IB Economics HL 3.3 Macroeconomic Objectives Questions

Read the extracts and answer the questions that follow.
Text D - Overview of Bhutan

(1) Bhutan is a lower-middle income country in southern Asia. It is mountainous, water is plentiful, and 60 % of the territory is protected forest. Since 2008, Bhutan has measured its economic development by changes in its "Gross National Happiness" (GNH) index. The index considers factors such as income inequality, environmental conservation, sustainable development, and gender equality, in addition to the components of the Human Development Index (HDI).

(2) The pursuit of GNH has involved using government programmes to spread the benefits of economic growth across all social groups. An example of this is the construction of large hydropower plants, not only for the export of electricity but also to ensure that remote communities can buy power at low prices. Hydropower is a renewable method of producing electricity using the natural flow of water. With these new plants, all rural and urban areas had access to electricity by 2019.

(3) Government intervention in the market for electricity has been necessary due to the high cost of resources. Both the production and distribution of electricity are therefore controlled by state
owned enterprises. Bhutan's government has relied on India for grants and loans to finance hydropower projects.

(4) Sales of surplus electricity to India, amounting to over 70 % of electricity generation in 2021, have increased the funds available to the government for investment in healthcare and education. These revenues have also helped to finance the expansion of essential infrastructure, particularly road networks. The government's aim has been to reduce poverty and to improve well-being, especially in rural areas.

(5) Hydropower has proved to be an important source of economic development. However, the private sector faces a lack of investment for multiple reasons, including high transport costs and a small domestic market. This has limited the creation of new private sector jobs. Furthermore, a sustainability tax of 100 USA dollars (USD) per night for tourists helps with Bhutan's conservation efforts. The tax reduces Bhutan's competitiveness as a tourist destination.

(6) Agriculture is vital to Bhutan's largely rural population. This sector employed 55 % of the workforce in 2021. However, most agricultural produce, such as rice, is consumed by farming households rather than sold in the market. By 2021, the country was importing about 50 % of its food. The growing food demands of urban areas could have negative consequences for the balance of payments.

(7) Agricultural output is constrained by many factors, including a lack of machinery, irrigation and affordable credit. Bhutan's partnership with the United Nations International Fund for Agricultural Development has provided funds for investment in the agricultural sector, such as irrigation systems, roads connecting farms to markets, and storage facilities. However, the GNH emphasis on sustainability could restrict growth in this sector. For example, to preserve biodiversity there are restrictions on the use of chemical fertilizers.
Text E - Youth unemployment in Bhutan*

(1) The youth unemployment rate for Bhutan in 2021 was 20.9 %. However, youth unemployment in towns was much higher than in rural areas. Approximately 60 % of the total unemployed youth were female.

(2) There is a mismatch between the needs of employers and the skills of young people. Apart from this problem, the private sector requires government assistance in creating job opportunities so that young people can find employment outside of the public sector. Moreover, a lack of finance discourages the youth from entrepreneurship, further reducing their work prospects and the growth of Bhutan's economy.
Text F - Bhutan's trade relations with India
Bhutan has a free trade agreement with India, removing all tariffs between the two countries. In 2021-2022, about 80 % of Bhutan's international trade was with India. India's top imports from Bhutan include electricity, metals, and cement. Bhutan relies on India for goods such as fuel, cars, and rice. Transactions between the two countries are straightforward, as the central bank of Bhutan ensures the ngultrum (Bhutan's currency, BTN) is fixed to the rupee (India's currency, INR) at the exchange rate of 1 BTN=1 INR.
* aged between 15 and 24

Define the term economic growth indicated in bold in the text (Text D, paragraph 2).

Read the extracts and answer the questions that follow.
Text A - Overview of the economy and government policies in Kenya

Read the extracts and answer the questions that follow.
Text A - Overview of the economy and government policies in Kenya

(1) Kenya, in East Africa, is achieving high annual economic growth rates, averaging above 5 %. Living standards are improving and employment is increasing in the manufacturing, tourism, construction, and education sectors. Kenya's high growth is also changing the distribution of income and affecting the environment. However, climate change, high levels of inequality and youth unemployment may reduce future growth rates.

(2) Floods and droughts are severe and frequent. In 2022-2023, droughts caused agricultural output to fall, affecting the employment of 40 % of the population and doubling the number of people with insufficient food. The government took measures to increase food supplies, such as reducing the tariff on imports of rice. It did not impose a price ceiling for essential food, as food shortages might result.

(3) The rising price of food is the main cause of inflation in Kenya. The central bank used a contractionary monetary policy in 2022 and 2023 to reduce inflation and to prevent the depreciation of the country's currency (Kenyan shilling, KES).

(4) The budget deficit as a percentage of gross domestic product (GDP) became smaller in 2023 because government expenditure grew more slowly than GDP. Moreover, economic growth resulted in higher tax revenue from both income tax and a 16 % indirect tax on goods and services. The government is also receiving revenue from the sale of some state-owned enterprises (SOEs). A World Bank programme, aimed at an expansion of "green" energy in Kenya, provides financial and technological support to the Kenya Power and Lighting Company, an SOE that has been making losses.

(5) The currency depreciation in 2022 boosted exports. Services, which are approximately 38 % of total exports and include tourism and financial services, are growing faster than exports of goods. Manufactured goods account for 37 % of total exports and agricultural goods account for 25 %. Revenue from exports of tea, flowers, vegetables, meat, and coffee are volatile and unpredictable. The droughts in 2022-2023 reduced output, which lowered export revenue from vegetables and flowers by almost 20 %.
Text B - Unequal distribution of the benefits of economic growth in Kenya

(1) Although economic growth has reduced absolute poverty, inequality remains a problem, particularly between the formal and informal sectors and between the urban and rural areas. Rural poverty is caused by low agricultural productivity and farmers' limited access to markets, finance, and technology.

(2) However, the level of education has improved significantly, with a literacy rate of over 90 %. Secondary school attendance rates have increased from 13 % in 2003 to 49 % in 2022, despite the costs of attending school. In 2022, the government introduced a fund (the Hustler Fund), partly financed by foreign aid. The fund provides low-interest loans to women, young people, and small firms, for education or investment.
Text C - Reducing and adapting to climate change in Kenya

(1) Global warming is affecting the Kenyan economy. Consequently, agricultural output and tourism, which account for 70 % of employment and most exports, will probably decline. Therefore, GDP could fall by 2 % annually. However, Kenya has relatively low carbon emissions, particularly because renewable resources generate 90 % of electricity, a figure that is planned to rise to 100 % by 2030.

(2) Measures taken by other economies to reduce carbon emissions provide opportunities for Kenya because the markets for "green" goods are expanding. Kenya is able to sell tradable permits (carbon credits) to high-emitting countries due to its reforestation programmes.

(3) The International Monetary Fund (IMF) recommends that climate-related considerations should be part of macroeconomic and infrastructure policies. It also recommends that carbon taxes should be imposed to reduce the use of fossil fuels by manufacturing firms. Rapid urbanization is increasing the need for electric vehicles and improved public transport. Energy efficiency measures, fuel substitution, and switching to rail transport will not only lower transportation costs but also reduce the trade deficit. This is because fossil fuels used for transportation and manufacturing are imported.

(4) Kenya is able to obtain finance and technology for investment in climate-related projects, such as renewable energy and forestry programmes, through foreign aid and partnerships with the private sector. Overall, these policies will reduce environmental disasters and increase economic growth and jobs in the formal sector.

Using information from the text/data and your knowledge of economics, discuss the consequences of high economic growth in Kenya.

Explain two economic costs of high unemployment.

Text B - Argentina's new economic reforms

Read the extracts and answer the questions that follow.
Text A - The economy of Argentina

(1) Argentina, the third-largest economy in Latin America, has experienced several cycles of high economic growth and deep recessions over the last 70 years. It has vast natural resources in energy and agriculture and potential for renewable energy. Its leading exports include soybeans and beef products, which contribute significantly to gross domestic product (GDP) and employment and are major sources of foreign currency. However, Argentina faces unfavourable climate conditions that create problems for the agriculture sector. A drought in 2023 caused over 20 billion United States dollars (USD) in losses for soybean farmers.

(2) Argentina faces high relative poverty rates despite redistribution policies such as transfer payments. Argentina is known for extensive government intervention, including price ceilings on rent and strong protection for labour unions and workers.

(3) For many years, Argentina managed its exchange rate by limiting the amount of foreign currency that citizens could purchase as well as by restricting imports. The aim was to protect reserve assets and prevent currency depreciation. This led to the establishment of an informal (unofficial) foreign exchange market and discouraged foreign direct investment (FDI). However, the foreign currency limitations resulted in an overvalued currency and failed to stop the level of reserve assets from decreasing.

(4) In 2018, Argentina requested a loan from the International Monetary Fund (IMF) to help fund its budget deficit and large external debt repayments. However, Argentina defaulted on its debt repayments to the IMF, which led to low consumer and business confidence, causing large FDI and portfolio investment outflows. To receive future loans, the IMF requires Argentina to promote good governance, reduce government spending, increase reserve assets and control inflation.

(5) In 2022, Argentina's economic challenges continued with high inflation and a persistent budget deficit, leading to unsustainable debt. High inflation has led to declining real wages. Moreover, uncertainty about future prices has contributed to lower business investment.
Text B - Argentina's new economic reforms

(1) In December 2023, Argentina's new government initiated reforms to help solve its economic challenges. The new economic reforms included:
- deregulating markets, such as removing price controls and restrictions on buying foreign currency
- privatization of 41 state-owned enterprises to improve efficiency, including the national airline, rail networks, state media, and major oil, water and sewage companies
- increasing labour market flexibility by reducing labour union power and lowering labour costs
- reducing government spending by cancelling infrastructure projects, reducing the size of the public sector and eliminating transport and energy subsidies.

(2) The immediate result of removing restrictions on foreign currency purchases was a large depreciation of the Argentine peso (ARS), Argentina's currency, as predicted by speculators. Moreover, inflation increased to over 250 %. The new government maintained that while the reforms may cause a short-term recession, the policies would ultimately lead to long-term price stability and economic growth, despite predictions that relative poverty rates could increase to 60 %. However, the government has stated it will continue spending on programmes to decrease poverty.

(3) To address the budget deficit and maintain a trade surplus, the government increased taxes on cigarettes and imposed tariffs on imports such as laptops. Income taxes were increased, but the level of income on which no income tax is paid was raised from ARS 1.35 million to ARS 1.55 million per month.

(4) The IMF supported the reforms and agreed to grant future loans to Argentina. The loans are important to establish international credibility and finance government spending.

Text C - Education and productivity in Argentina
Despite significant investments in education, achievement levels are not improving. Experts recommend that Argentina focus on improving the quality of education to decrease poverty rates and increase the economy's productive capacity. Additionally, Argentina's low female labour force participation rate indicates an underutilized resource. An improved education system could increase female participation in the economy and raise household incomes.

Define the term inflation indicated in bold (Text A, paragraph 5).

The economy of Japan has been subject to many periods of deflation since 1993.

Consequently, price increases became unusual, and the expected inflation rate has often been close to zero. Most price rises have been the result of a depreciated yen (JPY), the currency in Japan.

An expansionary fiscal policy has not lead to a significant rise in the price level, partly because of a lack of business and consumer confidence. Therefore, the central bank, the Bank of Japan, has set a target rate of 2 % for sustainable and stable inflation.

Figure 2 plots the inflation rate against the unemployment rate in Japan for selected dates from 1993 to 2022. SRPC is the short-run Phillips curve.

Assume that the two banks decide to collude and come to an agreement that would maximize their joint profits.

Table 3 shows the total cost of the basket of goods that the typical consumer in Tokyo purchases per week in JPY as well as the consumer price index (CPI) for Tokyo.

Discuss the possible consequences of deflation for an economy.

Using real-world examples, discuss the potential trade-off between unemployment and inflation.

Economists agree that travel by train, instead of by plane or car, should be promoted in Europe because of environmental issues. However, the growth of passenger rail travel in Spain has slowed down. During 2013, millions of passenger-kilometres* travelled on railways in Spain increased by 6.72 %, while in 2019 the annual increase only amounted to 1.36 %.
* passenger-kilometres measure the distance travelled by all passengers over one year

Figure 4 illustrates the monopoly-market structure for tickets on a train between Madrid and Barcelona in Spain. MC is marginal cost, AC is average cost, D is the demand for tickets and M R is marginal revenue.

Government investment in railways is constrained by Spain's level of government debt, as shown in Table 2. Despite a planned reduction in the budget deficit, International Monetary Fund (IMF) projections up to 2027 estimate that general government debt as a percentage of GDP will remain at over 110 %, which may not be sustainable.

With two references to the data provided in Table 2, explain the difference between a budget deficit and government debt.

To reduce the possible risk from unsustainable government debt, policies could be chosen that do not require large increases in government expenditure. For example, regulations could require that any abnormal profits earned by a railway firm must be directed to investments in upgrading the railway sector.

Alternatively, the government could promote consumer nudges to influence how people choose to travel.

Table 2 provides information relating to the country of Averna in 2019.

Read the extracts and answer the questions that follow.
Text A - Overview of the economy and government policies in Kenya

Read the extracts and answer the questions that follow.
Text A - Overview of the economy and government policies in Kenya

(1) Kenya, in East Africa, is achieving high annual economic growth rates, averaging above 5 %. Living standards are improving and employment is increasing in the manufacturing, tourism, construction and education sectors. Kenya's high growth is also changing the distribution of income and affecting the environment. However, climate change and high levels of inequality may reduce future growth rates.

(2) Floods and droughts are severe and frequent. In 2022-2023, droughts caused agricultural output to fall, affecting the employment of 40 % of the population and doubling the number of people with insufficient food. The government took measures to increase food supplies, such as reducing the tariff on imports of rice.

(3) The rising price of food is the main cause of inflation in Kenya. The central bank used a contractionary monetary policy in 2022 and 2023 to reduce inflation and to prevent the depreciation of the country's currency (Kenyan shilling, KES).

(4) The budget deficit as a percentage of gross domestic product (GDP) became smaller in 2023 because government expenditure grew more slowly than GDP. Moreover, economic growth resulted in higher tax revenue from both income tax and a 16 % indirect tax on goods and services. The government is also receiving revenue from the sale of some state-owned enterprises (SOEs). A World Bank programme, aimed at an expansion of "green" energy in Kenya, provides financial and technological support to the Kenya Power and Lighting Company, an SOE that has been making losses.

(5) The currency depreciation in 2022 boosted exports. Services, which are approximately 38 % of total exports and include tourism and financial services, are growing faster than exports of goods. Manufactured goods account for 37 % of total exports and agricultural goods account for 25 %. Revenue from exports of tea, flowers, vegetables, meat, and coffee are volatile and unpredictable. The droughts in 2022-2023 reduced output, which lowered export revenue from vegetables and flowers by almost 20 %.
Text B - Unequal distribution of the benefits of economic growth in Kenya

(1) Although economic growth has reduced absolute poverty, inequality remains a problem, particularly between the formal and informal sectors and between the urban and rural areas. Rural poverty is caused by low agricultural productivity and farmers' limited access to markets, finance, and technology.

(2) However, the level of education has improved significantly, with a literacy rate of over 90 %. Secondary school attendance rates have increased from 13 % in 2003 to 49 % in 2022, despite the costs of attending school. In 2022, the government introduced a fund (the Hustler Fund), partly financed by foreign aid. The fund provides low-interest loans to women, young people, and small firms, for education or investment.
Text C - Reducing and adapting to climate change in Kenya

(1) Global warming is affecting the Kenyan economy. Consequently, agricultural output and tourism, which account for 70 % of employment and most exports, will probably decline. Therefore, GDP could fall by 2 % annually. However, Kenya has relatively low carbon emissions, particularly because renewable resources generate 90 % of electricity, a figure that is planned to rise to 100 % by 2030.

(2) Measures taken by other economies to reduce carbon emissions provide opportunities for Kenya, because the markets for "green" goods are expanding. Kenya is able to sell tradable permits (carbon credits) to high-emitting countries due to its reforestation programmes. However, there are challenges for Kenya. The production of exports, such as coffee, needs to meet strict sustainability regulations imposed by the European Union (EU) on imports.

(3) The International Monetary Fund (IMF) recommends that climate-related considerations should be part of macroeconomic and infrastructure policies. It also recommends that carbon taxes should be imposed to reduce the use of fossil fuels by firms. Rapid urbanization is increasing the need for electric vehicles and improved public transport. Energy efficiency measures, fuel substitution, and switching to rail transport will not only lower transportation costs but also reduce the trade deficit. This is because fossil fuels used for transportation and manufacturing are imported.

(4) Kenya is able to obtain finance and technology for investment in climate-related projects, such as renewable energy and forestry programmes, through foreign aid and partnerships with the private sector. Overall, these policies will reduce environmental disasters and increase economic growth and jobs in the formal sector.

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Using information from the text/data and your knowledge of economics, discuss the likely impact of high economic growth on environmental sustainability in Kenya.