IB Economics SL Unit 4 The Global Economy Questions

Build your IB Economics SL Global Economy foundation through trade, exchange rates, development and international policy decisions.

Exam points

Explain the benefits of international trade and the operation of exchange rates using diagrams and relevant data.
Analyse tariffs, quotas, subsidies, exchange-rate changes and economic integration for consumers, producers, government and trading partners.
Evaluate free trade, protection, integration and exchange-rate choices using efficiency, equity, competitiveness, stability and country-context trade-offs.

Covered syllabus points

4.1 Benefits of international trade 4.2 Types of trade protection 4.3 Arguments for and against trade control/protection 4.4 Economic integration 4.5 Exchange rates 4.6 Balance of payments 4.7 Sustainable development 4.8 Measuring development 4.9 Barriers to economic growth and/or economic development 4.10 Economic growth and/or economic development strategies

[Maximum number: 25]

(a)

Explain two possible benefits of international trade.

[ 10 ]

(b)

Using real-world examples, discuss the advantages and disadvantages of a country imposing trade protection on imported goods.

[ 15 ]

Answers may include:
- Terminology: trade protection, imported goods
- Explanation: of the impact of trade protection on consumers, producers, government and society
- Diagram: tariff, quota or subsidy diagram to show the impact of trade protection
- Synthesis (discuss): Advantages including protection of infant industries, national security, health and safety, government revenue, protection of jobs, etc. Disadvantages including misallocation of resources, retaliation, increased costs, higher prices, less choice, reduced export competitiveness, etc.
- Examples: real-world examples of countries that have imposed trade protection on imported goods.
N.B. It should be noted that terminology, theory, diagrams and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Assessment Criteria

Part (b) 15 marks

Marks

Level descriptor

0

- The work does not reach a standard described by the descriptors below.

1-3

- The response indicates little understanding of the specific demands of the question.

- Economic theory is stated but it is not relevant.

- Economic terms are stated but they are not relevant.

- The response contains no evidence of synthesis or evaluation.

- A real-world example(s) is identified but it is irrelevant.

4-6

- The response indicates some understanding of the specific demands of the question.

- Relevant economic theory is described.

- Some relevant economic terms are included.

- The response contains evidence of superficial synthesis or evaluation.

- A relevant real-world example(s) is identified.

7-9

- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed.

- Relevant economic theory is partly explained.

- Some relevant economic terms are used appropriately.

- Where appropriate, relevant diagram(s) are included.

- The response contains evidence of appropriate synthesis or evaluation but lacks balance.

- A relevant real-world example(s) is identified and partly developed in the context of the question.

10-12

- The specific demands of the question are understood and addressed.

- Relevant economic theory is explained.

- Relevant economic terms are used mostly appropriately.

- Where appropriate, relevant diagram(s) are included and explained.

- The response contains evidence of appropriate synthesis or evaluation that is mostly balanced.

- A relevant real-world example(s) is identified and developed in the context of the question.

13-15

- The specific demands of the question are understood and addressed.

- Relevant economic theory is fully explained.

- Relevant economic terms are used appropriately throughout the response.

- Where appropriate, relevant diagram(s) are included and fully explained.

- The response contains evidence of effective and balanced synthesis or evaluation.

- A relevant real-world example(s) is identified and fully developed to support the argument.

[Maximum number: 25]

(a)

Explain how a country might use trade protection to prevent dumping and to protect an infant industry.

[ 10 ]

(b)

Using real-world examples, evaluate the effects of a country imposing a tariff on a good.

[ 15 ]

Answers may include:
- Terminology: tariff.
- Explanation: of how a tariff will increase prices for domestic consumers, decrease their quantity demanded and reduce their consumer surplus. A tariff will also increase the price for domestic producers, increase their quantity supplied and increase their revenues and producer surplus. Additionally, a tariff will increase domestic government tax revenue and reduce the quantity imported.
- Diagram: a tariff diagram to show the impact on consumers, producers, and the government.
- Real-world examples: of where a tariff has been applied to an industry and the impact it has had on consumers, producers, and the government.
- Synthesis (evaluate): effect on different stakeholders, consideration of the advantages and disadvantages of imposing a tariff such as retaliation by other countries, which affects domestic producers' export markets and how tariffs might lead to higher costs of production for domestic producers, causing cost-push inflation. There could also be evaluation of the efficiency losses caused by a tariff.
N.B. It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Assessment Criteria

Marks

Level descriptor

0

- The work does not reach a standard described by the descriptors below.

1-3

- The response indicates little understanding of the specific demands of the question.

- Economic theory is stated but it is not relevant.

- Economic terms are stated but they are not relevant.

- The response contains no evidence of synthesis or evaluation.

- A real-world example(s) is identified but it is irrelevant.

4-6

- The response indicates some understanding of the specific demands of the question.

- Relevant economic theory is described.

- Some relevant economic terms are included.

- The response contains evidence of superficial synthesis or evaluation.

- A relevant real-world example(s) is identified.

7-9

- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed.

- Relevant economic theory is partly explained.

- Some relevant economic terms are used appropriately.

- Where appropriate, relevant diagram(s) are included.

- The response contains evidence of appropriate synthesis or evaluation but lacks balance.

- A relevant real-world example(s) is identified and partly developed in the context of the question.

10-12

- The specific demands of the question are understood and addressed.

- Relevant economic theory is explained.

- Relevant economic terms are used mostly appropriately.

- Where appropriate, relevant diagram(s) are included and explained.

- The response contains evidence of appropriate synthesis or evaluation that is mostly balanced.

- A relevant real-world example(s) is identified and developed in the context of the question.

13-15

- The specific demands of the question are understood and addressed.

- Relevant economic theory is fully explained.

- Relevant economic terms are used appropriately throughout the response.

- Where appropriate, relevant diagram(s) are included and fully explained.

- The response contains evidence of effective and balanced synthesis or evaluation.

- A relevant real-world example(s) is identified and fully developed to support the argument.

[Maximum number: 10]

Study the extract and data below and answer the questions that follow.
Ecuador sees 2014 trade deficit falling with new import rules, but at what cost?

(1) In the period from January to May 2014, Ecuador posted a trade surplus of US$483 million, moving from a deficit of US$626 million one year before.

(2) The government has been implementing an import-substitution policy to reduce the trade deficit. On 4 December 2013, Ecuador's Foreign Trade Committee established new quality control measures for the importation of 293 items, including cosmetics, toys, toothpaste, meat and cereals. In order for goods on the list to be imported a certificate needs to be obtained, ensuring that the products meet quality control standards. There are up to 13 steps to be taken before a product may enter as a result of the excessive regulations holding up the certificates.

(3) The import-substitution policy also involves a move to provide support to domestic industries. The president firmly believes in the benefits of sheltering infant industries. He has complained about imports such as coconut water, banana puree or cornflakes, which he believes could be produced by domestic industries, supported by appropriate policies. In addition, he points out that Ecuador is a top exporter of fine aroma cocoa, but imports approximately US $\$ 25$ million worth of chocolate per year. Other measures to protect domestic industries include anti-dumping measures and higher tariffs on raw materials and capital equipment that are available in Ecuador.

(4) In the month since this intervention started, different businesses have begun to feel both the advantages and disadvantages. Pica, one of the largest companies in the plastic industry, has taken advantage of the policy. The reduction in the importation of certain products has allowed them to increase their own production.
(5) In contrast, Toni Industries, one of the most important dairy businesses in the country has suffered. It has complained that cornflakes, which the company uses as a complementary good to one of its key products, could not get through customs because it did not have the quality control certificate.

(6) Many industry analysts and economists argue that closing off imports will isolate the country and create a false sense of competitiveness. They are also concerned that the government seems to be assuming that other countries will not react. Some argue that the government should seek to create incentives for investment, like tax benefits, or legal security, which would allow the entry of new competitors into the Ecuadorean markets.

Table 1: Selected exports and imports for Ecuador, January to May 2014

www.latinvex.com, 19 March 2014 and www.blogs.wsj.com, 14 July 2014]

(a)

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

[ 2 ]

(b)

Using information from the text/data and your knowledge of economics, evaluate Ecuador's import-substitution policy as a means of achieving economic growth and development.

[ 8 ]

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Marking guidance:

Do not award beyond Level 2 if the answer does not contain reference to the information provided.
Level ..... Marks
0 The work does not reach a standard described by the descriptors below. ..... 0
1 Few relevant concepts are recognized. ..... 1-2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. ..... 3-5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. ..... 6-8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term

Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations.

Responses may include:
- explanation of import-substitution:
- policy to replace imports with domestically produced goods
- elements of an import-substitution policy may include any measures to support domestic producers (eg tariffs, quotas, subsidies, administrative barriers)
- explanation of economic growth
- explanation of economic development.

Possible strengths:
- reduction in imports means a reduction in import spending, which will reduce the trade deficit and contribute to economic growth
- increased real GDP (may refer to diagram in part (b))
- increase employment, which may contribute to economic growth and development
- Ecuador has moved from trade deficit to trade surplus so its policy seems to be effective (paragraph ())
- Ecuador's exports are largely primary products, and so import-substitution may be necessary for Ecuador to diversify and/or produce products with more value-added such as chocolate (Table 1 and paragraph 3 )
- it is important that countries have the right to set and enforce product standards to protect their people from below-standard products (paragraph (2))
- firms like Pica may be able to increase output, thereby achieving economies of scale;
this may allow it to become an exporter and further help Ecuador's trade balance (paragraph ©), thereby resulting in economic growth;
possible job creation and breaking of poverty cycle for those with jobs
- any policies to support domestic producers may be seen as interventionist supply-side policies, which will increase long-run aggregate supply (paragraph ©).

Possible weaknesses:
- the government may not be able to correctly identify the industries that will be able to compete with imports
- domestic products are likely to be more expensive than imports, which is harmful to consumers;
impact on low income earners will be significant
- producers like Toni Industries will have to buy from more expensive domestic producers, which increase costs of production (paragraph ( ))
- higher tariffs on capital equipment and raw materials will feed through to higher costs of production leading to (cost-push) inflation (diagram) (paragraph ©)
- allows domestic producers to remain less efficient than foreign producers (paragraph 6)
- less choice of consumer goods
- misallocation of resources
- danger of retaliation (paragraph ( ).

Any reasonable evaluation.

[Maximum number: 28]

Read the extracts and answer the questions that follow.

Text A — Bangladesh: the economic role of women

(1) Bangladesh is a densely populated country in Asia. Its currency is the Bangladeshi taka (BDT). The annual rate of growth of gross domestic product (GDP) has steadily increased from 5.6 % in 2010 to 8.1 % in 2019. Absolute poverty has declined, but inequality has risen, partly due to higher unemployment rates for women than men. Moreover, the labour force participation rate for women is much lower than the rate for men. Over 80 % of the women's jobs are in the informal economy, and these jobs are low paid and insecure. Women need regular paid work, which not only raises household income but also improves economic well-being in terms of education and health.

(2) The structure of the economy is changing. The growth of cities is due to the expansion of the manufacturing sector, which now contributes a larger share to GDP than the agricultural sector. These changes have increased the number of women in the labour force. In particular, the growth of the ready-made garments (RMG) industry (mass-produced clothing) has given women the opportunity to move into formal employment. The RMG industry provides jobs for almost 4 million low-skilled and semi-skilled workers, accounting for over 40 % of total manufacturing employment. The majority of these jobs are being filled by women, with the result that the gap between the wages of men and women is gradually being reduced.

(3) There are concerns about working and safety conditions in the RMG factories. After an accident in a factory in 2013, reforms are being implemented, partly in response to criticisms from overseas retailers and consumers who purchase the garments. The minimum wage has been increased, inspections are carried out, and there are fewer small, unsafe factories.

(4) While working conditions are improving, such reforms raise the costs of manufacturing garments. Furthermore, the international garment market is becoming more competitive, putting pressure on Bangladeshi factories to reduce costs.

(5) The overseas demand for Bangladeshi garments had been rising strongly until 2019. However, demand has recently fallen, reducing firms' revenue. The reduction in revenue and the need to lower costs have forced certain firms to reduce the size of their labour force by dismissing some of their female workers.

(6) The number of ethically and environmentally concerned consumers is increasing globally. Rather than trying to lower costs, firms can be more successful if they produce "green ready-made garments" by implementing sustainable practices. About 100 garment factories in Bangladesh have already been certified as producers that meet specified environmental standards. In addition, global retailers and fashion brands are supporting recycling initiatives through the Circular Fashion Partnership.

Text B - Trade prospects for exports of ready-made garments (RMG)

(1) Exports of RMG account for over 84 % of Bangladesh's total exports. At present, Bangladesh is the world's second largest garment exporter after China. Bangladeshi exports could further increase as Chinese garments become more expensive due to rising wages in China.

(2) Bangladesh is designated as an Economically Least Developed Country (ELDC) and is therefore able to sell goods in Europe and China without any quotas or tariffs being imposed. However, Bangladesh will graduate from ELDC status by 2026 and will then no longer be eligible for preferential trade agreements. Moreover, the USA, which is the largest export market for Bangladeshi garments, has applied a 15 % tariff on imports from Bangladesh since 2013, citing concerns about working conditions in factories.

Text C - Role of foreign direct investment in the RMG sector

(1) Vietnam and Myanmar have significantly increased their garment exports to China due to foreign direct investment (FDI) from China. Chinese investors have set up factories that import raw materials from China and re-export the finished goods back to China.

(2) Consequently, to compete successfully in the huge Chinese market, Bangladesh needs to attract more FDI from China. Bangladesh is developing the required infrastructure, such as transport links. It is also necessary to diversify into expensive high-end fashion, market more aggressively, and use branding strategies.

(3) The funds from additional FDI would be helpful, because the relative contribution of Official Development Assistance (ODA) to Bangladesh's budget is declining. Furthermore, the foreign exchange obtained from foreign investors assists in financing the current account deficit.

Table 1: Economic data for Bangladesh

Table 2: Development data for Bangladesh

*estimate

(a)

Define the term informal economy indicated in bold in the text (Text A, paragraph 1).

[ 2 ]

(b)

Using information from Table 1, calculate the price of this shirt in US$ in 2019.

[ 2 ]

US dollar price $=400 \times \frac{1}{84.5}=4.7337 \ldots$ [1]

Price in 2019 = ($) 4.73 [1]
An answer of 4.73 without working is sufficient for [1].
For full marks to be awarded, the response must provide valid working. Units ($) need not be provided since they are stated in the question.

(c)

State whether the Bangladeshi exchange rate depreciated or appreciated between 2010 and 2019.

[ 1 ]

(d)

Using an international trade diagram for the US market, explain how the imposition of a 15 % tariff on imported garments from Bangladesh would affect the revenue earned by Bangladeshi producers (Text B, paragraph 2).

[ 4 ]

(e)

Using an exchange rate diagram, explain how the change in imports of goods and services from 2010 to 2019 is likely to have affected the exchange rate of the Bangladeshi taka (Table 1).

[ 4 ]

(f)

Using information from the text/data and your knowledge of economics, discuss the extent to which the ready-made garments (RMG) sector in Bangladesh contributes to achieving the Sustainable Development Goal: "Promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all".

[ 15 ]

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Marks	Level descriptor
0	- The work does not reach a standard described by the descriptors below.
1-3	- The response indicates little understanding of the specific demands of the question. - Economic theory is stated but it is not relevant. - Economic terms are stated but they are not relevant. - The response contains no evidence of synthesis or evaluation. - The response contains no use of text/data.
4-6	- The response indicates some understanding of the specific demands of the question. - Relevant economic theory is described. - Some relevant economic terms are included. - The response contains evidence of superficial synthesis or evaluation. - The response contains limited use of text/data.
7-9	- The response indicates understanding of the specific demands of the question, but these demands are only partially addressed. - Relevant economic theory is partly explained. - Some relevant economic terms are used appropriately. - Where appropriate, relevant diagram(s) are included. - The response contains evidence of appropriate synthesis or evaluation but lacks balance. - The response includes some relevant information from the text/data.
10-12	- The specific demands of the question are understood and addressed. - Relevant economic theory is explained. - Relevant economic terms are used appropriately. - Where appropriate, relevant diagram(s) are included and explained. - The response contains evidence of appropriate synthesis or evaluation that is mostly balanced. - The use of information from the text/data is generally appropriate, relevant, and applied correctly.
13-15	- The specific demands of the question are understood and addressed. - Relevant economic theory is fully explained. - Relevant economic terms are used appropriately throughout the response. - Where appropriate, relevant diagram(s) are included and fully explained. - The response contains evidence of effective and balanced synthesis or evaluation. - The use of information from the text/data is appropriate, relevant, and is used to formulate a reasoned argument supported by analysis/evaluation.

Command term
"Discuss" requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.

Answers may include:
- Definition of sustainable economic growth
- Definition of full (and productive) employment
- An explanation of the links between growth and inclusivity/equality
- Diagrams (e.g AD/AS, poverty cycle...)

Positive consequences of the RMG sector towards achieving SDG #8 may include:
- Provides opportunities for women to get employment (Text A, paragraph 2;
Table 2)
- Reduces the wage gap between men and women (Text A, paragraph 2)
- Both the above will lead to more equality and result in better health and education for families (Text A, paragraph 1;
Table 2)
- Facilitates the movement of the economy towards the manufacturing sector, which promotes growth and reduces poverty (Text A, paragraph 2;
Table 2)
- Despite high GDP growth and rising GNI per capita, unemployment is increasing due to the rising labour force (which is rising faster than the population). Therefore, the sector is needed to provide jobs (Table 1)
- Can take advantage of preferential trade agreements because Bangladesh is a designated Economically Least Developed Country (ELDC) (Text B, paragraph 2)
- Rising exports will increase AD and real GDP (Text B, paragraphs 1 and 2;

Table 1)
- As wages in China increase, there is the possibility that exports, providing revenue and foreign exchange, will increase significantly (Text B, paragraph 1)
- Could attract FDI from China, which will provide funds, possibly helping to break the poverty cycle (Text C, paragraph 2)
- FDI will provide foreign exchange to buy imports, which exceed exports and are growing faster than exports. Imports (eg of capital and raw materials) are essential for growth (Text C, paragraph 3;
Table 1)
- As more "green" firms are established, they will improve the environment and promote more exports (Text A, paragraph 6)
- If the sector can market itself more effectively (eg with more branding) and diversify, it can compete better globally (Text C, paragraph 2).

Negative consequences of the RMG sector towards achieving SDG #8 may include:
- Workers are sometimes exploited and work in unsafe conditions (Text A, paragraph 3)
- Job security is low and the need to reduce costs may make it lower (Text A, paragraph 5)
- The bigger firms (possibly MNCs) and stricter safety regulations are driving out the smaller firms which may lead to reduced competition as large firms may dominate the market. This may result in higher profits for the larger firms (and thus lead to inequality) and labour being exploited (Text A, paragraph 3)
- Exports are too specialized, which raises risks if demand or supply conditions change. Therefore, need to diversify to keep growth sustained (Text A, paragraph 5;
Text B, paragraph 1;
Text C, paragraph 2)
- There is a lot of competition from other countries, which puts pressure on firms (Text A, paragraph 4;
Text C, paragraph 1)
- When Bangladesh is no longer eligible for preferential trade agreements as an ELDC, export earnings may decrease (Text B, paragraph 2) and therefore growth may not be sustained
- More FDI may lead to more worker exploitation and/or damage to the environment (Text C, paragraph 2)
- More manufacturing leads to increasing urbanization, which may cause negative externalities of production, such as congestion and pollution (Table 2) and therefore growth may be unsustainable.

All question bank results loaded

Covered syllabus points

Question 1

Question (a)

Question (b)

Question 2

Question (a)

Question (b)

Question 3

Question (a)

Question (b)

Question 4

Question (a)

Question (b)

Question (c)

Question (d)

Question (e)

Question (f)