IB Economics HL 3.3 Macroeconomic objectives Question Bank

Study the extract below and answer the questions that follow.
Relief as Kenya raises tariff for steel and iron imports

(1) Steel manufacturers in Kenya are set to benefit as the government moves to protect the local manufacturing industry from cheap steel and iron imports.

(2) In 2014 a government official announced an increased tariff on steel and iron imports. "Our steel mills are closing down due to unfair competition from cheaper imported iron and steel products," he explained. "To protect and create more jobs in the iron and steel industries, tariffs on a wide range of imported iron and steel products will be increased from 0 % and 10 % to 25 %," he said. The government official further stated that as well as protecting the local industries from cheaper imports, the protectionist measures would raise an additional 2.6 billion Kenyan shillings (Kenya's currency) annually in government revenue and support economic growth.

(3) The potential of local industries to expand and create jobs through trade has been held back by a number of administrative barriers. The government remains focused on improving the business environment. Over the past six months, the government has made it easier to register a company and trade across borders. The time taken to move goods out of the main harbour has fallen sharply; non-tariff barriers such as roadblocks have also been reduced. Importers of refined industrial sugar and wheat are also pleased after the government scrapped requirements to pay unnecessary administrative charges.

(4) However, there is a belief among manufacturers that there is a need for more deregulation to lower their costs of production and in effect reduce the cost of doing business.
Kenya sees gross domestic product (GDP) growth picking up but current account a concern

(5) Good economic growth rates in neighbouring countries like Uganda help to boost Kenyan exports, particularly for agriculture that makes up nearly a quarter of the Kenyan economy. The government suggests that the main risks to growth are the slow performance of developed economies that are key export markets for Kenyan goods and services, and Kenya's large and persistent current account deficit of over 10 % of gross domestic product (GDP) in the last three years. This is a major concern for sustained economic growth and the value of the Kenyan shilling.
[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com, 25 July 2014 and www.cnbcafrica.com, 25 November 2013]

The following table presents national income statistics for selected variables related to Country Z for 2012 and is expressed in millions of dollars.

Burundi is a landlocked country in Central Africa. Its economy is heavily reliant on the agricultural sector, which employs 92 % of the labour force but contributes only 40 % of gross domestic product (GDP). Most of the 11.5 million population live in poverty, especially in rural areas. The level of food insecurity (people without access to enough food) is almost twice as high as the average for sub-Saharan African countries with more than 60 % of the population living below the poverty line.

Infrastructure in Burundi is poor. There are no railroads and only three major routes through the country, two of which involve water transport, across Lake Tanganyika. Access to clean water is low, while fewer than 5 % of the population have access to electricity. The literacy rate for those aged 15 and over is 61.6 %, while only 1 % of secondary schools have access to the internet.

Study the following extract and data and answer the questions that follow.
Filipino rice farmers prepare for trade liberalization

(1) To meet its obligations under World Trade Organization (WTO) rules, the president of the Philippines has asked the government to eliminate the current quota system for rice imports. As an important part of food security measures, the government wants to achieve self-sufficiency in the production of rice. To support this goal, the WTO allowed the Philippines to extend its rice quota until June 2017 to allow more time for local farmers to prepare for free trade.

(2) The current quota system for rice imports makes domestic prices rise dramatically during periods of low domestic supply.

(3) Eliminating the quota on rice aims to make the rice market more competitive, which could reduce the price of rice by as much as 7 Philippine pesos $\left(\mathrm{PH}^{\mathrm{P}}\right)$ per kilogram (kg). The National Economic and Development Authority has estimated that lower rice prices could save Filipino households as much as PH 2362 per year. However, if the rice quota is eliminated, economists have warned that the government must prepare local rice producers so that they can either compete with rice imports or move to producing other crops. "Currently Filipino farmers cannot compete with Vietnamese farmers who may enjoy economies of scale" declared one economist. "The solution is to bring down the cost of production of rice."

(4) To help Filipino farmers to adjust to competition from lower-priced rice imports, the government has allocated funds to the Rice Competitiveness Enhancement Fund. This fund will provide support to farmers in order to increase productivity by supplying high-yield seeds and fertilizer. It will also provide subsidies to encourage the use of agricultural machinery and will offer support services and training to farmers.

(5) Apart from being an essential food for many Filipinos, rice is also an important input for the food industry. The plan to remove the import quota will reduce the inflation rate in the Philippines by up to 0.4 %. In July 2018, the central bank governor reported that inflation had reached 5.7 %, well above the government's target range of 2 % to 4 %. He stated that "supply-side factors are the main drivers of the present inflation. These factors include rising international oil prices, higher indirect taxes and poor weather conditions that have affected food supply". The president stated that the removal of the rice quota was one solution to ease the rising inflation.

Table 1 shows the gross domestic product (GDP) of the United States of America (USA) economy from 2020 to 2023. The USA is not the fastest growing economy in the world, but it is the largest. It also has the largest budget deficit and the largest current account deficit in the world. As a result, the actions of its central bank, the Federal Reserve, always make news.

Study the extract below and answer the questions that follow.
Relief as Kenya raises tariff for steel and iron imports

(1) Steel manufacturers in Kenya are set to benefit as the government moves to protect the local manufacturing industry from cheap steel and iron imports.

(2) In 2014 a government official announced an increased tariff on steel and iron imports. "Our steel mills are closing down due to unfair competition from cheaper imported iron and steel products," he explained. "To protect and create more jobs in the iron and steel industries, tariffs on a wide range of imported iron and steel products will be increased from 0 % and 10 % to 25 %," he said. The government official further stated that as well as protecting the local industries from cheaper imports, the protectionist measures would raise an additional 2.6 billion Kenyan shillings (Kenya's currency) annually in government revenue and support economic growth.

(3) The potential of local industries to expand and create jobs through trade has been held back by a number of administrative barriers. The government remains focused on improving the business environment. Over the past six months, the government has made it easier to register a company and trade across borders. The time taken to move goods out of the main harbour has fallen sharply; non-tariff barriers such as roadblocks have also been reduced. Importers of refined industrial sugar and wheat are also pleased after the government scrapped requirements to pay unnecessary administrative charges.

(4) However, there is a belief among manufacturers that there is a need for more deregulation to lower their costs of production and in effect reduce the cost of doing business.
Kenya sees gross domestic product (GDP) growth picking up but current account a concern

(5) Good economic growth rates in neighbouring countries like Uganda help to boost Kenyan exports, particularly for agriculture that makes up nearly a quarter of the Kenyan economy. The government suggests that the main risks to growth are the slow performance of developed economies that are key export markets for Kenyan goods and services, and Kenya's large and persistent current account deficit of over 10 % of gross domestic product (GDP) in the last three years. This is a major concern for sustained economic growth and the value of the Kenyan shilling.
[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com, 25 July 2014 and www.cnbcafrica.com, 25 November 2013]

Study the following extract and data and answer the questions that follow.

Read the extracts and answer the questions that follow.
Text A — Costa Rica: Economic growth and development strategies

(1) In the early 1990s, Costa Rica, a Central American country with a population of approximately 5 million people, was considered an economic development success story. This stable democracy has experienced consistent economic growth (approximately 4 % annually) for the last 20 years. Some experts say this has been due to moving from a failed import substitution policy to outward-oriented economic policies. The outward-oriented policies included export promotion, diversification, trade liberalization and inward foreign direct investment (FDI). During the same period, social and environmental policies were implemented. Public education and healthcare were guaranteed for all citizens, social programmes were improved to include extensive transfer payments and minimum wages were increased. This helped the reduction in absolute poverty rates and Costa Rica became known as a global leader in environmental conservation efforts.

(2) The Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), was a significant move towards trade liberalization. In addition to reducing trade barriers, it established a secure and predictable environment for foreign investors. This agreement also led to the breakup of the state-owned monopolies in the telecommunication and insurance industries in Costa Rica. Additionally, trade agreements with Canada, China, the European Union (EU), Mexico, Peru and Singapore were established.

(3) Costa Rica encouraged inward FDI by lowering regulations and providing tax incentives in manufacturing industries. In 1997, Intel, a large multinational tech company from the United States (US) invested US$300 million in building a computer parts factory. Intel's investment helped diversify Costa Rica's main exports away from coffee and bananas to electronics. Moreover, the FDI allowed Costa Rica to benefit from production externalities, as multinational companies provided training to local employees. Manufacturing and services overtook agriculture in terms of contribution to gross domestic product (GDP), and Costa Rica experienced its first trade surplus in 50 years. The increase in real GDP from the FDI was significant, as the marginal propensity to consume (MPC) was 0.8 at the time.

(4) To promote diversification, export subsidies for companies in the manufacturing sector were granted. Agricultural diversification was also encouraged through subsidising farmers who were adopting new technology to produce higher value-added products, such as roasted coffee beans.
Text B - Current concerns

(1) Despite earlier successes, income inequality in Costa Rica has remained high and poverty levels have remained unchanged for several years. This has been blamed on insufficient transfer payments due to a tax system that is not progressive enough and tax exemptions offered to foreign firms. Unemployment has consistently risen, and despite high levels of spending in education, a significant number of young people have not completed secondary or higher education. The focus on higher value-added sectors did not create jobs for low skilled workers, which had a disproportionate impact on women and youth. Additionally, the social programmes have often failed, and still fail, to reach the very poor.

(2) High social and environmental spending, large increases in public sector wages, and insufficient revenue have resulted in very large government (national) debt. Most of the debt is domestic, which is raising concerns about possible crowding out.

(3) FDI has historically supported economic growth, however, domestic investment and further FDI have slowed down due to rising costs and outdated infrastructure. Additionally, the appreciating colón (Costa Rica's currency) has lowered export competitiveness, and Costa Rica remains heavily dependent on one major trading partner, the US.
Text C - "Green Trademark" environmental policy
The "Green Trademark" policy has reversed deforestation and has resulted in Costa Rica becoming one of the countries with the greatest level of biodiversity in the world. However, it is difficult to maintain the environmental focus due to pressure on government resources and the high opportunity costs associated with land use. The consistent economic growth has made it difficult for Costa Rica to reduce carbon emissions from fossil fuels. Increasing urbanization and the growth in the manufacturing sector have increased air and water pollution. Moreover, the overuse of chemicals in farming has caused river pollution, and the intensive use of land for agriculture has generated concern for environmental conservation.

\footnotetext{
*2011 figure
}

Text A - Overview of Vietnam

(1) Economic reforms in Vietnam during the past 30 years have led to rapid economic growth, which has transformed a poor nation into a lower middle-income economy. The percentage of the population with an income of less than US$1.90 a day declined from 38\% in 2002 to below 2 % in 2018.

(2) Vietnam used to be a food-insecure nation, in which many people sometimes lacked access to affordable food, but it is now a leading exporter of basic food commodities. It also aims to become an exporter of high quality and processed food products. However, agricultural production only accounts for 18 % of gross domestic product (GDP), although it uses 40 % of the land and employs 43 % of the labour force. Due to the growing rural population, land is often divided up between a greater number of farmers, causing some farms to become smaller. These farms have fewer opportunities to benefit from economies of scale and lower average costs of production.

(3) Vietnam's rapid growth and industrialization, focused on export-oriented manufacturing, have had a harmful impact on the environment. Electricity consumption has tripled since 2010, growing faster than GDP. Electricity generation, which mainly uses fossil fuels, accounts for approximately 60 % of Vietnam's carbon emissions. Demand for water continues to increase. Unsustainable exploitation of natural resources, such as land, fisheries, and timber, could negatively affect prospects for long-term growth. In addition, Vietnam's primary sector is highly vulnerable to the climate and is therefore subject to supply shocks.

(4) Vietnam has signed several free trade agreements (FTAs). Its first FTA was a partnership with Japan in 2008. Both Vietnam and Japan are members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which took effect at the beginning of 2019. These FTAs also promote inward foreign direct investment (FDI). In addition, Vietnam has introduced policies to attract foreign investment, such as tax incentives and spending on infrastructure.

(5) Japan is the biggest provider of foreign aid to Vietnam and the largest source of FDI. Japanese firms and aid agencies are jointly financing large-scale projects, including port infrastructure and a high-speed railway, which will reduce the Hanoi to Ho Chi Minh journey time from about 35 hours to under six hours. Other Japanese-funded aid projects are in the areas of health care, education, and the environment.
Text B - Trade and investment flows between Vietnam and Japan

(1) Japan imports seafood and consumer products such as textiles, leather shoes and processed foods from Vietnam, because Vietnam has a comparative advantage in such items. Conversely, Vietnam imports machinery, technology, and raw materials for production from Japan. Gradually barriers to trade are being removed. In 2020, Vietnam began exporting lychees (a luxury fruit) to Japan after five years of negotiations on quality standards. The improved access to the Japanese market has increased the number of consumers and the revenue earned by Vietnamese lychee farmers.

(2) Japanese firms invest in Vietnam, particularly in urban areas, because wages are low and they can export from Vietnam to other CPTPP members and to China and Indonesia. Panasonic, a Japanese multinational company (MNC), relocated a major factory, which manufactures refrigerators and washing machines, from Thailand to Vietnam in 2020. The construction of a coal-fired power plant is mainly funded by Japanese firms. The Japanese government is promoting further investment by subsidizing over 30 firms that are relocating from China to Vietnam. Most of these firms are food processors or producers of manufactured goods (for example, medical equipment).
Text C - Roles of the central bank in Vietnam

(1) The central bank in Vietnam has been lowering interest rates since mid-2019. However, it has kept the minimum reserve requirement at 3 % of commercial bank deposits, despite suggestions that this requirement could be lowered.

(2) The central bank also regulates the exchange rate of the dong (Vietnam's currency). It actively intervenes in the foreign exchange market to stabilize the rate when necessary. In April 2020, there was downward pressure on the dong due to the lower interest rates and fewer foreign tourists. However, the central bank has a large amount of reserve assets, which were used to prevent the dong from depreciating.

* 2018 figure

* 2018 figure

Read the extracts and answer the questions that follow.
Text A - Overview of Mexico

(1) Mexico, with its abundant natural resources, is the second largest economy in Latin America. However, compared to other Latin American countries, Mexico has underperformed. Its annual economic growth rate averaged 2.5 % between 1994 and 2019. Per capita income rose more slowly, at an average rate of less than 1 % annually.

(2) Government expenditure has been rising, while taxation revenue has been stable or falling. Therefore, there is concern about the increasing government debt. If there is a recession, automatic stabilizers will increase the budget deficit, further raising the level of government debt. However, the International Monetary Fund (IMF) forecasts that government debt will stabilize in the mid-2020s, at around 65 % of gross domestic product (GDP).

(3) The oil sector makes an important contribution to Mexico's economy. Earnings from this sector were about 30 % of total government revenue in 2019. However, as countries increase their use of alternative energy sources, the long-term trend of falling oil prices will probably continue.
4

(5) Since 1994, the exchange rate for the peso (Mexico's currency) has been floating. In March 2020, the rate changed from 18 pesos per United States (US) dollar to 25 pesos per US dollar. During 2020, the deficit on the balance of trade in goods continued to widen. However, by April 2021 the trade balance had changed to a surplus as exports of manufactured goods rose strongly. The deficit on the current account has also been narrowed by rising net remittances.
Text B - Free trade agreements

(1) The North American Free Trade Agreement (NAFTA) was a three-country accord negotiated by the governments of Canada, Mexico, and the United States that entered into force in January 1994. NAFTA eliminated most tariffs on products traded between the three countries, with a major focus on liberalizing trade in agriculture, textiles, and automobile manufacturing. The deal also sought to protect intellectual property, establish dispute resolution mechanisms, and through side agreements, implement labor and environmental safeguards. Trade among the NAFTA members tripled over the following 25 years, partly due to trade disputes between the US and China.

(2) Following the establishment of NAFTA, productivity increased in Mexico. US and Canadian firms viewed Mexico as a low-cost location for factories, which could improve their competitiveness. Therefore, foreign direct investment (FDI) into Mexico grew significantly throughout the 1990s and early 2000s. In the industrial north of Mexico, high-tech manufacturing factories were established and wages increased. However, the agricultural south did not benefit from the FDI. Agricultural exports from Mexico did increase, but Mexican farmers, especially corn producers, faced competition from subsidized US agriculture.

(3) The wage differential between the US and Mexico was predicted to decrease significantly, but a large wage gap remains. NAFTA's effect on employment has been mixed. Some workers became unemployed when their firms lost market share due to increased competition, while others gained from the creation of new market opportunities.

(4) In 2020, NAFTA was renegotiated as the US-Mexico-Canada Agreement, which kept elements of NAFTA, while adding provisions regarding digital trade and financial services. The requirement that a high proportion of the inputs used in exported goods must come from member countries may mean that the cheapest inputs cannot be used. There are also additional rules to protect the environment and support labour rights. For example, 40 % of the value of the components in each vehicle exported from Mexico must come from factories paying a wage of at least US$16 per hour. As a result, the incomes of Mexicans who find industrial employment are raised.
Text C - Access to banking and finance in rural areas

(1) The persistence of income inequality in Mexico is partly due to domestic factors, such as underdeveloped financial institutions and low productivity in the large informal sector. Improving access to banking and finance could significantly benefit low-income households and small firms.

(2) The Expanding Rural Finance Project aims to provide finance for women, young people, and small firms in rural areas where there are no commercial banks. Over 170000 loans (averaging US$1850 per loan) were provided from 2016 to 2020. Among the recipients, 76 % lived in rural areas and 81 % were women.

*estimate