Build your IB Economics HL Global Economy foundation by evaluating international evidence, diagrams and policy trade-offs across countries.
Country X and Country Y are capable of producing both apples and bananas. Assume a two-country, two-product model.
Country Y has absolute advantage in the production of both apples and bananas, and comparative advantage in the production of bananas.
Explain two possible economic consequences for the eurozone if the euro appreciates.
Tanya exchanges her US$ for EU€.
Calculate the quantity of EU€ she will receive for her US .
The EU€ depreciates by 10 % against the US$. Fearing further depreciation of the EU€, Tanya exchanges her EU€ for US$.
Calculate, in US$, the loss made by Tanya as a result of these transactions.
Explain two reasons why a government might prefer a floating exchange rate system for its currency.
The following diagram illustrates the domestic market for rice in Country Alpha. This diagram will be used for several of the following questions.
The following table provides selected data from the balance of payments for Alpha for 2016.
Table 1
Using the data in Table 1, calculate Alpha's current account balance for 2016.
Outline how Alpha's current account balance for 2016 is likely to affect the exchange rate of its currency.
State one way in which the government of Alpha might bring about a depreciation of its currency.
Following the depreciation, it is observed that the current account balance worsens initially, but improves after a certain period of time. Explain why this might be expected to happen.
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
Define the term property rights indicated in bold in the text (Text F, paragraph 1).
Using an exchange rate diagram, explain how a rise in palm oil prices may cause an appreciation of the Indonesian rupiah (Text D, paragraph 4 ).
Using information from the texts/data and your knowledge of economics, discuss whether there is a conflict between meeting Sustainable Development Goal 12 (responsible consumption and production) and the objective of economic growth in Indonesia.
Study the extract below and answer the questions that follow.
Ghana to seek help from International Monetary Fund
(1) Ghana has said it will seek financial aid in the form of a loan from the International Monetary Fund (IMF) to help stop the rapid decline in the value of the cedi, Ghana's currency, and close a large budget deficit. Ghana's transformation from one of Africa's fastest growing economies to the home of the world's worst-performing currency has become a concern. The exchange rate depreciated by 40 % against the US dollar in 2014. The fall in the currency has led to increases in the price of consumer goods such as sugar and fuel; inflation is at an unacceptable 15 %.
(2) Despite being a major exporter of gold, oil and cocoa, Ghana's current account deficit has risen sharply to 12 % of its gross domestic product (GDP). This is partly due to a rapid increase in demand for imports and falling gold prices. Additionally, oil revenues have not been as strong as expected.
(3) The government is also struggling with a wide budget deficit, which stood at 10 % of GDP last year. Ghana's good reputation for fiscal responsibility has worsened considerably as the government tripled salaries for police officers and soldiers.
(4) It is expected that the news of talks with the IMF will be positively received in international financial markets. The finance minister has said the step would help to stabilize the currency, to bring domestic prices under control, and also to restore investors' confidence in Ghana's economy.
(5) A Ghanaian spokesperson noted that the IMF would insist on the government introducing measures to tackle inflation and reduce its budget deficit. The IMF says that Ghana needs to tighten its budget immediately, by reducing public sector wages, lowering subsidies and increasing taxes. The IMF is likely to demand a limit on borrowing and perhaps some privatization of power and water companies.
(6) Earlier this year, problems in the economy had led to nationwide protests, with thousands of workers across the country protesting in the streets about the rise in the cost of living. The country's largest trade union says the government has been mismanaging the economy. In response to the protests, a government minister said that the government would work very hard to achieve economic development to make life easier for the working people of Ghana but that all Ghanaians would have to make "some sacrifices for the economy to recover". and www.bbc.com/news, 24 July 2014 and 4 August 2014]
Define the term economic development indicated in bold in the text (paragraph 6).
Using an exchange rate diagram, explain how the large current account deficit may have affected the value of the Ghanaian cedi.
Using an AD/AS diagram, explain how the falling value of the Ghanaian cedi may have contributed to inflation.
Using information from the text/data and your knowledge of economics, discuss possible consequences of International Monetary Fund (IMF) financial aid on Ghana's economic growth and development.