Marco Paper 2

20/04/2024, 20:01 Collections | RevisionDojo
Economics Mock Exam

From topics Topic 2 - Macroeconomics, Short-term fluctuations and long-term
trend (business cycle), Measures of economic activity: gross domestic product
(GDP), and gross national product (GNP) or gross national income (GNI), The
circular flow of income model, The meaning of aggregate supply, Shifting the
aggregate supply curve over the long term, Alternative views of aggregate supply,
The AD curve, The components of AD, The determinants of AD or causes of shifts
in the AD curve, Short-run equilibrium, Equilibrium in the Keynesian model, The
nature of the Keynesian multiplier, The meaning of unemployment, Consequences
of unemployment, Types and causes of unemployment, The meaning of inflation,
disinflation and deflation, Types and causes of inflation, Consequences of
inflation, Consequences of deflation, Possible relationships between
unemployment and inflation, The meaning of economic growth, Causes of
economic growth, Consequences of economic growth, The meaning of equity in
the distribution of income, Poverty, The role of taxation in promoting equity, Other
measures to promote equity, The relationship between equity and efficiency,
Types of government expenditures (government budget), Sources of government
revenue, The budget outcome, The impact of automatic stabilizers, Fiscal policy
and short-term demand management, Fiscal policy and its impact on potential
output, Evaluation of fiscal policy, Interest rate determination and the role of a
central bank, Monetary policy and short-term demand management, Monetary
policy and inflation targeting, Evaluation of monetary policy, Investment in human
capital (supply side policy), Investment in new technology (supply side policy),
Investment in infrastructure (supply side policy), Industrial policies (supply side
policy), Supply-side policies and the economy, Policies to encourage competition
(market-based policy), Labour market reforms (market-based policy), Incentive-
related policies, The strengths and weaknesses of supply-side policies
Question Paper
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1
Japan–European Union Economic Partnership Agreement (JEEPA)
1. In July 2017, the Japan–European Union Economic Partnership Agreement (JEEPA)
was announced and it may come into force in 2019. Jointly, Japan and the European
Union (EU) currently account for 28 % of global gross domestic product (GDP). The
trade agreement could raise the EU’s exports to Japan by 34 % and Japan’s exports
to the EU by 29 %. Economists say that this trade agreement marks a determined
effort to combat rising protectionism and sends a powerful signal that cooperation,
not trade protection, is the way to tackle global challenges.
2. The largest benefit to Japan will be for Japanese car manufacturers, as Europe will
gradually lower tariffs from 10 % on Japanese cars. Car tariffs are a big concern for
Japanese car manufacturers, who struggle to compete with South Korean car
manufacturers. South Korean cars are sold to the EU tariff-free thanks to a free trade
agreement signed in 2011. Within Europe, car manufacturers are one of the largest
sources of jobs. Car manufacturers in the EU are concerned that cutting tariffs on car
imports from Japan may lead to a large increase of Japanese cars into the European
market.
3. The trade agreement will also resolve non-tariff barriers, such as technical
requirements and regulations. More importantly, however, the EU and Japan will make
their environmental and safety standards on cars the same, which will make trade
easier.
4. Japanese politicians have been defending their relatively inefficient farmers for a long
time. Now, Japan will lower tariffs on European meat, dairy products and wine, cutting
85 % of the tariffs on food products coming into Japan. This includes removing the
current 30 % tariff on some European cheeses, such as cheddar and gouda cheese.
However, imported camembert cheese will face a quota. This may be because Japan
produces some camembert cheese.
5. JEEPA is particularly alarming for United States (US) beef and pork farmers because
Japan has been the biggest export market for US beef and the second biggest export
market for US pork. Any preferential tariff that EU farmers receive will make it much
tougher for American farmers to sell meat in Japan.
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6. With this trade agreement, the EU and Japan are trying to promote the values of
economic cooperation and environmental conservation, which are both important for
long-term economic growth and sustainability. However, JEEPA faces significant
challenges because it will have to be passed by the Japanese Parliament, the
European Parliament and European national governments. There is no guarantee that
all governments will agree to the economic partnership.
[Source: adapted from The Japan-EU Trade Agreement: Pushing Back Against
Protectionism, http://globalriskinsights.com,
15 July 2017; Japan-EU trade agreement may hurt U.S. meat producers, by Katherine
Hyunjung Lee, Jul 12, 2017, Medill
News Service, https://dc.medill.northwestern.edu; and A new trade deal between the EU
and Japan, The Economist (London,
England), Jul 8th 2017, https://www.economist.com/finance-and-
economics/2017/07/08/a-new-trade-deal-between-the-eu-andjapan.
© The Economist Newspaper Limited, London, July 8th 2017]
1. Define the term quota indicated in bold in the text (paragraph [4]). [2]
2. Define the term sustainability indicated in bold in the text (paragraph [6]). [2]
3. Using an AD/AS diagram, explain the impact of the trade agreement between Japan [4]
and the EU (JEEPA) on Japan’s economic growth (paragraph [1]).
4. Using an international trade diagram, explain the likely impact of Japan “removing [4]
the current 30 % tariff” on the level of cheddar cheese imports. (paragraph [4]).
5. Using information from the text/data and your knowledge of economics, evaluate [8]
the possible consequences of the trade agreement between Japan and the EU
(JEEPA).
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Question 2
Pakistan and the International Monetary Fund
1. Pakistan is a low-income country with a rapidly growing population and widespread
poverty. As of 2019, it has a large budget deficit due to high levels of military
spending and high costs of debt servicing (35 % of the deficit is interest payments). It
is also experiencing a widening current account deficit and is heavily dependent on
foreign aid.
2. Pakistan’s government is negotiating a loan from the International Monetary Fund
(IMF). Amongst its conditions, the IMF has said that the government must decrease
private-sector regulation such as regulations on financial institutions. The government
must also sell state-owned enterprises and government revenue must be raised by
increasing indirect taxes and improving tax collection systems. Furthermore, the IMF
insists that the government cuts its spending further.
3. The government has stated that the IMF loan is essential to restore confidence in
Pakistan’s economy. This would help to attract foreign direct investment (FDI) to
encourage economic growth and help break out of the poverty cycle. High debt levels
and slowing economic growth in 2018 discouraged FDI. The IMF loan is also needed
to help persuade other multilateral lenders such as the World Bank and the Asian
Development Bank to provide and extend loans.
4. In the past, Pakistan has had 21 agreements with the IMF with limited success—any
balance of payments or external debt improvement has been temporary. The IMF
states that this is because Pakistan has not always met the conditions of the loans,
while other stakeholders argue it was the lack of support given to Pakistan to
implement the conditions and to allocate the loan funds appropriately.
5. Economists say that there needs to be a focus on improving human capital to provide
the large number of young people entering the labour force with the skills to grow
businesses. The quality of education needs to improve and to be combined with an
effort to provide girls with greater access to education—female participation in the
labour force is the lowest in the region.
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6. The World Bank has financed education and infrastructure, such as renewable energy
projects, in poor regions of Pakistan. However, critics of the World Bank argue that the
projects are not making a significant difference and the construction of hydroelectric
dams leads to environmental damage.
7. The government believes that the macroeconomic concerns of the IMF should be
addressed first, and poverty issues in Pakistan can be dealt with later.
[Source: © International Baccalaureate Organization 2020.]
1. State two functions of the International Monetary Fund (IMF) (paragraph [2]). [2]
2. Define the term human capital indicated in bold in the text (paragraph [5]). [2]
3. Using a poverty cycle diagram, explain how the government of Pakistan could [4]
intervene to “break out of the poverty cycle” (paragraph [3]).
4. Using an externalities diagram, explain how “greater access to education” for girls [4]
in Pakistan could reduce market failure (paragraph [5]).
the potential impact of the IMF and the World Bank on economic development in
Pakistan.
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Question 3
New Zealand dollar overvalued
1. The New Zealand finance minister said the exchange rate of the New Zealand dollar
(NZD), is “unsustainably high; it is somewhere between 10 % to 15 % overvalued”.
2. The NZD had been near its record high against the US dollar before weakening last
week on slower inflation figures and a fall in dairy prices. The NZD has gained about 6
% so far this year.
3. However, the finance minister said that New Zealand exporters had developed
strength because of the high currency. “New Zealand is actually in reasonably good
shape,” he said. “We have had an export sector operating with a strong exchange rate
now for five or six years and that has had an impact on efficiency.”
4. An economist said recently that the central bank might consider intervening in the
currency market to achieve a depreciation in the value of the NZD.
5. The Reserve Bank (central bank) governor raised the official interest rate for the
fourth time this year to 3.5 % at a time when other major economies have their rates
at record low levels.
6. He said that, “Encouragingly, the economy appears to be adjusting to the monetary
policy tightening that has taken place since the start of the year. It is important that
inflation expectations remain contained. This interest rate increase will help keep
future average inflation near the 2 % target and ensure that the economic expansion
can be sustained”.
7. New Zealand’s economy is expected to grow at an annual pace of 3.7 % over 2014.
New Zealand government figures showed a monthly trade (in goods) surplus of
247millioninJune2014comparedto371 million in June 2013. The annual trade (in
goods) balance turned to a surplus of 1.2billionf romadef icitof 819 million a year
earlier.
8. Global demand for New Zealand dairy products has been a key support for the
country’s exports over the past 18 months, though prices have dropped this year with
increased supply.
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1. Define the term depreciation indicated in bold in the text (paragraph[4]). [2]
2. Define the term monetary policy indicated in bold in the text(paragraph[6]). [2]
3. Using an exchange rate diagram, explain how the increase in the official interest [4]
rate to 3.5 % is likely to affect the value of the New Zealand dollar (paragraph[5]).
4. Using an AD/AS diagram, explain how “monetary policy tightening” may affect a [4]
country’s inflation rate (paragraph[6]).
5. Using information from the text/data and your knowledge of economics, discuss the [8]
possible economic consequences of an overvalued New Zealand dollar on the New
Zealand economy.
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Question 4
Current account deficit poses a challenge to Pakistan’s economy
1. The president of Pakistan has expressed his concern at the significant increase in
Pakistan’s current account deficit. The current account deficit grew to US
12.12billioninthef iscalyearof 2016/17comparedtoU S 4.86 billion in 2015/16.
The deficit was caused by rising imports and falling exports. The increasing current
account deficit may result in Pakistan having to request a new International Monetary
Fund (IMF) loan to fund the deficit. To avoid this, the president is proposing that the
importing of luxury, non-essential items needs to be reduced.
2. The governor of Pakistan’s central bank agreed with the president’s concern. He said
that the “rapidly growing current account deficit is the biggest challenge facing the
country’s economy”. He agreed that the problem is made worse because many non-
essential imports are being purchased, which requires borrowing from abroad.
However, he stressed that while rising non-essential imports are a problem, “32 % of
imports are capital goods” and are necessary for the continued growth of small to
medium enterprises (SMEs), agriculture, housing and construction.
3. Central bank advisors have also recommended depreciating the rupee (Pakistan’s
currency) to reduce the trade deficit. The value of the rupee is currently controlled
through a managed exchange rate system. It has been suggested that the rupee is
overvalued by as much as 20 %. However, the central bank governor claims that a
“depreciation has a number of negative effects”.
4. In 2016, Pakistan’s economic growth reached 5.3 %, its highest point for 10 years. The
government has estimated that it will be 6 % in 2017. According to the central bank
governor, loans to SMEs are currently only 7 to 8 % of all loans to businesses in
Pakistan. He believes that if loans to SMEs were increased to 15 to 17 % of all loans to
businesses in Pakistan, there would be even higher economic growth.
5. Along with the current account deficit, fiscal policy decisions have also led to a
significant budget deficit. The budget deficit increased in 2016, resulting in greater
public debt. The central bank recommends the government’s debt to be limited to 60
% of gross domestic product (GDP).
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[Source: adapted from Current account deficit may lead to IMF loan: FPCCI chairperson,
https://www.thenews.com.pk/
print/226102-Current-account-deficit-may-lead-to-IMF-loan-FPCCI-chairperson and
Current account deficit poses biggest
challenge to economy: SBP, https://www.thenews.com.pk/print/225481-Current-
account-deficit-poses-biggest-challenge-toeconomy-
SBP. Copyright © The News International, Karachi, Pakistan.]
1. List two functions of the central bank (paragraph [2]). [2]
2. Define the term fiscal policy indicated in bold in the text (paragraph [5]). [2]
3. Using an exchange rate diagram, explain how the central bank might depreciate the [4]
value of the rupee(paragraph [3]).
4. Explain the difference between a current account deficit and a budget deficit [4]
(paragraph [5]).
effects of the increasing current account deficit on Pakistan’s economy.
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Question 5
Indonesia’s economy
1. Indonesians hope that their new president will be able to speed up reforms to
stimulate economic growth and economic development. These reforms include
upgrading infrastructure, reducing red tape (excessive regulations) and reducing
corruption. It is also hoped that he will increase Indonesia’s global competitiveness,
create new jobs and educate one of the world’s youngest workforces.
2. Some government policies are already being implemented. These include a large
power plant construction programme, tax incentives to infant industries and tax cuts
for industries like transport, telecommunications, metal production and agricultural
processing. In addition, there has been a decision to reduce fuel subsidies in order to
contribute funds towards the government’s record US$22 billion investment in
infrastructure projects. The subsidies had kept fuel prices low in a country where
millions of people live in poverty.
3. Despite the policies, Indonesia is struggling. Economic growth is slow and consumer
confidence has deteriorated. Indonesia’s main export commodities are coal, gold and
palm oil, for which prices have fallen. The inflation rate is 7.26%, which is above the
central bank’s target range of 3 to 5%. Slower growth in the world economy makes
the situation even worse for Indonesia’s struggling economy.
4. Economists have said that the president must put his efforts into improving export
competitiveness by making investments in education and training.
5. The costs of doing business in Indonesia are high due to paperwork and confusing
regulations. The government has adopted policies to improve this. These policies aim
to create certainty and transparency for foreign investors and to empower small
businesses, which play a critical part in Indonesia’s economy. Other policies, such as
obtaining loans and encouraging micro-credit institutions, make it easier to gain
access to credit.
6. Trade protection and intervention are increasing as policymakers look to reduce
imports, manage markets and promote domestic industries.
Figure 1 – Indonesian development statistics
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[Sources: adapted from World Bank and Statistics Indonesia;

www.legalbusinessonline.com, accessed 18 September 2015; www.indonesia-
investments.com, accessed 23 August 2015; www.hdr.undp.org, accessed 23 August
2015; www.bloombergview.com, accessed 9 August 2015; www.reuters.com, accessed 9
August 2015; www.lowyinterpreter.org, accessed 23 August 2015 and
www.data.worldbank.org, accessed 23 August 2015]
* signifies no data available

1. Define the term infrastructure indicated in bold in the text (paragraph 1). [2]
2. Define the term micro-credit indicated in bold in the text (paragraph 5). [2]
3. Using a demand and supply diagram, explain the impact on the market for fuel of [4]
the government’s decision to reduce fuel subsidies (paragraph 2).
4. Using a production possibilities curve (PPC) diagram, explain how “the [4]
government’s record US$22 billion investment in infrastructure projects” will affect
Indonesia’s production possibilities (paragraph 2).
possible impacts of market-oriented and interventionist policies on Indonesia’s
economic development.
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Question 6
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.
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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”.
1. Define the term budget deficit indicated in bold in the text (paragraph[1]). [2]
2. Define the term economic development indicated in bold in the text (paragraph[6]). [2]
3. Using an exchange rate diagram, explain how the large current account deficit may [4]
have affected the value of the Ghanaian cedi.
4. Using an AD/AS diagram, explain how the falling value of the Ghanaian cedi may [4]
have contributed to inflation.
5. Using information from the text/data and your knowledge of economics, discuss [8]
possible consequences of International Monetary Fund (IMF) financial aid on
Ghana’s economic growth and development.
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Question 7
Angola and Namibia
1. Angola and Namibia are neighbouring countries on the west coast of Africa.
Angola
2. Angola’s economy is driven by its oil sector. It is the second largest oil producer in
Africa. Oil production and its supporting activities contribute about 50% of gross
domestic product (GDP), more than 70% of government revenue and more than 90%
of the country’s exports. Diamonds contribute an additional 5% to exports.
Subsistence agriculture provides the main livelihood for most people in Angola, but
half of the country’s food is still imported.
3. Since 2005, the Angolan government has borrowed billions of US dollars from China,
Brazil, Portugal, Germany, Spain and the European Union (EU) to help rebuild Angola’s
infrastructure. The global recession that started in 2008 slowed economic growth. In
particular, lower prices for oil and diamonds during the global recession slowed GDP
growth to 2.4% in 2009, and many construction projects stopped.
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4. Falling oil prices and slower than expected growth in non-oil sectors have reduced
growth prospects for 2015. Angola has responded by reducing government subsidies
and by proposing import quotas and making it more difficult to import. Domestic fuel
subsidies have been eliminated. Corruption, especially in the mining sector, is a major
long-term challenge.
Namibia
5. Namibia’s economy is heavily dependent on the mining and processing of minerals for
export. Mining accounts for 11.5 % of GDP, but provides more than 50% of foreign
exchange earnings. Namibia is a primary source for high-quality diamonds. In
addition, Namibia is the world’s fifth-largest producer of uranium, produces large
quantities of zinc and is a smaller producer of gold and copper. The mining sector
employs less than 2% of the population. Namibia normally imports about 50% of its
grain requirements.
6. A high per capita GDP, relative to the region, hides one of the world’s most unequal
income distributions. The Namibian economy is closely linked to South Africa with the
Namibian dollar pegged one-to-one to the South African rand. Namibia receives 30%
to 40% of its revenues from the countries in the Southern African Customs Union
(SACU). Angola is not a member of the SACU.
7. Namibia’s economy remains vulnerable to world commodity price fluctuations and
drought. The rising cost of mining diamonds, increasingly from the sea, has reduced
profit margins. Namibian authorities recognize these issues and have emphasized the
need for diversification.
Figure 1: Selected economic data for Angola and Namibia (2014)
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[Sources: adapted from www.commons.wikimedia.org, 14 August 2014; The World

Factbook, Country Reports,
Central Intelligence Agency, 2015; www.databank.worldbank.org, accessed 13 August
2015 and www.cia.gov, accessed 13 August 2015]
1. Define the term infrastructure indicated in bold in the text (paragraph 3). [2]
2. Define the term customs union indicated in bold in the text (paragraph 6). [2]
3. Angola and Namibia have different Gini coefficient values. Using a Lorenz curve [4]
diagram, explain what this means (Figure 1).
4. Using a demand and supply diagram, explain the effect on the price and quantity of [4]
fuel consumed in Angola, caused by the elimination of domestic fuel subsidies
(paragraph 4).
5. Using information from the text/data and your knowledge of economics, compare [8]
and contrast factors that are likely to lead to economic development in Angola and
Namibia.
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Question 8
Australia’s terms of trade
1. Australia’s terms of trade fell sharply in the three months through to June 2015, the
largest fall since the global financial crisis of 2008. Official trade price data released
by the Australian Bureau of Statistics (ABS) imply the terms of trade slumped by
about 5.8% from the March quarter. This may worsen the current account deficit.
2. The terms of trade index is now significantly below its September 2011 peak because
of ongoing falls in the prices of iron ore, coal and energy. This is of critical importance
given Australia’s growing reliance on income from exports of liquefied natural gas.
3. “The golden age of commodity-driven income growth is long gone,” said an
economist at Commonwealth Bank. “The continued fall in the terms of trade reflects a
pronounced fall in the purchasing power of Australian households and businesses.
This has been a familiar theme over the past few years,” he said. “Basically, falling
commodity prices, namely iron ore and coal, have weighed heavily on export revenues
and therefore, real gross national income growth.”
4. Falling prices for exports are likely to damage the Australian government’s revenue
expectations and to damage hopes for any rebound in economic strength in the near
future.
5. While the quantity of export shipments – chiefly iron ore – continues to break
records,the revenues received by the nation’s biggest exporters continue to fall and
several key economists fear that this may lead to a recession. This would break a 24-
year run of unbroken economic growth.
6. The Australian dollar’s 0.4% fall in the exchange rate has done little to offset this
effect, and the Reserve Bank of Australia continues to signal that it may take further
measures to lower its current price of around AU1 = U S 0.73.
7. The ongoing terms of trade collapse highlights the urgency for governments and
companies to accelerate efforts at encouraging productivity. The manager of the
Reserve Bank of Australia said, “Australia’s dreadful productivity effort over the last
decade was masked by the rapidly increasing terms of trade up until 2013. This kept
our income growing but the weakness now is harshly exposed as commodity prices
slide”.
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Figure 1 – Export and import indices for Australia
[Sources: Extract: Adapted from Fairfax Syndication, www.afr.com/news, 30 July 2015

Table: ABS data used with permission from the Australian Bureau of Statistics, July 2015,
www.abs.gov.au\]
1. Define the term current account deficit indicated in bold in the text (paragraph 1). [2]
2. Define the term gross national income indicated in bold in the text (paragraph 3). [2]
3. Using a definition of price elasticity of demand, explain why “the revenues received [4]
by the nation’s biggest exporters continue to fall” (paragraph 5).
4. Using a definition of the terms of trade, explain the terms of trade change in [4]
Australia from 2011 to 2015 (Figure 1).
possible effects of the fall in Australia’s terms of trade on the Australian economy.
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Question 9
1. Relief as Kenya raises tariff for steel and iron imports [4]
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
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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]
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Question 10
Inequality in China
1. As China’s economy first began to use market-oriented policies in the 1970s, it was
famously suggested that some citizens, particularly through hard work, “should be
allowed to get rich before others”. The government still plays a dominant role in the
allocation of resources and benefits, keeping most of the gains for itself and its
employees. Civil servants, who are assigned government housing, have benefited
more and accumulated more wealth than the private sector employees.
2. Income inequality is a politically sensitive issue in China and the government has not
reported on it for 26 years. In 1988, the Gini coefficient was 0.38 and the next set of
figures released in 2014 give a value of 0.47.
3. According to research by the China Reform Foundation (CRF), “hidden income”
amounts to more than US$1.4 trillion, or the equivalent of Australia’s annual gross
domestic product (GDP). “Hidden incomes” refer to money gained from bribery or
other corrupt behaviour, for example, bribes for officials or corrupt payments for
doctors.
4. Low-income households are stuck with an outdated tax system that fails to address
the inequality issue. They carry the burden of tax payments while the rich and
powerful operate largely outside the tax system. Low-income households also have
difficulty accessing credit.
5. Although the Chinese government expenditure is high, there tends to be inadequate
spending on social protection programmes relating to health and old age. The lack of
social protection has resulted in a high marginal propensity to save (MPS) amongst
the low-income households as they put money away to provide for future health,
education and retirement needs. The high savings result in a low marginal propensity
to consume at 37 % of household income (compared to an average of more than 50
% of household income in more developed-market economies). The low marginal
propensity to consume and the associated high savings rate have received significant
attention in domestic and international policy circles and are viewed as a key barrier
to China’s continuing road to development.
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1. Define the term market-oriented policies indicated in bold in the text [2]
(paragraph[1]).
2. With reference to the figures on the marginal propensity to consume [4]
(paragraph[5]), explain how the value of the multiplier in China would compare with
the value of the multiplier in a more developed-market economy (no calculation
required).
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Question 11
Trade strategies in the Philippines
1. For more than 20 years the Philippines has been limiting the volume of rice it imports.
However, the agreement with the World Trade Organization (WTO) that permitted
these restrictions expired in 2017. In early 2019, the government replaced the quantity
restrictions with tariff protection. A 35% tariff on imported rice from the Association
of Southeast Asian Nations (ASEAN)* was imposed to protect the domestic rice
industry in the Philippines. Following the replacement of the quota with a tariff, rice
prices are expected to fall significantly. However, urban households want the
president to allow rice to be imported without any tariffs to reduce food bills even
further.
2. The poorest quintile of households in the Philippines consumes nearly twice as much
ordinary rice and 20 times more National Food Authority (NFA) rice compared to the
richest quintile. Rising food prices are pushing up inflation as a result of increasing
salaries in urban areas. The daily minimum wage in Manila, the Philippine capital, will
increase by 4.9 %, the highest hike in six years, to the equivalent of US$10.11. Farming
and fishing provide the livelihoods for around one-third of the labour force in the
Philippines. Land reform programmes are slowly being implemented to change the
current situation of unfair ownership of land and resources by a few individuals.
However, uncertainty continues to discourage investment in adequate irrigation
systems in the countryside. As an agricultural country, irrigation in the Philippines is
very important. Improvements in the quality of infrastructure services will help cut the
cost of doing business, attract more investment, and enhance productivity around the
country. Food manufacturing, including food and beverage processing, remains the
most dominant primary industry in the Philippines. This has become a focus in the
hope of increasing farm incomes, because this part of the economy is currently
dominated by big international companies. Major exports of processed fruits and nuts
include mangos, pineapples, bananas and peanuts.
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3. The Philippine Export Development Plan (PEDP) 2018–2022 calls for boosting the
export of services, increasing export competitiveness, and exploring new markets.
Efforts have already been made to harmonize the country’s standards, testing,
certification and quality accreditation of products to improve trade and comply with
standards in the European Union. The PEDP aims to increase the volume and value of
exports by encouraging investment in production processes and supply chains.
Another strategy to achieve the plan’s objective is to exploit existing and new
opportunities from trade agreements.
4. The Philippines lacks the infrastructure needed to attract export-oriented
manufacturing. To support the PEDP, the government needs to increase its spending
on new airports, roads and bridges. These public works are critical to boosting the
incomes of people in poorer areas by connecting them better to Manila. To allow for
this extra spending, a series of tax reforms was started: the income tax for the highest
income earners has been raised from 30 % to 35 %, and indirect taxes have been
increased.
[Source: Adapted from Philippines News Agency, “Proposed Ph Export Plan Backs PDP
2017-2022 Targets”, June 21, 2018,
https://www.pna.gov.ph/articles/1039017.\]
* ASEAN consists of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma),
Philippines, Singapore, Thailand and Vietnam.
1. State two functions of the World Trade Organization (WTO) (paragraph [1]). [2]
2. Define the term inflation indicated in bold in the text (paragraph [2]). [2]
3. Using a Lorenz curve diagram, explain the possible impact on the distribution of [4]
income in the Philippines when “the income tax for the highest income earners has
been raised from 30 % to 35 %” (paragraph [4]).
4. Using an AD/AS diagram, explain the impact on the potential output of the [4]
Philippines of the government increasing its “spending on new airports, roads and
bridges” (paragraph [4]).
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the use of export promotion as a means of achieving economic development in the
Philippines.
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Question 12
Chinese investment helps Peru to develop
1. Over the past decade, Peru has been one of South America’s fastest-growing
economies, with an average economic growth rate of 5.9 % and low average annual
inflation of 2.9 %. This has been mostly due to a favourable external environment,
sensible macroeconomic policies and reforms of environmental regulations designed
to increase investment in Peru’s profitable mining sector. However, the deregulation in
the mining sector has been opposed by environmental groups and trade unions,
fearing increased pollution and poorer working conditions.
2. Strong growth in employment and income has dramatically reduced poverty rates.
Absolute poverty fell from 27.6 % in 2005 to 9 % in 2015.
3. Gross domestic product (GDP) growth continued to accelerate in 2016, very much
helped by higher mining export output as several new large mining projects entered
into production and reached full capacity. Peru mines and exports many commodities,
including copper, gold, lead, zinc, tin, iron ore, silver, and oil and petroleum products.
4. China is Peru’s main trading partner, taking 22.1 % of Peru’s exports and supplying
22.7 % of their imports in 2016. Chinese companies are also significant suppliers of
foreign direct investment (FDI) to Peru, recently investing over US$2 billion to
purchase a hydroelectric power plant. The second main trading partner is the United
States (US), taking 15.2 % of Peru’s exports and supplying 20.7 % of their imports in
2016.
5. Peru’s current account deficit declined significantly from 4.9 % to 2.8 % of GDP in
2016, owing to increasing export growth and lower imports. Peru’s government
continues to support a free trade policy; since 2006, Peru has signed trade deals with
17 different countries including the US, Canada, China and Japan. In addition, a trade
deal has also been signed with the European Union.
6. Real GDP growth is expected to slow slightly in 2017 due to an anticipated lower
growth rate in the mining sector and weak private investment. To support the
economy as mining production slows, the government is expected to increase public
investment in 2017.
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7. Growth projections may not be achieved if any, or a combination, of the following

occur: external shocks in commodities prices, a further deceleration of China’s
economic growth, unpredictability in world capital markets and the threat of tight
monetary policy in the US. Raising economic growth requires structural and fiscal
reforms to improve productivity, reduce the size of the informal sector and improve
the efficiency of public services.
[Source: adapted from “The World Bank Country Overview: Peru”,
http://www.worldbank.org/en/country/peru/overview, 17 April
2017; and “The World Factbook”, https://www.cia.gov/library/publications/the-world-
factbook/geos/pe.html, 6 September 2017]
1. Define the term absolute poverty indicated in bold in the text (paragraph [2]). [2]
2. Define the term foreign direct investment (FDI) indicated in bold in the text [2]
(paragraph [4]).
3. Explain two reasons why Chinese companies may have been attracted into Peru [4]
(paragraph [4]).
4. Using a poverty cycle diagram, explain how increased foreign direct investment [4]
might break the cycle (paragraph [4]).
the factors that may allow Peru to continue to achieve high rates of economic
growth in the future.
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Question 13
South Korea’s current account surplus
1. South Korea, Asia’s fourth-largest economy, has experienced a current account
surplus since 2012. South Korea’s large working-age population, which tends to save
a large portion of its income for retirement, contributes to the surplus. The South
Korean government has expressed concerns about the impact of the high savings on
domestic demand and the level of imports. However, it has been predicted that as the
population ages the surplus will gradually disappear by 2042.
2. The South Korean won (South Korea’s currency) recorded the second highest
appreciation against the United States dollar (US$) in 2017 among currencies of the
G20* nations. The current account surplus, the improved economic conditions and
the expectations of an interest rate rise have all helped increase the South Korean
won’s value.
3. The South Korean won officially operates under a floating exchange rate system, but
the central bank would intervene if there were major fluctuations in the market that
needed to be managed. The US is monitoring the exchange rate policy of South Korea
due to the significant trade imbalance between the two countries. If the US identifies
that a major trading partner like South Korea tries to limit an appreciation of its
currency, then the US may consider tariffs to reduce the imbalance.
4. South Korea’s financial account in the balance of payments recorded a deficit of
US$13 billion in 2018, as Koreans have invested extensively in other countries.
Furthermore, foreigners have been reluctant to invest in South Korea due to the trade
disputes and the potential of a trade war erupting between the US and China. The US
and China are South Korea’s largest trading partners, and South Korea, with its export
oriented economy (exports amount to 43 % of gross domestic product [GDP]), is
sensitive to external demand shocks.
5. South Korea’s domestic investment in key areas (such as manufacturing, construction
and machinery) fell during 2018, and GDP grew by less than expected. Additionally,
private consumption increased only by 0.3 % in 2018, the slowest growth for 4 years.
There is also concern about the level of unemployment, especially the high rates of
youth unemployment.
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6. Normally, in a situation of low growth, the central bank would implement expansionary
monetary policy. However, the US Federal Reserve (the central bank of the US) and
the European central bank are considering monetary tightening. If the South Korean
central bank does not raise interest rates in line with the US and the European Union it
runs the risk that the South Korean won may depreciate. Therefore, the South Korean
government has begun discussions on using fiscal policy to help revive the job market
and support domestic demand.
[Source: Adapted from: South Korea Current Account, Trading Economics,
https://tradingeconomics.com/south-korea/currentaccount;
and Anon, 2018. S. Korean Won’s Appreciation 2nd Highest in G20 Last Year. KBS World
Radio,
http://world.kbs.co.kr/service/news\_view.htm?lang=e&Seq\_Code=133432.\]
* G20 members include: Argentina, Australia, Brazil, Canada, China, France, Germany,
India, Indonesia, Italy, Japan, Republic of Korea (South Korea), Mexico, Russia, Saudi
Arabia, South Africa, Turkey, the United Kingdom, the US and the EU
1. Define the term interest rate indicated in bold in the text (paragraph [2]). [2]
2. List two components of the financial account (paragraph [4]). [2]
3. Using an exchange rate diagram, explain how South Korea’s current account [4]
surplus could have “helped increase the South Korean won’s value” (paragraph
[2]).
4. Using an AD/AS diagram, explain how the use of fiscal policy could lower “the high [4]
rates of youth unemployment” in South Korea (paragraph [5]).
possible implications on South Korea’s economy of a current account surplus.
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Question 14
Burundi
1. Burundi is a small landlocked African country. Densely populated, it has a population
of approximately 10.6 million inhabitants. The economy is dominated by subsistence
agriculture, which employs 90 % of the population, though cultivatable land is
extremely scarce. More than a decade of conflict led to the destruction of much of the
country’s physical, social and human capital. However, substantial improvements have
occurred since the conflict ended in 2006, thanks largely to the success of measures
implemented to reduce the excessive control of the military.
2. Even though Burundi is enjoying its first decade of sustained economic growth,
poverty remains widespread. Burundi’s ranking on the Human Development Index
(HDI) increased by 2.5 % per year between 2005 and 2013 as education and health
outcomes have significantly improved over the period, yet the country still ranks low
at 180th out of 187 countries in 2013. Per capita gross national income more than
doubled between 2005 (US130)and2013(U S 280).
3. Burundi is making the transition from a post-conflict economy to a stable and growing
economy. Economic reforms and institution building are ongoing. After significant
improvements to achieve peace and security, the country’s development program is
shifting gradually towards modernizing public finance. However, the government has
limited “fiscal space” because tax collection is very hard to carry out and tax receipts
are low.
4. With its limited resources, the government is attempting to strengthen basic social
services and upgrade infrastructure and institutions, particularly in the energy, mining,
and agricultural sectors. This has been accompanied by increasing participation of
the private sector. The goal now is to grow a more stable, competitive and diversified
economy with enhanced opportunities for employment and improved standards of
living.
5. Over the last decade, annual economic growth in Burundi has been between 4 % and
5 %. Inflation continues to decline reaching 3.9 % in July 2016, down from 24 % in
March 2012, reflecting a careful monetary policy helped by a recent decrease in the
prices of imports, especially oil, which is an essential commodity.
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6. Burundi’s main exports are agricultural; coffee and tea account for 90 % of foreign
exchange earnings, and exports are a relatively small share of Gross Domestic
Product (GDP).
1. List two components of the Human Development Index (HDI) (paragraph [2]). [2]
2. Define the term monetary policy indicated in bold in the text (paragraph [5]). [2]
3. Using a production possibilities curve (PPC) diagram, explain the effect on [4]
economic growth of the “destruction of much of the country’s physical, social and
human capital” (paragraph [1]).
4. Using an AD/AS diagram, explain why the “decrease in the prices of imports, [4]
especially oil” might reduce inflationary pressure (paragraph [5]).
the challenges to economic growth and economic development faced by Burundi.
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Question 15
Economic development in two West African countries
Ghana
1. Ghana is the world’s second largest cocoa producer and Africa’s second largest gold
producer. It is one of Africa’s fastest growing economies and has made major
progress in achieving persistent economic growth.
2. Over the last decade, Ghana has enjoyed increasingly stable and improving
democratic governance. Four successful elections during the decade have
strengthened the effectiveness of key national institutions, improved investor
confidence and created an environment that promotes investment and growth.
3. Ghana enjoys a high degree of media freedom; the private press and broadcasters
operate without significant restrictions. The media are free to criticize the authorities
without fear of punishment, says the non governmental organization (NGO) Reporters
Without Borders. The private press is allowed to express criticism of government
policy, which increases the accountability and transparency of the government.
4. Although Ghana’s growth has been fairly strong, the source of growth has always
been dominated by commodities and the capital-intensive services sector. Neither of
these has a direct effect on poverty reduction. Growth in rural areas is often limited by
basic infrastructure, such as roads. This limits the ability of people in rural areas to
access markets in urban areas.
**Nigeria
**
5. Nigeria is Africa’s leading oil producer. In 2016, it experienced its first full year of
recession in 25 years. Global oil prices reached a 13-year low and oil production was
drastically cut. Oil has continued to dominate Nigeria’s growth pattern, but the
volatility of oil-dependent growth prevents progress in social and economic
development.
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6. On the political front, the transition from military dictatorship to democratic rule has
been acclaimed as one of Nigeria’s major successes in the last decade. The 2011
general election, supported by the United Nations, was widely acknowledged by
international observers and domestic monitors as one of the freest and fairest
elections conducted in the country in recent years.
Ghana and Nigeria
7. Both Ghana and Nigeria have cut fuel subsidies in order to reduce their budget
deficits. This has had severe consequences for low-income households.
Table 1: Selected economic data for Ghana and Nigeria
[Source: adapted from UNDP Ghana country profile, http://hdr.undp.org, accessed 19

February 2019;
UNDP Nigeria country profile, http://hdr.undp.org, accessed 19 February 2019; About
Ghana, http://hdr.undp.org,
accessed 19 February 2019; About Nigeria, http://hdr.undp.org, accessed 19 February
2019]
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* measles: a highly contagious disease that is one of the leading causes of death among
young children
1. State the reason for the difference between Ghana’s GNI per capita and its GDP per [2]
capita (Table 1).
2. Define the term Gini coefficient indicated in bold in Table 1. [2]
3. Using an externalities diagram, explain why the percentage of infants receiving [4]
measles vaccinations in Nigeria indicates the existence of a market failure(Table 1).
4. Using a demand and supply diagram, explain how the cut in fuel subsidies may [4]
have had “severe consequences for low-income households” (paragraph [7]).
5. Using information from the text/data and your knowledge of economics, compare [8]
and contrast the level of economic development in Ghana and Nigeria.
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Question 16
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.
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[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com,

25 July 2014 and www.cnbcafrica.com, 25 November 2013]
1. Define the term tariff indicated in bold in the text (paragraph 2). [2]
2. Define the term economic growth indicated in bold in the text (paragraph 2). [2]
3. Using an international trade diagram, explain the impact on the Kenyan government [4]
of implementing a tariff on steel imports.
4. Using an exchange rate diagram, explain why a deficit in the current account may [4]
result in downward pressure on the Kenyan shilling (Kenya’s currency) (paragraph
5).
the claim that trade protection measures will support economic growth in Kenya.
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Question 17
Trade war with the United States puts pressure on China’s currency
1. As a trade war between the United States (US) and China worsens, a central bank
official has said that China will not use its currency to deal with trade conflicts and will
continue with the market-based reforms of its exchange rate system. In the past, the
US has accused China of being a currency manipulator that has maintained a fixed
exchange rate to keep the renminbi (RMB, China’s currency) undervalued. According
to a US trade official, “a depreciating currency is good for the Chinese economy”.
2. The value of the renminbi has fallen 9 % against the US dollar (US$) in the past six
months. Expansionary domestic monetary policy, concerns about economic growth
and an escalating trade war continue to put downward pressure on the renminbi.
Allowing the value of the renminbi to fall suggests that the central bank is currently
maintaining a managed exchange rate rather than a fixed peg to the US dollar.
3. The cause of the lower value of the renminbi—aside from a slowdown in Chinese
economic growth—is a shrinking current account surplus. The US has imposed tariffs
on US$250 billion worth of Chinese imports. The US president has also threatened to
impose tariffs on the remaining imports from China. This, along with a widening trade
deficit in services, caused mainly by the rise in Chinese tourists travelling abroad,
would further reduce China’s current account surplus. In 2017, China’s current
account surplus was 1.6 % of gross domestic product (GDP). By the first quarter of
2018, the surplus became a small deficit.
4. There is international concern about the potential damage that a prolonged trade war
with the US could cause to the Chinese economy. Central bank officials in China are
concerned about the depreciating currency but are trying to avoid central bank
intervention. To support the export sector, the Chinese government is considering
measures such as subsidies and exemptions from some indirect taxes. These
measures, along with a falling renminbi will allow Chinese exporters to avoid passing
on some of the tariff costs to US consumers.
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5. To complicate matters for China, economic growth in the US is causing US interest

rates to rise and the US dollar to strengthen. This, along with China’s first current
account deficit in 20 years, is negatively affecting China’s financial account.
Responding to the rising US interest rates with increases of its own is not a good
option for China’s central bank, because Chinese companies have a heavy debt
burden that is slowing economic growth. Recently, a government official advised
against increasing China’s interest rate because of its impact on borrowing costs in
China.
[Source: Michael Smith, The Australian Financial Review, 2018. China risks further US fire
as currency hits 10-year low. [online] Available at:
https://www.afr.com/markets/currencies/china-risks-further-us-fire-as-currency-hits-
10year-low20181030-h17agp [accessed 30 October 2018]. Source adapted.
Financial Times: Tom Mitchell, 2018. US rate rises compound trade pressure on China.
Available at: https://www.ft.com/content/27a73392-c534-11e8-bc21-54264d1c4647 2
October. Used under license from the Financial Times. All Rights Reserved. [Accessed 1
October 2018]. Source adapted.
Trading Economics, 2018. China Current Account. Available at:
https://tradingeconomics.com/china/current-account [accessed 31 October 2018].
Source adapted.]
1. Define the term fixed exchange rate indicated in bold in the text (paragraph [1]). [2]
2. Define the term monetary policy indicated in bold in the text (paragraph [2]). [2]
3. Using an exchange rate diagram, explain why the “widening trade deficit in [4]
services” could lead to a depreciation of the renminbi (paragraph [3]).
4. Using an AD/AS diagram, explain how “increasing China’s interest rate” could affect [4]
its economic growth (paragraph [5]).
view that a depreciating currency is good for the Chinese economy.
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Question 18
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.
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[Source: According to a report on ResearchAndMarkets.com. China’s Auto Revolution,

2018 - China Poised to Become Major Auto Exporter. Available at:
https://www.prnewswire.com/news-releases/chinas-auto-revolution-2018---china-
poisedto-become-major-auto-exporter-300720917.html [accessed 28 September
2018]. Source adapted.]
1. Define the term trade war indicated in bold in the text (paragraph [1]) [2]
2. Define the term consumption indicated in bold in the text (paragraph [3]). [2]
3. Using an international trade diagram, explain how US tariffs could affect the export [4]
of Chinese steel and aluminium to the US (paragraph [2]).
4. Using a demand and supply diagram, explain how reduced tariffs on “imported [4]
factors of production” would affect the price of Chinese goods (paragraph [7]).
the impacts of free trade measures on China’s economy.
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Question 19
Economic growth in Laos
1. The construction of the China–Laos railway is a major contributor to Laos’ economic
growth. This landlocked country is projected to grow by 7 % this year, which is a good
achievement for a country still experiencing low incomes and over-reliance on the
agricultural sector.
2. The 420 kilometre railway line will connect China to Laos and link Southeast Asian
countries all the way to Singapore. The railway will improve the communication
between resource-rich Laos and its neighbours, all of which have larger markets. This
will increase both trade and tourism in the region. With the help of Chinese
investment, the Lao government also plans to increase its hydroelectric power
generation capacity in the next 12 years. This could mean a total of 429 dams on the
Mekong River by 2030. However, environmentalists say that the excessive
construction of dams could destroy the ecosystem.
3. Five years ago, the Lao government introduced a policy to privatize state-owned
property, designed to attract foreign direct investment (FDI). The privatization policy
was especially appealing to Chinese investors and has succeeded in increasing FDI in
Laos. The Lao government sold a share in its telecommunication industry to a Chinese
firm, which helped launch Laos’ first satellite. This not only improved internet
connection quality for communication purposes but also made health services and
education more accessible in rural areas, where 61 % of the labour force work as
farmers.
4. The Lao government hopes that Chinese investment will not only introduce
technological innovations but will also bring jobs that would help many of the citizens
of Laos to break out of the poverty trap. Six Chinese construction companies are now
carrying out construction along the entire railway track and are employing a total of
50000 workers, although these are mostly Chinese.
5. Many are concerned that Laos may be heading for a debt crisis with so much
investment financed through borrowing. The construction of the railway will cost an
estimated US6billion, whichwillbe60 840 million. Around US$500 million of that
amount will come from loans from China. The remaining amount will be drawn from
the government budget.
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[Source: Foreign Policy In Focus, 2018. China’s Belt and Road Hits Bumps in Laos.
Available at: https://fpif.org/chinas-belt-and-road-hits-bumps-in-laos/ [accessed 19
January 2019]. Source adapted.
Radio Free Asia, 2018. China’s Fast Track to Influence: Building a Railway in Laos. Available
at: https://www.rfa.org/english/news/special/laoschinarailway/ [accessed 25 October
2018]. Source adapted.]
1. Define the term economic growth indicated in bold in the text (paragraph [1]). [2]
2. Define the term poverty trap indicated in bold in the text(paragraph [4]). [2]
3. Using an AD/AS diagram, explain how the construction of the China–Laos railway [4]
will contribute to economic growth in Laos (paragraph [1]).
4. Using an externalities diagram, explain why the construction of dams on the [4]
Mekong River might lead to market failure (paragraph [2]).
the role of foreign direct investment in promoting economic development in Laos.
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Question 20
Turkey’s rising current account deficit
1. According to forecasts from the International Monetary Fund (IMF), Turkey’s current
account deficit is expected to rise from 4.4 % of gross domestic product (GDP) in
2016 to 5.6 % of GDP in 2017, with real GDP growth falling from 3.3 % in 2016 to 2.9 %
in 2017. The current account deficit is perceived to be the biggest problem for
Turkey’s economy. An international credit agency has reduced Turkey’s credit rating
to “negative” because risks to the country’s credit profile have risen significantly in
recent months.
2. Economic activity has been further damaged by several factors, including political
uncertainty, conflicts in neighbouring countries and trade protection by its trading
partners. Turkey’s tourism revenues, which contribute 10 % to the country’s GDP, have
fallen significantly due to security concerns related to terrorist attacks.
3. The current account deficit has contributed to a massive depreciation of the Turkish
lira (Turkey’s currency), which dropped by 20 % against the United States dollar (US$)
over the previous year. This is a significant problem for Turkey, which relies on a
steady inflow of overseas investment to finance its current account deficit.
4. Part of the problem is Turkey’s dependence on imports, especially energy. Higher
import costs for energy will further worsen Turkey’s current account deficit and create
further pressure on inflation (Figure 4).
5. The Turkish government has blamed the currency collapse on speculators. The
president of Turkey has asked Turkish citizens to help. There is approximately US
140billionworthoff oreigncurrencybeingheldinf oreigncurrencysavingsac
1 billion worth of foreign currency in September 2018.
6. Analysts believe that the only solution to the falling value of the Turkish lira and the
current account deficit is an increase in the official interest rate by the central bank.
However, Turkey’s president has made it clear that he will not accept higher interest
rates. In fact, he has demanded lower interest rates to stimulate the economy.
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[Source: adapted from ‘Battered: Turkish lira suffers worst year since 2008’, by Mehreen
Khan, Markets, FT.COM,
22 December 2016, ‘Turks urged to trust in lira to defeat “tyranny of dollar”’, by Mehul
Srivastava and Jonathan Wheatley,
Markets, FT.COM, 07 December 2016 ,’Turkish lira tumbles amid fears on economy and
terrorist threat’, by Mehul Srivastava
and Roger Blitz, Markets, FT.COM, 12 January 2017, used under licence from the Financial
Times. All Rights Reserved;
Turkey’s Surging Current Account Deficit and Its Impact in 2017, by Market Realist, Apr. 21,
2017:
http://marketrealist.com/2017/04/turkeys-surging-current-account-deficit-and-its-
impact-in-2017/, 21 April 2017;
Turkey’s annual current account deficit growth jumps to 68 percent in May,
www.intellignews.com, 13 July 2017.]
Figure 4: Turkey inflation rate
[Source: adapted from https://tradingeconomics.com, accessed 6 September 2017]

1. State two functions of the International Monetary Fund (IMF) (paragraph [1]). [2]
2. Define the term depreciation indicated in bold in the text (paragraph [3]). [2]
3. Using an AD/AS diagram, explain how Turkey’s reliance on energy imports is putting [4]
“further pressure on inflation” (paragraph [4]).
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4. Using an exchange rate diagram, explain what is likely to have happened to the [4]
Turkish lira when Turkish citizens “bought US$1 billion worth of foreign currency”
(paragraph [5]).
implications of Turkey’s persistent current account deficit.
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Question 21
Bhutan’s growth soars amid hydropower building boom
1. Bhutan is a developing Asian country, bordered by India and China. The government
of Bhutan is mostly interventionist in its approach to economic growth and economic
development. Situated in the Himalayan mountains, Bhutan has significant water
resources that may be employed to generate hydropower.
2. The most significant intervention by the government is investment in the generation of
hydropower. However, funding is not possible domestically. The hydropower projects
are mostly financed by concessional long-term loans from India. Government
borrowing to finance hydropower construction has made Bhutan the second-most
indebted nation in Asia. Bhutan now has a high level of government debt, equal to 118
% of annual real gross domestic product (GDP).
3. The funding of Bhutan’s interventionist policies has created significant dependence
on Indian tied aid. A condition of the aid is that Indian companies lead the
infrastructure projects. The large amount of foreign aid has made achieving self-
reliance difficult. At present, India finances nearly one-quarter of the Bhutan
government’s budget expenditures.
4. When the projects are completed they will more than double Bhutan’s hydropower
generation capacity and over 80 % of the power generated will be exported to India.
Hydropower to India is Bhutan’s largest export, and the increased exports will lead to
greater government revenue. Real GDP growth is expected to reach 11.7 % by 2019.
5. Another significant intervention by the government is the promotion of university
education for as many young people as possible, coupled with the creation of
government jobs to employ them. The present level of exporting hydropower to India
has provided some government revenue to pay for government jobs. However, while
the number of university graduates is growing each year, the number of government
jobs has not been growing at the same rate.
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6. In response to the current inability to provide enough jobs, the government is also
implementing other programmes. Firstly, they are encouraging graduates to pursue
employment in Bhutan’s small private sector, which is struggling to make a meaningful
contribution to economic growth. Secondly, the government is promoting tourism,
making it one of the most popular alternatives to government employment. Thirdly,
the government is attempting to reduce red tape (excessive regulations) in areas such
as industrial licensing, trade, labour markets and finance. This red tape is a barrier to
foreign direct investment. Finally, the government is trying to make employment in
agriculture more appealing. Bhutan’s climate means that it could be well-positioned to
produce and export a variety of fruits.
[Source: adapted from Central Intelligence Agency, The World Factbook, Bhutan,
https://www.cia.gov/library/publications/theworld-
factbook/geos/bt.html, accessed 19 August 2017; White-collared, by Ross Adkin, 31
August 2016, Himal Southasian,
http://himalmag.com/white-collared-bhutan-thimphu-bureaucrats, accessed 19 August
2017; The World Bank: Bhutan,
https://data.worldbank.org/country/bhutan, © 2019 The World Bank Group, licenced
under the Creative Commons Attribution
4.0 International License, https://creativecommons.org/licenses/by/4.0; and Bhutan
growth soars amid hydropower building
boom, by Nidup Gyeltshen and Phuntsho Wangdi, August 17, 2017,
https://asia.nikkei.com/Economy/Bhutan-growth-soarsamid-
hydropower-building-boom, accessed 19 August 2017]
1. Define the term concessional long-term loans indicated in bold in the text [2]
(paragraph [2]).
2. Define the term real gross domestic product (GDP) indicated in bold in the text [2]
(paragraph [2]).
3. Explain two possible disadvantages for Bhutan in receiving India’s tied aid [4]
(paragraph [3]).
4. Using a production possibilities curve (PPC) diagram, explain how rising numbers of [4]
university graduates will affect Bhutan’s potential output (paragraph [5]).
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the government policies being used to promote economic development in Bhutan.
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Question 22
Sri Lanka’s economic reforms
1. After Sri Lanka’s 25-year civil war ended in 2009 it became one of the world’s fast-
growing emerging markets, helped by billions of US dollars worth of infrastructure
investment from China. Sri Lanka’s new government plans to implement a range of
market-oriented policies to open up its financial system, liberalize the Sri Lankan
rupee (Sri Lanka’s currency) and make new trade deals with both India and China.
2. Sri Lankan economists and corporate leaders are urging “tough” economic decisions,
reducing the bureaucracy and eliminating costly inefficiencies in state enterprises.
300 state-owned firms dominate the economy, and there is pressure for them to
enhance their competitiveness. One realistic option is a policy of privatization.
Another policy is the establishment of 46 economic zones across the country with low
tax rates. This should encourage the private sector to invest in setting up these
zones.
3. Improving infrastructure is also a priority. Power supply is unreliable and broadband
speeds are slow in rural areas.
4. Another priority is to reduce controls on exchanging currency. Sri Lankans find it
difficult to obtain foreign exchange, limiting tourism and business overseas. Improving
access to foreign currencies would make people’s lives easier and encourage more
business.
5. On a positive note, improved international relations has increased tourism. To take
advantage of this, the government should now implement a strategy to further
promote tourism.
6. A major challenge for the government is that more than 25% of the population lives
below US$2.50 per day. This is caused largely by the fact that 30 % of the population
is involved in agriculture, which contributes less than 10% of gross domestic product.
In addition, tackling youth unemployment and increasing household incomes are
challenges.
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7. But perhaps the greatest problem confronting the government is the country’s
massive debt burden, which is equivalent to 700% of its tax revenue. This creates a
significant debt servicing problem, especially because much of the debt is foreign
owned.
8. Another problem is a current account crisis. Sri Lanka needs to replace its reliance on
payments from Sri Lankans employed overseas with export revenues. And instead of
relying on borrowing from overseas to finance its current account deficit, the country
needs to attract foreign direct investment.
9. There is also a need for the government to try to improve the ability for companies to
do business, such as by reducing the time it takes to register a business and by
improving access to credit for small companies, which would significantly stimulate
the economy. Business confidence has to improve in order to stimulate new
investments and economic growth.
[Sources: adapted from Sunday Times, Sri Lanka, www.sundaytimes.lk, 23 August 2015,
and
James Crabtree, 2015, Sri Lanka plans ‘big bang’ reforms, Financial Times, www.ft.com,
19 August. Used under licence from the Financial Times. All Rights Reserved.]
1. List two characteristics of an economically less developed country. [2]
2. Define the term privatization indicated in bold in the text (paragraph 2). [2]
3. Using a production possibilities curve (PPC) diagram, explain how “billions of US [4]
dollars worth of infrastructure investment from China” may affect potential
economic output (paragraph 1).
4. Using a definition of the term opportunity cost and information from the text, [4]
explain how the servicing of debt has an opportunity cost that may affect economic
development in Sri Lanka.
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possible effects of the proposed market-oriented reforms on Sri Lanka’s economic
development.
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Question 23
Bank of Canada raises interest rates for the first time in seven years
1. For seven years Canada’s central bank, the Bank of Canada, kept its official interest
rate at 0.5 %. This period of easy monetary policy may be coming to an end. The Bank
of Canada has just raised its official interest rate from 0.5 % to 0.75 %, claiming that
there is new confidence in the Canadian economy. Figures show that the 3.5 % growth
in gross domestic product (GDP) in the first quarter of 2017 is above its potential. In
addition, the Bank of Canada expects growth in consumer spending, exports and
business investment to stimulate economic growth in the months ahead. Such factors
might contribute to inflationary pressure in the future.
2. One of the issues that might have delayed the interest rate increase in Canada is that
the inflation rate is still low and falling. Central banks typically raise interest rates
when inflation is rising. That is not the problem in Canada, where the consumer price
index (CPI) has been rising at well below the Bank of Canada’s 2 % inflation target.
However, the governor of the Bank of Canada says that he is looking at forecasts of
future inflation rates, noting that the data suggest the interest rate increase is
necessary. An official statement from the Bank of Canada notes that growth is
increasing across all industries and regions and that the economy has started to
improve. There is no longer a need for the low interest rate.
3. Positive economic growth figures, the optimism shown by the Bank of Canada, and
the recent interest rate increase have caused a rapid appreciation of the Canadian
dollar against the United States (US) dollar over recent months. There are now
expectations that the Bank of Canada will raise the interest rate once or possibly
twice more before the end of the year, as signs continue to point to a healthy
economy. This would likely cause further strengthening of the Canadian dollar against
the US dollar.
4. An economist has said that the gain in the Canadian dollar against the US dollar may
have a large effect on importers and exporters, although it will likely be months before
consumers see the effects. She further noted that the effects would vary across
different industries. There is some concern about the consequences for the Canadian
current account. Currently the current account deficit is at 3.6 % of GDP.
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5. A stronger currency is also likely to encourage more Canadians to travel south to the
US.
[Source: adapted from Bank of Canada raises interest rates for first time in seven years,
The Globe and Mail, July 12, 2017, https://beta.theglobeandmail.com]
Table 1: Canada’s main exports
[Source: adapted from https://tradingeconomics.com, accessed 4 September 2017]

Table 2: Canada’s main export destinations
[Source: adapted from https://tradingeconomics.com, accessed 5 October 2017]

1. Outline two roles of a country’s central bank (paragraph [1]). [2]
2. Define the term current account deficit indicated in bold in the text (paragraph [4]). [2]
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3. Using an AD/AS diagram, explain the likely impact on the Canadian economy of the [4]
increase in the official interest rate (paragraph [1]).
4. Using an exchange rate diagram, explain one reason for the appreciation of the [4]
Canadian dollar (paragraph [3]).
possible effects on the Canadian economy of the strengthening of the Canadian
dollar against the US dollar.
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Question 24
Fiji’s challenges and opportunities
1. In 2016, the island nation of Fiji suffered from cyclone Winston (a tropical storm),
costing more than 40 lives and damaging its infrastructure. One of the country’s four
sugar mills was severely damaged, harming raw sugar processing. Processed sugar
is, in addition to bottled water and tourism, a major export in Fiji. A recent study found
that the damage from the cyclone continues to have a lasting effect on communities
as fisherwomen report fewer and smaller crabs and fishes. The social safety net is
limited and there are calls for the government to help the citizens who have been
affected by the cyclone. However, the government had to use its budget to rebuild
infrastructure.
2. The government has prepared several strategies to strengthen the economy. These
include financial support for sugar cane producers, diversification of its agricultural
produce, better access to finance and encouragement of investment. The
government has committed to provide equal opportunities for all: promoting the
participation of women in education and political leadership, because Fiji has one of
the lowest female participation rates in politics in the world.
3. To support its sugar cane farmers, the government provides a 55 % subsidy on
pesticides (products that kill weeds) used in farming. However, small farmers are
complaining about the excessive paperwork that needs to be completed to receive
the subsidy and there is potential for corruption. Fiji competes with Brazil, which has
an absolute advantage, in the world market for sugar.
4. To diversify, the government plans to expand the ginger and coconut industries. Both
industries are economically and environmentally sustainable. The industries provide
an increased number of Fijians with a worthwhile income. Coconut production plays a
very important role in Fiji’s economy, particularly in the more isolated rural
communities, where formal employment is scarce and where alternative cash crops
(crops grown to be sold for profit) do not exist. Coconut is a staple food and is vital for
food security (ensuring that people have access to enough food), but is also
important for health, economic and cultural reasons. New market opportunities have
emerged in high-value products – green coconut products, such as coconut water,
are becoming increasingly popular throughout the world.
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5. The Asian Development Bank encourages Fijian farmers to access “green finance”.
These financial investments support economic development through sustainable
development initiatives and policies. Under the government’s new reforms, farmers
are able to use assets such as crops and contracts as collateral for loans, creating
improved access to finance. However, to increase incomes, farmers will also need to
improve their financial knowledge.
6. To create an investment-friendly environment, the government must develop more
infrastructure, create market access through greater economic integration and reduce
asymmetric information between farmers and wholesale buyers. Australia has
decided to help Fiji by financing infrastructure through grants and concessional loans.
1. Define the term absolute advantage indicated in bold in the text (paragraph [3]). [2]
2. Define the term asymmetric information indicated in bold in the text (paragraph [2]
[6]).
3. Using a costs diagram, explain how the expansion of the coconut industry could [4]
lead to economies of scale (paragraph [4]).
4. Using a production possibility curve (PPC) diagram, explain how damage to Fiji’s [4]
infrastructure has affected its production possibilities (paragraph [1]).
view that government intervention is the best way to achieve economic
development in Fiji.
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Question 25
Economic development in Honduras and Guatemala
Honduras
1. Honduras is a developing country in Central America. While historically dependent on
the export of primary products, Honduras has more recently diversified its exports to
include clothing and automobile components. Honduras’ economy depends heavily
on exports to the United States (US) and, to a lesser extent, on remittances (money
sent by a foreign worker to their home country).
2. In rural areas, approximately one out of five Hondurans lives in absolute poverty. The
country is also vulnerable to external shocks and has experienced worsening terms of
trade. Revenue earned by the agricultural sector has decreased by one-third over the
past two decades. This is partially due to the declining prices of the country’s export
crops, especially bananas and coffee beans.
3. The Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) has
helped attract foreign direct investment (FDI). However, a threat to future FDI inflows
is Honduras’ high level of crime and violence. It has one of the highest murder rates in
the world.
Guatemala
4. Guatemala shares a border with Honduras. Guatemala has the largest population and
the biggest economy in Central America. Guatemala is the top remittance recipient in
Central America as a result of large numbers of Guatemalans living and working in the
US. These inflows on the current account are equivalent to two-thirds of the country’s
export revenue and about 10 % of its gross domestic product (GDP).
5. The agricultural sector employs 31 % of Guatemala’s labour force. Key agricultural
exports include sugar, coffee, bananas and vegetables. The CAFTA-DR has reduced
the barriers to FDI, resulting in increased investment and diversification of exports,
particularly in iron, steel and non-traditional agricultural exports (such as high-priced
fruits and vegetables). While the free trade agreement has improved the conditions
for investment, FDI continues to be limited by concerns over security, the lack of
skilled workers and poor infrastructure.
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6. With some of the worst poverty, malnutrition and infant mortality rates in the region,
Guatemala’s economic development is slowing. Those worst affected live in rural
areas. Faster economic growth is crucial to achieving the country’s medium- and
long-term poverty reduction objectives.
Table 2: Selected economic data for Honduras and Guatemala
[Source: Central Intelligence Agency, 2018. The World Factbook. Available at:
https://www.cia.gov/library/publications/the-world-factbook/geos/gt.html [accessed 1
November 2018]. Source adapted.
United Nations Human Development Reports, Guatamala
(http://hdr.undp.org/en/countries/profiles/GTM) and Honduras
(http://hdr.undp.org/en/countries/profiles/HND). Licenced under Creative Commons 3.0
IGO, https://creativecommons.org/licenses/by/3.0/igo/legalcode.\]
1. Define the term absolute poverty indicated in bold in the text (paragraph [2]). [2]
2. Define the term investment indicated in bold in the text (paragraph [5]). [2]
3. Using a perfectly competitive firm diagram, explain the effect of declining prices of [4]
coffee beans on the profits of Honduras’ coffee farmers in the short run (paragraph
[2]).
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4. With reference to the data in Table 2, explain why the GNI per capita for Guatemala [4]
is lower than its GDP per capita.
5. Using information from the text/data and your knowledge of economics, contrast [8]
the potential for economic development in Guatemala and Honduras.
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Question 26
Can the Democratic Republic of the Congo achieve its economic potential?
1. The Democratic Republic of the Congo (DRC) is a nation of great potential. It has
large mineral resources and an abundance of fertile land. The mining and export of
cobalt, copper and gold are the main source of government revenue. However, the
abundance of natural resources causes devastating conflicts as rebel groups fight for
control of the DRC’s resources. With a population of 80 million and gross domestic
product (GDP) per capita of only US$457, the DRC is one of the world’s poorest
nations. It is ranked 176 in the world in terms of the Human Development Index (HDI).
2. The government has been accused of relying too much on tariffs, but to improve living
standards, the government needs revenue to spend on agriculture, electricity and
roads. Furthermore, business owners in the DRC complain of corruption and
increasing “red tape” (excessive regulations).
3. The government believes that a strong agricultural sector could boost economic
growth but only 10 % of the land is used for farming. Rice, maize and other crops grow
well in the tropical climate and yet the government spends US$1 billion per year
importing basic foods. According to a government spokesperson, the lack of
infrastructure is a major barrier to the processing and transporting of agricultural
products. The DRC’s road network is so bad that farmers and traders often make a
two-week trip in small boats down the Congo River to sell their produce. The DRC has
just 27 877 kilometres (km) of roads. It is estimated that 90 000 km of national roads
and 150 000 km of rural roads must be built.
4. In addition, the World Bank reports that only 17 % of the DRC’s population has access
to electricity, despite the capacity of the Congo River to generate enough electricity
to satisfy the needs of the region.
5. To make matters worse, the regional conflicts have affected the availability of
healthcare services. It is estimated that half of the health centres have been looted*,
burnt or destroyed. Government expenditure on healthcare per capita remains one of
the lowest in the world. Non-governmental organizations (NGOs) are relied on to
protect the health and wellbeing of citizens. NGOs help to achieve this by distributing
medicine and teaching families about hygiene and proper sanitation.
*looted: goods stolen from a place, typically during a war or riot
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[Source: Médecins Sans Frontières/Doctors Without Borders (MSF), 2017. D. R. Congo:

Urgent need for aid in the rural areas
of Kasai. [online] Available at: https://prezly.msf.org.uk/d-r-congo-urgent-need-for-aid-
in-the-rural-areas-of-kasai#.
AFP, News24, 2018. Restive DRC’s big challenge - fulfilling economic potential. [online]
Available at:
https://www.news24.com/Africa/News/restive-drcs-big-challenge-fulfilling-economic-
potential-20181003
[accessed 3 October 2018]. Source adapted.]
1. Define the term gross domestic product (GDP) per capita indicated in bold in the [2]
text (paragraph [1]).
2. List two components of the Human Development Index (HDI) (paragraph [1]). [2]
3. Using an externalities diagram, explain the benefits of hygiene and sanitation [4]
education programmes (paragraph [5]).
4. Using a production possibilities curve (PPC) diagram, explain how the production [4]
possibilities (potential output) of the DRC might be affected if there were greater
access to electricity (paragraph [4]).
the effectiveness of interventionist policies as a means of achieving economic
development in the DRC.
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Question 27
Economic growth in Cambodia
1. Economic growth in Cambodia Cambodia has become one of the fastest growing
economies in Asia and has now been classified as an upper middle-income country,
according to the World Bank.
2. Export promotion has helped Cambodia to grow. It has used low-cost labour to
manufacture products for export. This has been helped by the fact that the price of
labour has increased in China and other Asian countries. Cambodia’s large supply of
inexpensive, low-skilled labour has attracted much foreign direct investment (FDI) into
the production of garments and footwear for export and contributed to its economic
growth. Last year, there was a 10.2 % increase in the export of garments and footwear
in Cambodia, which makes up 70 % of its exports.
3. Throughout Asia, hundreds of millions of people have been lifted out of poverty
through manufacturing jobs that allowed them to better educate their children, who
could then have a better life.
4. However, Cambodia’s manufacturing competitiveness is being challenged by other
countries in the region, particularly those that manufacture low-cost clothing. A
recent increase in the minimum wage may also pose problems. Industry
representatives have raised concerns that the garment industry may lose investors,
who may leave to find cheaper places, if the minimum wage continues to increase.
5. Cambodia needs to further diversify its economy if it hopes to maintain the high
growth rates it has achieved in recent years. To support diversification, the
government has launched an industrial development policy aimed at upgrading
industry from low-cost, labour-intensive manufacturing to production with higher
value added. The policy encourages the expansion and modernization of small and
medium-sized enterprises, stronger regulations and enforcement, and a better
environment for doing business.
6. There remain many challenges to deal with. One of them is growing inequality—there
is income inequality between urban and rural areas—as well as gender inequality.
Women continue to face disadvantages in gaining access to higher education, well-
paid employment opportunities and decision-making roles in government.
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7. Approximately 30 000 young Cambodians enter the labour force each year but often
do not have the required skills to meet the needs of the labour market. While a large
proportion of the labour force is employed, many jobs are informal, vulnerable,
unstable and poorly paid. There is a critical need to address problems in education
and training and to help children complete school. While 98 % of children attend
primary school in Cambodia, many drop out later due to a lack of funds. Only 30 % of
young people complete high school.
8. The rapid economic and population growth in Cambodia is leading to significant
environmental pollution. Environmentalists have identified garment factories as being
one of the four main industrial activities that significantly contribute to air and water
pollution.
[Source: adapted from Here Comes Cambodia: Asia’s New Tiger Economy, Asian
Development Bank, May 10, 2016,
https://www.adb.org/news/features/here-comes-cambodia-asia-s-new-tiger-economy\]
1. Define the term economic growth indicated in bold in the text (paragraph [2]). [2]
2. Define the term diversification indicated in bold in the text (paragraph [5]). [2]
3. Using a demand and supply diagram, explain why the increase in the minimum [4]
wage might affect Cambodia’s garment manufacturing competitiveness against
other countries in the region(paragraph [4]).
4. Using an externalities diagram, explain why the garment industry is a source of [4]
market failure (paragraph [8]).
export promotion as a strategy for achieving economic development in Cambodia.
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Question 28
Argentina’s currency keeps falling
1. The year 2018 started badly for Argentina when the worst drought in 50 years
negatively affected its export revenues from maize and soybeans, both important
exports. The economy suffered several additional problems: a stronger United States
dollar (US$), international investors selling Argentinian assets due to a lack of
confidence in the economy, rising inflation from 25 % to nearly 50 % (Figure 1) and a
significant depreciation of the peso, Argentina’s currency.
2. When Argentina’s president was elected in 2015, inflation was at 25 %. He gave the
central bank freedom to raise interest rates, which encouraged foreign investors to
buy government bonds. The government had borrowed a lot of money from overseas
to finance the persistentbudget deficit, but by 2018, foreign investors were interested
in other markets.
3. As the peso was overvalued in 2015, it kept demand for imports high and made it hard
for exports to compete. The current account deficit rose to more than 5 % of gross
domestic product (GDP) but slowly narrowed in 2018, because the president allowed
the peso to float freely.
4. In May 2018, in an attempt to control the inflation rate and stop the fall in the peso’s
value, the Argentinian central bank raised interest rates to 40 %. In addition, it started
selling foreign currency reserves. However, there were concerns that if the selling of
foreign currency reserves continued, they would be depleted quickly. To address this
concern, the president negotiated a US$50 billion loan from the International
Monetary Fund (IMF). Yet the peso continued to fall. The IMF loan means that most of
Argentina’s debt-servicing requirements are covered until 2020. However, under IMF
loan conditions, the budget deficit must be cut by postponing infrastructure projects,
subsidies must be cut, and government jobs must be cut.
5. A spokesperson from the IMF said “Argentina has a floating, market-determined
exchange rate, and the IMF fully supports that. The exchange rate should continue to
be determined by market forces.”
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6. The peso’s weakness causes imported oil prices to go up, further raising inflation. The
falling real incomes of households combined with higher interest rates will affect the
economy negatively, possibly leading to a recession. Interest rates will remain high for
some time, discouraging investment. Economists expect Argentina to fall into
recession, for the fifth time in a decade.
Figure 1: Argentina’s inflation rate
[Source: Adapted from Anon, n.d. Argentina Current Account, Trading Economics,
https://tradingeconomics.com/argentina/current-account.]
1. Define the term budget deficit indicated in bold in the text (paragraph [2]). [2]
2. Define the term gross domestic product (GDP) indicated in bold in the text [2]
(paragraph [3]).
3. Using an exchange rate diagram, explain how raising interest rates would “stop the [4]
fall in the peso’s value” (paragraph [4]).
4. Using an AD/AS diagram, explain how the peso’s weakness is “raising inflation” [4]
(paragraph [6]).
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Question 29
São Tomé and Príncipe Economic Development Challenges
1. São Tomé and Príncipe (STP) is an island nation and is one of the smallest economies
in Africa. STP faces many economic development challenges including: a limited
range of export products (mostly commodities) and markets, limited human capital,
insufficient infrastructure, vulnerability to supply-side shocks due to climate change,
limited access to credit, political instability and poor governance. All these challenges
have led to a high dependence on foreign aid.
2. International organizations estimate that approximately 50 % of STP’s population is
living in relative poverty. Its economic growth rate has been consistent at 4–5 %
between 2013 and 2018, but the International Monetary Fund (IMF) suggests that STP
will need an economic growth rate of 6 % to have an impact on the poverty rate.
3. To increase economic growth and reduce its dependence on foreign aid and cocoa
exports (80 % of its total exports), STP is planning to extract offshore oil and develop
the comparative advantage it has in tourism. Over 50 % of its exports go to the
European Union. It is hoped that diversifying STP’s exports will increase the number of
its potential trading partners. To achieve this aim, STP is seeking membership with the
World Trade Organization (WTO) and the Central African Economic and Monetary
Community. Developing export markets could help STP benefit from economies of
scale and overcome the restrictions of its geographical remoteness and high
transport costs. However, STP will need help from multinational oil companies to
exploit its oil reserves, and the government needs to improve transparency to ensure
that oil revenues are used to support economic development.
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4. In STP, foreign aid accounts for 57 % of gross domestic product (GDP) and 93 % of
public investments, including a significant portion of health and education spending.
In addition, concessional loans have been provided by the IMF. However, STP had to
agree to decrease the budget deficit as a condition of the loan from the IMF.
5. There are some government officials who believe that aid will not solve the economic
development challenges in STP. It did not meet the nutrition targets set by the
Millennium Development Goals and continues to struggle with providing adequate
clean water and nutritional intake for its population. Clean water is becoming scarce in
STP due to business pollution and poor household sanitation, which is also spreading
diseases. Other environmental concerns are climate change, deforestation and
erosion of coastal areas due to the sand extracted for the construction of roads and
buildings.
[Source: Adapted from Jennings, R., 2018. Taiwan cannot compete with China on Aid to
keep foreign allies. VOA News.
Available at: https://www.voanews.com/east-asia-pacific/taiwan-cannot-compete-china-
aid-keep-foreign-allies.\]
1. Define the term relative poverty indicated in bold in the text (paragraph [2]). [2]
2. Define the term economies of scale indicated in bold in the text (paragraph [3]). [2]
3. Using an externalities diagram, explain why “business pollution” is leading to [4]

market failure in STP (paragraph [5]).
role of aid in achieving economic development in STP.
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Question 30
The World Bank reports on economic growth in Kenya
1. The World Bank’s recent overview of Kenya has given a positive assessment of
Kenya’s growth prospects, based on domestic and international factors. The East
African nation of Kenya has a population of approximately 46.1 million, which
increases by an estimated one million per year. The World Bank projected 5.9 %
economic growth in 2016, rising to 6 % in 2017. This positive outlook is based on
continued low oil prices, growth in the agricultural sector, expansionary monetary
policy and ongoing infrastructure investments.
2. The World Bank has identified other key contributing factors to Kenya’s short-term
growth. These include an expanding services sector, higher levels of construction,
currency stability, low inflation, a growing middle-class and rising incomes, a surge in
remittances (money sent by a foreign worker to their home country) and increased
public investment in energy and transportation.
3. Tourism, information and communications and public administration are among the
sectors that have registered the highest growth. Inflation has been at an average of
6.3 %, which is within the Kenyan central bank’s target range.
4. The World Bank also predicted that, of 82 countries investigated, Kenya would have
the highest long-term growth and that its real gross domestic product (GDP) in 2050
should be seven times larger than it is today. Fast population growth, a modest
improvement in the business environment, urbanization and fast-growing
neighbouring countries are all contributing factors to the positive prediction.
5. While the growing Kenyan economy is creating more jobs now than in the past, these
are mainly in the informal services sector and are low productivity jobs. 9 million
young people will join the labour market in the next 10 years. Given the scarcity of
formal sector jobs, they will continue to find jobs in the informal sector. These jobs are
usually in very small businesses, often run from homes.
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6. The World Bank suggests that there is a need to increase the productivity of jobs in
the informal sector. It says that this could be achieved by increasing work-related
skills through training schemes, increasing communication and learning between
formal and informal firms, and helping small-scale firms to become suppliers for firms
in the formal sector. To create more and higher-skilled jobs, it is also essential to
reduce the cost of doing business.
7. According to the World Bank, Kenya has made significant structural and economic
reforms that have contributed to sustained economic growth in the past decade.
However, economic growth does not always mean economic development. The main
development challenges facing Kenya include poverty, inequality, climate change, low
commodity prices and the vulnerability of the economy to internal and external
shocks.
[Source: adapted from The World Bank Country Overview,
http://www.worldbank.org/en/country/kenya/overview,
7 March 2017; Kenya in 2050, The Economist Intelligence Unit,
https://www.eiu.com/public/topical\_report.
aspx?campaignid=ForecastingTo2050, 13 July 2017, data reused by permission of The
Economist Intelligence Unit; and World
Bank economic updates, Kenya’s Economy Strong in a Challenging Global Environment,
http://www.worldbank.org/en/country/
kenya/publication/kenya-economic-update-economy-strong-challenging-global-
environment, March 2016.]
1. Define the term investment indicated in bold in the text(paragraph [2]). [2]
2. Define the term productivity indicated in bold in the text (paragraph [5]). [2]
3. Using an AD/AS diagram, explain how expansionary monetary policy might lead to [4]
economic growth (paragraph [1]).
4. Explain the difference between economic growth and economic development [4]
(paragraph [7]).
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extent to which continued economic growth may lead to economic development in
Kenya.
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Question 31
The fall of the Indian rupee
1. Over the past year, India’s current account deficit widened as the 14 % increase in
export revenue could not offset the rise in import expenditure. Over the same period,
the value of the rupee (India’s currency) has fallen by 13 %.
2. The rise in import expenditure was in part caused by higher oil prices following
production cuts by the Organization of the Petroleum Exporting Countries (OPEC).
Another reason for the increase in import expenditure was the higher spending on
machinery and capital goods needed to achieve economic growth.
3. Exports of services, especially software services, have helped to boost export
revenue. However, one critical weakness in India’s exports of services is the lack of
diversification. Exports of software services account for more than 41 % of India’s total
service exports and more than 90 % of its software service exports are restricted to
the United States and the European Union.
4. The depreciation of the rupee, one of the steepest seen in recent years, has resulted
in fears of high inflation. An economist at the Reserve Bank of India (India’s central
bank) has warned that the increase in oil prices and consumers’ expectations of rising
inflation could worsen inflationary pressures.
5. Despite calls for an increase in interest rates in order to protect the rupee from further
depreciation, the Reserve Bank of India has chosen to keep interest rates unchanged.
The combined effect of a fall in confidence and higher interest rates would dampen
economic growth.
Table 1: Selected economic indicators for India
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Tulsi Jayakumar, Forbes India, 2018. Reining in Current Account Deficit: Options for India.
Available at: http://www.forbesindia.com/article/spjimr/reining-in-current-account-
deficit-options-for-india/51455/1 [accessed 19 January 2019]. Source adapted.
Reproduced by permission of the author.
1. Define the term current account indicated in bold in the text (paragraph [1]). [2]
2. Define the term depreciation indicated in bold in the text(paragraph [4]). [2]
3. Using an AD/AS diagram, explain how an increase in oil prices “could worsen [4]
inflationary pressures” (paragraph [4]).
4. Using an exchange rate diagram, explain how higher interest rates could “protect [4]
the rupee from further depreciation” (paragraph [5]).
possible economic consequences on the Indian economy of a depreciating rupee.
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Question 32
Angola’s economic reforms
1. Following an oil price crash in 2014, Angola has endured a recession, a dramatic rise
in inflation and empty supermarket shelves caused by severe shortages of foreign
currency. Angola is highly dependent on export revenues from oil production, a major
source of United States dollars. The foreign currency is needed to import
manufactured goods because the country’s manufacturing sector is small.
2. To respond to these challenges, the president of Angola has presented a plan with
desperately needed reforms to promote economic development. The plan proposes
tax incentives to attract foreign investment and privatization of the
telecommunication and railway sectors. It also aims to expand infrastructure projects
with private sector involvement. In addition, reforms are recommended to make the
banking sector stronger. This is important if the government wants to reduce the
borrowing costs experienced by Angolan businesses.
3. The recent 20 % devaluation of the kwanza (Angola’s currency) is another sign that
the government is serious about making Angola attractive to foreign direct investment
(FDI). Angola has a fixed exchange rate. As the kwanza has been overvalued, this has
caused a reduction in foreign currency reserves.
4. Angola’s future economic growth is likely to be low. The business environment for
firms remains difficult. High borrowing costs, corruption and poor infrastructure
remain challenges. The government has failed to exploit Angola’s vast agricultural
potential. The country depends heavily on oil revenues, which are falling.
5. Living conditions for households are also poor as inflation is expected to remain above
25 %. Approximately 40 % of Angolans live in absolute poverty and unemployment is
high, especially in rural areas. Aware of the urgent need to reduce regional inequality,
the government has announced plans to encourage investment in rural areas.
However, there are also proposals to reduce public debt by removing some subsidies
on food and by introducing ad valorem taxes.
6. Although Angola’s economic growth has been slow, it remains the third-largest
economy in sub-Saharan Africa and the government is the second-largest public
spender in the region.
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[Source: Business Day, 2018. President Lourenço’s economic reforms are making Angola
attractive. Available at: https://www. businesslive.co.za/bd/opinion/2018-02-16-president-
lourenos-economic-reforms-are-making-angola-attractive/# [accessed 19 January 2019].
Source adapted.
AFP, News24, 2018. Angola president vows investment drive, graft fight. Available at:
https://www.news24.com/Africa/News/angola-president-vows-investment-drive-graft-
fight-20181015 [accessed 19 January 2019]. Source adapted.]
1. Define the term recession indicated in bold in the text (paragraph [1]). [2]
2. Define the term privatization indicated in bold in the text (paragraph [2]). [2]
3. Using a demand and supply diagram, explain the impact on households of [4]
“removing some subsidies on food” (paragraph [5]).
4. Using a Lorenz curve diagram, explain the likely impact on income distribution of [4]
“plans to encourage investment in rural areas” (paragraph [5]).
the effectiveness of market-oriented policies in achieving economic development in
Angola.
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Question 33
United States (US) tin can manufacturers seek tariff exemption on tinplate steel
1. The Can Manufacturers Institute (CMI) has asked the US Department of Commerce to
take away tariffs and other trade protection measures that are currently applied to
imports of tinplate steel. Tinplate steel is used to make tin cans as packaging for food.
The CMI represents the tin can manufacturing industry and its suppliers in the US.
2. The tin can manufacturing industry accounts for the annual domestic production of
approximately 124 billion tin cans. The industry employs more than 28 000 people,
with factories in 33 US states, Puerto Rico and American Samoa. It generates revenue
of around US$17.8 billion. The CMI claims that the tariff on imports of tinplate steel
has a severe economic impact on the tin can manufacturing industry.
3. Approximately 2 % of all US steel is tinplate. Currently, there is excess demand that is
causing a disequilibrium in the domestic US tinplate steel market. In 2016, US demand
for tinplate steel was 2.1 million tons, while domestic supply was 1.2 million tons,
meaning that only 57 % of domestic demand was met by US tinplate steel producers.
Not only is there a domestic shortage of tinplate steel, but also the CMI claims that
there has been a noticeable decline in the quality of domestically-produced tinplate
steel.
4. The CMI claims that even a small increase in the price of raw materials could create a
competitive disadvantage, forcing some tin can manufacturing plants to shut down.
This would create structural unemployment for 10 000 workers in regionally-based
factories. The CMI also claims that the tariff puts food can producers at a competitive
disadvantage with other food packaging substitutes, such as plastic and glass. These
substitutes are not subject to tariffs.
5. According to the CMI, canned fruits and vegetables cost 20 % less than fresh food.
Because of this, people on low incomes consume canned foods at a higher rate than
the average American. Canned food offers a low-cost solution to feeding the nation;
especially the 42 million Americans who live in low-income households. The figure
includes 13 million children. The CMI further claims that tariffs, or any trade barriers,
have harsh consequences for those living in relative poverty.
[Source: adapted from www.prnewswire.com, accessed 27 August 2017]
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1. Define the term excess demand indicated in bold in the text (paragraph [3]). [2]
2. Define the term structural unemployment indicated in bold in the text (paragraph [2]
[4]).
3. Using a supply and demand diagram and data from the text, explain how a [4]
“disequilibrium in the domestic US tinplate steel market” would occur if there were
no imports (paragraph [3]).
4. Using an international trade diagram, explain the effect of a tariff on the imports of [4]
tinplate steel(paragraph [1]).
5. Using information from the text/data and your knowledge of economics, discuss [8]
possible economic impacts of the tariff on tinplate steel.
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Question 34
China’s increasing presence in Bolivia
1. Between 2000 and 2014, annual bilateral trade between China and Bolivia increased
dramatically from US$75.3 million to US$2.25 billion. China has become the fifth-
largest market for Bolivian exports, which mostly consist of raw materials such as
minerals, hydrocarbons, wood and soybeans.
2. At the same time, China has become Bolivia’s main source of imports. China now
supplies half of Bolivia’s clothing, cars, motorcycles, cell phones, computers and
other electronics. Bolivia’s expenditure on Chinese imports significantly exceeds the
revenue that is received from its exports to China. Since 2014, Bolivia has experienced
significant current account deficits with China.
3. In recent years, the Bolivian government has taken loans from Chinese banks to
support the purchase of Chinese imports of goods and services, along with Chinese-
built roads, bridges, railways, hydroelectric power plants and mining facilities. In 2015,
the Bolivian government owed more than US$600 million to Chinese banks.
4. The socialist Bolivian government wants to implement an ambitious Five-Year National
Development Plan from 2016 to 2020. Faced with sharply declining export revenues
and commodity prices, it will rely increasingly on foreign capital to fund its projects.
5. All projects financed by Chinese loans must be awarded to Chinese companies, which
come with their own materials, equipment and technology, and often their own labour.
The new loans will have a combination of commercial interest rates, between 2.5 %
and 4 %, and concessional interest rates, up to 1 %. The Bolivian government is
expecting to be able to repay the loans through continued growth of the economy.
6. China’s foreign direct investment (FDI) is mostly being aimed at energy and
infrastructure development. Chinese firms are currently involved in major road-
building projects, hydroelectric power station projects, expanding airports and
developing a steel-producing plant. These projects have created problems for local
communities in terms of water contamination and the overuse of Bolivia’s scarce
water supply.
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7. This FDI strategy generates profits for Chinese firms in the short term, as they build
and improve the infrastructure. Since Bolivia is a resource-rich country, Chinese firms
will be looking to invest in profitable mining projects in the future, once the
infrastructure is in place.
[Source: adapted from Financial sovereignty or a new dependency? How China is
remaking Bolivia,
http://nacla.org/blog/2017/08/11/financial-sovereignty-or-new-dependency-how-china-
remaking-bolivia,
10 August 2017, this article was originally published by NACLA; and Trading Economics,
Bolivia Current Account,
https://tradingeconomics.com/bolivia/current-account, accessed 9 October 2017]
1. Define the term interest rates indicated in bold in the text (paragraph [5]). [2]
2. Describe the nature of foreign direct investment (paragraph [6]). [2]
3. Using information from the text, explain two reasons why Chinese multinational [4]
corporations (MNCs) are investing in Bolivia.
4. Using an externalities diagram, explain how the Chinese infrastructure projects [4]
have caused negative externalities (paragraph [6]).
possible effects of Chinese involvement on economic growth and development in
the Bolivian economy.
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20/04/2024, 20:01 Collections | RevisionDojo

Economics Mock Exam

[Sources: adapted from World Bank and Statistics Indonesia;

* signifies no data available

[Sources: adapted from www.commons.wikimedia.org, 14 August 2014; The World

Figure 1 – Export and import indices for Australia

[Sources: Extract: Adapted from Fairfax Syndication, www.afr.com/news, 30 July 2015

1. Steel manufacturers in Kenya are set to benefit as the government moves to

5. Good economic growth rates in neighbouring countries like Uganda help to

7. Growth projections may not be achieved if any, or a combination, of the following

2. List two components of the financial account (paragraph [4]). [2]

[Source: adapted from UNDP Ghana country profile, http://hdr.undp.org, accessed 19

[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com,

5. To complicate matters for China, economic growth in the US is causing US interest

[Source: According to a report on ResearchAndMarkets.com. China’s Auto Revolution,

[Source: adapted from https://tradingeconomics.com, accessed 6 September 2017]

[Source: adapted from https://tradingeconomics.com, accessed 4 September 2017]

[Source: adapted from https://tradingeconomics.com, accessed 5 October 2017]

[Source: Médecins Sans Frontières/Doctors Without Borders (MSF), 2017. D. R. Congo:

3. Using an externalities diagram, explain why “business pollution” is leading to [4]

2. Describe the nature of foreign direct investment (paragraph [6]). [2]

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