IB Economics SL Unit 3 Macroeconomics Topic Practice

Study the following extract and answer the questions that follow.
China's trade reforms

(1) The Chinese government has announced a set of free trade measures, including lower import tariffs on cars, soybeans and pharmaceuticals, in an attempt to end a trade war with the United States (US).

(2) The US government has long accused China of engaging in unfair trade practices to maintain their current account surplus. The trade dispute between the two largest economies intensified when the US said it would impose anti-dumping tariffs on Chinese steel and aluminium.

(3) The trade war with the US comes at a bad time given the slowdown in China's domestic demand. In recent years, China's economic growth has relied less on investment and exports and more on consumption expenditure.

(4) Producers of many Chinese manufactured goods currently benefit from protectionist measures. In particular, imports of industrial equipment, medical devices, tractors and vehicles are subject to high tariffs.
5 Automobile production capacity in China is growing. However, the domestic market is becoming oversupplied, with more cars being offered for sale than Chinese consumers want to buy. For this reason, Chinese car manufacturers are seeking to export their cars to other markets. They are therefore eager to see reduced trade tensions as increased US tariffs would make it harder to export Chinese cars to the US.

(6) Some Chinese car manufacturers are already focusing on adding advanced capabilities to their cars in order to be more competitive in global markets. China is increasing its efforts to become a world leader in self-driving cars. These will be intelligent cars that will improve transport efficiency and meet energy-saving and emission-reduction targets. Many believe that Chinese companies are so innovative that they no longer require protection from international enterprises.

(7) However, many Chinese firms remain dependent on imported factors of production. Approximately 30 % of Chinese exports are manufactured using imported equipment and components. The reduction of tariffs would therefore lower prices not only for producers but also for consumers of Chinese goods.

Define the term consumption indicated in bold in the text (paragraph (3).

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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

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Text A — India-United Kingdom trade agreement negotiations

(1) India is a country located in South Asia. India's government predicts 7 % annual economic growth and it is expected to become the third-largest global economy by 2030. To support growth, India is establishing trade agreements to diversify trade partners, and reduce the impact of global political and economic shocks. However, the annual inflation rate increased from 4 % in 2021 to 7.8 % in 2022 due to supply chain issues and oil price increases. In response, India's government has reduced taxes on fuel while the central bank has tightened monetary policy.

(2) The United Kingdom (UK), a country in Europe, needs trade agreements with countries in Asia as this area contains some of the world's fastest-growing economies and represents over 40 % of global gross domestic product (GDP). It is currently negotiating a free trade agreement (FTA) with India, which aims to double trade between the two countries by 2030. The agreement is also expected to increase labour movement and job opportunities and protect intellectual property. The Indian government is negotiating easier access to UK work permits and student visas but is concerned that some of its citizens may not return home with their skills.

(3) The India-UK FTA would reduce trade protection, including tariffs and quotas, and administrative barriers. India expects to increase its exports of textiles, leather goods, footwear, and pharmaceutical products, whereas the UK aims to boost its exports of British cars, wine, spirits and vinegar. Additionally, foreign direct investment (FDI) between the two countries is expected to increase. The FDI inflows could help to finance India's large current account deficit, which has increased as worker remittances from abroad have fallen. However, the current account deficit may decrease anyway because of recent increases in portfolio investment outflows, which could also impact the value of the rupee (India's currency).

(4) Increased competition from UK imports may threaten the growth of infant industries in India. An example is the local wine industry in India, which has grown by 30-40 % in recent years. However, to protect infant industries, the reduction in tariffs will be gradual and business taxes will be lowered.

(5) Another discussion area in India-UK trade negotiations is the possible privatization of essential services in India, such as healthcare, education, and water. There has been encouragement from the UK for India to open these markets to foreign investment and competition.

(6) Increased trade and competition could lower prices, forcing firms to cut labour costs. Indian labour protection groups want the UK to stop trade talks until India changes a law restricting labour unions. They believe the trade agreement should include regulations to protect against poor working conditions and low pay, which impact gender inequality and child welfare.
Text B - India-UK trade negotiations and Sustainable Development Goals

(1) India and the UK recognize the relationship between trade and sustainable development and are committed to supporting the sustainable development goals (SDG).

(2) The India-UK FTA negotiations are encouraging collaborative research and development projects in the following areas:
- Clean energy and green technologies; decreasing the market failure associated with fossil fuel energy, developing electric vehicles, and waste management practices.
- Gender inequalities; improving access to credit and markets for women, improving education opportunities, and increasing labour participation rate of females in India.
- Human and labour rights; supporting programmes that create work opportunities and better working conditions.
- The agricultural sector and food security; addressing India's low productivity rates, which are blamed on ineffective fertilizer subsidies, lack of infrastructure, and flooding and drought problems from climate change.
- The healthcare sector; developing pharmaceutical products.

(3) India-UK's previous health sector collaboration resulted in global vaccine development and helped decrease the market failure in the industry. However, possible FTA intellectual property rules may limit India's ability to produce low-price medication, resulting in reduced export opportunities and possibly creating monopolies. On the other hand, targeted research and development could lead to cheaper medication, and the UK's insurance expertise may improve India's health insurance programme.

(4) Growth in India-UK trade may increase carbon emissions, deforestation, and air and water pollution. Experts estimate the FTA could increase trade-related transport emissions by up to 36 %. Environmental experts believe this is significant as the UK continues cutting solar panel subsidies, slowing the conversion to clean energy.

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Text C - Overview of the economy and government policies in Malaysia

(1) Malaysia, located in Southeast Asia, is an upper-middle-income country. While aiming to increase incomes further, mainly through trade and foreign direct investment (FDI), the government also has the objectives of reducing carbon emissions and inequality. Annual rates of economic growth have been averaging between 4 % and 5 % in the early 2020 s .

(2) Inflation in the early 2020s has been low, despite rising global prices. However, unemployment is high, particularly among young people. Real wages in many jobs are lower than four years ago. Therefore, a deflationary (recessionary) gap exists and real gross domestic product (GDP) is below its potential. Fiscal policy could be more expansionary, because government debt is not very large.

(3) Absolute poverty has been eliminated, but income inequality remains high because there are many low-income and unskilled workers in the informal sector. In addition to spending on education and health, the government provides subsidies for necessities, such as gasoline, flour and electricity. However, high-income households often benefit more from subsidies than low
income households. For example, high-income households represent 10 % of electricity users, but they receive over 50 % of the energy subsidies. There are also concerns that subsidies for gasoline add to government spending and have caused external costs to rise due to cars being used more.

(4) The government is considering targeted measures, such as providing electricity subsidies only to low-income households. In addition, from May 2022, the minimum wage was increased by 30 %. Although there were concerns that this might increase unemployment, research studies into the effects of a previous rise in the minimum wage in Malaysia show that it increased labour productivity by motivating workers, reduced unemployment by increasing consumption, and increased the labour force participation rate, particularly for females.

(5) Government spending is promoting growth by spending on infrastructure, accelerating innovation, and providing subsidies or loans with low interest rates for agriculture and fishing. In addition, the government is increasing growth in potential output by raising labour productivity through investment in human capital, with measures to improve schooling and nutrition.

(6) Malaysia has consistently had a current account surplus through the early 2000s. Import tariffs have been reduced, because Malaysia is a member of two large free trade areas. However, administrative barriers to trade are high and the International Monetary Fund recommends their removal.

(7) The central bank of Malaysia manages the exchange rate of the ringgit (Malaysia's currency) by using reserve assets. Some trading partners suggest that the ringgit is an undervalued currency. There are financial market regulations affecting the inflows and outflows of FDI and portfolio investment, because the flows are large and volatile. However, transactions on the capital and financial accounts of the balance of payments are gradually being liberalized.
Text D - Environmental policies in Malaysia

(1) The Malaysian government is committed to a 55 % reduction in carbon emissions, which are mostly due to electricity generation and private transportation. Therefore, many government investments are in green projects.

(2) The government is implementing measures to encourage the use of renewable energy, rather than fossil fuels, to generate energy so that the output of energy becomes closer to the socially optimum output. A tradable permits scheme for emissions is being considered and the subsidies on gasoline may be restricted. Carbon taxes, which could generate up to 3 % of GDP in revenue, may also be implemented. Low-income households would be provided with transfer payments as compensation for the resulting higher energy prices.

(3) Although environmental regulations on firms exist, there is concern that such regulations may be weakened when the government encourages investment by firms. However, the government could make support for investment conditional on firms meeting environmental standards.
Text E - The taxation system in Malaysia
The 2023 budget in Malaysia contained measures to raise more government revenue through additional taxes on luxury goods and e-cigarettes. A study has shown that a 10 % increase in price leads to a 24 % reduction in demand for e-cigarettes by teenagers. Therefore, the tax on e-cigarettes is impacting the markets for other goods, such as tobacco cigarettes. The budget also raised income tax rates for high-earners and reduced the rates for low-earners. Corporate income tax rates were lowered for small and medium-sized firms.