroad. The
most common income flows involve remittances and profit repatriation.
Marks allocation
For referring to the data [1]
For correctly identifying each one of two reasons [1]
c Marks allocation
For drawing an exchange rate diagram where the horizontal axis is labeled Q of Egyptian pound (or just
Egyptian currency) and the vertical axis P of Egyptian pound, or another currency per Egyptian pound,
showing a second demand curve that results in excess demand or supply for the Egyptian pound, which is
made to shift back to the original equilibrium exchange rate through appropriate policies. [2]
For explaining that a floating exchange rate is determined by free market forces, therefore by the
intersection of currency demand and currency supply without government intervention, whereas in
a fixed exchange rate currency demand and supply are made to determine the exchange rate through
buying or selling of reserve currencies, changes in interest rates, or some other policy. [2]
d Marks allocation
For drawing a subsidy diagram showing how the subsidy results in a lower price and greater quantity. [2]
For explaining how price through its signaling and incentive functions reallocates resources; however
subsidies work to distort prices therefore prices send out the wrong signals and incentives to consumers,
causing them to overconsume. Therefore reduction or removal of subsidies will allow prices to
perform better in their allocation function. [2]

3 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021
 ECONOMICS FOR THE IB DIPLOMA: MARKSCHEMES

e Marks allocation
For drawing an AD-AS diagram showing AD shifting to the right, resulting in higher real GDP. [2]
For explaining that net exports are exports minus imports, which are a component of AD, so an increase
in net exports means that exports have increased but also that imports may have decreased causing AD
to increase. [2]
f Marks allocation
For drawing an AD-AS diagram showing SRAS shifting to the left, resulting in a higher price level as
well as lower real GDP.  [2]
For explaining that this is cost-push inflation, caused by higher costs of production. The depreciating
currency increases the domestic price of imported inputs, therefore firms that depend on imported
inputs face higher costs of production. [2]
g Answers may include:
•• Egypt has a growing share of the population living below the poverty line, which may actually be
an underestimate.
•• It also faces growing income inequality.
•• Possible policies include:
•• Increased spending on health care and education, which actually fell; this trend should be reversed
•• Reduction of public school fees that recently actually increased
•• Changes in the tax system to make it more progressive; this recently became more regressive
through a new indirect tax which works to increase income inequality
•• Increases in transfer payments
•• More targeted spending on goods and services such as merit goods, which is made possible through
the reduction in fuel subsidies
•• Further efforts to integrate women and youth in the labour market; youth unemployment is high
and many new jobs are in the informal economy; efforts should be made to create more jobs in the
formal economy, which offers worker protection
Any other reasonable argument.
For full marks the response must
•• fully address the demands of the question
•• fully explain the relevant economic theory
•• use economic terms correctly
•• if relevant, use diagrams effectively
•• contain effective synthesis or evaluation
•• use information from the text or data appropriately to support the arguments

4 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021