IB Economics Higher Level

1. (a) Explain why governments impose price floors in the market for agricultural products. [10] (b) Evaluate the effectiveness of government regulations in achieving a reduction in the consumption of demerit goods. [15]

1. (a) Explain why governments provide subsidies. [10] (b) Evaluate the effectiveness of price floors in achieving a reduction in the consumption of demerit goods. [15]

1. (a) Explain why merit goods tend to be under-provided in a free market. [10] (b) Evaluate the use of carbon taxes to reduce threats to sustainability. [15]

2. (a) Explain why a monopolistically competitive firm can make economic (abnormal) profit in the short run, but not in the long run. [10] (b) Discuss the consequences of a perfectly competitive market becoming a monopoly market. [15] Section B Answer one question from this section. Macroeconomics

2. (a) Explain the reasons for the shape of the long-run average total cost curve. [10] (b) Discuss the view that governments should always try to prevent the creation of barriers to entry in a market. [15] Section B Answer one question from this section. Macroeconomics

2. (a) Explain why producers in an oligopolistic market might choose to engage in non-price competition. [10] (b) Evaluate the view that the use of legislation and regulation by government is the most effective way to control monopoly power. [15] Section B Answer one question from this section. Macroeconomics

3. (a) Explain two causes of demand-pull inflation. [10] (b) Evaluate the effectiveness of interventionist supply-side policies in reducing demand-pull inflation. [15]

3. (a) Explain the causes of cost-push inflation. [10] (b) Discuss the view that deflation is more harmful than inflation. [15]

3. (a) Explain how rising commodity prices and wages might lead to cost-push inflation. [10] (b) Discuss the possible consequences of deflation for an economy. [15]

4. (a) Explain two causes of structural unemployment. [10] (b) Discuss the consequences of different types of unemployment. [15] 

4. (a) Explain how the Lorenz curve and the Gini coefficient are used to measure differences in income inequality between countries. [10] (b) Discuss the view that taxation is the most effective means of achieving equity in the distribution of income. [15] 

4. (a) Explain how a better trained and educated labour force might affect economic growth. [10] (b) Discuss the view that economic growth always leads to rising living standards. [15] 

1. Study the following extract and data and answer the questions that follow. Filipino rice farmers prepare for trade liberalization To meet its obligations under World Trade Organization (WTO) rules, the president of the Philippines has asked the government to eliminate the current quota system for rice imports. As an important part of food security measures, the government wants to achieve self-sufficiency in the production of rice. To support this goal, the WTO allowed the Philippines to extend its rice quota until June 2017 to allow more time for local farmers to prepare for free trade. The current quota system for rice imports makes domestic prices rise dramatically during periods of low domestic supply. Eliminating the quota on rice aims to make the rice market more competitive, which could reduce the price of rice by as much as 7 Philippine pesos (PH₱) per kilogram (kg). The National Economic and Development Authority has estimated that lower rice prices could save Filipino households as much as PH₱2362 per year. However, if the rice quota is eliminated, economists have warned that the government must prepare local rice producers so that they can either compete with rice imports or move to producing other crops. “Currently Filipino farmers cannot compete with Vietnamese farmers who may enjoy economies of scale” declared one economist. “The solution is to bring down the cost of production of rice.” To help Filipino farmers to adjust to competition from lower-priced rice imports, the government has allocated funds to the Rice Competitiveness Enhancement Fund. This fund will provide support to farmers in order to increase productivity by supplying high-yield seeds and fertilizer. It will also provide subsidies to encourage the use of agricultural machinery and will offer support services and training to farmers. Apart from being an essential food for many Filipinos, rice is also an important input for the food industry. The plan to remove the import quota will reduce the inflation rate in the Philippines by up to 0.4 %. In July 2018, the central bank governor reported that inflation had reached 5.7 %, well above the government’s target range of 2 % to 4 %. He stated that “supply-side factors are the main drivers of the present inflation. These factors include rising international oil prices, higher indirect taxes and poor weather conditions that have affected food supply”. The president stated that the removal of the rice quota was one solution to ease the rising inflation. (This question continues on the following page)      Turn over (Question 1 continued) Table 1: Average economic costs and prices of rice in the Philippines and Vietnam Philippines Vietnam Average total cost per kg of rice PH₱12.41 PH₱6.53 Price per kg of rice PH₱12.19 PH₱9.64 (a) (i) State two functions of the World Trade Organization (WTO) (paragraph ). [2] (ii) Define the term free trade indicated in bold in the text (paragraph ). [2] (b) Using an AD/AS diagram, explain how removing “the import quota will reduce the inflation rate in the Philippines” (paragraph ). [4] (c) Using a perfect competition diagram, explain whether farmers in the Philippines are making an economic profit or loss (Table 1). [4] (d) Using information from the text/data and your knowledge of economics, evaluate the impact on the economy in the Philippines of removing the rice quota. [8] – 3 – 2221 – 5104

1. Study the following extract and data and answer the questions that follow. The strong Thai baht 1 Thailand’s currency, the Thai baht, ended 2019 at its highest value in more than six years. With a 7.8 % gain against the United States dollar (US$), it was the currency that appreciated the most among major Asian currencies. 2 The Thai baht’s appreciation was caused by several factors. Many foreign investors are attracted by Thailand’s economic stability, high levels of foreign reserves, low inflation rate and low unemployment (Table 1). However, the inflation rate is below the central bank’s target. 3 Initially, the central bank of Thailand (BoT) was not too concerned, as the strong Thai baht was helping Thai importers and those who had foreign debts. Additionally, Thai producers could afford to import new technology and capital equipment. An appreciating currency could also help improve the country’s terms of trade. 4 However, a strong currency can have severe consequences on an export-oriented country like Thailand. Exports account for 65 % of gross domestic product (GDP), and in 2019 exports declined by 7 %. Additionally, the tourism industry, which makes up approximately 20 % of GDP and accounts for 16 % of employment, started to express concern. Economic growth in 2019 was 3 %, down from 4.1 % in 2018. 5 Therefore, towards the end of 2019, the BoT implemented measures to prevent further appreciation of the Thai baht. The BoT reduced controls on capital outflows to make it easier for Thai citizens to move money abroad. Additionally, restrictions were placed on the amount of money foreigners could hold in Thai bank accounts. 6 The BoT is considering further measures including the use of foreign reserves, a decrease in the interest rate, and imposing controls on capital inflows, to prevent speculative inflows. However, these controls may impact the country’s credibility and financial markets. Expansionary monetary policy may also increase household debt which, at 78.6 % of GDP, is among the highest in Asia. 7 The BoT is concerned about using foreign reserves, as this may result in Thailand being labelled a currency manipulator* by the US. Currently, Thailand’s overall large current account surplus is the only requirement it meets to be labelled a currency manipulator. However, Thailand’s bilateral trade surplus with the US is currently US$19 billion, which means it is close to meeting a second requirement. Thailand wants to avoid being labelled a currency manipulator as the US may use trade protection in retaliation. * currency manipulator: the US will label a country as a currency manipulator if the following three requirements are met (a country will be placed on a watchlist if they meet two of the requirements): 1. The country is using its foreign reserves to change the value of its currency to gain an advantage 2. The country has a bilateral trade surplus with the US of over US$20 billion 3. The country has a current account surplus of more than 2 % of its GDP. (This question continues on the following page) – 3 – 8821 – 5104 Turn over (Question 1 continued) Table 1: Thailand macroeconomic indicators 2019 Current account surplus US$3.4 billion Unemployment rate 1 % Inflation rate 0.3 % Economic growth 3 % (a) (i) Define the term gross domestic product indicated in bold in the text (paragraph 4). [2] (ii) Define the term current account surplus indicated in bold in the text (paragraph 7). [2] (b) Using an exchange rate diagram, explain how a decrease in the interest rate might influence the value of the Thai baht (paragraph 6). [4] (c) Using a production possibilities curve (PPC) diagram, explain how the importing of “new technology and capital equipment” might affect Thailand’s production possibilities (paragraph 3). [4] (d) Using information from the text/data and your knowledge of economics, evaluate the implications of the strong Thai baht on Thailand’s economy. [8]

2. Study the following extract and answer the questions that follow. Trade war with the United States puts pressure on China’s currency 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”. 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. 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. 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. 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. (This question continues on the following page)      Turn over (Question 2 continued) (a) (i) Define the term fixed exchange rate indicated in bold in the text (paragraph ). [2] (ii) Define the term monetary policy indicated in bold in the text (paragraph ). [2] (b) Using an exchange rate diagram, explain why the “widening trade deficit in services” could lead to a depreciation of the renminbi (paragraph ). [4] (c) Using an AD/AS diagram, explain how “increasing China’s interest rate” could affect its economic growth (paragraph ). [4] (d) Using information from the text/data and your knowledge of economics, discuss the view that a depreciating currency is good for the Chinese economy. [8] – 5 – 2221 – 5104

2. Study the following extract and answer the questions that follow. Free Trade Agreement between the European Union and Indonesia 1 The European Union (EU) and Indonesia are currently negotiating a free trade agreement (FTA). The agreement will aim to increase trade, avoid trade protection and expand foreign direct investment (FDI). Indonesia has the largest economy and population in Southeast Asia. The EU is Indonesia’s third-largest trading partner. 2 The FTA could see the clothing and footwear industry in Indonesia increase by over 10 %. However, the labour-intensive manufacturing industry has historically been known for poor working conditions and low wages. On the other hand, increased output could decrease the high unemployment in Indonesia (currently at 12 %). The EU expects its car industry to benefit from the FTA. The agreement would encourage the EU to specialize in cars, and Indonesia to specialize in clothing, therefore both countries could benefit from comparative advantage. 3 Since Indonesia’s main competitors already have trade agreements with the EU, establishing an FTA is a priority for the Indonesian government. The EU has a potential market of 510 million consumers, and may offer areas for growth during a time of lower global trade and uncertainty due to the trade war between the United States and China. 4 However, recent trade issues between the EU and Indonesia have slowed down negotiations. The EU announced that palm oil biodiesel is unsustainable and will phase these fuels out by 2030. Experts say that palm oil causes excessive deforestation and contributes to climate change. Indonesia is the world’s largest exporter of palm oil. 5 The EU has imposed tariffs on biodiesel exports from Indonesia, which may result in Indonesia losing a market worth over US$450 million. Palm oil represents 12 % of Indonesia’s total exports, contributes approximately 2.6 % to gross domestic product (GDP), and the industry employs more than 15 million people. The EU is Indonesia’s largest palm oil customer. Additionally, some EU manufacturing businesses are unhappy with the tariffs as they rely on palm oil to produce their products, such as processed foods. 6 In response, Indonesia filed a lawsuit with the World Trade Organization (WTO), stating that the EU’s policy on biodiesel is unfair and is damaging the international image of palm oil. Indonesia claims it is committed to sustainable production practices and to protecting its forests. 7 To make up for losing the EU’s market, Indonesia is actively exploring other markets to boost its exports of palm oil. Other countries like China, India and Russia have a more relaxed policy on palm oil and have growing demand for it. Indonesia has also retaliated to the tariff through an investigation into whether EU dairy products exported to Indonesia benefited from subsidies, and has recommended a 20 %–25 % tariff on EU dairy products. 8 However, the EU has tried to lower tensions by offering a US$17 million grant to improve trade conditions and capacity in preparation for the FTA. Experts have said that the FTA could support the development of legal and sustainable palm oil production through supporting good governance and capacity building. Indonesia has stated it would welcome help to decrease any market failure caused by palm oil. (This question continues on the following page) – 5 – 8821 – 5104 Turn over (Question 2 continued) (a) (i) Define the term tariffs indicated in bold in the text (paragraph 5). [2] (ii) State two functions of the World Trade Organization (WTO) (paragraph 6). [2] (b) Using a demand and supply diagram for processed food, explain how the EU’s tariff on palm oil might impact the market for processed food in the EU (paragraph 5). [4] (c) Using a production possibilities curve (PPC) diagram to illustrate comparative advantage, explain why the EU would export cars to Indonesia and Indonesia would export clothing to the EU (paragraph 2). [4] (d) Using information from the text/data and your knowledge of economics, discuss the economic effects on Indonesia of establishing a free trade agreement with the EU. [8]

3. Study the following extract and answer the questions that follow. Can the Democratic Republic of the Congo achieve its economic potential? 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). 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). 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. 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. 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 (This question continues on the following page)      Turn over (Question 3 continued) (a) (i) Define the term gross domestic product (GDP) per capita indicated in bold in the text (paragraph ). [2] (ii) List two components of the Human Development Index (HDI) (paragraph ). [2] (b) Using an externalities diagram, explain the benefits of hygiene and sanitation education programmes (paragraph ). [4] (c) Using a production possibilities curve (PPC) diagram, explain how the production possibilities (potential output) of the DRC might be affected if there were greater access to electricity (paragraph ). [4] (d) Using information from the text/data and your knowledge of economics, evaluate the effectiveness of interventionist policies as a means of achieving economic development in the DRC. [8] – 7 – 2221 – 5104

3. Study the following extract and answer the questions that follow. Changing times for Vanuatu 1 Vanuatu is an island nation in the west of the Pacific Ocean. The islands are isolated with 80 % of the population living in rural villages as subsistence farmers. In recent years, Vanuatu has experienced strong economic growth driven by tourism, construction and foreign aid. However, Vanuatu has a United Nations (UN) status as the world’s most vulnerable country to natural disasters, and this vulnerability is intensified through climate change. Furthermore, economic development in Vanuatu is constrained by lack of education, limited public sector capacity, poor infrastructure and low labour market participation rates of women and youth. 2 Vanuatu currently faces growing income disparities between rural and urban areas. The poverty rate is currently at 3.8 % in the rural areas and 10.4 % in Port Vila, the capital city. Urbanization has led to large numbers of unskilled low-income workers concentrated in informal sectors in Port Vila. As a result, there is a shortage of housing, water and electricity services. 3 The UN categorizes Vanuatu as a Least Developed Country, but it will be moving to the higher category of Developing Country by the end of 2020. This will mean that some special assistance such as access to development finance, trade and market access, and technology transfer will be slowly withdrawn. However, there will be benefits for Vanuatu as it will gain greater access to commercial lenders, foreign direct investment (FDI) and climate finance funds. 4 To help with the transition to the new UN category, Australia and New Zealand are continuing aid projects to improve public sector capacity, increase economic participation of women and youth and improve access to electricity in Vanuatu. Moreover, Japan and China have significantly increased aid through grants and concessional loans. China is now the leading donor to Vanuatu. 5 The Vanuatu government has targeted the development of human capital through education, healthcare and infrastructure. Most of the aid from China has been used to develop new airports and shipping ports. This infrastructure will further help producers to access export markets and gain economies of scale. However, government institutions need to be improved so that the benefits of export revenues are redistributed to those in need. Historically, the lack of good governance has led to misuse of funds. 6 Economists believe the foreign aid spending could help attract FDI, which is important to help Vanuatu develop export markets in organic beef, sandalwood oil, tamanu oil and canarium nuts to provide areas for growth. Historically, growth was driven through import substitution by subsidizing manufacturing industries. 7 Vanuatu is currently reforming the tax system to lower the reliance on indirect taxes and implementing a progressive tax system to increase government revenue. The increased tax revenue will also decrease Vanuatu’s dependence on foreign aid. (This question continues on the following page) – 7 – 8821 – 5104 Turn over (Question 3 continued) (a) (i) Define the term foreign direct investment indicated in bold in the text (paragraph 3). [2] (ii) Define the term human capital indicated in bold in the text (paragraph 5). [2] (b) Using a demand and supply diagram, explain how a subsidy changes the consumer surplus for a good (paragraph 6). [4] (c) Using a Lorenz curve, explain how a progressive tax system could change Vanuatu’s income distribution (paragraph 7). [4] (d) Using information from the text/data and your knowledge of economics, discuss the effectiveness of foreign aid in achieving economic development in Vanuatu. [8]

4. Study the following extract and data and answer the questions that follow. Economic development in Honduras and Guatemala Honduras 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). 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. 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 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). 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. 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. (This question continues on the following page)       (Question 4 continued) Table 2: Selected economic data for Honduras and Guatemala Honduras Guatemala Human Development Index (HDI) rank 133 127 Gross national income (GNI) per capita in purchasing power parity (PPP) terms (US$) 4215 7278 GDP per capita in PPP terms (US$) 5600 8100 Real GDP growth rate (%) 4.80 2.80 Tax collection (% of GDP) 19.30 10.40 Gini coefficient 0.47 0.53 Sanitation access (% of total population) 83 64 Health expenditure (% of GDP) 7.69 6.20 Education expenditure (% of GDP) 5.87 2.83 Time required to start a business (days) 13 27 (a) (i) Define the term absolute poverty indicated in bold in the text (paragraph ). [2] (ii) Define the term investment indicated in bold in the text (paragraph ). [2] (b) Using a perfectly competitive firm diagram, explain the effect of declining prices of coffee beans on the profits of Honduras’ coffee farmers in the short run (paragraph ). [4] (c) With reference to the data in Table 2, explain why the GNI per capita for Guatemala is lower than its GDP per capita. [4] (d) Using information from the text/data and your knowledge of economics, contrast the potential for economic development in Guatemala and Honduras. [8]  – 9 – 2221 – 5104 References: 1. Rappler, 2018. Gov’t to support farmers amid moves to lift rice import quotas. Available at: https://www.rappler.com/business/203837-government-support-philippine-farmers-lifting-rice-import-quotas [accessed 1 June 2018]. Source adapted. Philippine News Agency, 2018. Tariff on imported rice to rake in P20-B yearly. Available at: http://www.pna.gov.ph/articles/1043516 [accessed 2 August 2018]. Source adapted. Ernesto M. Ordoñez / Inquirer.net, 2018. Averting the 35% rice tariff crisis. Available at: https://business.inquirer.net/258373/averting-35-rice-tariff-crisis#ixzz5VJ32ugph. Ben O. de Vera, Inquirer.net, 2018. Tariff on rice to curb inflation by 0.4 percentage point. Available at: https://business.inquirer.net/256313/tariff-rice-curb-inflation-0-4-percentage-point#ixzz5VGfm0xUp [accessed 29 August 2018]. Source adapted. 2. 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-low- 20181030-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. 3. 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. 4. 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. All other texts, graphics and illustrations © International Baccalaureate Organization 2021

4. Study the following extract and answer the questions that follow. New policies for Brazil 1 From 2010 to 2014, Brazil experienced an economic boom with annual gross domestic product (GDP) growth of 8 %. During this time, the government spent heavily on social programmes (including cash transfers and pensions) that helped millions to get out of the poverty cycle. The poverty rate decreased from 22 % to 9 % and the Gini coefficient dropped from 0.581 to 0.515. However, the spending on social programmes resulted in fiscal deficits and a large public debt, which is currently 80 % of GDP. 2 In 2015, Brazil entered a recession that lasted until 2017. During the recession GDP declined by an average of 3 % per year. By 2017, the number of Brazilians living in absolute poverty climbed by 13 %, inequality worsened, and unemployment was 12 %. From late 2017 to 2019, Brazil struggled to recover, with only approximately 1 % annual economic growth. 3 Some economists blamed the slow recovery on the lack of investment in education and technology during the economic boom. According to those economists, investment in human and physical capital was necessary to improve productivity and decrease the reliance on the production of primary commodities. Historically, spending on education has not been effective in reaching the very poor. 4 In 2018, a newly elected government, aiming to stimulate economic growth, introduced market-oriented policies. Since Brazil has a large economy, the new government believed that Brazil should take advantage of world trade and foreign investment to boost economic growth and achieve economic development. 5 The new government aimed to increase the number of multinational corporations (MNCs) investing in Brazil through deregulation and trade liberalization. Furthermore, in 2020 several state-owned enterprises were privatized. 6 Additionally, new labour market and tax reforms were introduced to create jobs, increase labour force participation and make it easier for firms to hire and fire workers. The reforms included increasing the retirement age and reducing transfer payments. However, trade unions claim that the reforms are unfair and will lead to the exploitation of workers. 7 There is concern that deregulation, privatization and market liberalization will put pressure on Brazil’s environment, threaten sustainable development, and benefit only urban areas. In 2017, the government introduced “green GDP” as an official measure and committed to environmental protection goals. This is necessary because, for example, over 40 % of the population live in areas without access to a sewage system and manufacturing companies are dumping untreated wastewater in rivers, contributing to water pollution. (This question continues on the following page) – 9 – 8821 – 5104 (Question 4 continued) (a) (i) Define the term multinational corporations indicated in bold in the text (paragraph 5). [2] (ii) Define the term “green GDP” indicated in bold in the text (paragraph 7). [2] (b) Using a business cycle diagram from 2010 to 2019, explain how cyclical unemployment may have changed during the economic boom (paragraph 1) and the recession (paragraph 2) in Brazil. [4] (c) Using an externalities diagram, explain how manufacturing companies in Brazil are contributing to market failure (paragraph 7). [4] (d) Using information from the text/data and your knowledge of economics, evaluate the impact of market-oriented policies on economic development in Brazil. [8]  References: 1. Bloomberg News, 2020. Thailand moves closer to US currency watchlist [online]. Available at: https://www.bangkokpost.com/world/1831214/thailand-moves-closer-to-us-currency-watchlist [Accessed 27 October 2020]. Used with permission of Bloomberg L.P. Copyright © 2022. All rights reserved. Source adapted. Bloomberg, 2019. The Thai Baht reached a new 6-year high. Here’s why it’s surging [online]. Available at: https://www.thestar.com.my/business/business-news/2019/10/25/the-thai-baht-reached-a-new-6-year-high-heres- why-its-surging [Accessed 27 October 2020]. Used with permission of Bloomberg L.P. Copyright © 2022. All rights reserved. Source adapted. Cumperayot, P., 2019. What Does a Rising Baht Mean for Thailand’s Economy? [online]. Available at: https://thediplomat.com/2019/08/what-does-a-rising-baht-mean-for-thailands-economy/ [Accessed 27 October 2020]. Source adapted. 2. Iswara, M. A., 2019. Indonesia gets Rp 232 billion grant from EU to ease trade negotiations [online]. Available at: https://www.thejakartapost.com/news/2019/09/30/indonesia-gets-rp-232-billion-grant-from-eu-to-ease-trade- negotiations.html [Accessed 27 October 2020]. Source adapted. 3. Daily Post, 2019. Vanuatu poised to graduate from Least Developed Country status [online]. Available at https:// dailypost.vu/news/vanuatu-poised-to-graduate-from-least-developed-country-status/article_203172ef-98a8-5e83- ab2c-515c4858ee86.html [Accessed 27 October 2020]. Source adapted. All other texts, graphics and illustrations © International Baccalaureate Organization 2021