Practise tariff, quota and subsidy diagrams alongside HL evaluation of trade wars, exporter revenue, government effects, consumer surplus and wider welfare.
Read the extracts and answer the questions that follow.
Text D - Overview of Indonesia and palm oil production
(1) Indonesia is the largest economy in Southeast Asia and its gross domestic product (GDP) has grown strongly. The proportion of those living in absolute poverty in Indonesia decreased from 37.4 \% in 1999 to 2.7\% in 2019.
(2) The palm oil industry is a major contributor to the Indonesian economy, accounting for 4.5 % of GDP and providing employment for over three million Indonesians. Palm oil production is technologically simple and profit margins are large. As a low-cost producer, Indonesia produces over 50 % of the world's output. Palm oil is the most widely used vegetable oil in the global market. It is an ingredient in many products (including foods, cosmetics, cleaning products and biofuel) and demand continues to increase.
(3) In 2015, despite a widening budget deficit, the Indonesian government began subsidizing biodiesel (a type of renewable fuel) made from palm oil to make it more price competitive with conventional diesel. The subsidies were aimed at reducing Indonesia's dependence on fossil fuel imports and at increasing exports of high-value refined palm oil products.
(4) In Indonesia, 80\% of the palm oil produced is exported, contributing substantially to export revenue and to government tax revenue. However, palm oil prices are volatile, due to changes in supply, making planning difficult and causing fluctuations in the exchange rate. For example, studies show that, due to the low price elasticity of demand (PED) for primary commodities, an increase in the price of palm oil results in greater export revenue. Consequently, the rupiah (Indonesia's currency) may appreciate.
(5) In 2019, the European Union (EU) decided to impose an 18 % tariff on imports of palm oil based biodiesel from Indonesia, partly due to concerns that palm oil production damages the environment. The EU also claimed the tariff was necessary to offset the effects of the biodiesel subsidy.
Text E - Sustainable Development Goal (SDG) 12 and concerns about palm oil production in Indonesia
(1) In the past, the Indonesian government supported the rapid growth of palm oil production in order to increase GDP and employment. This policy often resulted in an inefficient use of land and high carbon emissions, as a result of deforestation.
(2) Sustainable Development Goal (SDG) 12 (responsible consumption and production) requires resources to be used more efficiently and sustainably through changes in production methods. Unsustainable use of Indonesia's natural resources will probably reduce long-term economic growth. Forests are necessary for food security, fuel, shelter and jobs. They also reduce the carbon in the atmosphere and protect against floods.
(3) Rates of deforestation in Indonesia have decreased recently. The World Bank's Forest Carbon Partnership Facility is providing US$110 million in aid to help reduce deforestation. Protecting forests from agricultural expansion will significantly reduce emissions. Profits will be lower, but the reputation of the palm oil industry will be improved and its long-term future made more secure.
(4) More than 50 multinational companies (MNCs) which use palm oil in their products have pledged to ensure that their suppliers do not contribute to deforestation. Pressure from the MNCs is encouraging Indonesian producers to use natural resources more sustainably.
Text F - Small-scale farmers and the Indonesian Sustainable Palm Oil (ISPO) certificate
(1) Small-scale farmers manage approximately 40 % of Indonesian plantations, but produce only 30 % of Indonesia's palm oil, because of poor farming techniques, low quality seeds, and a weak banking system, which limits their access to finance. In addition, land disputes occur due to a lack of property rights. To make up for their low productivity, farmers sometimes illegally clear more land for planting.
(2) The Indonesian Sustainable Palm Oil (ISPO) certification system requires that palm oil producers only occupy land legally, that they do not plant in areas designated as forest, and that they use sustainable agricultural practices. Initially, only large plantations had to get certification. However, the system was extended in 2020 and now small-scale farmers also have to obtain certification. Participating in the system should improve the productivity of small-scale farmers and reduce deforestation.
Table 3: Economic data for Indonesia
Table 4: Development data for Indonesia
Table 5: National income statistics for Indonesia
Using an international trade diagram, explain the effect of the EU tariff on the imports of palm oil based biodiesel from Indonesia (Text D, paragraph 5).
The following diagram illustrates the market for bananas in Country A. D and S represent the domestic demand and supply for bananas, while bananas can be imported at the current world price of per kg.
Identify the price which would be paid by consumers in Country A per kg of bananas following the imposition of the quota.
Identify the quantity of bananas which would be purchased in Country A per month following the imposition of the quota.
Calculate the change in revenue earned by domestic producers of bananas in Country A as a result of the quota.
With reference to the diagram, explain why the welfare loss from the imposition of the quota is likely to be greater than the welfare loss resulting from a tariff of per kg.
The demand and supply functions for the currency of Country A (the dollar ($)) are given by:
where Qd is the quantity of dollars demanded per month, Qs is the quantity of dollars supplied per month and P is the price of the dollar, measured in yen ( ¥ ).
Read the extracts and answer the questions that follow.
Text A - Overview of Tanzania
(1) Tanzania is one of Africa's fastest growing economies with an average of 7 % annual economic growth since 2000. It is a politically stable country, rich in wildlife and natural resources. However, the growth has been concentrated in urban manufacturing, using capital intensive production. The benefits from this growth have not reached all people and significant inequalities exist between urban and rural areas. Although the relative poverty rate has fallen over the last 15 years, the number of people living in absolute poverty has increased.
(2) Most people are employed in the slow-growing agricultural sector that relies on unskilled labour. Although incomes increased from 2008 to 2018, the demand for agricultural goods only increased by 21 % during this time period. Over 70 % of Tanzania's population lives in rural areas, relying on subsistence farming with limited tradable crops. Only 30 % of land is being used for agricultural production. With investment, the remaining unused land could be developed and generate income for farmers.
(3) The rural sector struggles to meet Tanzania's food requirements due to low levels of skilled labour and productivity. Additionally, high youth unemployment leads to large numbers of unskilled rural youth migrating to the cities, often finding employment in the informal sector where wages and working conditions are poor. Insufficient investment and lack of government support for diversifying the agriculture sector have been blamed for the persistent inequalities and poverty.
(4) Tanzania's cities have experienced a growing middle class with strong purchasing power and political influence who have placed demands on the government for cheaper electricity, better infrastructure, and more imported goods. In response, the government provided subsidies for electricity in city centres and tax benefits to foreign companies operating in Tanzania. There is concern that these measures may worsen inequality and lead to social unrest.
(5) The growth of Tanzania's manufacturing and service sector was funded through aid and large government borrowing, resulting in high national debt. Most of the government borrowing was from foreign sources and in US dollars (US$), which is a concern due to a recent depreciation of the Tanzanian shilling (Tanzania's currency) against the US$. Some of the debt was borrowed domestically and placed upward pressure on interest rates. Higher interest rates have resulted in crowding out but helped keep inflation under control.
Text B - Strategies and opportunities for Tanzania
(1) Previous governments have used interventionist supply-side policies to improve access to water, education, and health services. However, the health service improvements are not keeping up with population growth and many young people are still not completing secondary school. Infrastructure has improved, but it is still insufficient as producers in the rural sector find it difficult to reach markets and access supplies.
(2) Aid organizations are currently supporting new sustainable businesses in rural areas through training programmes, especially for women and young people, who make up most of the unemployed in rural areas. Economists have advised the government to improve access to credit through microfinance organizations and to simplify regulations to make it easier to start new businesses.
(3) The government is establishing property rights in rural areas to provide security for farmers. Historically, farmers could easily lose their land, which reduced their incentive to invest in productive farming methods. The government wants to develop Tanzania's land resources and lower its reliance on imported food. To reduce food imports, a subsidy will be granted to dairy farmers to allow them to compete against imported dairy products.
(4) Tanzania is a member of the East African Community (EAC) customs union and common market. However, Tanzania needs to improve human capital and encourage diversification so that the benefits of regional integration can reach the poor. These policies can also help attract foreign direct investment (FDI). Opportunities for growth through trade will expand as the EAC works towards becoming a monetary union in 2024.
Text C - Oil pipeline to be constructed
Tanzania and Uganda plan to construct a major oil pipeline from Uganda through Tanzania, ending at a port in Tanzania. This will attract FDI which could help fund infrastructure and generate jobs. However, environmentalists are concerned about potential ecological damage due to the waste created during the construction of the pipeline. Economists have suggested the waste could be avoided through a circular economy approach in the planning and construction stage.
Table 1: Economic data for Tanzania
Table 2: Development data for Tanzania
* Estimate
Using an international trade diagram, explain how a subsidy could help Tanzanian dairy farmers compete against imported dairy products (Text B, paragraph 3 ).
