IB · ECON HL

Economics HL

The global economy — Unit 4 HL

Name: ____________________Date: October 14, 2026

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
Marking points
- Explains that appreciation makes Country X's goods more expensive in foreign-currency terms for trading partners.
- Explains why: it now takes more of the foreign currency to buy the same amount of Country X's currency-priced goods.
- States that with price-elastic demand, the percentage fall in quantity demanded exceeds the percentage price rise.
- Concludes that the volume, and likely the value, of Country X's exports will fall as a result.
Examiner tip: Separate the effect on price, which is always predictable from the exchange-rate move, from the effect on volume, which depends on elasticity.
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
Marking points
- Recognises credit for the stated point: Explains that appreciation makes Country X's goods more expensive in foreign-currency terms for trading partners.
- Identifies the missing requirement: Explains why: it now takes more of the foreign currency to buy the same amount of Country X's currency-priced goods.
- Identifies the missing requirement: States that with price-elastic demand, the percentage fall in quantity demanded exceeds the percentage price rise.
- Identifies the missing requirement: Concludes that the volume, and likely the value, of Country X's exports will fall as a result.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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]
Marking points
- Sums the four balances: −40 + 15 − 5 + 2.
- Obtains a current account balance of −$28bn.
- States that this is a current account deficit.
- Suggests a valid policy, such as an expenditure-switching policy (e.g., depreciation) or an expenditure-reducing policy.
- Explains a valid drawback, such as depreciation raising import prices and contributing to inflation, or reduced expenditure slowing domestic growth.
Examiner tip: Add the sub-balances with their correct signs; a single sign error changes a surplus into a deficit.
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]
Marking points
- Recognises credit for the stated point: Sums the four balances: −40 + 15 − 5 + 2.
- Identifies the missing requirement: Obtains a current account balance of −$28bn.
- Identifies the missing requirement: States that this is a current account deficit.
- Identifies the missing requirement: Suggests a valid policy, such as an expenditure-switching policy (e.g., depreciation) or an expenditure-reducing policy.
- Identifies the missing requirement: Explains a valid drawback, such as depreciation raising import prices and contributing to inflation, or reduced expenditure slowing domestic growth.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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]
Marking points
- Converts Country B's basket: 40 × 4 = 160 units of Country A's currency.
- States that the basket is cheaper in Country B (160) than in Country A (200) once converted.
- States that, under purchasing power parity, this suggests Country A's currency is overvalued relative to Country B's currency.
- Notes that the PPP-implied exchange rate would be 200/40 = 5, versus the actual rate of 4.
- Explains a valid real-world friction, such as transport costs, trade barriers, non-traded goods and services, or capital flows driven by factors other than trade.
- States that these frictions mean actual exchange rates can deviate from PPP-implied rates for extended periods.
Examiner tip: Convert both baskets into the same currency before comparing them; comparing raw numbers in different currencies is meaningless.
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]
Marking points
- Recognises credit for the stated point: Converts Country B's basket: 40 × 4 = 160 units of Country A's currency.
- Identifies the missing requirement: States that the basket is cheaper in Country B (160) than in Country A (200) once converted.
- Identifies the missing requirement: States that, under purchasing power parity, this suggests Country A's currency is overvalued relative to Country B's currency.
- Identifies the missing requirement: Notes that the PPP-implied exchange rate would be 200/40 = 5, versus the actual rate of 4.
- Identifies the missing requirement: Explains a valid real-world friction, such as transport costs, trade barriers, non-traded goods and services, or capital flows driven by factors other than trade.
- Identifies the missing requirement: States that these frictions mean actual exchange rates can deviate from PPP-implied rates for extended periods.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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]
Marking points
- 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.
- States the new domestic price after the tariff = world price + tariff = $10 + $5 = $15.
- Calculates new Qd = 100 − 2(15) = 70 and new Qs = 20 + 2(15) = 50.
- Calculates the new import quantity = 70 − 50 = 20 units, a fall from the pre-tariff 40 units.
- Calculates tariff revenue = $5 × 20 = $100.
Examiner tip: Government tariff revenue is always calculated using the post-tariff import quantity, not the pre-tariff quantity — the tariff itself reduces the volume of trade it is levied on.
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]
Marking points
- Recognises credit for the stated 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.
- Identifies the missing requirement: States the new domestic price after the tariff = world price + tariff = $10 + $5 = $15.
- Identifies the missing requirement: Calculates new Qd = 100 − 2(15) = 70 and new Qs = 20 + 2(15) = 50.
- Identifies the missing requirement: Calculates the new import quantity = 70 − 50 = 20 units, a fall from the pre-tariff 40 units.
- Identifies the missing requirement: Calculates tariff revenue = $5 × 20 = $100.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- 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.
- States that the scarcity rent is captured by the license holders/importers rather than by the domestic government, since no tariff revenue is collected.
- Explains that because a quota fixes the quantity, any rise in domestic demand over time cannot be met by additional imports, so the domestic price is pushed up further than an equivalent fixed-rate tariff would allow, since imports under a tariff could still expand if extra world supply is available.
Examiner tip: A tariff generates government revenue; an equivalent quota (with free licenses) instead creates a private windfall gain for whoever holds the import licenses.
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
Marking points
- Recognises credit for the stated 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.
- Identifies the missing requirement: States that the scarcity rent is captured by the license holders/importers rather than by the domestic government, since no tariff revenue is collected.
- Identifies the missing requirement: Explains that because a quota fixes the quantity, any rise in domestic demand over time cannot be met by additional imports, so the domestic price is pushed up further than an equivalent fixed-rate tariff would allow, since imports under a tariff could still expand if extra world supply is available.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- Identifies a free trade area (FTA).
- Identifies a customs union.
- Identifies a common market.
Examiner tip: Each level of integration adds one further step: FTA (no internal tariffs) → customs union (+ common external tariff) → common market (+ free factor mobility) → economic union (+ harmonised policy, possibly a single currency).
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
Marking points
- Recognises credit for the stated point: Identifies a free trade area (FTA).
- Identifies the missing requirement: Identifies a customs union.
- Identifies the missing requirement: Identifies a common market.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- Identifies the J-curve effect.
- States the Marshall-Lerner condition: the sum of the (absolute values of the) price elasticities of demand for exports and imports must exceed 1 for a depreciation to improve the trade balance.
- Explains that immediately after depreciation, the quantities of exports and imports bought are largely fixed by pre-existing contracts and habits (demand is relatively inelastic in the short run).
- Explains that the trade balance therefore initially worsens simply because imports now cost more in domestic currency while export and import volumes have not yet adjusted, and only improves once quantities respond as demand becomes more elastic over the long run.
Examiner tip: The J-curve describes the time path (worsen then improve); the Marshall-Lerner condition describes whether the eventual long-run improvement happens at all.
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
Marking points
- Recognises credit for the stated point: Identifies the J-curve effect.
- Identifies the missing requirement: States the Marshall-Lerner condition: the sum of the (absolute values of the) price elasticities of demand for exports and imports must exceed 1 for a depreciation to improve the trade balance.
- Identifies the missing requirement: Explains that immediately after depreciation, the quantities of exports and imports bought are largely fixed by pre-existing contracts and habits (demand is relatively inelastic in the short run).
- Identifies the missing requirement: Explains that the trade balance therefore initially worsens simply because imports now cost more in domestic currency while export and import volumes have not yet adjusted, and only improves once quantities respond as demand becomes more elastic over the long run.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- States that under a fixed exchange rate, the government or central bank sets and actively maintains the exchange rate at a specific level.
- States that under a floating exchange rate, the exchange rate is determined freely by the forces of supply and demand in the foreign exchange market, without government intervention.
- Explains that to prevent depreciation, the central bank would need to buy its own currency using its foreign currency reserves, increasing demand for the domestic currency to support its value.
- Explains that this approach is limited by the size of the central bank's foreign currency reserves, since persistent selling pressure on the currency could eventually exhaust them.
Examiner tip: Defending a fixed exchange rate against depreciation pressure always costs the central bank foreign currency reserves — this is why fixed rates can become unsustainable if market pressure persists.
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
Marking points
- Recognises credit for the stated point: States that under a fixed exchange rate, the government or central bank sets and actively maintains the exchange rate at a specific level.
- Identifies the missing requirement: States that under a floating exchange rate, the exchange rate is determined freely by the forces of supply and demand in the foreign exchange market, without government intervention.
- Identifies the missing requirement: Explains that to prevent depreciation, the central bank would need to buy its own currency using its foreign currency reserves, increasing demand for the domestic currency to support its value.
- Identifies the missing requirement: Explains that this approach is limited by the size of the central bank's foreign currency reserves, since persistent selling pressure on the currency could eventually exhaust them.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- Identifies the factory investment as a financial account (foreign direct investment) credit.
- Identifies the bond interest received as a current account (primary income) credit.
- Identifies the machinery export as a current account (trade in goods) credit.
- States that the balance of payments sums to zero by accounting identity, because every international transaction generates a matching debit and a matching credit entry across the accounts (double-entry bookkeeping).
Examiner tip: A current account deficit must, by the same accounting identity, be matched by an equal and opposite surplus on the financial and capital accounts combined.
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
Marking points
- Recognises credit for the stated point: Identifies the factory investment as a financial account (foreign direct investment) credit.
- Identifies the missing requirement: Identifies the bond interest received as a current account (primary income) credit.
- Identifies the missing requirement: Identifies the machinery export as a current account (trade in goods) credit.
- Identifies the missing requirement: States that the balance of payments sums to zero by accounting identity, because every international transaction generates a matching debit and a matching credit entry across the accounts (double-entry bookkeeping).
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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]
Marking points
- Uses the formula: terms of trade index = (export price index / import price index) × 100.
- Calculates the terms of trade index = (108/120) × 100 = 90.
- States that since the index fell below the Year 1 base of 100, the terms of trade have worsened (deteriorated).
- Explains that a lower terms-of-trade index means the country must now export a greater quantity of goods to purchase the same quantity of imports as before, since its exports have become relatively cheaper compared with its imports.
Examiner tip: A rising import price index combined with a slower-rising export price index always worsens the terms of trade, regardless of whether both indices are individually rising.
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]
Marking points
- Recognises credit for the stated point: Uses the formula: terms of trade index = (export price index / import price index) × 100.
- Identifies the missing requirement: Calculates the terms of trade index = (108/120) × 100 = 90.
- Identifies the missing requirement: States that since the index fell below the Year 1 base of 100, the terms of trade have worsened (deteriorated).
- Identifies the missing requirement: Explains that a lower terms-of-trade index means the country must now export a greater quantity of goods to purchase the same quantity of imports as before, since its exports have become relatively cheaper compared with its imports.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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]
Marking points
- Calculates Country A's opportunity cost of 1 unit of cloth = 30/60 = 0.5 units of wheat.
- Calculates Country B's opportunity cost of 1 unit of cloth = 40/40 = 1 unit of wheat.
- Identifies Country A as having the comparative advantage in cloth, since its opportunity cost of cloth (0.5) is lower than Country B's (1).
- Identifies Country B as having the comparative advantage in wheat, since Country A has the comparative advantage in cloth.
- Explains that if each country specialises in the good in which it has a comparative advantage (A in cloth, B in wheat) and trades with the other, total combined output of both goods can exceed what both countries could produce in isolation.
- Explains that trade at a mutually beneficial exchange rate, between each country's opportunity costs, allows both countries to consume combinations of cloth and wheat beyond their own individual production possibilities.
Examiner tip: Identify comparative advantage by comparing opportunity costs across countries, never absolute output levels — a country can have the comparative advantage in a good even if it produces less of everything in absolute terms.
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]
Marking points
- Recognises credit for the stated point: Calculates Country A's opportunity cost of 1 unit of cloth = 30/60 = 0.5 units of wheat.
- Identifies the missing requirement: Calculates Country B's opportunity cost of 1 unit of cloth = 40/40 = 1 unit of wheat.
- Identifies the missing requirement: Identifies Country A as having the comparative advantage in cloth, since its opportunity cost of cloth (0.5) is lower than Country B's (1).
- Identifies the missing requirement: Identifies Country B as having the comparative advantage in wheat, since Country A has the comparative advantage in cloth.
- Identifies the missing requirement: Explains that if each country specialises in the good in which it has a comparative advantage (A in cloth, B in wheat) and trades with the other, total combined output of both goods can exceed what both countries could produce in isolation.
- Identifies the missing requirement: Explains that trade at a mutually beneficial exchange rate, between each country's opportunity costs, allows both countries to consume combinations of cloth and wheat beyond their own individual production possibilities.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- 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.
- Explains that this dependence on short-term inflows to finance the deficit makes the country vulnerable to a sudden stop, where foreign capital abruptly dries up.
- Explains that if foreign investors withdraw this capital, the resulting fall in demand for the domestic currency (as investors convert back to their own currency) causes it to depreciate sharply.
- Notes that this depreciation could trigger a wider financial or currency crisis, especially if the country or its firms hold debt denominated in foreign currency, which becomes more expensive to repay.
Examiner tip: A current account deficit financed by long-term, stable FDI is generally considered far more sustainable than one financed by volatile short-term ('hot money') capital flows.
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
Marking points
- Recognises credit for the stated 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.
- Identifies the missing requirement: Explains that this dependence on short-term inflows to finance the deficit makes the country vulnerable to a sudden stop, where foreign capital abruptly dries up.
- Identifies the missing requirement: Explains that if foreign investors withdraw this capital, the resulting fall in demand for the domestic currency (as investors convert back to their own currency) causes it to depreciate sharply.
- Identifies the missing requirement: Notes that this depreciation could trigger a wider financial or currency crisis, especially if the country or its firms hold debt denominated in foreign currency, which becomes more expensive to repay.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- 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.
- Elaborates on how this benefit arises specifically from deeper integration, e.g., a single currency removes exchange-rate risk that previously discouraged cross-border trade and investment.
- Explains that a member country adopting a single currency gives up its own independent monetary policy, e.g., it can no longer set its own interest rate or devalue its own exchange rate.
- Explains that this loss of policy independence can be especially costly if member economies experience different economic shocks (asymmetric shocks) but must share the same interest rate and cannot devalue individually to restore competitiveness.
Examiner tip: The core trade-off of a currency union is trading away independent monetary policy in exchange for lower transaction costs and exchange-rate certainty — its net benefit depends heavily on how similar member economies' business cycles are.
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
Marking points
- Recognises credit for the stated 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.
- Identifies the missing requirement: Elaborates on how this benefit arises specifically from deeper integration, e.g., a single currency removes exchange-rate risk that previously discouraged cross-border trade and investment.
- Identifies the missing requirement: Explains that a member country adopting a single currency gives up its own independent monetary policy, e.g., it can no longer set its own interest rate or devalue its own exchange rate.
- Identifies the missing requirement: Explains that this loss of policy independence can be especially costly if member economies experience different economic shocks (asymmetric shocks) but must share the same interest rate and cannot devalue individually to restore competitiveness.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- Identifies a valid losing group, such as workers and firms in the import-competing industry facing new foreign competition.
- Explains that the gains to consumers (lower prices, wider choice) and to firms in the export industry with the comparative advantage exceed the losses to the import-competing industry, so total welfare rises even though it is not evenly shared.
- Suggests a valid compensation mechanism, such as government-funded retraining programmes, temporary income support, or subsidies for displaced workers, funded from the broader gains from trade.
Examiner tip: Free trade increases total welfare, but the gains and losses are not evenly distributed — the compensation principle argues winners could, in theory, fully compensate losers and still be better off.
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
Marking points
- Recognises credit for the stated point: Identifies a valid losing group, such as workers and firms in the import-competing industry facing new foreign competition.
- Identifies the missing requirement: Explains that the gains to consumers (lower prices, wider choice) and to firms in the export industry with the comparative advantage exceed the losses to the import-competing industry, so total welfare rises even though it is not evenly shared.
- Identifies the missing requirement: Suggests a valid compensation mechanism, such as government-funded retraining programmes, temporary income support, or subsidies for displaced workers, funded from the broader gains from trade.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
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
Marking points
- 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.
- Outlines that temporary protection can allow the infant industry time to grow, gain experience, and achieve economies of scale, until it becomes internationally competitive on its own.
- Evaluates a valid weakness, such as the risk that a protected industry never actually 'grows up' and becomes internationally competitive, remaining permanently dependent on protection.
- Explains an additional consequence, such as domestic consumers paying higher prices or facing less choice for as long as the protection continues, or that removing protection later becomes politically difficult due to lobbying by the protected industry.
Examiner tip: The infant industry argument justifies only temporary protection with a credible exit plan — its main real-world weakness is that protection, once granted, is politically hard to remove.
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
Marking points
- Recognises credit for the stated 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.
- Identifies the missing requirement: Outlines that temporary protection can allow the infant industry time to grow, gain experience, and achieve economies of scale, until it becomes internationally competitive on its own.
- Identifies the missing requirement: Evaluates a valid weakness, such as the risk that a protected industry never actually 'grows up' and becomes internationally competitive, remaining permanently dependent on protection.
- Identifies the missing requirement: Explains an additional consequence, such as domestic consumers paying higher prices or facing less choice for as long as the protection continues, or that removing protection later becomes politically difficult due to lobbying by the protected industry.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.