IB Economics 2014 May and Nov Exams

IB ECONOMICS
2014 Examinations: May and November examination sessions
The May and November 2014 examinations
May
Nov
HL Paper 1 examination
HL Paper 1 mark scheme
HL Paper 2 examination
HL Paper 2 mark scheme
SL Paper 1 examination
SL Paper 1 mark scheme
SL Paper 2 examination
SL Paper 2 mark scheme
HL Paper 3 examination
HL Paper 3 mark scheme
2014 IB Economics Examinations
2214-5103 3 pages
M14/3/ECONO/HP1/ENG/TZ2/XX
Monday 5 May 2014 (afternoon)
ECONOMICS
HIGHER LEVEL
PAPER 1
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
You are not permitted access to any calculator for this paper.
Section A: answer one question.
Section B: answer one question.
Use fully labelled diagrams and references to examples where appropriate.
The maximum mark for this examination paper is [50 marks].
© International Baccalaureate Organization 2014
1 hour 30 minutes
22145103
2214-5103
– 2 –
M14/3/ECONO/HP1/ENG/TZ2/XX
SECTION A
Answer one question from this section.
Microeconomics
1. (a) Analyse the private and external benets associated with the consumption of
university education.
[10 marks]
(b) Evaluate the policies a government might use to increase the consumption of
university education.
[15 marks]
2. (a) Using a diagram, explain why rms in monopolistic competition are neither
allocatively nor productively efcient.
[10 marks]
(b) Examine the view that the market for food is more benecial to consumers if
dominated by a monopoly retailer (supermarket) rather than by a large number
of small shops operating under monopolistic competition.
[15 marks]
2214-5103
– 3 –
M14/3/ECONO/HP1/ENG/TZ2/XX
SECTION B
Answer one question from this section.
Macroeconomics
3. (a) Explain how the aggregate demand curve can be shifted by a reduction in
interest rates.
[10 marks]
(b) Evaluate the effectiveness of monetary policy to increase aggregate demand
during a recession.
[15 marks]
4. (a) Explain two factors which might cause economic growth.
[10 marks]
(b) Evaluate the view that the benets of economic growth will always outweigh the
costs.
[15 marks]
M14/3/ECONO/HP1/ENG/TZ2/XX/M
17 pages
MARKSCHEME
May 2014
ECONOMICS
Higher Level
Paper 1
– 2 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must not
be reproduced or distributed to any other person without the
authorization of the IB Assessment Centre.
– 3 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
Use the question-specific markscheme together with the markbands. Award up to the maximum marks
as indicated.
SECTION A
Microeconomics
1. (a) Analyse the private and external benefits associated with the consumption
of university education. [10 marks]
Answers may include:
definitions of private benefits and external benefits
diagram to show the private and external benefits associated with the
consumption of university education
an explanation of the private benefits of university education in terms of
employment prospects, the enjoyment of the experience and the
development of wider life skills; explanation of the external benefits of
university education in terms of: improvements in the quality of the
workforce, lower unemployment, higher growth rates
examples of the private and external benefits of university education.
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 4 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
(b) Evaluate the policies a government might use to increase the consumption
of university education. [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already
been given in part (a), and then referred to in part (b) should be rewarded.
Answers may include:
definition of a merit good
diagram(s) to show the impact of the policies the government might use to
increase in the consumption of university education
an explanation of the policies a government might use to increase the
consumption of university education as a merit good: subsidies to
universities, financial support for students, promotion of university
education
example(s) of the policies the government might use to increase the
consumption of university education
synthesis or evaluation.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Evaluation may be in terms of the policiescosts and effectiveness.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 5 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 6 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
2. (a) Using a diagram, explain why firms in monopolistic competition are
neither allocatively nor productively efficient. [10 marks]
Answers may include:
definitions of monopolistic competition, allocative efficiency and
productive efficiency
diagram of monopolistic competition
an explanation of monopolistic competition showing that it cannot be
productively efficient because it does not produce where
MC ATC=
or
allocatively efficient because it does not produce where
MC AR
=
examples to support the explanation given.
– 7 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 8 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
(b) Examine the view that the market for food is more beneficial to consumers
if dominated by a monopoly retailer (supermarket) rather than by a large
number of small shops operating under monopolistic competition. [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already
been given in part (a), and then referred to in part (b) should be rewarded.
Answers may include:
definitions of monopoly, monopolistic competition
an explanation of theory of the firm related to retail markets, how both
monopoly and monopolistic competition have their advantages and
disadvantages in terms of costs, price and output
diagram to show the possible impact on consumers under monopoly and
monopolistic competition in terms of price
examples of relevant market structures
synthesis and evaluation (examine).
Command term
“Examine” requires candidates to consider an argument or concept in a way
that uncovers the assumptions and interrelationships of the issue.
Factors considered may include: the effects on efficiency and customer
service, welfare effects, price and output, and economies of scale.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 9 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 10 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
SECTION B
Macroeconomics
3. (a) Explain how the aggregate demand curve can be shifted by a reduction in
interest rates. [10 marks]
Answers may include:
definitions of aggregate demand and interest rates
diagram to show the impact of a reduction in interest rates on aggregate
demand
an explanation of how the reduction in interest rates might affect aggregate
demand, such as an increase in consumption and investment
examples of how a reduction in interest rates might affect aggregate
demand.
– 11 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 12 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
(b) Evaluate the effectiveness of monetary policy to increase aggregate
demand during a recession. [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already
been given in part (a), and then referred to in part (b) should be rewarded.
Answers may include:
definitions of monetary policy and recession
diagram to show impacts of monetary policy on aggregate demand.
Diagram to show a deflationary (recessionary) gap
an explanation of factors that might impact effectiveness of monetary
policy: ability to adjust interest rates incrementally and relatively quickly,
conflict with other objectives, impact on the exchange rate, limited
effectiveness in a deep recession. An explanation that it depends on the
shape of the aggregate supply curve. Candidates may evaluate the
effectiveness of monetary policy through a comparison with alternative
policies
examples of situations where monetary policy has been applied to increase
aggregate demand
synthesis or evaluation.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Evaluation of the effectiveness of monetary policy to increase aggregate
demand.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 13 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 14 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
4. (a) Explain two factors which might cause economic growth. [10 marks]
Answers may include:
definition of economic growth
diagrams to illustrate economic growth, for example by a rightward shift of
AD and/or LRAS
an explanation of any two factors that might lead to economic growth such
as investment in physical, human and natural capital, productivity gains, rise
in net exports
examples of instances where the factors identified have led to economic
growth.
– 15 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 16 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
(b) Evaluate the view that the benefits of economic growth will always
outweigh the costs. [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already
been given in part (a), and then referred to in part (b) should be rewarded.
Answers may include:
definition of economic growth
diagrams to illustrate the costs and benefits
an explanation of the potential benefits of growth eg higher living standards
and on government finances; the potential costs, eg on sustainable
development and in terms of the possible conflicts with the other goals of
economic policy such as low inflation or equity in the distribution of income
examples of costs/benefits of growth which have occurred
synthesis or evaluation.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Discussion may include: an evaluation of the positive and negative
consequences of growth.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 17 – M14/3/ECONO/HP1/ENG/TZ2/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
2214-5104 9 pages
M14/3/ECONO/HP2/ENG/TZ0/XX
Tuesday 6 May 2014 (morning)
ECONOMICS
HIGHER LEVEL
PAPER 2
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
You are not permitted access to any calculator for this paper.
Section A: answer one question.
Section B: answer one question.
Use fully labelled diagrams and references to the text/data where appropriate.
The maximum mark for this examination paper is [40 marks].
© International Baccalaureate Organization 2014
1 hour 30 minutes
22145104
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SECTION A
Answer one question from this section.
1. Study the extract below and answer the questions that follow.
Fast-growing Turkish economy showing signs of overheating
The impressive economic growth that Turkey has enjoyed from 2010–2012 may soon come
to an end, as the country’s economy shows signs of overheating. Although ofcials are still
optimistic, economists are concerned about the inationary gap, and note that the growing
current account decit makes Turkey vulnerable.
At the crossroads of Europe and the Middle East, Turkey has benetted from a boom in foreign
investment and trade, and has been one of the engines of global growth from 2010–2012.
The economy grew by 8.9 % in 2010 – one of the highest in the world – and the Organisation
for Economic Co-operation and Development (OECD) expects it to have grown by a further
7.4 % in 2011.
However, analysts warn that the current growth rate is unlikely to last. “What GDP growth
rates don’t reveal is that the Turkish economy is now showing signs of overheating,” said an
economist at Capital Economics. The fast economic growth of 2010–2012 “was accompanied
by a rapid widening of the current account decit,” which has jumped to 10 % of its GDP.
“What is more, from 2010–2012, the current account decit has mostly been nanced with
short-term borrowing, which means Turkey is facing a heavy external debt service burden
of $135 billion (101 billion euros) in the period 2012–2013,” warned the chief economist
at Finansbank.
Turkey’s current account decit, which surged from just over 2 % of GDP in 2009, is partially
due to the rise in oil prices. Since Turkey is a large net oil importer, it is clearly worse off from
higher oil prices. Turkey’s net energy imports were equivalent to around 6 % of GDP in 2011
– accounting for over half of the total current account decit of 10 % of GDP.
There is more to Turkey’s current account shortfall than simply the high cost of energy imports.
The decit has also widened due to rapidly rising domestic demand, suggesting that a period of
weaker domestic demand is needed to put the current account on a sustainable footing.
A nancial services ratings agency warned recently that the high current account decit
makes Turkey vulnerable to sudden nancial account outows. There are concerns about the
difculty of attracting capital inows to fund the current account decit.
[Source: adapted from http://www.dailystar.com.lb/Business/International/2012/Apr-02/168817-fast-growing-turkish-economy-showing-
signs-of-overheating.ashx#axzz31EjcEmch;
‘Fast-growing Turkish economy showing signs of overheating’; April 02, 2012; By Fulya Ozerkan]
(This question continues on the following page)
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M14/3/ECONO/HP2/ENG/TZ0/XX
(Question 1 continued)
(a) (i) Dene the term inationary gap indicated in bold in the text
(paragraph ).
(ii) Dene the term nancial account indicated in bold in the text
(paragraph ).
[2 marks]
[2 marks]
(b) With reference to the concept of price elasticity of demand, explain why
rising oil prices have contributed to Turkey’s growing current account decit
(paragraph ).
[4 marks]
(c) Explain two reasons why “rapidly rising domestic demand” may have
contributed to Turkey’s current account decit (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the possible policies that the Turkish authorities might use to reduce
the current account decit.
[8 marks]
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2. Study the extracts below and answer the questions that follow.
Freer trade in the Pacic Region?
Text A
In November 2011, leaders of the nine Trans-Pacic Partnership (TPP) countries – Australia,
Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, United States, and Vietnam –
announced the outlines of an agreement that is expected to increase trade and investment among
the countries, promote innovation, economic growth and development, and support job creation.
[Source: adapted from http://www.ustr.gov/tpp, 12 November 2011]
Text B
Japan’s Prime Minister said Japan would “start talks with other countries toward participating
in TPP”, indicating Japan’s interest. The Prime Ministers remark has caused more debate
in Japan.
Japanese exporters of industrial products – cars, electric appliances and high-tech machinery
– are very keen to join. The strong appreciation of the Japanese yen (Japan’s currency)
dramatically reduced the price competitiveness of their products last year.
The toughest opposition to the TPP comes from farmers, most of them with small farms,
protected for many years by government subsidies and high tariffs on imports. Japan imposes
a tariff of 252 % on imported wheat and 325 % on imported sugar.
[Source: adapted from http://www.nst.com.my/, 9 January 2012]
(This question continues on the following page)
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M14/3/ECONO/HP2/ENG/TZ0/XX
(Question 2 continued)
Text C
 Australian farmers are thrilled with the news that the Australian Prime Minister was pushing for
the TPP. With a comparative advantage in many agricultural products, Australia has much to
gain from a free trade agreement.
 Tariffs and other trade barriers in other countries are often disguised as farm subsidies, quotas
and product standards to protect local producers. This restricts Australia’s ability to sell many
foods freely into global markets. Beef, rice, wine, lamb and sugar exports are among those
most affected.
 Only 40 % of primary products grown in Australia are consumed domestically. Therefore,
Australian producers need access to as many export markets as possible so that producers can
gain from the potential economies of scale.
 Australia has relaxed most of its tariffs on imported food in recent years, and yet tariffs on
Australian beef entering Japan, for example, remain as high as 38 %. Many nations restrict the
entry of Australian beef to protect their own cattle farmers. While Japan has ofcially opened
its doors to Australian rice, Japanese producers remain heavily subsidized by its government,
therefore limiting Australia’s access to the Japanese rice market.
[Source: adapted from http://www.theaustralian.com.au/, 14 November 2011]
(a) (i) Dene the term investment indicated in bold in the text (Text A).
(ii) Dene the term comparative advantage indicated in bold in the text
(Text C, paragraph ).
[2 marks]
[2 marks]
(b) Using a cost diagram, explain how access to foreign markets may
allow Australian farmers to “gain from the potential economies of scale”
(Text C, paragraph ).
[4 marks]
(c) Using an international trade diagram, explain how Japanese subsidies have been
“limiting Australia’s access to the Japanese rice market” (Text C, paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
discuss the possible consequences for Australian and Japanese producers of
moving towards freer trade.
[8 marks]
2214-5104
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M14/3/ECONO/HP2/ENG/TZ0/XX
SECTION B
Answer one question from this section.
3. Study the extracts and data below and answer the questions that follow.
Ivory Coast
Text A
 Ivory Coast is a developing economy located in West Africa. It depends heavily on agriculture
and related activities, which are the source of income for approximately 70 % of the population.
Ivory Coast is among the world’s largest producers and exporters of cocoa beans, and a
signicant producer and exporter of coffee and palm oil. Consequently, the economy is highly
sensitive to uctuations in international prices for these products. Since 2006, petroleum oil
and gas production have been rising and become an important source of growth. Cocoa, coffee
and petroleum oil are the country’s top export revenue earners.
 Since the end of the civil war in 2003, political turmoil has continued to damage the economy,
resulting in the loss of foreign direct investment (FDI) and harming economic growth.
Per capita gross domestic product (GDP) has declined by 15 % since 1999, but registered
a slight improvement in 2009–2010. Power cuts caused by a turbine (generator) failure in
early 2010 slowed economic activity. Ivory Coast’s long-term challenges include political
instability and deteriorating infrastructure.
[Source: © International Baccalaureate Organization 2014]
Text B
 The International Monetary Fund (IMF) awarded a $616 million loan to Ivory Coast
to help revive its economy which was devastated by widespread political unrest and
post-election violence. The IMF also supported $8 million in aid for the country under
the Heavily Indebted Poor Countries (HIPC) initiative. The money provides relief on debt
service as the country moves through the HIPC process toward debt forgiveness.
 Ivory Coast “could qualify for debt relief on the vast majority of its external debts” through
the HIPC and other initiatives in 2012 once it completes certain conditions, including
“key structural and social reforms”.
“Ivory Coast’s economy is recovering faster than anticipated, following a severe post-election
crisis that caused a sharp decline in activity in the rst four months of the year,” said the IMF
deputy managing director.
[Source: adapted from http://www.channelnewsasia.com, 5 November 2011]
(This question continues on the following page)
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M14/3/ECONO/HP2/ENG/TZ0/XX
(Question 3 continued)
Figure 1 – World Commodity Prices 2011
Many commodity prices fell last year as the euro crisis and slowing growth in emerging markets
weakened demand.
Selected commodity prices, % change 28 December 2010 – 17 January 2012, $ terms
Orange juice
Gold
American beef
Australian wool
Oil
Rice
Coffee
Aluminium
Copper
Soyabeans
Palm oil
Sugar
Wheat
Cocoa
Timber
Cotton
45 40 35 30 25 20 15 10 5 0 5 10 15 20 25
+
[Source: Data sourced from Thomas Reuters and Bloomberg.]
(a) (i) De ne the term gross domestic product (GDP) indicated in bold in the text
(Text A, paragraph ).
(ii) Outline the main function of the International Monetary Fund (IMF)
(Text B, paragraph ).
[2 marks]
[2 marks]
(b) With reference to Text A and Figure 1, explain what is likely to have happened
to Ivory Coast’s terms of trade in 2011.
[4 marks]
(c) Using an AD/AS diagram, explain how a loss of foreign direct investment (FDI)
might have harmed economic growth in Ivory Coast (Text A).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
discuss the main challenges facing Ivory Coast as it seeks to achieve
economic growth and economic development.
[8 marks]
2214-5104
– 8 –
M14/3/ECONO/HP2/ENG/TZ0/XX
4. Study the extract and data below and answer the questions that follow.
Africa’s hopeful economies
 The majority of Africa’s billion people live below the poverty line. Disease and hunger
are still a big problem. Advances in technology are contributing to improved health care.
For example, death rates due to malaria have fallen by 20 % due to better bed nets,
which protect people from mosquito bites. Labour productivity has been rising. It is now
growing by an average of 2.7 % a year. However, foreign investors in countries with high
HIV-infection rates complain about expensively trained workers dying in their 30s and 40s.
As a result, there is an ongoing shortage of skilled workers, which means that hiring qualied
staff can be very expensive.
 Trade between Africa and the rest of the world has increased by 200 % since 2000.
Ination in Africa fell from 22 % in the 1990s to 8 % in the period 2000–2010. Foreign debts
declined by a quarter and budget decits by two-thirds. The International Monetary Fund (IMF)
expects sub-Saharan Africa’s economies to expand by 5.75 % in 2012. The World Bank said
in a report in 2011 that “Africa could be about to experience an economic take-off”. However,
its ofcials think major poverty reduction will require higher economic growth.
 Various types of market-oriented policies have taken place in Africa. Reforms in regulations
have partially liberated markets. A series of privatizations (more than 100 in Nigeria alone)
has reduced the role of the state in many countries. Trade barriers have been reduced and
despite the shortage of good roads, regional trade is picking up. Trade among African countries
has increased from 6 % to 13 % of the total volume.
 Foreign investors are no longer just interested in oil wells and mines. They are now investing
in consumer goods businesses. Africa’s political and technological changes have increased
interest from outside investors.
 African governments are encouraging entrepreneurship. According to the World Bank,
36 out of 46 African governments made things easier for business in 2011.
 Despite these reforms, there are still signicant concerns. Extra mouths will need to be fed
as Africa’s population is growing. Africa is now a net food importer, yet it has 60 % of the
world’s unused agricultural land. It produces less per person now than in 1960. Africa’s land
is often hard to farm, with annual variations in climate. Farmers lack access to capital for
fertilizer and irrigation. More roads and storage facilities are also needed since much agricultural
output rots before it gets to markets. Furthermore, land ownership often poses a problem.
[Source: © The Economist Newspaper Limited, London (2011)]
(This question continues on the following page)
2214-5104
– 9 – M14/3/ECONO/HP2/ENG/TZ0/XX
(Question 4 continued)
Figure 1 – Open for business
Capital  ows into Africa, $bn 2010 prices
Total FDI
Total aid
80
60
40
20
0
2000 01 02 03 04 05 06 07 08 09 10
[Source: © The Economist Newspaper Limited, London (2011)]
(a) (i) De ne the term in ation indicated in bold in the text (paragraph ).
(ii) De ne the term privatization indicated in bold in the text (paragraph ).
[2 marks]
[2 marks]
(b) Using a production possibilities curve (PPC) diagram, explain how
“better bed nets” (paragraph ) may contribute to economic growth.
[4 marks]
(c) With reference to a poverty trap (poverty cycle), explain why “major poverty
reduction will require higher economic growth” (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the strengths and weaknesses of market-oriented policies used by
African governments to encourage economic growth.
[8 marks]
M14/3/ECONO/HP2/ENG/TZ0/XX/M
19 pages
MARKSCHEME
May 2014
ECONOMICS
Higher Level
Paper 2
– 2 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must not
be reproduced or distributed to any other person without the
authorization of the IB Assessment Centre.
– 3 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
In addition to the assessment criteria use the paper-specific markscheme below. Award up to the
maximum marks as indicated.
SECTION A
1. (a) (i) Define the term inflationary gap indicated in bold in the text
(paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is to do with too much demand or rising prices in an
economy.
2 Accurate definition. 2
An explanation that it refers to the situation where:
the economy is (in equilibrium) at a level of output that is greater
than the full employment level of output or above potential output
OR
an increase in aggregate demand (when the economy is at full
employment) results in an increase in the average price level with
no increase in real GDP.
(ii) Define the term financial account indicated in bold in the text
(paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is part of the balance of payments accounts.
2 Accurate definition. 2
An explanation that it is the (net) balance arising from (two of the
following):
flows of foreign direct investment
flows of portfolio investment
changes in reserve assets.
OR
An explanation that it is the net change in foreign ownership of
domestic financial assets.
– 4 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(b) With reference to the concept of price elasticity of demand, explain why
rising oil prices have contributed to Turkey’s growing current account deficit
(paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For explaining that oil is an import and that demand for oil is inelastic or for
explaining that increases in price will lead to relatively smaller decreases in
quantity demanded, increasing total expenditure on oil (and/or total import
expenditure) thus contributing to the growing current account deficit.
2 The written response is accurate. 3–4
For explaining that oil is an import and that demand for oil is inelastic and
for explaining that increases in price will lead to relatively smaller decreases
in quantity demanded, increasing total expenditure on oil (and/or total
import expenditure) thus contributing to the growing current account deficit.
(c) Explain two reasons why “rapidly rising domestic demand” may have
contributed to Turkey’s current account deficit (paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 An explanation of any one of the following: 1–2
the increase in domestic demand would include an increase in the
demand for imports thus increasing import expenditure
an increase in domestic demand would lead to inflation, increasing the
price of exports and so (possibly) reducing export revenue
rapidly rising demand means that producers increase their sales to
domestic consumers, cutting exports and export revenues
rising demand in the economy may mean that producers need to import
more raw materials and capital to meet the demand, thus increasing
spending in imports.
2 An explanation of any two of the following: 3–4
the increase in domestic demand would include an increase in the
demand for imports thus increasing import expenditure
an increase in domestic demand would lead to inflation, increasing the
price of exports and so (possibly) reducing export revenue
rapidly rising demand means that producers increase their sales to
domestic consumers, cutting exports and export revenues
rising demand in the economy may mean that producers need to import
more raw materials and capital to meet the demand, thus increasing
spending in imports.
– 5 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the possible policies that the Turkish authorities might use to reduce
the current account deficit. [8 marks]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths
and limitations.
Responses may include:
an explanation of a current account deficit
expenditure–switching policies:
- depreciating the currency to make exports more competitive and imports
more expensive might worsen the deficit if PED for oil is inelastic and
Turkey is a “large net oil importer” (paragraph ); will only be successful
if the combined price elasticity of demand for exports and imports is greater
than 1 (Marshall-Lerner condition)
- protectionist measures such as tariffs, quotas or subsides to reduce spending
on imports might lead to retaliation harming the “boom in foreign
investment and trade” (paragraph )
expenditure-reducing policies:
- use contractionary monetary and/or fiscal policies to reduce overall AD in
order to reduce spending on imports
- would also serve to reduce the “inflationary gap” (paragraph )
- contractionary monetary policy could lead to appreciation of the lira, which
may help to reduce inflationary pressure; this could also reduce cost of
imported capital which would increase LRAS
- would reduce “rapidly rising domestic demand” (paragraph ), however, it
would be difficult to assess the correct amount of deflation needed.
May overshoot and cause recession
– 6 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
- contractionary monetary policies, increasing interest rates, should reduce the
fear of financial account outflows (paragraph )
- time lag involved
supply-side policies
- supply side policies may be used to improve the competitiveness of exports
and increase the competitiveness of goods that compete with imports, but
this is a long term solution.
Any reasonable discussion.
– 7 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
2. (a) (i) Define the term investment indicated in bold in the text (Text A). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is buying machinery.
2 Accurate definition. 2
An explanation that it is:
any addition to the capital stock of the economy
OR
expenditure/spending by firms on capital.
No credit for defining “financial investment”.
(ii) Define the term comparative advantage indicated in bold in the text
(Text C, paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that one country can produce more efficiently than another
country.
2 Accurate definition. 2
An explanation that it is when a country can produce a product at a
lower opportunity cost than another country.
– 8 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(b) Using a cost diagram, explain how access to foreign markets may allow
Australian farmers to “gain from the potential economies of scale” (Text C,
paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled diagram showing an LRAC curve
indicating falling average cost as output increases or for an explanation that,
as output increases due to the ability to sell to a larger market, Australian
farmers may benefit from economies of scale and so benefit from reduced
costs per unit of output.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled diagram showing an LRAC curve
indicating falling average cost as output increases and for an explanation
that, as output increases due to the ability to sell to a larger market,
Australian farmers may benefit from economies of scale and so benefit from
reduced costs per unit of output.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
For full marks, it is essential to make some use of the diagram, either by referring
to two points noted on the diagram, or referring to the section of the diagram
where average costs are falling.
Some students may show two or more short run costs curves, with the “envelope”
LRAC curve. This is certainly acceptable, but not necessary.
For costs diagrams, the use of Cost or Price and Output or Quantity on the axes is
sufficient. A title is not necessary.
– 9 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(c) Using an international trade diagram, explain how Japanese subsidies have
been “limiting Australia’s access to the Japanese rice market” (Text C,
paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled international trade diagram showing the
granting of a subsidy to Japanese rice farmers, an increase in quantity
supplied by Japanese producers and a fall in the quantity of imports or for
an explanation that a subsidy for Japanese farmers, reduces their costs, thus
increasing their supply and reducing imports of Australian rice.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled international trade diagram showing the
granting of a subsidy to Japanese rice farmers, an increase in quantity
supplied by Japanese producers and a fall in the quantity of imports and for
an explanation that a subsidy for Japanese farmers, reduces their costs, thus
increasing their supply and reducing imports of Australian rice.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
The use of P and Q on the axes is sufficient for a demand and supply diagram.
The world supply curve must be labelled S
w
or S
world
or S
Australia
. A title is not
necessary.
price of rice (Y)
S
d
S
d
+ subsidy
P
w
S
Australia
(or S
world
or S
w
)
quantity of rice
Q1 Q3 Q2
imports with subsidy
imports without subsidy
D
– 10 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
discuss the possible consequences for Australian and Japanese producers of
moving towards freer trade. [8 marks]
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
Responses may include:
definitions of free trade
explanation of the gains from trade
explanation of the benefits and drawbacks of comparative advantage (Text C,
paragraph ) (may include diagram)
the gains from economies of scale (may refer back to part (b))
varying effects on different producers
favourable for Australian agricultural producers (Text C, paragraph )
currently facing high levels of protection in Japanese markets (Text C,
paragraph )
favourable for Japanese producers of industrial products (Text B, paragraph )
who are struggling due to strong yen
unfavourable for Japanese farmers (Text B, paragraph ) who may lose
government subsidies and benefits of high tariffs
possibility that Australian manufacturing industries may suffer (not mentioned
in text)
greater efficiency as producers in both countries face more competition
loss of jobs when protection is removed
diagram showing removal of tariff (in any of the markets) to show effects on
domestic producers and foreign producers
diagram showing removal of subsidy to show effects on domestic producers
and foreign producers
– 11 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
enhancement of trade and investment among the countries (Text A) may
support producers in both countries
promotion of innovation (Text A).
Any reasonable discussion.
– 12 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
SECTION B
3. (a) (i) Define the term gross domestic product (GDP) indicated in bold in the
text (Text A, paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is the output produced in an economy.
2 Accurate definition. 2
An explanation that it is the total value of all goods and services
produced in an economy (in a given time period).
OR
An explanation that it is the sum of consumption, investment,
government spending and net exports.
(ii) Outline the main function of the International Monetary Fund (IMF)
(Text B, paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 There is limited understanding. 1
A list of unspecific functions is given.
2 There is clear understanding. 2
A clear outline of one of the following:
ensure the stability of the international monetary system
promote international monetary cooperation
lend money to help members in balance of payments difficulties.
– 13 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(b) With reference to Text A and Figure 1, explain what is likely to have
happened to Ivory Coast’s terms of trade in 2011. [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For explaining that the terms of trade is an index that shows the value of a
country’s average export prices relative to the import prices (the formula
would be acceptable, ie the index of export prices divided by the index of
import prices times one hundred) or for explaining that coffee and cocoa
prices went down, while petroleum oil prices went up, and if coffee and
cocoa make up a larger percentage of its exports, then the terms of trade
likely will have fallen.
2 The written response is accurate. 3–4
For explaining that the terms of trade is an index that shows the value of a
country’s average export prices relative to the import prices (the formula
would be acceptable, ie the index of export prices divided by the index of
import prices times one hundred) and for explaining that coffee and cocoa
prices went down, while petroleum oil prices went up, and if coffee and
cocoa make up a larger percentage of its exports, then the terms of trade
likely will have fallen.
As long as students show understanding of the concept through a
definition/explanation, and make a logical link to the data, then they may
receive full credit. For example, some of the main export prices went down
(coffee and cocoa), while oil prices went up, so it is uncertain what would
have happened to the terms of trade. For full credit, it is necessary to be
aware that some prices have gone down while the price of oil has risen.
– 14 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(c) Using an AD/AS diagram, explain how a loss of foreign direct investment
(FDI) might have harmed economic growth in Ivory Coast (Text A). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled AD/AS diagram showing a shift of the AD
curve to the left and a fall in output or for an explanation that foreign
investment is part of investment and so is a component of AD and, if it falls,
then AD will also fall, resulting in a fall in total output.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled AD/AS diagram showing a shift of the AD
curve to the left and a fall in output and for an explanation that foreign
investment is part of investment and so is a component of AD and, if it falls,
then AD will also fall, resulting in a fall in total output.
Alternative response:
For drawing a correctly labelled AD/AS diagram showing a shift of the LRAS
curve to the left and a fall in output with an explanation that a fall in FDI would
result in a reduction/deterioration in the level of capital, a factor of production, in
the economy.
No credit may be given for an answer that focuses on a shift in short run aggregate
supply.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level or average price level.
The horizontal axis may be output, real output, national output, real national
output, national income, or GDP. A title is not necessary.
– 15 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
discuss the main challenges facing Ivory Coast as it seeks to achieve economic
growth and economic development. [8 marks]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
Responses may include:
definitions of economic growth and economic development
distinction between economic growth and economic development
discussion of challenges to achieve economic growth and economic
development might include:
- overspecialization on a narrow range of exports: dependence upon
agricultural production (Text A, paragraph )
- price volatility/fluctuations in world resource prices (Text A, paragraph )
and changes in the terms of trade (Figure 1) creates uncertainty and reduces
the ability of producers to invest and the ability of government to spend on
development objectives
- political unrest (Text A, paragraph ) and post-election violence (Text B,
paragraph ) creates a poor investment climate and may make it difficult
to complete the conditions necessary for debt relief (Text B, paragraph )
- loss of FDI (Text A, paragraph )
- deteriorating infrastructure (Text A, paragraph ) makes it difficult to
attract FDI
- high levels of debt (Text B, paragraph ) make it difficult for government
to finance spending on development objectives.
Any reasonable discussion.
– 16 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
4. (a) (i) Define the term inflation indicated in bold in the text (paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is an increase in prices.
2 Accurate definition. 2
An explanation that it a sustained increase in the average (general)
price level.
(ii) Define the term privatization indicated in bold in the text (paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is when government no longer owns a company.
2 Accurate definition. 2
An explanation that the government sells state-owned enterprises
(assets) to the private sector.
– 17 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(b) Using a production possibilities curve (PPC) diagram, explain how
“better bed nets” (paragraph ) may contribute to economic growth. [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled PPC diagram to show an outward shift of
the PPC curve or for an explanation that the nets improve the quality
(health) and/or quantity of labour, a factor of production, thus increasing
production possibilities and contributing to economic growth.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled PPC diagram to show an outward shift of
the PPC curve and for an explanation that the nets improve the quality
(health) and/or quantity of labour, a factor of production, thus increasing
production possibilities and contributing to economic growth.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
For a PPC, the axes could be two alternative products, one on each axis, eg Good
A and Good B or Schools and Motor Cars; or two groups of products,
eg Consumer Goods and Producer Goods. A title is not necessary.
(c) With reference to a poverty trap (poverty cycle), explain why “major poverty
reduction will require higher economic growth(paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
An explanation that a poverty trap is an inability to invest in (physical,
human or natural) capital due to low savings, forming a self-perpetuating
cycle (which may be illustrated by the use of a poverty cycle diagram) or
an explanation that current rates of economic growth are not sufficient to
break out of this trap so that higher rates of economic growth are necessary.
2 The written response is accurate. 3–4
An explanation that a poverty trap is an inability to invest in (physical,
human or natural) capital due to low savings, forming a self-perpetuating
cycle (which may be illustrated by the use of a poverty cycle diagram) and
an explanation that current rates of economic growth are not sufficient to
break out of this trap so that higher rates of economic growth are necessary.
– 18 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the strengths and weaknesses of market-oriented policies used by
African governments to encourage economic growth. [8 marks]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths
and limitations.
Responses may include:
Explanation of market-oriented policies:
- reforms in regulations (paragraph )
- trade liberalization (paragraph )
- privatization (paragraph )
- reduction in government expenditure – not in text, but might be mentioned
- reference to the Washington Consensus – not in text, but could be mentioned
Possible strengths:
- faster economic growth may be attributable to such market-oriented policies
- increased incomes
- privatization may result in greater efficiencies
- privatisation generates revenue for governments
- greater role for entrepreneurship (paragraph )
- increased role of incentives
- increased competition with the growth of new firms (paragraph ) leading
to increased efficiency, lower prices, more choice
- may attract more FDI, leading to more employment (paragraph )
- more MNCs investing in consumer goods businesses, giving consumers
increased access to goods and services (link to development)
- benefits of trade liberalisation = greater choice, lower prices (paragraph
– regional trade is picking up)
– 19 – M14/3/ECONO/HP2/ENG/TZ0/XX/M
- trade liberalisation may lead to increased efficiencies possible reference to
comparative advantage
Possible weaknesses
- under-provision of infrastructure, which is necessary for growth (paragraph
shortage of good roads) (paragraph more roads and storage
facilities needed for agriculture)
- under-provision of merit goods and public goods: although advances in
technology are contributing to health care (paragraph ), market forces
alone will not provide enough health care. Disease and hunger are still
major problems that market-oriented policies are unlikely to solve
- privatisation may mean that some essential goods (eg water) may not be
affordable to all
- possible vulnerability to external forces (eg FDI dropped significantly in
2008, Figure 1)
- trade liberalisation may leave some African producers unable to compete
- growth is not enough to reduce poverty (paragraph )
- the agricultural sector needs support/government intervention (paragraph )
- market-oriented policies may lead to increased inequality, with increased
social tensions. This may threaten growth in the long term
- profit motive may lead to negative externalities of production = threats to
sustainability
- unclear property rights (paragraph ) may make it difficult for market-
oriented policies to be successful.
Any reasonable discussion.
2214-5112 3 pages
M14/3/ECONO/SP1/ENG/TZ2/XX
Monday 5 May 2014 (afternoon)
ECONOMICS
STANDARD lEvEl
PAPER 1
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
You are not permitted access to any calculator for this paper.
Section A: answer one question.
Section B: answer one question.
Use fully labelled diagrams and references to examples where appropriate.
The maximum mark for this examination paper is [50 marks].
© International Baccalaureate Organization 2014
1 hour 30 minutes
22145112
2214-5112
– 2 –
M14/3/ECONO/SP1/ENG/TZ2/XX
SECTION A
Answer one question from this section.
Microeconomics
1. (a) Explain three factors that could lead to an increase in demand for cigarettes.
[10 marks]
(b) Discuss three policies a government might use to reduce the consumption of
a demerit good such as cigarettes.
[15 marks]
2. (a) Distinguish between the concepts of income elasticity of demand (YED) and
cross price elasticity of demand (XED).
[10 marks]
(b) To what extent might the concepts of YED and XED be of signicance for
business organizations?
[15 marks]
2214-5112
– 3 –
M14/3/ECONO/SP1/ENG/TZ2/XX
SECTION B
Answer one question from this section.
Macroeconomics
3. (a) Explain the income, output and expenditure methods used to measure real
gross domestic product (GDP).
[10 marks]
(b) Discuss the usefulness of real GDP per capita as a method of measuring
the living standards of a country’s population.
[15 marks]
4. (a) Using an appropriate diagram, explain why a country might experience a
deationary gap.
[10 marks]
(b) “Fiscal policy is the most effective way of bringing an economy out of
recession.” To what extent is this statement valid?
[15 marks]
M14/3/ECONO/SP1/ENG/TZ2/XX/M
17 pages
MARKSCHEME
May 2014
ECONOMICS
Standard Level
Paper 1
– 2 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must not
be reproduced or distributed to any other person without the
authorization of the IB Assessment Centre.
– 3 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
Use the question-specific markscheme together with the markbands. Award up to the maximum marks
as indicated.
SECTION A
Microeconomics
1. (a) Explain three factors that could lead to an increase in demand for
cigarettes. [10 marks]
Answers may include:
definition of demand
diagram showing a rise in the demand for cigarettes
an explanation of three of the possible factors that could increase the
demand for cigarettes such as a rise in consumer income, promotion or
advertising of cigarettes by producers and population or demographic
changes
examples to support the explanations of a rise in demand for cigarettes.
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 4 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
(b) Discuss three policies a government might use to reduce the consumption
of a demerit good such as cigarettes. [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already
been given in part (a), and then referred to in part (b) should be rewarded.
Answers may include:
definitions of a demerit good and negative consumption externalities
diagram to show the negative externalities of cigarette consumption
an explanation of why cigarettes are considered a demerit good,
the disadvantages to the consumer of cigarette consumption, the policies a
government might use to reduce the consumption of cigarettes including:
indirect tax, regulation, negative advertising, price controls and education.
Explanation of the negative externalities associated with the consumption
of cigarettes
examples of three policies used to reduce cigarette consumption
synthesis or evaluation (discuss).
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments.
Discussion may include: consideration of the problems encountered by the
government policies.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
N.B. Award a maximum of level 3 if only two policies are discussed.
Award a maximum of level 2 if only one policy is discussed.
– 5 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 6 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
2. (a) Distinguish between the concepts of income elasticity of demand (YED)
and cross price elasticity of demand (XED). [10 marks]
Answers may include:
definitions of YED and XED
diagrams to illustrate YED and XED
an explanation of the features of YED and XED and how they differ in
terms of calculation and interpretation
examples of goods with different YED and XED.
– 7 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 8 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
(b) To what extent might the concepts of YED and XED be of significance for
business organizations? [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already
been given in part (a), and then referred to in part (b) should be rewarded.
Answers may include:
diagrams which may be relevant to the discussion
an explanation of the relevance of YED for business organizations in terms
of normal goods/inferior goods and primary goods/manufactured
goods/services; explanation of the relevance of XED for business
organizations in terms of changes in prices of substitute and complements
examples of use of the concepts in practice
synthesis or evaluation (to what extent).
Command term
“To what extent” requires candidates to consider the merits or otherwise of an
argument or concept.
Consideration of the merits of the concepts may include: the relative
importance of the two concepts and the difficulties of obtaining an accurate
measure of each in reality.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 9 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 10 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
SECTION B
Macroeconomics
3. (a) Explain the income, output and expenditure methods used to measure real
gross domestic product (GDP). [10 marks]
Answers may include:
definition of real GDP
an explanation of the income, output and expenditure methods of calculating
GDP
examples of methods of measurement
a circular flow diagram to show income, output and expenditure.
– 11 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 12 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
(b) Discuss the usefulness of real GDP per capita as a method of measuring
the living standards of a country’s population. [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already
been given in part (a), and then referred to in part (b) should be rewarded.
Answers may include:
definitions of real GDP per capita and living standards
an explanation of how real GDP per capita can be an indicator of living
standards in terms of incomes of the population, goods and services
available, employment levels; explanation of the problems of using real
GDP per capita to measure living standards in terms of distribution of
income, the nature of goods and services produced, non-monetary
influences on living standards; explanation of alternative measures
examples of GDP per capita and living standards
synthesis or evaluation (discuss).
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses.
Discussion may include: a consideration of the strengths and weaknesses of
real GDP per capita as a method of measuring living standards.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 13 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 14 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
4. (a) Using an appropriate diagram, explain why a country might experience a
deflationary gap. [10 marks]
Answers may include:
definitions of deflationary gap and recession
diagram of AD/AS showing equilibrium real output at a level below
full-employment output
an explanation of why there may be a deflationary gap including recession
in the economy, a fall in AD or a fall in SRAS
examples of where recessions have occurred.
– 15 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 16 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
(b) “Fiscal policy is the most effective way of bringing an economy out of
recession.” To what extent is this statement valid? [15 marks]
N.B. It should be noted that definitions, theory, and examples that have already
been given in part (a), and then referred to in part (b) should be rewarded.
Answers may include:
definitions of recession and fiscal policy
diagram showing an increase in AD
an explanation of how expansionary fiscal policy may increase AD
including the role of automatic stabilizers, the disadvantages of fiscal policy
and alternative policies a government might use
examples of situations when fiscal policy has been used in a recession
synthesis or evaluation (to what extent).
Command term
“To what extent” requires candidates to consider the merits or otherwise of an
argument or concept.
Consideration of the merits of the statement may include: the strengths and
weaknesses of using fiscal policy in relation to other policies.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 17 – M14/3/ECONO/SP1/ENG/TZ2/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
2214-5113 9 pages
M14/3/ECONO/SP2/ENG/TZ0/XX
Tuesday 6 May 2014 (morning)
ECONOMICS
STANDARD LEVEL
PAPER 2
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
You are not permitted access to any calculator for this paper.
Section A: answer one question.
Section B: answer one question.
Use fully labelled diagrams and references to the text/data where appropriate.
The maximum mark for this examination paper is [40 marks].
© International Baccalaureate Organization 2014
1 hour 30 minutes
22145113
2214-5113
– 2 –
M14/3/ECONO/SP2/ENG/TZ0/XX
SECTION A
Answer one question from this section.
1. Study the extract below and answer the questions that follow.
Japan in rst trade gap since 1963
 Japan’s current account surplus fell 85.5 % in November 2011 from a year earlier to
138.5 billion Japanese yen (Japan’s currency) ($1.80 billion), the Ministry of Finance said.
In 2011, Japan recorded its rst decit in its balance of trade in goods since 1963.
 The appreciation of the Japanese yen against the dollar has reduced Japan’s current account
surplus. The Japanese yen gained 8.5 % against the dollar in the 12 months since January 2011.
The currency has acquired a new and unusual status as a safe haven, reinforced by the eurozone
debt crisis since international investors are concerned about the single European currency.
 It is estimated that a 1 % gain in the Japanese yen could reduce the export volumes by 0.34 %,
slowing down growth for a country that has relied on overseas demand to maintain its recovery
from March 2011’s earthquake. To stop the trade in goods decit from getting worse, the world
economy would have to grow by 4 % and the value of the Japanese yen would have to fall
by 5 %. It is unlikely that this will happen.
 With their rapidly aging and decreasing population, Japanese rms face severe challenges
and have little choice but to look abroad for growth. The Japanese yen’s appreciation to
record highs against the euro and relative strength against the US dollar has led to a boom in
outward foreign direct investment (FDI). Exporters are transferring their operations from
Japan to other economies, where parts and labour costs are lower.
 Japan’s current account surplus could move into a decit sooner than 2015 if more companies
shift production abroad to combat losses from a strong Japanese yen. In 2011 Japanese rms
purchased a record number of rms across the rest of Asia. Worldwide the number of Japanese
purchases reached 455, only just short of its record of 463 in 1990.
Japanese rms are also acquiring shares in natural resource companies. Mitsubishi spent
more than $5 billion buying a quarter of mining giant Anglo-American’s Chilean copper unit,
and trading group Itochu bought a $1 billion stake in a US oil and gas rm.
The Japanese Prime Minister has encouraged the trend. “We will take advantage of the
appreciating Japanese yen to support Japanese companies in purchasing foreign companies
and acquiring resource interests,” he said.
 However, Japanese authorities have signalled there are concerns about a further appreciation
of the Japanese yen. The central bank said last month that it plans to increase the funds
available for currency intervention.
[Source: adapted from www.bloomberg.com, 5 January 2012; www.chinadaily.com.cn, 12 January 2012 and www.channelnewsasia.com]
(This question continues on the following page)
2214-5113
– 3 –
Turn over
M14/3/ECONO/SP2/ENG/TZ0/XX
(Question 1 continued)
(a) (i) Dene the term foreign direct investment (FDI) indicated in bold in the
text (paragraph ).
(ii) Describe two responsibilities of a country’s central bank (paragraph ).
[2 marks]
[2 marks]
(b) With reference to the text, explain how Japan’s current account can be in
surplus while it has a trade in goods decit (paragraph ).
[4 marks]
(c) Using an exchange rate diagram, explain how Japanese authorities might
intervene in the currency market as a result of their concern about the value
of the Japanese yen (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
discuss the possible consequences of the appreciation of the Japanese yen
(paragraph ).
[8 marks]
2214-5113
– 4 –
M14/3/ECONO/SP2/ENG/TZ0/XX
2. Study the extract below and answer the questions that follow.
Text removed for copyright reasons
[Source: http://www.theage.com.au/national/car-makers-plead-for-help-20111207-1ojc3.html]
(This question continues on the following page)
2214-5113
– 5 –
Turn over
M14/3/ECONO/SP2/ENG/TZ0/XX
(Question 2 continued)
(a) (i) Dene the term currency appreciation indicated in bold in the text
(paragraph ).
(ii) Dene the term subsidies indicated in bold in the text (paragraph ).
[2 marks]
[2 marks]
(b) Using a demand and supply diagram, explain the impact of the “recent currency
appreciation” on Australia’s domestic car market (paragraph ).
[4 marks]
(c) Using a demand and supply diagram, explain the impact on Australia’s car
market resulting from the government’s policy to implement a carbon tax
(paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
discuss the effects of “global economic uncertainty” (paragraph ), “low trade
barriers” (paragraph ) and a “carbon tax” (paragraph ) on Australia’s
car industry.
[8 marks]
2214-5113
– 6 –
M14/3/ECONO/SP2/ENG/TZ0/XX
SECTION B
Answer one question from this section.
3. Study the extract below and answer the questions that follow.
Haiti
 Haiti remains the poorest country in the Americas and one of the poorest in the world, with a
gross domestic product (GDP) per capita of US$670 and signicant needs in basic services.
It is also one of the most unequal, with a Gini coefcient of 0.59. Over half of its population
of 10 million lives in absolute poverty, as 78 % live on less than US$2 per day. In 2010,
an earthquake killed over 200 000 Haitians.
 Before the earthquake, the country’s social indicators were well below regional averages and
the country had suffered from repeated external and political shocks. In 2008, rising food
and fuel prices led to riots and the fall of the government. Tropical storms and hurricanes
that same year caused losses estimated at US$900 million (15 % of GDP). Despite this,
Haiti experienced modest but stable growth in the 2000s, with an average real growth of
2.2 % per year between 2004 and 2009. In 2011, Haiti ranked 158th out of 187 in the Human
Development Index (HDI).
 In October 1996, Haiti agreed to implement a wide range of market-oriented reforms
outlined in the IMF’s US$1.2 billion Emergency Economic Recovery Plan (EERP).
The recovery package aimed to create a capital-friendly macroeconomic environment for the
export-manufacturing sector over a ve-year period. Requirements of the recovery package
include reducing tariffs and selling off state-owned enterprises, as well as keeping wages
from rising.
 In just 33 years, Haiti has gone from being self-sufcient in rice, sugar, poultry and pork,
to being the largest importer of US foodstuffs in the Caribbean.
The Haitian economy is recovering from the earthquake. After a contraction of 5.4 % in
2009–10, GDP grew 5.1 % in 2010–2011. In 2011–12, it was projected to grow by 7 %,
mainly driven by agriculture, textiles and construction. The macroeconomic situation
is improving with domestic tax revenues rising to 13 % of GDP in 2011 due to increasing
imports and recovery efforts.
[Source: adapted from http://newint.org/features/2012/01/01/haiti-earthquake-relief-reconstruction/ and www.historycommons.org/]
(This question continues on the following page)
2214-5113
– 7 –
Turn over
M14/3/ECONO/SP2/ENG/TZ0/XX
(Question 3 continued)
(a) (i) Dene the term absolute poverty indicated in bold in the text
(paragraph ).
(ii) List two components of the Human Development Index (HDI)
(paragraph ).
[2 marks]
[2 marks]
(b) Using a Lorenz curve diagram, explain the meaning of “a Gini coefcient
of 0.59” (paragraph ).
[4 marks]
(c) Using a production possibilities curve (PPC) diagram, comment on the likely
effect of the earthquake in 2010 on Haiti’s economy (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
discuss strategies that the Haitian government might use to achieve economic
growth and development.
[8 marks]
2214-5113
– 8 –
M14/3/ECONO/SP2/ENG/TZ0/XX
4. Study the extract below and answer the questions that follow.
African Development Bank (AfDB) promotes improved access to water, sanitation and health
services in rural and urban Uganda
The AfDB and the Government of Uganda signed two agreements recently to nance
projects to improve health services and access to water and sanitation, in urban and rural areas
of Uganda. The projects will cost US$155.8 million and are expected to boost the country’s
efforts to meet the 2015 Millennium Development Goals for health, water and sanitation.
Uganda’s National Development Plan identies the provision of improved health services as
well as adequate water supply and improved sanitation as key priority areas. “Investing in
human development is crucial to economic growth and reducing poverty” said a government
ofcial. “So is the provision of adequate quantity and quality of water for all social and
economic needs, for current and future generations.”
Up to 2.4 million people in rural areas and small towns across Uganda should have
improved access to water supply and sanitation by 2016 following the AfDB’s approval of
US$67 million. This supports Uganda’s national goal to increase access to water supply and
sanitation services to 100 % coverage by 2035.
Furthermore, access to quality and affordable health care services for the Kampala and
metropolitan area will be improved. Immediate project beneciaries are estimated at
3 million people, the majority being women and children under 15 years of age.
The AfDB Vice-President said: “The AfDB and Uganda have been partners in several
development areas and the AfDB will continue to work with the Government of Uganda in its
efforts to improve the economic and social wellbeing of the people of Uganda.”
[Source: http://www.afdb.org/en/news-and-events/article/afdb-promotes-improved-access-to-water-sanitation-and-health-services-in-rural-
and-urban-uganda-8771/]
(This question continues on the following page)
2214-5113
– 9 –
M14/3/ECONO/SP2/ENG/TZ0/XX
(Question 4 continued)
(a) (i) List two of the Millennium Development Goals (MDGs) (paragraph ).
(ii) Dene the term economic growth indicated in bold in the text
(paragraph ).
[2 marks]
[2 marks]
(b) Using a demand and supply diagram, explain how the AfDB projects will lead
to more “affordable health care services” (paragraph ).
[4 marks]
(c) With reference to a poverty trap (poverty cycle), explain how “investing in
human development is crucial to … reducing poverty” (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the likely effectiveness of the AfDB and Ugandan government projects
in promoting economic development (paragraph ).
[8 marks]
M14/3/ECONO/SP2/ENG/TZ0/XX/M
18 pages
MARKSCHEME
May 2014
ECONOMICS
Standard Level
Paper 2
– 2 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must not
be reproduced or distributed to any other person without the
authorization of the IB Assessment Centre.
– 3 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
In addition to the assessment criteria use the paper-specific markscheme below. Award up to the
maximum marks as indicated.
SECTION A
1. (a) (i) Define the term foreign direct investment (FDI) indicated in bold in the
text (paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is investment between countries.
2 Accurate definition. 2
An explanation that it is any two of the following:
long-term investment in another country
investment by a multinational corporation (MNC)
investment in another country representing at least 10% ownership.
(ii) Describe two responsibilities of a country’s central bank (paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 There is limited understanding. 1
One of the following responsibilities is stated:
regulator of commercial banks
banker to the government
control of interest rates
control of money supply
maintenance of price stability
control of exchange rate policy.
2 There is clear understanding. 2
Two of the following responsibilities are stated:
regulator of commercial banks
banker to the government
control of interest rates
control of money supply
maintenance of price stability
control of exchange rate policy.
– 4 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(b) With reference to the text, explain how Japan’s current account can be in
surplus while it has a trade in goods deficit (paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For explaining that the current account is made up of the balance of trade in
goods and the balance of trade in services, as well as net transfers and net
income flows or for explaining that the Japanese trade deficit is negative,
but this simply means that the other elements of the current account must
outweigh that deficit, giving an overall surplus.
2 The written response is accurate. 3–4
For explaining that the current account is made up of the balance of trade in
goods and the balance of trade in services, as well as net transfers and net
income flows and for explaining that the Japanese trade deficit is negative,
but this simply means that the other elements of the current account must
outweigh that deficit, giving an overall surplus.
(c) Using an exchange rate diagram, explain how Japanese authorities might
intervene in the currency market as a result of their concern about the value
of the Japanese yen (paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled exchange rate diagram showing an increase
in supply of the yen and a fall in the exchange rate or for an explanation that
the Japanese authorities would enter the foreign exchange markets, buying
foreign currencies, thus increasing the supply of their own currency in the
market and so increasing its supply and lowering its exchange rate.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled exchange rate diagram showing an increase
in supply of the yen and a fall in the exchange rate and for an explanation
that the Japanese authorities would enter the foreign exchange markets,
buying foreign currencies, thus increasing the supply of their own currency
in the market and so increasing its supply and lowering its exchange rate.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
For an exchange rate diagram, the vertical axis may be exchange rate or yen per
other currency. The horizontal axis should be quantity, or quantity of yen. A title
is not necessary.
– 5 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
discuss the possible consequences of the appreciation of the Japanese yen
(paragraph ). [8 marks]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
Responses may include:
definition of appreciation
an increasing trade in goods deficit and falling current account surplus
(paragraph )
an eventual current account deficit (paragraph )
slowing economic growth (paragraph )
the impact of outward foreign direct investment (paragraph )
the impact on employment of firms moving their production abroad
(paragraph )
the short-run and long-run impacts on the balance of payments accounts of FDI
and increased (property) income from abroad (paragraph )
“Japanese firms are also acquiring shares in natural resource companies”
(paragraph ) advantages of diversification
the pressures on the government to intervene in the value of the Japanese yen
(paragraph )
downward pressure on inflation
cheaper imports, with benefits for consumers and lower costs of imported raw
materials and energy for Japanese companies
the impact on export industries (paragraph )
self-correcting nature of currency if it is allowed to float
– 6 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
reaction from the international community of the manipulation of the currency
by the government. Others may follow suit
PEDx = .34 (paragraph ) export revenue should increase despite currency
appreciation (trade in services inelastic)
Japan has an underlying problem of an aging and decreasing population that
should be addressed beyond currency value
the concern that the appreciation is partly due to the yen being viewed as a
“safe haven” (paragraph ) and therefore the financial inflows may suddenly
be reversed.
Any reasonable discussion.
– 7 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
2. (a) (i) Define the term currency appreciation indicated in bold in the text
(paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that the currency rises in value.
2 Accurate definition. 2
An explanation that it is a rise in the value (or price) of a currency,
plus one of the following:
in terms of another currency
in a floating exchange rate system.
(ii) Define the term
subsidies
indicated in bold in the text
(paragraph )
.
[2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is money given to firms.
2 Accurate definition. 2
An explanation that it is money given to a firm by the government in
order to (any one of the following):
reduce (production) costs
increase supply (output/production)
reduce price
increase consumption
increase investment and/or employment
protect domestic industries from imported products.
– 8 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using a demand and supply diagram, explain the impact of the “recent
currency appreciation” on Australia’s domestic car market (paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled demand and supply diagram, showing a
decrease in demand for Australian cars or for an explanation that
appreciation of the currency makes imported cars less expensive resulting in
a fall in demand for Australian cars, reducing the price and quantity sold.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled demand and supply diagram, showing a
decrease in demand for Australian cars and for an explanation that
appreciation of the currency makes imported cars less expensive resulting in
a fall in demand for Australian cars, reducing the price and quantity sold.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks]. The use of P and Q on the axes is sufficient for a demand and supply
diagram. A title is not necessary.
Note: Candidates may show the supply curve shifting to the right and suggest that
an appreciation of the currency will lead to cheaper imported raw materials and so
lower costs for car producers. More cars would be sold at a lower price. If this is
correctly drawn and explained, then it may be fully rewarded.
– 9 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using a demand and supply diagram, explain the impact on Australia’s car
market resulting from the government’s policy to implement a carbon tax
(paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled demand and supply diagram showing a
decrease (leftward shift) of the supply curve or for an explanation that a
carbon tax will increase production costs causing a fall in supply and
therefore the price of cars to increase and quantity to decrease.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled demand and supply diagram showing a
decrease (leftward shift) of the supply curve and for an explanation that a
carbon tax will increase production costs causing a fall in supply and
therefore the price of cars to increase and quantity to decrease.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks]. The use of P and Q on the axes is sufficient for a demand and supply
diagram. A title is not necessary.
Note: Candidates may show an externalities diagram, with the MPC curve being
shifted by the imposition of the tax. If the explanation is also correct, then this
may be fully rewarded.
– 10 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
discuss the effects of “global economic uncertainty” (paragraph ), “low
trade barriers” (paragraph ) and a “carbon tax” (paragraph ) on
Australia’s car industry. [8 marks]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
Responses may include:
“Global economic uncertainty”
reduced demand for cars on a global scale hence reduced demand for
Australian cars or supply of car parts (including exports)
likely to require government assistance resulting in opportunity cost issues for
government (paragraph )
lack of “policy certainty” (paragraph ) further reduces investment in the car
industry during time of global economic uncertainty.
“Low trade barriers”
“most open car market in the world” (paragraph ), facing increasing
competition from cheaper imports
intense competition from imports (paragraph ), which may stimulate
innovation and cost reductions
decision to “reduce the funding of the Green Car Innovation Fund by hundreds
of millions of dollars” (paragraph ) reduces incentive to produce cars to
compete with cheaper imports
Australian producers not competing on equal terms with foreign producers
(paragraph ). In light of this, Australian government not giving enough
support to domestic producers according to Mr Devereux (paragraph )
– 11 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
Australian innovations have been developed by foreign car manufacturers
(paragraph ) vs developing domestically.
“Carbon Tax”
increases production costs at a time when the industry is already suffering from
increasingly competitive imports (paragraph ) and other problems such as a
high dollar, low trade barriers, less government financial support and lower
demand due to global economic uncertainty
encourages industry to pursue cleaner production methods which are likely to
make them more internationally competitive in long run and possibly increase
car exports. Other countries may copy this Australian innovation
if car makers in other countries don’t have the same carbon taxes, this will
make the Australian car makers less competitive.
Any reasonable discussion.
– 12 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
SECTION B
3. (a) (i) Define the term
absolute poverty
indicated in bold in the text
(paragraph )
.
[2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is when a person struggles to survive.
2 Accurate definition. 2
An explanation that it is when people live below a certain level of
income that is necessary to meet basic needs.
(ii) List
two
components of the Human Development Index (HDI)
(paragraph )
.
[2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 There is limited understanding. 1
For any one of the following:
real national income per head (real GNI/GDP per capita)
life expectancy
mean years of schooling
expected years of schooling.
Note that measures of education have changed in 2011. It would be
acceptable to refer to adult literacy rate or average years of schooling
or school enrollment rates. However, generalizations, such as
“educational indicator” or “health indicator” should not be rewarded.
2 There is clear understanding. 2
For any two of the following:
real national income per head (real GNI/GDP per capita)
life expectancy
mean years of schooling
expected years of schooling.
Note that measures of education have changed in 2011. It would be
acceptable to refer to adult literacy rate or average years of schooling
or school enrollment rates. However, generalizations, such as
“educational indicator” or “health indicator” should not be rewarded.
– 13 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using a Lorenz curve diagram, explain the meaning of “a Gini coefficient
of 0.59” (paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled Lorenz curve diagram with the line of
equality and Haiti’s Lorenz curve to show income inequality or an
explanation that the Gini coefficient of 0.59 is the ratio of the area between
the line of equality and the country’s Lorenz curve, and the total area under
the line of equality. (This may be expressed as a formula.)
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled Lorenz curve diagram with the line of
equality and Haiti’s Lorenz curve to show income inequality and an
explanation that the Gini coefficient of 0.59 is the ratio of the area between
the line of equality and the country’s Lorenz curve, and the total area under
the line of equality. (This may be expressed as a formula.)
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
Note: Candidates who simply interpret the value of 0.59 as being high inequality
would only receive one mark for the explanation.
For a Lorenz curve, the vertical axis should be (cumulative) percentage of income
and the horizontal axis should be (cumulative) percentage of population or
households. A title is not necessary.
Note: the term “cumulative” is not necessary for labeling to be marked as correct.
– 14 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using a production possibilities curve (PPC) diagram, comment on the likely
effect of the earthquake in 2010 on Haiti’s economy (paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled PPC diagram showing an inward shift of
the PPC curve or for explaining that the earthquake would reduce the
quantity and/or quality of factors of production in the economy, thus
reducing production possibilities (potential output).
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled PPC diagram showing an inward shift of
the PPC curve and for explaining that the earthquake would reduce the
quantity and/or quality of factors of production in the economy, thus
reducing production possibilities (potential output).
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
For a PPC, the axes could be two alternative products, one on each axis, eg Good
A and Good B or Schools and Motor Cars; or two groups of products,
eg Consumer Goods and Producer Goods. A title is not necessary.
– 15 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
discuss strategies that the Haitian government might use to achieve economic
growth and development. [8 marks]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
Responses may include:
definitions of economic growth and economic development
explanation of market-oriented reforms targeting economic growth
(paragraph )
suggestions of strategies to counter problems in the text and thus gain growth
and/or development, which might include:
- improvements in income distribution (paragraph )
- achieving political stability (paragraph )
- aid to repair natural disaster damage (paragraph )
- IMF aid (paragraph )
- provision of infrastructure to possibly minimize effects of future tropical
storms/hurricanes
export-led growth / import substitution (paragraph )
education and health provision
financial sector strategies to improve saving and investment
privatization and other supply-side policies (paragraph )
improving the role of women
FDI
debt relief.
Any reasonable discussion.
– 16 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
4. (a) (i) List two of the Millennium Development Goals (MDGs) (paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 There is limited understanding. 1
One goal is stated or two goals are partially stated.
2 There is clear understanding. 2
Two of the following goals are listed:
eradicate extreme poverty and hunger
achieve universal primary education
promote gender equality and empower women
reduce child mortality
improve maternal health
combat HIV/AIDs, malaria and other diseases
ensure environmental sustainability
develop a global partnership for development.
(ii) Define the term economic growth indicated in bold in the text
(paragraph ). [2 marks]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is a growing economy (or an increase in GDP).
2 Accurate definition. 2
An explanation that it is an increase in the value of real output
(over time). Or, an explanation that it is an increase in real GDP.
Note: the term “over time” is not necessary for 2 marks.
– 17 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using a demand and supply diagram, explain how the AfDB projects will
lead to more “affordable health care services” (paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled market diagram showing an increase in
supply (rightward shift) of health care services resulting in more services at
a lower price or for explaining that the increased spending on health care
services will increase the supply of services leading to an increase in
quantity at a lower price resulting in “affordable health care services”.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled market diagram showing an increase in
supply (rightward shift) of health care services resulting in more services at
a lower price and for explaining that the increased spending on health care
services will increase the supply of services leading to an increase in
quantity at a lower price resulting in “affordable health care services”.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks]. The use of P and Q on the axes is sufficient for a demand and supply
diagram. A title is not necessary.
(c) With reference to a poverty trap (poverty cycle), explain how “investing in
human development is crucial to … reducing poverty” (paragraph ). [4 marks]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
An explanation that a poverty trap is an inability to invest in physical,
human and natural capital due to low savings or income, forming a self-
perpetuating cycle (which may be illustrated by the use of a poverty cycle
diagram) or an explanation that in this case, investing in human capital
through improvements in health and sanitation provides the intervention
needed to break out of the cycle, by raising productivity and thus incomes,
reducing poverty.
2 The written response is accurate. 3–4
An explanation that a poverty trap is an inability to invest in physical,
human and natural capital due to low savings or income, forming a self-
perpetuating cycle (which may be illustrated by the use of a poverty cycle
diagram) and an explanation that in this case, investing in human capital
through improvements in health and sanitation provides the intervention
needed to break out of the cycle, by raising productivity and thus incomes,
reducing poverty.
– 18 – M14/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the likely effectiveness of the AfDB and Ugandan government
projects in promoting economic development (paragraph ). [8 marks]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths
and limitations.
Responses may include:
definition of economic development
possibility that corruption might prevent the projects from meeting targets
the need for good governance to ensure that development objectives are met
the benefits of improved health of women to empower women; “immediate
project beneficiaries are estimated at 3 million people, the majority being
women and children under 15 years of age” (paragraph )
proposals conform to the existing National Development Plan (paragraph )
targeting both urban and rural areas may increase the likely effectiveness
explanation as to how US$155.8 million will “boost” efforts to meet health
water and sanitation goals (paragraph )
discussion regarding the challenges of breaking the poverty cycle
discussion regarding improved health, sanitation and water infrastructure
leading to growth which can lead to development
discussion of projects in context of relevant millennium development goals
discussion of projects in terms of external benefits/merit goods
role of NGO’s in helping achieve MDG’s
discussion of criteria in awarding contracts in these key priority areas.
Any other appropriate response.
17 pages
M14/3/ECONO/HP3/ENG/TZ0/XX
Tuesday 6 May 2014 (morning)
ECONOMICS
HIGHER LEVEL
PAPER 3
INSTRUCTIONS TO CANDIDATES
Write your session number in the boxes above.
You are permitted access to a calculator for this paper.
Do not open this examination paper until instructed to do so.
Answer two questions in the boxes provided.
Unless otherwise stated in the question, all numerical answers must be given exactly or correct
to two decimal places.
You must show all your working.
The maximum mark for this examination paper is [50 marks].
© International Baccalaureate Organization 2014
1 hour
Candidate session number
Examination code
2 2 1 4 5 1 0 7
20EP01
22145107
– 2 –
M14/3/ECONO/HP3/ENG/TZ0/XX
20EP02
Answer two questions. Each question is worth [25 marks]. Write your answers in the boxes provided.
1. The following table presents national income statistics for selected variables related to
Country Z for 2012 and is expressed in millions of dollars.
National Income Statistics $ (million)
Government spending on goods and services 3300
Wages and salaries 6900
Investment spending 1020
Consumer spending 6520
Direct taxation 4150
Exports 2295
Prots of companies 5475
Imports 2450
(a) Calculate the gross domestic product (GDP) for Country Z in 2012.
[2]
.......................................................................
.......................................................................
.......................................................................
.......................................................................
(b) The population of country Z is 420 000. Calculate per capita GDP for Country Z in 2012.
[2]
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.......................................................................
.......................................................................
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20EP03
(Question 1 continued)
(c) Countries may calculate GDP using the output approach, the income approach or the
expenditure approach. Outline the difference between the expenditure approach and the
income approach.
[2]
.......................................................................
.......................................................................
.......................................................................
.......................................................................
(d) Economists have suggested that it is important to calculate “green GDP”. Outline the
meaning of the term “green GDP”.
[2]
.......................................................................
.......................................................................
.......................................................................
.......................................................................
(e) In Country Z, for each additional $1 of income earned, 4 cents ($0.04) is saved, 15 cents
($0.15) is taken as tax and 6 cents ($0.06) is spent on imported goods and services.
Calculate the value of the multiplier in Country Z.
[2]
.......................................................................
.......................................................................
.......................................................................
.......................................................................
(This question continues on the following page)
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20EP04
(Question 1 continued)
(f) (i) The government of Country Z intends to increase government spending in order to
increase GDP by $950 million. Using your answer to (e), calculate the increase in
government spending needed to bring about the desired change in GDP.
[2]
..................................................................
..................................................................
..................................................................
..................................................................
(ii) Sketch an AD/AS diagram to show the impact of the multiplier.
[3]
(This question continues on the following page)
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20EP05
(Question 1 continued)
(g) Explain the multiplier process which causes the nal increase in GDP to be different
from the initial increase in government spending.
[4]
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
(h) Of the 420 000 people living in Country Z, 260 000 are either working or actively
seeking work. The ofcial unemployment gure is 66 000.
(i) Calculate the rate of unemployment in Country Z.
[2]
..................................................................
..................................................................
..................................................................
..................................................................
(This question continues on the following page)
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20EP06
(Question 1 continued)
(ii) Explain two difculties economists face when they try to measure unemployment
accurately.
[4]
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..................................................................
..................................................................
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20EP07
Please do not write on this page.
Answers written on this page
will not be marked.
– 8 –
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20EP08
2. The following diagram illustrates the market for corn in Country A where the price of corn
is initially at the world price of $6.70 per kilogram (kg) and a portion of the country’s corn
requirements are met through imports. The government of Country A decides to impose a tariff
on imported corn. The effects are shown on the diagram.
The corn market in Country A
Price per kg ($)
10
9
8
7
6
S
D
Sw
1
Sw
D
100 200 300 400
Quantity per year (millions of kg)
(a) Determine the following:
(i) Size of the tariff per kg.
[1]
..................................................................
..................................................................
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20EP09
(Question 2 continued)
(ii) The increase in domestic production per year resulting from the tariff.
[1]
..................................................................
..................................................................
(iii) The decrease in domestic consumption per year resulting from the tariff.
[1]
..................................................................
..................................................................
(iv) The tariff revenues collected per year by the government of Country A.
[1]
..................................................................
..................................................................
(b) List two other trade barriers that the government of Country A could have adopted
instead of imposing a tariff.
[2]
.......................................................................
.......................................................................
.......................................................................
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(This question continues on the following page)
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20EP10
(Question 2 continued)
(c) (i) Calculate the change in revenue earned by the domestic corn producers following
the tariff.
[3]
..................................................................
..................................................................
..................................................................
..................................................................
..................................................................
..................................................................
(ii) Using your answer to (c)(i), calculate the percentage change in the revenue of
domestic corn producers.
[1]
..................................................................
..................................................................
(d) (i) Calculate the change in revenue earned by foreign corn producers because of
the tariff.
[3]
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(This question continues on the following page)
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20EP11
(Question 2 continued)
(ii) Using your answer to (d)(i), calculate the percentage change in the revenue
earned by foreign corn producers.
[1]
..................................................................
..................................................................
(e) State one reason why governments may decide to impose a tariff.
[1]
.......................................................................
.......................................................................
(f) (i) Explain two disadvantages of trade protection.
[4]
..................................................................
..................................................................
..................................................................
..................................................................
..................................................................
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M14/3/ECONO/HP3/ENG/TZ0/XX
20EP12
(Question 2 continued)
(ii) Calculate the decrease in the consumer surplus resulting from the imposition of
the tariff.
[2]
..................................................................
..................................................................
..................................................................
..................................................................
(g) Explain why the welfare loss resulting from the corn tariff is smaller than the loss of
consumer surplus.
[4]
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
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20EP13
3. (a) In Country X, the monthly demand for butter is given by the function
D
Q 884 6P=−
while the monthly supply of butter is given by the function
S
Q 744 4 P=+
where price is in dollars ($) and quantity is in thousands of kilograms (kg) of butter
per month.
(i) Calculate the equilibrium price of butter in Country X.
[2]
..................................................................
..................................................................
..................................................................
..................................................................
(ii) Calculate the equilibrium quantity per month of butter in Country X.
[2]
..................................................................
..................................................................
..................................................................
..................................................................
Assume that incomes in Country X increase. As a result the demand for butter increases by
10 000 kg per month at each price.
(b) State the new equation for demand.
[1]
.......................................................................
.......................................................................
(This question continues on the following page)
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M14/3/ECONO/HP3/ENG/TZ0/XX
20EP14
(Question 3 continued)
(c) (i) Assume that the supply changes from
S
Q 744 4 P=+
to
S
Q 744 5P=+
Outline how this change will affect the steepness of the supply curve.
[2]
..................................................................
..................................................................
..................................................................
..................................................................
(ii) Assume now that the supply changes from
S
Q 744 4 P=+
to
S
Q 544 4P=+
Outline why this change will affect the position of the supply curve.
[2]
..................................................................
..................................................................
..................................................................
..................................................................
(d) (i) Dene the term price elasticity of supply (PES). [2]
..................................................................
..................................................................
..................................................................
..................................................................
(This question continues on the following page)
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20EP15
(Question 3 continued)
(ii) The increase in demand of 10 000 kg per month (see 3.(b)) has led to a new
equilibrium price of $15 and a new equilibrium quantity of 804 000 kg butter.
Calculate the PES for butter between the original and the new market price.
[2]
..................................................................
..................................................................
..................................................................
..................................................................
(e) Explain two factors that determine the PES of a product.
[4]
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(This question continues on the following page)
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20EP16
(Question 3 continued)
Using the original demand and supply functions
D
Q 884 6P=−
and
S
Q 744 4 P=+
assume that the government has decided to set a price ceiling of $10. The following diagram
illustrates the resulting market outcome.
Price per unit ($)
18
17
16
15
14
13
12
11
10
9
8
D
S
750 800 850
Quantity per period (000s of kg)
(f) Calculate the resulting shortage.
[1]
.......................................................................
.......................................................................
(This question continues on the following page)
– 17 –
M14/3/ECONO/HP3/ENG/TZ0/XX
20EP17
(Question 3 continued)
(g) Calculate the change in consumer expenditure on butter per month resulting from the
imposition of the price ceiling.
[3]
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
(h) Explain two consequences on consumers of butter if a price ceiling (maximum price)
is imposed.
[4]
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
.......................................................................
Please do not write on this page.
Answers written on this page
will not be marked.
20EP18
Please do not write on this page.
Answers written on this page
will not be marked.
20EP19
Please do not write on this page.
Answers written on this page
will not be marked.
20EP20
M14/3/ECONO/HP3/ENG/TZ0/XX/M
16 pages
MARKSCHEME
May 2014
ECONOMICS
Higher Level
Paper 3
– 2 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must not
be reproduced or distributed to any other person without the
authorization of the IB Assessment Centre.
– 3 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
Notes for examiners:
1. Whenever relevant, carry over marks must be awarded. If a candidate makes an error in calculation,
but then uses the incorrect figure appropriately and accurately in later question parts,
then the candidate may be fully rewarded. This is the “own-figure rule” and you should put OFR on
the script where you are rewarding this. Please note that OFR is now available as an annotation
stamp.
2. Alternative approaches may be taken in responses to the [4 mark] questions that use A02 command
terms. If this is the case and the alternative approaches are valid, then full credit should be given.
1. (a) Calculate the gross domestic product (GDP) for Country Z in 2012. [2]
( )
6520 1020 3300 2295 2450+++
[1]
Any valid working is sufficient for [1].
$10
685
000
000 [1]
An answer of $10
685 million or $10.69 billion (or $10.685 billion) without
workings is sufficient for [1].
(b) The population of country Z is 420
000. Calculate per capita GDP for
Country Z in 2012. [2]
10 685 000 000
420 000
[1]
Any valid working is sufficient for [1].
$25 440.48=
or
$25 440
[1]
An answer of 25 440 without workings is sufficient for [1].
OFR applies
N.B. A response which gives the answer to the nearest $ should be accepted as
this is standard practice for publication of national income statistics.
– 4 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(c) Countries may calculate GDP using the output approach, the income
approach or the expenditure approach. Outline the difference between the
expenditure approach and the income approach. [2]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is limited understanding. 1
For a response which is accurate but is limited to one of the two approaches.
OR which refers to both approaches in a vague fashion (eg “in the
expenditure approach, total spending is calculated”).
2 There is clear understanding. 2
For a clear understanding that in the expenditure approach, total spending
on domestic output is summed, whereas in the income approach, incomes
earned in the production of domestic output are summed.
A response which states accurately the components of each approach should be
fully rewarded ie
expenditure approach
( )
CIG XM=+++
income approach = wages + profits + interest + rent.
However, it is not necessary to state these components in order to earn full marks.
(d) Economists have suggested that it is important to calculate “green GDP”.
Outline the meaning of the term “green GDP”. [2]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is limited understanding. 1
For a response which conveys the idea that the term relates to effects on the
environment.
2 There is clear understanding. 2
For a response which explains that green GDP is GDP adjusted for the
effects of production on the environment.
– 5 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(e) In Country Z, for each additional $1 of income earned, 4 cents ($0.04) is
saved, 15 cents ($0.15) is taken as tax and 6 cents ($0.06) is spent on imported
goods and services. Calculate the value of the multiplier in Country Z. [2]
Multiplier
1
0.04 0.15 0.06
=
++
[1]
Any valid working is sufficient for [1].
4=
[1]
An answer of 4 without workings is sufficient for [1].
If a candidate states
1
0.25
=
4=
this should be fully rewarded.
(f) (i) The government of Country Z intends to increase government spending
in order to increase GDP by $950 million. Using your answer to (e),
calculate the increase in government spending needed to bring about
the desired change in GDP. [2]
950
G
4
Δ=
[1]
Any valid working is sufficient for [1].
$237 500 000=
[1]
An answer of 237.5 million (or 237
500
000) without workings is sufficient
for [1].
OFR applies
– 6 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(ii) Sketch an AD/AS diagram to show the impact of the multiplier. [3]
For an AD/AS diagram (with correct labelling). [1]
For an AD/AS diagram showing a shift in AD. [2]
For an AD/AS diagram showing a shift in AD and a second, larger shift in
AD in the same direction. [3]
Candidates who incorrectly label the diagram, or who do not include an AS
curve, can be rewarded with a maximum of [2]. Any version of the
aggregate supply curve is acceptable.
For the vertical axis, the labelling could be price level, average price level,
PL, APL, CPI or GPL. For the horizontal axis, the labelling could be real
GDP, real output, real income, RGDP or Y. A title is not necessary.
– 7 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(g) Explain the multiplier process which causes the final increase in GDP to be
different from the initial increase in government spending. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For a response which explains that spending by one person represents
income to another OR that an increase in government spending leads to a
series of increases in income.
2 The written response is clear. 3–4
For a response which explains that spending by one person represents
income to another. Thus an increase in government spending leads to a
series of additional increases in income. Therefore the eventual increase in
GDP will be greater than the initial increase in government spending.
A response which makes effective use of an algebraic explanation to
demonstrate the successive increments in national income may be fully
rewarded.
(h) (i) Calculate the rate of unemployment in Country Z. [2]
Ue rate
66 000
100
260 000
=×
[1]
Any valid working is sufficient for [1].
25.38%=
[1]
– 8 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(ii) Explain two difficulties economists face when they try to measure
unemployment accurately. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For one difficulty clearly explained or for two difficulties explained in
a vague manner.
2 The written response is clear. 3–4
For two difficulties explained clearly. Difficulties may include:
“hidden” unemployment underestimation as a result of
individuals dropping out of the labour market, this could be
because they are discouraged from looking for work
underemployment underestimation as a result of part time
workers who would have preferred to be working full time
overestimation as a result of the inclusion in the official
unemployment statistic of those working in the parallel economy
the measure is an average, and therefore ignores disparities
between groups in the economy.
Any other valid response.
2. (a) Determine the following:
(i) Size of the tariff per kg. [1]
$0.50
An answer of 50 cents (or $0.50) is sufficient for [1].
(ii) The increase in domestic production per year resulting from the tariff. [1]
90 million kg
An answer of 90 000 000 kg (or 90 million kg) is sufficient for [1].
(iii) The decrease in domestic consumption per year resulting from the
tariff. [1]
80 million kg
An answer of 80 000 000 kg (or 80 million kg) is sufficient for [1].
(iv) The tariff revenues collected per year by the government of country A. [1]
$40 million
An answer of $40 000 000 (or $40 million) is sufficient for [1].
Examiners should be reminded that candidates who do not include the
correct units should be penalized only once per question.
– 9 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(b) List two other trade barriers that the government of country A could have
adopted instead of imposing a tariff. [2]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1
For providing one appropriate trade barrier.
2 The written response is clear. 2
For providing two appropriate trade barriers.
Trade barriers may include:
quotas
subsidies to domestic producers
administrative barriers
foreign exchange controls.
Any other valid response.
(c) (i) Calculate the change in revenue earned by the domestic corn producers
following the tariff. [3]
Initial producer revenue
6.7 110 737=× =
[1]
Producer revenue following the tariff
7.2 200 1440=× =
[1]
Change in producer revenue
1440 737 $703==
million [1]
OFR applies
(ii) Using your answer to (c)(i), calculate the percentage change in the
revenue of domestic corn producers. [1]
1440
1100
737
⎛⎞
⎛⎞
−× =
⎜⎟
⎜⎟
⎝⎠
⎝⎠
an increase of 95.39
% [1]
An answer of 95.39
% or 95.39 (without workings) is sufficient for [1].
OFR applies
– 10 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(d) (i) Calculate the change in revenue earned by foreign corn producers
because of the tariff. [3]
Initial revenue
( )
360 110 6.70 1 675=×=
[1]
Revenue following the tariff
( )
280 200 6.70 536=×=
[1]
Change in producer revenue
( )
536 1675 $1139 000 000 $1139 million= =
(a decrease) [1]
OFR applies
(ii) Using your answer to (d)(i), calculate the percentage change in the
revenue earned by foreign corn producers. [1]
536
1100 68%
1675
⎛⎞
⎛⎞
−× =
⎜⎟
⎜⎟
⎝⎠
⎝⎠
(a decrease of 68
%) [1]
An answer of –68
% or –68 (without workings) is sufficient for [1].
OFR applies
(e) State one reason why governments may decide to impose a tariff. [1]
For any one of the following: [1]
to assist domestic producers
to maintain levels of employment
to collect revenue
to correct a deficit in trade of goods and services.
Any other valid response.
– 11 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(f) (i) Explain two disadvantages of trade protection. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For any two disadvantages merely stated or expressed in a vague
manner OR one disadvantage clearly stated.
A candidate who merely states one disadvantage or explains it in a
vague manner may be awarded [1].
2 The written response is clear. 3–4
For any two disadvantages explained clearly.
A candidate who explains one disadvantage clearly and a second
disadvantage merely stated or expressed in a vague manner may be
awarded [3].
Disadvantages may include:
a misallocation of resources
danger of retaliation and “trade wars”
the potential for corruption
increased costs of production due to lack of competition
higher prices for domestic consumers
increased costs of imported factors of production
reduced export competitiveness.
Any other valid disadvantage should be rewarded.
– 12 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(ii) Calculate the decrease in the consumer surplus resulting from the
imposition of the tariff. [2]
The area of the trapezoid/trapezium:
( )
280 360
0.5
2
+
×
[1]
Any valid working is sufficient for [1].
= $160 million [1]
An answer of $160 million without workings is sufficient for [1].
Or, the difference between the area of the original consumer surplus
( )
8.95 6.70 360
405
2
−×
⎛⎞
=
⎜⎟
⎝⎠
and the new consumer
surplus
( )
8.95 7.20 280
245
2
−×
⎛⎞
=
⎜⎟
⎝⎠
[1]
which is –$160 million (a decrease) [1]
An answer of $160 000 000 (or $160 million) is sufficient for [1].
A response which has identified $9 as the intercept on the vertical axis and
has produced an answer of $162 million should be fully rewarded.
(g) Explain why the welfare loss resulting from the corn tariff is smaller than the
loss of consumer surplus. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For a response which demonstrates some limited understanding of the idea
that with the imposition of the tariff some stakeholders gain, while others
lose.
2 The written response is clear. 3–4
For a response which demonstrates clear understanding that welfare loss
will be smaller than the loss in consumer surplus because producer surplus
increases and the government earns tariff revenues. Thus part of the loss in
consumer surplus is offset by a benefit to other stakeholders ie domestic
producers and the government.
A clear response which refers to only one of the gains (producer surplus or
tariff revenues) may be awarded a maximum of [3].
OFR may be applied in the case of candidates who provide an incorrect response
to (f)(ii) but who use their answer to provide a reasoned conclusion. To reach
level 2, reference to either tariff revenue or producer surplus must be made.
– 13 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
3. (a) (i) Calculate the equilibrium price of butter in Country X. [2]
DS
QQ=
884 6P 744 4P= +
10P 140=
[1]
Any valid working is sufficient for [1].
P $14=
[1]
An answer of $14 or 14 (without workings) is sufficient for [1].
N.B. An answer of 1.4 cents or $0.014 should be fully rewarded as
candidates may have assumed that the price given in the question is per
$000 kg.
(ii) Calculate the equilibrium quantity per month of butter in Country X. [2]
! ! !
Q 884 (6 14)=×
OR
Q744(414)=+×
[1]
Any valid working is sufficient for [1].
Q800000kg=
[1]
An answer of 800 thousand kg or 800 (without workings) is sufficient for
[1].
(b) State the new equation for demand. [1]
D
Q 894 6P=
[1]
(c) (i) Outline how this change will affect the steepness of the supply curve. [2]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1
For identifying that the supply curve will become less steep (ie flatter/
shallower).
2 The written response is clear. 2
For identifying that the supply curve will become less steep (ie flatter/
shallower) because, for any change in price, the change in quantity
supplied will be greater, and hence the supply curve will become
shallower/flatter.
Full marks may be awarded if a candidate explains that since the slope
of the function increases (from +4 to +5) but the axes are reversed (the
independent variable is on the vertical) the supply curve will become
shallower/flatter.
– 14 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(ii) Outline why this change will affect the position of the supply curve. [2]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1
For a response which indicates that the supply curve will shift to the
left OR that the quantity supplied has decreased.
2 The written response is clear. 2
For a response which indicates that the supply curve will shift to the
left because the quantity supplied has decreased.
(d) (i) Define the term price elasticity of supply (PES). [2]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Vague definition. 1
The idea that price elasticity of supply relates to changes in quantity
following a change in price.
2 Accurate definition. 2
An explanation that price elasticity of supply is the responsiveness of
supply (or, of quantity supplied) to a change in price.
The provision of the correct formula is sufficient for [1] only.
% change in quantity supplied
% change in price
(ii) Calculate the PES for butter between the original and the new market
price. [2]
%Q 0.5
PES
%P 7.14
Δ
==
Δ
[1]
Any valid working is sufficient for [1].
PES 0.07=
[1]
An answer of 0.07 is sufficient for [1].
OFR applies
Accurate calculation of at least one percentage is deemed to be sufficient
valid working.
– 15 – M14/3/ECONO/HP3/ENG/TZ0/XX/M
(e) Explain two factors that determine the PES of a product. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
Any two factors expressed in a vague manner OR one factor explained
clearly.
A candidate who explains one factor in a vague manner may be
awarded [1].
2 The written response is clear. 3–4
Any two factors explained clearly.
A candidate who explains one factor clearly and a second factor in a vague
manner may be awarded [3].
Factors may include:
the time period: the longer the time period, the more price elastic supply will
be as firms will have more time to adjust to any change in demand / price
conditions
whether the firm has excess (or, unused) capacity available: if it does, then
increasing output will be easier so supply will be more price elastic
possibility of storage: the greater the ability to store stocks, the more price
elastic supply will be as firms