IB Economics HL 3.4 Economics of Inequality and Poverty Questions

The following information provides a simplified version of the calculation of a consumer price index (CPI).

In Country A, the rate of inflation is measured by the calculation of a CPI. The index is calculated using the five products which are purchased by citizens of Country A as representative of a "typical basket of goods".

The weighting given to each product is based on the quantities of each product purchased by the average household in Country A per week.

Assume that 2015 is the base year for the purpose of calculating the CPI.

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.

Sketch a Lorenz curve to show how the change in the "level of income on which no income tax is paid" may affect Argentina's income distribution (Text B, paragraph 3 ).

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

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, many of which were recording losses and burdening the government budget
- 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.

The following information provides a simplified version of the calculation of a consumer price index (CPI).

In Country A, the rate of inflation is measured by the calculation of a CPI. The index is calculated using the five products which are purchased by citizens of Country A as representative of a "typical basket of goods".

The weighting given to each product is based on the quantities of each product purchased by the average household in Country A per week.

Assume that 2015 is the base year for the purpose of calculating the CPI.

With reference to the distribution of income, distinguish between equity and equality.

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

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, many of which were recording losses and burdening the government budget
- 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 relative poverty indicated in bold (Text A, paragraph 2).

Indonesia is a middle-income country in southeast Asia. Its main agricultural exports are palm oil and coffee, which Malaysia also produces. The maximum amount of each good that Indonesia and Malaysia can produce in one hour is shown in Table 3.

Explain two possible causes of income inequality in Indonesia.

The Indonesian government has been providing producers with fossil fuel subsidies to support low-income households, who use kerosene for heating and cooking. However, subsidies are gradually being replaced with cash transfer payments to households, with the aim of reducing both carbon emissions and poverty. Furthermore, removing the subsidies completely would release funds for government spending on health and education.

Figure 2 illustrates the daily world price of wheat in US dollars (US$) per kilogram from August 2020 to February 2021.

Beycan resides in Turkey and earns TL955000 annually.

Table 6 shows selected tax revenue sources and the Gini coefficient for Turkey, Austria, Germany and the OECD average.

Using the data in Table 6, explain why a greater reliance on indirect taxes compared to income taxes for revenue collection is often associated with a higher Gini coefficient value.

The following information was published in the United Nations Development Programme 2016 Regional Human Development Report: "Inequalities in Turkey: An Overview":
- The Human Development Report reported that Turkey's gross national income (GNI) per capita ranks at 50, while its standard Human Development Index (HDI) rank is lower at 62 .
- Turkey's Inequality-adjusted Human Development Index (IHDI) score is almost 16 % lower than its standard HDI score.
- The share of public expenditure on education is 2.9 % of gross domestic product (GDP) in Turkey, while the average share of public expenditure on education is 4.9 % of GDP among other high human development countries. Even among low human development countries, the average share is 3.6 %.

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

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

(1) The Philippines is a country in the Asia-Pacific region. Growth rates of gross domestic product (GDP) in the 2020s are expected to average 5 % per year. With increasing urbanization, a growing middle class and a large, young population, the Philippines' economic growth is based on strong consumer demand.

(2) Although the primary sector is still important, there is stronger growth in the services sector, including tourism and insurance. Remittances from overseas workers also contribute a lot to national income.

(3) The government has made progress in reducing poverty, partly due to policies that encourage workers to leave agriculture for higher wage jobs in other sectors. However, poverty reduction is proceeding slowly, with more than 70 % of the labour force still working in low-wage jobs in the informal economy. The Philippines is vulnerable to natural disasters, such as earthquakes and droughts, which damage the economy and most severely affect the poor who work in farming and fishing. Fish stocks are falling due to illegal fishing and climate change. Agricultural productivity is low and unsustainable practices have caused deforestation.

(4) Infrastructure and public services, including health care and education, are inadequate in many rural areas and there is poor nutrition in low-income households. Rising food and fuel prices will further reduce real incomes. For the lowest income earners, food amounts to 60 % of total expenditure, while the highest income earners spend only 28 % on food. This can be explained by the low-income elasticity of demand (YED) for food.

(5) An expansionary fiscal policy has caused a persistent budget deficit. Higher global energy prices and the depreciation of the peso ( PHP, the Philippine currency) have added to inflationary pressures. In response, the central bank raised its interest rate several times, from 2\% in 2021 to 5.5\% in 2022.

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

(6) The Philippines has experienced more free trade in agricultural goods following its membership of the ASEAN economic community (a free trade area). For example, a quota on pork imports into the Philippines has been removed.

(7) However, to help local farmers, a 35 % tariff has been placed on rice imported into the Philippines, even though rice and other cereals account for a large proportion of imports. Tariff revenues are used to provide subsidies for modern farm equipment, seeds and training for rice farmers. The aim is to create a more efficient and competitive agricultural sector.
Text E - Reduction of poverty rates in the Philippines

(1) In order to achieve the first Sustainable Development Goal (SDG), the government of the Philippines aims to eliminate extreme poverty by 2040. In 2019, taxes were increased on tobacco, alcohol and e-cigarettes, partly to fund an expansion of the public health care system.

(2) Another programme provides regular cash payments to mothers, conditional on their children regularly attending school and receiving preventive health check-ups. Therefore, it is reducing poverty, improving human capital and increasing gender equality. According to a World Bank study, the Philippines' programme is one of the most efficient social support systems in the world: it costs only 0.4 % of GDP, yet covers nearly 20 million people.

(3) The government gives fuel subsidies to private bus drivers who provide transport in rural areas. In addition, the bus drivers are asking for an increase in the legal minimum price that they charge passengers, although the minimum (floor) price is already above the equilibrium price.
Text F - Infrastructure and job creation in the Philippines
Infrastructure in the Philippines, including infrastructure related to information technology, is being improved, in order to create jobs and connect the poor to more opportunities and basic services. Many projects are financed by Official Development Assistance (ODA), which includes loans and grants. The ODA funding also supports programmes for youth employment and for improving skills. Training is provided for priority areas: agricultural businesses, construction, information technology, management, tourism, and firms run by women entrepreneurs.

* estimate

Using information from the text/data and your knowledge of economics, evaluate the policies used in the Philippines to reduce poverty and income inequality.

Figure 2 illustrates the daily world price of wheat in US dollars (US$) per kilogram from August 2020 to February 2021.

Beycan resides in Turkey and earns TL955000 annually.

Table 6 shows selected tax revenue sources and the Gini coefficient for Turkey, Austria, Germany and the OECD average.

Using the income distribution information in Table 5, construct a fully labelled Lorenz curve diagram for Turkey in 2017.

"Best Meals" is one of many small catering companies, each of which prepares a variety of different meals for airlines in Country X. Table 1 shows the costs of production in US dollars (US$) on a per hour basis for "Best Meals".

${ }^{1}$ joule: a standard unit of energy
${ }^{2}$ passenger kilometre: one passenger travelling one kilometre

- The aviation sector creates emissions that account for about 4.9 % of human made global warming and its share of greenhouse gas emissions is rapidly growing.
- A flight from San Francisco to Paris can produce around 1.25 metric tons of carbon emissions per passenger. This is more $\mathrm{CO}_{2}$ than the average person in certain countries generates in an entire year.
- The energy source for aircraft is not easily substitutable. Road and rail-based passenger vehicles can switch from carbon-based fuels to renewably sourced electricity. Aviation emissions are thus not expected to be easily reduced.
- The aviation industry's growth has also accelerated as a result of subsidies, including general sales tax and fuel tax exemptions, which are unavailable to other modes of transport.

The catering companies buy tomatoes from the domestic market to prepare their meals. Figure 1 illustrates the domestic market for tomatoes, which is perfectly competitive. S is supply and D is demand.

In order to support the incomes of the tomato farmers, the government of Country X has set a price floor (Pmin) at US$2.80 per kilogram.