Economics HL
The global economy — Unit 4 HL
- 1.
The currency of Country X appreciates significantly against major trading partners' currencies. (a) Explain the likely effect of this appreciation on the price of Country X's exports in foreign markets. (b) Explain the likely effect on the volume of Country X's exports, assuming demand for its exports is price elastic.
[4 marks] · no calculator - 2.
Marking analysis: A learner attempts the following task: “The currency of Country X appreciates significantly against major trading partners' currencies. (a) Explain the likely effect of this appreciation on the price of Country X's exports in foreign markets. (b) Explain the likely effect on the volume of Country X's exports, assuming demand for its exports is price elastic.” Their response addresses only this point: “Explains that appreciation makes Country X's goods more expensive in foreign-currency terms for trading partners.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 3.
A country records the following for one year: trade in goods balance −$40bn, trade in services balance +$15bn, primary income balance −$5bn, secondary income balance +$2bn. (a) Calculate the current account balance. (b) State whether the country has a current account deficit or surplus. (c) Suggest one policy a government could use to address a persistent current account deficit. (d) Explain one possible drawback of that policy.
[5 marks] - 4.
Marking analysis: A learner attempts the following task: “A country records the following for one year: trade in goods balance −$40bn, trade in services balance +$15bn, primary income balance −$5bn, secondary income balance +$2bn. (a) Calculate the current account balance. (b) State whether the country has a current account deficit or surplus. (c) Suggest one policy a government could use to address a persistent current account deficit. (d) Explain one possible drawback of that policy.” Their response addresses only this point: “Sums the four balances: −40 + 15 − 5 + 2.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 5.
The nominal exchange rate between Country A and Country B is 4 units of Country A's currency per 1 unit of Country B's currency. A basket of goods costs 200 units of Country A's currency in Country A, and 40 units of Country B's currency in Country B. (a) Calculate the price of Country B's basket in Country A's currency, using the nominal exchange rate. (b) State whether the basket is cheaper in Country A or Country B once converted to the same currency. (c) Based on purchasing power parity theory, state what this suggests about the value of Country A's currency relative to Country B's currency. (d) Explain one real-world reason exchange rates might not adjust quickly to eliminate this difference.
[6 marks] - 6.
Marking analysis: A learner attempts the following task: “The nominal exchange rate between Country A and Country B is 4 units of Country A's currency per 1 unit of Country B's currency. A basket of goods costs 200 units of Country A's currency in Country A, and 40 units of Country B's currency in Country B. (a) Calculate the price of Country B's basket in Country A's currency, using the nominal exchange rate. (b) State whether the basket is cheaper in Country A or Country B once converted to the same currency. (c) Based on purchasing power parity theory, state what this suggests about the value of Country A's currency relative to Country B's currency. (d) Explain one real-world reason exchange rates might not adjust quickly to eliminate this difference.” Their response addresses only this point: “Converts Country B's basket: 40 × 4 = 160 units of Country A's currency.” Evaluate the response against the complete 6-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[6 marks] - 7.
A country is a price taker in the world market for a good, where the world price is $10 per unit. Its domestic demand is Qd = 100 − 2P and its domestic supply is Qs = 20 + 2P. The government then imposes a tariff of $5 per unit on imports. (a) Calculate the domestic quantity demanded and supplied, and the resulting import quantity, before the tariff (at the world price). (b) State the new domestic price once the $5 tariff is fully passed on. (c) Calculate the new quantities demanded and supplied, and the new import quantity, after the tariff. (d) Calculate the government's tariff revenue.
[5 marks] - 8.
Marking analysis: A learner attempts the following task: “A country is a price taker in the world market for a good, where the world price is $10 per unit. Its domestic demand is Qd = 100 − 2P and its domestic supply is Qs = 20 + 2P. The government then imposes a tariff of $5 per unit on imports. (a) Calculate the domestic quantity demanded and supplied, and the resulting import quantity, before the tariff (at the world price). (b) State the new domestic price once the $5 tariff is fully passed on. (c) Calculate the new quantities demanded and supplied, and the new import quantity, after the tariff. (d) Calculate the government's tariff revenue.” Their response addresses only this point: “Calculates, at the world price of $10: Qd = 100 − 20 = 80 and Qs = 20 + 20 = 40, giving pre-tariff imports of 80 − 40 = 40 units.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 9.
Instead of a tariff, a government considers imposing an import quota that limits imports of a good to a fixed physical quantity. (a) Explain how a quota, unlike a tariff, restricts import quantity directly rather than raising price indirectly. (b) State who captures the scarcity rent (the gap between the world price and the higher domestic price) when a quota is used and import licenses are given away rather than auctioned. (c) Explain one reason a quota can become more restrictive over time than an equivalent tariff, if domestic demand rises.
[3 marks] · no calculator - 10.
Marking analysis: A learner attempts the following task: “Instead of a tariff, a government considers imposing an import quota that limits imports of a good to a fixed physical quantity. (a) Explain how a quota, unlike a tariff, restricts import quantity directly rather than raising price indirectly. (b) State who captures the scarcity rent (the gap between the world price and the higher domestic price) when a quota is used and import licenses are given away rather than auctioned. (c) Explain one reason a quota can become more restrictive over time than an equivalent tariff, if domestic demand rises.” Their response addresses only this point: “Explains that a quota sets a fixed maximum physical quantity of imports directly, whereas a tariff works by raising the price of imports, with any quantity effect emerging indirectly from that price change.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 11.
Groups of countries form different levels of trading bloc. (a) Identify the trading bloc type where members remove tariffs on trade between themselves but each keeps its own independent tariffs against non-member countries. (b) Identify the trading bloc type that adds a common external tariff against non-members to the arrangement in (a). (c) Identify the trading bloc type that adds free movement of labour and capital between members to the arrangement in (b).
[3 marks] · no calculator - 12.
Marking analysis: A learner attempts the following task: “Groups of countries form different levels of trading bloc. (a) Identify the trading bloc type where members remove tariffs on trade between themselves but each keeps its own independent tariffs against non-member countries. (b) Identify the trading bloc type that adds a common external tariff against non-members to the arrangement in (a). (c) Identify the trading bloc type that adds free movement of labour and capital between members to the arrangement in (b).” Their response addresses only this point: “Identifies a free trade area (FTA).” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 13.
Following a significant depreciation of its currency, a country's trade balance initially worsens for several months before eventually improving. (a) Identify the term used to describe this initial worsening followed by later improvement in the trade balance. (b) State the Marshall-Lerner condition, in terms of the price elasticities of demand for exports and imports, that must hold for a depreciation to improve the trade balance in the long run. (c) Explain one reason the trade balance might worsen immediately after depreciation, even though the underlying quantities eventually adjust favourably.
[4 marks] · no calculator - 14.
Marking analysis: A learner attempts the following task: “Following a significant depreciation of its currency, a country's trade balance initially worsens for several months before eventually improving. (a) Identify the term used to describe this initial worsening followed by later improvement in the trade balance. (b) State the Marshall-Lerner condition, in terms of the price elasticities of demand for exports and imports, that must hold for a depreciation to improve the trade balance in the long run. (c) Explain one reason the trade balance might worsen immediately after depreciation, even though the underlying quantities eventually adjust favourably.” Their response addresses only this point: “Identifies the J-curve effect.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 15.
(a) Distinguish between a fixed exchange rate system and a floating exchange rate system. (b) Explain how a central bank operating a fixed exchange rate would need to intervene in the foreign exchange market if market forces were putting downward pressure on its currency.
[4 marks] · no calculator - 16.
Marking analysis: A learner attempts the following task: “(a) Distinguish between a fixed exchange rate system and a floating exchange rate system. (b) Explain how a central bank operating a fixed exchange rate would need to intervene in the foreign exchange market if market forces were putting downward pressure on its currency.” Their response addresses only this point: “States that under a fixed exchange rate, the government or central bank sets and actively maintains the exchange rate at a specific level.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 17.
For each of the following transactions, identify which balance-of-payments account it would be recorded in. (a) A foreign company builds a new factory in the country (foreign direct investment inflow). (b) The country's residents receive interest payments on foreign government bonds they own. (c) The country exports machinery to another country. (d) State one reason the overall balance of payments must, by definition, always sum to zero.
[4 marks] · no calculator - 18.
Marking analysis: A learner attempts the following task: “For each of the following transactions, identify which balance-of-payments account it would be recorded in. (a) A foreign company builds a new factory in the country (foreign direct investment inflow). (b) The country's residents receive interest payments on foreign government bonds they own. (c) The country exports machinery to another country. (d) State one reason the overall balance of payments must, by definition, always sum to zero.” Their response addresses only this point: “Identifies the factory investment as a financial account (foreign direct investment) credit.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 19.
In Year 1, a country's export price index was 100 and its import price index was 100. In Year 2, its export price index rose to 108, while its import price index rose to 120. (a) Calculate the terms of trade index for Year 2, using Year 1 = 100 as the base. (b) State whether the terms of trade have improved or worsened. (c) Explain what this change means for the quantity of imports the country can purchase for a given quantity of exports.
[4 marks] - 20.
Marking analysis: A learner attempts the following task: “In Year 1, a country's export price index was 100 and its import price index was 100. In Year 2, its export price index rose to 108, while its import price index rose to 120. (a) Calculate the terms of trade index for Year 2, using Year 1 = 100 as the base. (b) State whether the terms of trade have improved or worsened. (c) Explain what this change means for the quantity of imports the country can purchase for a given quantity of exports.” Their response addresses only this point: “Uses the formula: terms of trade index = (export price index / import price index) × 100.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 21.
Country A can produce either 60 units of cloth or 30 units of wheat per week using all its resources. Country B can produce either 40 units of cloth or 40 units of wheat per week using all its resources. (a) Calculate the opportunity cost of producing one unit of cloth in each country, in terms of wheat. (b) Identify which country has a comparative advantage in producing cloth. (c) Identify which country has a comparative advantage in producing wheat. (d) Explain, using the concept of comparative advantage, how both countries could gain from specialising and trading with each other.
[6 marks] - 22.
Marking analysis: A learner attempts the following task: “Country A can produce either 60 units of cloth or 30 units of wheat per week using all its resources. Country B can produce either 40 units of cloth or 40 units of wheat per week using all its resources. (a) Calculate the opportunity cost of producing one unit of cloth in each country, in terms of wheat. (b) Identify which country has a comparative advantage in producing cloth. (c) Identify which country has a comparative advantage in producing wheat. (d) Explain, using the concept of comparative advantage, how both countries could gain from specialising and trading with each other.” Their response addresses only this point: “Calculates Country A's opportunity cost of 1 unit of cloth = 30/60 = 0.5 units of wheat.” Evaluate the response against the complete 6-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[6 marks] - 23.
A country runs a persistent current account deficit for many years, financed mainly by short-term foreign borrowing rather than foreign direct investment. (a) Explain why this financing method could make the country vulnerable to a sudden reversal of capital inflows (a 'sudden stop'). (b) Explain one likely consequence for the country's currency if foreign investors suddenly withdraw this short-term capital.
[4 marks] · no calculator - 24.
Marking analysis: A learner attempts the following task: “A country runs a persistent current account deficit for many years, financed mainly by short-term foreign borrowing rather than foreign direct investment. (a) Explain why this financing method could make the country vulnerable to a sudden reversal of capital inflows (a 'sudden stop'). (b) Explain one likely consequence for the country's currency if foreign investors suddenly withdraw this short-term capital.” Their response addresses only this point: “Explains that short-term borrowing (e.g., short-term bonds or bank loans) can be withdrawn or not renewed quickly if foreign investors become less confident, unlike FDI, which is tied to long-term physical assets and cannot be withdrawn as easily.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 25.
Several countries are considering forming a common market with a single shared currency, similar to a currency union. (a) Explain one economic benefit member countries could gain from this deeper economic integration. (b) Explain one significant cost, in terms of national economic policy independence, that member countries would need to accept.
[4 marks] · no calculator - 26.
Marking analysis: A learner attempts the following task: “Several countries are considering forming a common market with a single shared currency, similar to a currency union. (a) Explain one economic benefit member countries could gain from this deeper economic integration. (b) Explain one significant cost, in terms of national economic policy independence, that member countries would need to accept.” Their response addresses only this point: “Explains a valid benefit, such as eliminating exchange-rate uncertainty and transaction costs for trade between members, or gains from a larger combined market enabling economies of scale.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 27.
Most economists argue that removing trade barriers and allowing free trade based on comparative advantage increases a country's total economic welfare. (a) Identify one group within a country that is likely to lose from opening up to free trade in a good the country does not have a comparative advantage in producing. (b) Explain why total welfare can still rise even though this group loses. (c) Suggest one way the government could use part of the overall gains from trade to compensate the group identified in (a).
[3 marks] · no calculator - 28.
Marking analysis: A learner attempts the following task: “Most economists argue that removing trade barriers and allowing free trade based on comparative advantage increases a country's total economic welfare. (a) Identify one group within a country that is likely to lose from opening up to free trade in a good the country does not have a comparative advantage in producing. (b) Explain why total welfare can still rise even though this group loses. (c) Suggest one way the government could use part of the overall gains from trade to compensate the group identified in (a).” Their response addresses only this point: “Identifies a valid losing group, such as workers and firms in the import-competing industry facing new foreign competition.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 29.
A developing country's government wants to protect a newly established domestic car manufacturing industry from established foreign competitors using a tariff. (a) Outline the infant industry argument for this protection. (b) Evaluate one weakness of using this argument to justify long-term, rather than temporary, protection.
[4 marks] · no calculator - 30.
Marking analysis: A learner attempts the following task: “A developing country's government wants to protect a newly established domestic car manufacturing industry from established foreign competitors using a tariff. (a) Outline the infant industry argument for this protection. (b) Evaluate one weakness of using this argument to justify long-term, rather than temporary, protection.” Their response addresses only this point: “Outlines that a new industry may not yet have achieved the economies of scale, experience or technology that established foreign competitors already have, so it cannot yet compete on price or quality.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator