Macroeconomic objectives Paper 2

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Economic growth in Laos

  1. The construction of the China–Laos railway is a major contributor to Laos’ economic growth. This landlocked country is projected to grow by 7 % this year, which is a good achievement for a country still experiencing low incomes and over-reliance on the agricultural sector.
  2. The 420 kilometre railway line will connect China to Laos and link Southeast Asian countries all the way to Singapore. The railway will improve the communication between resource-rich Laos and its neighbours, all of which have larger markets. This will increase both trade and tourism in the region. With the help of Chinese investment, the Lao government also plans to increase its hydroelectric power generation capacity in the next 12 years. This could mean a total of 429 dams on the Mekong River by 2030. However, environmentalists say that the excessive construction of dams could destroy the ecosystem.
  3. Five years ago, the Lao government introduced a policy to privatize state-owned property, designed to attract foreign direct investment (FDI). The privatization policy was especially appealing to Chinese investors and has succeeded in increasing FDI in Laos. The Lao government sold a share in its telecommunication industry to a Chinese firm, which helped launch Laos’ first satellite. This not only improved internet connection quality for communication purposes but also made health services and education more accessible in rural areas, where 61 % of the labour force work as farmers.
  4. The Lao government hopes that Chinese investment will not only introduce technological innovations but will also bring jobs that would help many of the citizens of Laos to break out of the poverty trap. Six Chinese construction companies are now carrying out construction along the entire railway track and are employing a total of 50000 workers, although these are mostly Chinese.
  5. Many are concerned that Laos may be heading for a debt crisis with so much investment financed through borrowing. The construction of the railway will cost an estimated US$6 billion, which will be 60 % funded by foreign investors. The governments of China and Laos will finance the remaining 40 %. Laos’ total commitment to the building of this infrastructure is US$840 million. Around US$500 million of that amount will come from loans from China. The remaining amount will be drawn from the government budget.

Question

Define the term economic growth indicated in bold in the text (paragraph [1]).

▶️Answer/Explanation

An explanation that it is one of the following:

  • an increase in real output (over time)
  • an increase in real GDP
  • an increase in potential output.

United States (US) tin can manufacturers seek tariff exemption on tinplate steel

  1. The Can Manufacturers Institute (CMI) has asked the US Department of Commerce to take away tariffs and other trade protection measures that are currently applied to imports of tinplate steel. Tinplate steel is used to make tin cans as packaging for food. The CMI represents the tin can manufacturing industry and its suppliers in the US.
  2. The tin can manufacturing industry accounts for the annual domestic production of approximately 124 billion tin cans. The industry employs more than 28 000 people, with factories in 33 US states, Puerto Rico and American Samoa. It generates revenue of around US$17.8 billion. The CMI claims that the tariff on imports of tinplate steel has a severe economic impact on the tin can manufacturing industry.
  3. Approximately 2 % of all US steel is tinplate. Currently, there is excess demand that is causing a disequilibrium in the domestic US tinplate steel market. In 2016, US demand for tinplate steel was 2.1 million tons, while domestic supply was 1.2 million tons, meaning that only 57 % of domestic demand was met by US tinplate steel producers. Not only is there a domestic shortage of tinplate steel, but also the CMI claims that there has been a noticeable decline in the quality of domestically-produced tinplate steel.
  4. The CMI claims that even a small increase in the price of raw materials could create a competitive disadvantage, forcing some tin can manufacturing plants to shut down. This would create structural unemployment for 10 000 workers in regionally-based factories. The CMI also claims that the tariff puts food can producers at a competitive disadvantage with other food packaging substitutes, such as plastic and glass. These substitutes are not subject to tariffs.
  5. According to the CMI, canned fruits and vegetables cost 20 % less than fresh food. Because of this, people on low incomes consume canned foods at a higher rate than the average American. Canned food offers a low-cost solution to feeding the nation; especially the 42 million Americans who live in low-income households. The figure includes 13 million children. The CMI further claims that tariffs, or any trade barriers, have harsh consequences for those living in relative poverty.

Question

Define the term structural unemployment indicated in bold in the text (paragraph [4]).

▶️Answer/Explanation

Occurs due to one of the following:

  •  a mismatch between skills of workers and the jobs available 
  • a mismatch between the geographical location of the
    workers and the jobs available
  • a permanent fall in the demand for a skill (demand for labour).

Bhutan’s growth soars amid hydropower building boom

  1. Bhutan is a developing Asian country, bordered by India and China. The government of Bhutan is mostly interventionist in its approach to economic growth and economic development. Situated in the Himalayan mountains, Bhutan has significant water resources that may be employed to generate hydropower.
  2. The most significant intervention by the government is investment in the generation of hydropower. However, funding is not possible domestically. The hydropower projects are mostly financed by concessional long-term loans from India. Government borrowing to finance hydropower construction has made Bhutan the second-most indebted nation in Asia. Bhutan now has a high level of government debt, equal to 118 % of annual real gross domestic product (GDP).
  3. The funding of Bhutan’s interventionist policies has created significant dependence on Indian tied aid. A condition of the aid is that Indian companies lead the infrastructure projects. The large amount of foreign aid has made achieving self-reliance difficult. At present, India finances nearly one-quarter of the Bhutan government’s budget expenditures.
  4. When the projects are completed they will more than double Bhutan’s hydropower generation capacity and over 80 % of the power generated will be exported to India. Hydropower to India is Bhutan’s largest export, and the increased exports will lead to greater government revenue. Real GDP growth is expected to reach 11.7 % by 2019.
  5. Another significant intervention by the government is the promotion of university education for as many young people as possible, coupled with the creation of government jobs to employ them. The present level of exporting hydropower to India has provided some government revenue to pay for government jobs. However, while the number of university graduates is growing each year, the number of government jobs has not been growing at the same rate.
  6. In response to the current inability to provide enough jobs, the government is also implementing other programmes. Firstly, they are encouraging graduates to pursue employment in Bhutan’s small private sector, which is struggling to make a meaningful contribution to economic growth. Secondly, the government is promoting tourism, making it one of the most popular alternatives to government employment. Thirdly, the government is attempting to reduce red tape (excessive regulations) in areas such as industrial licensing, trade, labour markets and finance. This red tape is a barrier to foreign direct investment. Finally, the government is trying to make employment in agriculture more appealing. Bhutan’s climate means that it could be well-positioned to produce and export a variety of fruits.

Question

Using a production possibilities curve (PPC) diagram, explain how rising numbers of university graduates will affect Bhutan’s potential output (paragraph [5]).

▶️Answer/Explanation

For drawing a correctly labelled PPC diagram showing an outward shift of the PPC and indication of the movement from one curve to the other AND for an explanation that rising numbers of university graduates means an increase in the quality and/or quantity of labour, thereby causing an increase in Bhutan’s potential output.

Argentina’s currency keeps falling

  1. The year 2018 started badly for Argentina when the worst drought in 50 years negatively affected its export revenues from maize and soybeans, both important exports. The economy suffered several additional problems: a stronger United States dollar (US$), international investors selling Argentinian assets due to a lack of confidence in the economy, rising inflation from 25 % to nearly 50 % (Figure 1) and a significant depreciation of the peso, Argentina’s currency.
  2. When Argentina’s president was elected in 2015, inflation was at 25 %. He gave the central bank freedom to raise interest rates, which encouraged foreign investors to buy government bonds. The government had borrowed a lot of money from overseas to finance the persistent budget deficit, but by 2018, foreign investors were interested in other markets.
  3. As the peso was overvalued in 2015, it kept demand for imports high and made it hard for exports to compete. The current account deficit rose to more than 5 % of gross domestic product (GDP) but slowly narrowed in 2018, because the president allowed the peso to float freely.
  4. In May 2018, in an attempt to control the inflation rate and stop the fall in the peso’s value, the Argentinian central bank raised interest rates to 40 %. In addition, it started selling foreign currency reserves. However, there were concerns that if the selling of foreign currency reserves continued, they would be depleted quickly. To address this concern, the president negotiated a US$50 billion loan from the International Monetary Fund (IMF). Yet the peso continued to fall. The IMF loan means that most of Argentina’s debt-servicing requirements are covered until 2020. However, under IMF loan conditions, the budget deficit must be cut by postponing infrastructure projects, subsidies must be cut, and government jobs must be cut.
  5. A spokesperson from the IMF said “Argentina has a floating, market-determined exchange rate, and the IMF fully supports that. The exchange rate should continue to be determined by market forces.”
  6. The peso’s weakness causes imported oil prices to go up, further raising inflation. The falling real incomes of households combined with higher interest rates will affect the economy negatively, possibly leading to a recession. Interest rates will remain high for some time, discouraging investment. Economists expect Argentina to fall into recession, for the fifth time in a decade.

Question

Define the term budget deficit indicated in bold in the text (paragraph [2]).

▶️Answer/Explanation

An understanding that it is when government spending is greater than government revenues.

Trade strategies in the Philippines

  1. For more than 20 years the Philippines has been limiting the volume of rice it imports. However, the agreement with the World Trade Organization (WTO) that permitted these restrictions expired in 2017. In early 2019, the government replaced the quantity restrictions with tariff protection. A 35% tariff on imported rice from the Association of Southeast Asian Nations (ASEAN)* was imposed to protect the domestic rice industry in the Philippines. Following the replacement of the quota with a tariff, rice prices are expected to fall significantly. However, urban households want the president to allow rice to be imported without any tariffs to reduce food bills even further.
  2. The poorest quintile of households in the Philippines consumes nearly twice as much ordinary rice and 20 times more National Food Authority (NFA) rice compared to the richest quintile. Rising food prices are pushing up inflation as a result of increasing salaries in urban areas. The daily minimum wage in Manila, the Philippine capital, will increase by 4.9 %, the highest hike in six years, to the equivalent of US$10.11. Farming and fishing provide the livelihoods for around one-third of the labour force in the Philippines. Land reform programmes are slowly being implemented to change the current situation of unfair ownership of land and resources by a few individuals. However, uncertainty continues to discourage investment in adequate irrigation systems in the countryside. As an agricultural country, irrigation in the Philippines is very important. Improvements in the quality of infrastructure services will help cut the cost of doing business, attract more investment, and enhance productivity around the country. Food manufacturing, including food and beverage processing, remains the most dominant primary industry in the Philippines. This has become a focus in the hope of increasing farm incomes, because this part of the economy is currently dominated by big international companies. Major exports of processed fruits and nuts include mangos, pineapples, bananas and peanuts.
  3. The Philippine Export Development Plan (PEDP) 2018–2022 calls for boosting the export of services, increasing export competitiveness, and exploring new markets. Efforts have already been made to harmonize the country’s standards, testing, certification and quality accreditation of products to improve trade and comply with standards in the European Union. The PEDP aims to increase the volume and value of exports by encouraging investment in production processes and supply chains. Another strategy to achieve the plan’s objective is to exploit existing and new opportunities from trade agreements.
  4. The Philippines lacks the infrastructure needed to attract export-oriented manufacturing. To support the PEDP, the government needs to increase its spending on new airports, roads and bridges. These public works are critical to boosting the incomes of people in poorer areas by connecting them better to Manila. To allow for this extra spending, a series of tax reforms was started: the income tax for the highest income earners has been raised from 30 % to 35 %, and indirect taxes have been increased.

Question

Define the term inflation indicated in bold in the text (paragraph [2]).

▶️Answer/Explanation

An understanding that it is a sustained increase in the (average/general) price level

Coffee production in Honduras

  1. Coffee farmers in Honduras, Central America, are struggling to earn enough revenue to cover production costs. Some have left their farms and migrated to the United States (US). Many remaining families depend on remittances (money sent by a foreign worker to their home country) from relatives in the US.
  2. The agricultural sector, which employs about 28 % of the labour force in Honduras and accounts for 45 % of gross domestic product (GDP), has always faced difficulties and has had very little government support. Fluctuations in international commodity prices are also a problem. The average global price of a 60 kg bag of coffee beans dropped from US$140 in 2017 to US$62 in 2019, because countries such as Vietnam, Indonesia and Ethiopia increased their exports.
  3. Scientists say that the greatest threat to crops comes from global warming. The World Bank has estimated that over the next 30 years climate change could force around 1.4 million people to leave Central America for the US. Meanwhile, global warming is partly blamed on the US continuing to operate coal-fired power plants, which account for about 30 % of its electricity generation.
  4. Rising temperatures and uncertain weather have affected plant growth, ruined harvests and led to pests and diseases. The amount of land suitable for growing coffee, which is Honduras’s most important agricultural export, will probably fall by over 40 % before 2050. Already, the number of coffee producers has declined by 25 % in some areas. Furthermore, reduced yields of subsistence crops like corn and beans could significantly increase malnutrition.
  5. Foreign aid from the US includes humanitarian aid and grants to non-governmental organizations (NGOs) that have projects helping farmers adapt to climate change. However, the US administration has threatened to stop all foreign aid to Central America, claiming that its governments are failing to reduce the flow of migrants to the US. Between 2016 and 2019, the total annual aid budget for Central America had already dropped from US$750 million to US$530 million. The biggest reductions were in projects assisting rural economies and agriculture, while there was a small increase in funds for drug control and border enforcement, in order to reduce the number of migrants to the US.
  6. There is concern among local coffee growers that if aid is stopped there will be more unemployment, leading to more migration and abandoned farms.
  7. NGOs are helping coffee farmers to cope better with droughts and to diversify into other crops, such as avocados or timber. Global coffee sellers, including Starbucks, are supporting some projects in the hope that they can ensure the future supply of coffee. However, coffee farming in Honduras may never be profitable again.

Question

Define the term unemployment indicated in bold in the text (paragraph [6]).

▶️Answer/Explanation

An understanding that it is when people do not have jobs and are actively looking for work

Infrastructure projects in Tanzania

  1. In 2018, Tanzania’s gross domestic product (GDP) grew by 7 %. But the trade balance deteriorated, with exports declining and imports increasing. Moreover, limits on government current expenditure and lower levels of inward foreign direct investment (FDI) suggest that GDP growth will weaken to 5 % in 2019. Inflation will stay low through 2019, due to lower prices for food and raw materials.
  2. The government has promised reforms to improve the business environment and fiscal management. However, the budget deficit is forecast to increase from 2.3 % of GDP to 4 % of GDP by 2020.
  3. Government investment in large-scale projects, such as the construction of railway lines, dams for electricity generation, bridges, roads and airports, could lead to annual economic growth of 10 %. These projects, however, are financed mainly by loans from commercial banks with a short repayment period and high interest rates. Therefore, the national debt and the cost of debt servicing are increasing. The national debt has risen from US$22 billion in 2015 to US$28.6 billion in 2019.
  4. The Minister for Finance and Planning is optimistic that the debt is sustainable. “The debt assessment shows we can continue to borrow locally and abroad to finance development activities and pay off matured loans using our internal and external revenue,” he said. According to the central bank, the transport and telecommunication sectors received a greater share of the funding, accounting for 26.8 % of the debt, followed by social welfare, education, energy and mining.
  5. All the large infrastructure projects use some materials imported from abroad, such as steel. Therefore, the current account deficit will widen further due to increased imports of resources necessary for production. The government’s ability to use its expenditure to stimulate domestic production will be reduced, because funds are being sent overseas to external lenders and construction firms.
  6. Tanzania is undergoing a structural change with a higher proportion of the labour force working in the manufacturing and service sectors, while agriculture is employing fewer workers. Despite a reduction in the poverty rate, the absolute number of poor people is still high due to population growth. According to a World Bank report, almost half the population lives on less than US$1.90 per person per day. It concludes that the poor have benefited relatively less from recent economic growth, resulting in an increase in income inequality from 2015 to 2019.
  7. Further investments in human capital, targeted towards the poor, are needed to increase access to higher-skilled jobs. However, government efforts to expand public services, including education, health, and sanitation and clean water facilities, have been undermined by their declining quality as the population rises faster than the supply of the services. Therefore, the levels of education and basic services remain low, particularly for the poorest and those living in rural areas.

Question

Using an AD/AS diagram, explain how “lower prices for food and raw materials” might put downward pressure on inflation (paragraph [1]).

▶️Answer/Explanation

 For drawing a correctly labelled AD/AS diagram, with the (SR)AS shifting right (downwards) and the equilibrium price level falling
AND for an explanation that the lower prices for food and raw materials will reduce costs, leading to an increase in (SR)AS and downward pressure on the price level/inflation.

Text A — Overview of North Macedonia

  1. North Macedonia is a small, landlocked nation that shares borders with five countries, including Bulgaria and Greece. Bulgaria and Greece are members of the European Union (EU) common market, which North Macedonia hopes to join soon. Since the country began negotiating for EU membership, trade with the EU has increased rapidly and now accounts for 75 % of North Macedonia’s exports and 62 % of its imports.
  2. Despite its small market, with a population of approximately 2 million, North Macedonia’s proximity to the EU, low wages and expected entry into the common market have attracted foreign investors. Greece, its richest neighbour, was its third highest source of foreign investment in 2019. The lower cost of living also appeals to Greek tourists.
  3. EU companies have invested in the financial, telecommunication, energy and food processing industries in North Macedonia. Many of the most profitable companies are from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may increase as firms located in North Macedonia will be allowed to bypass all custom checks and enjoy tariff-free trade within the common market. One particular challenge for North Macedonia, however, is that most of the profits of foreign companies are likely to be repatriated (sent back to the companies’ home countries).
  4. In 2018, North Macedonia’s export revenue was US$7.57 billion and its import expenditure was US$9.56 billion. The country’s main exports are iron and steel, clothing and accessories, and food products. Food, livestock and consumer goods account for 33 % of imports while the remainder are machinery, petroleum and other materials needed for the industrial production process.
  5. The manufacturing sector, which now employs 31 % of the labour force, has gained more importance. The agricultural sector remains strong, contributes over 10 % of North Macedonia’s gross domestic product (GDP) and employs about 16 % of the country’s workforce.
  6. The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However, youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty line. Unemployment and poverty contribute to high rates of emigration. More than 20 % of the North Macedonian population have emigrated since 1994, mostly to the EU. As a member of the EU, North Macedonia will enjoy free movement of labour which will make it easy for its citizens to live and work in other EU countries.

 Text B — North Macedonia’s economic reforms

  1. To be considered for EU membership, North Macedonia implemented a series of supply-side policies to reform its economy. The EU imposes strict requirements for membership but provides financial assistance to countries preparing for membership. North Macedonia has received 633 million euros (the currency of the EU) to help with the reforms.
  2. Most of the supply-side policies seek to improve the international competitiveness of North Macedonia’s industries. The authorities are increasing access to education and training for workers. The expansion of the transport network and other infrastructure is also expected to increase efficiency.
  3. Protection of the environment is also on the list of requirements for EU membership. North Macedonia aims to reduce its dependence on coal and to instead promote the use of solar, wind and hydropower technologies. These low-carbon energy sources would help decrease its air pollution, which is among the worst in Europe.
  4. The reforms, which started in 2014, have shown progress. Exports and manufacturing output are more diversified and more concentrated on high-value products. To attract FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the region. The central bank also prevents the denar (North Macedonia’s currency) from appreciating against the euro through managing foreign reserves. However, skill shortages and a mismatch of skills with those required by companies discourage foreign firms from investing. Important investment gaps in public infrastructure also remain.

Text C — North Macedonia’s trade agreements

North Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.

Question

Define the term unemployment rate indicated in bold in the text (Text A, paragraph [6]).

▶️Answer/Explanation

An understanding that it is the proportion /percentage of the labour face which does not hold a job(is unemployed) 

A formula for the unemployment rate is sufficient for L2 .

eg:

\(unemployment\;rate= \frac{number\;of\; unemployed}{labour\;face} \times 100%\)

Text A — Overview of North Macedonia

  1. North Macedonia is a small, landlocked nation that shares borders with five countries, including Bulgaria and Greece. Bulgaria and Greece are members of the European Union (EU) common market, which North Macedonia hopes to join soon. Since the country began negotiating for EU membership, trade with the EU has increased rapidly and now accounts for 75 % of North Macedonia’s exports and 62 % of its imports.
  2. Despite its small market, with a population of approximately 2 million, North Macedonia’s proximity to the EU, low wages and expected entry into the common market have attracted foreign investors. Greece, its richest neighbour, was its third highest source of foreign investment in 2019. The lower cost of living also appeals to Greek tourists.
  3. EU companies have invested in the financial, telecommunication, energy and food processing industries in North Macedonia. Many of the most profitable companies are from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may increase as firms located in North Macedonia will be allowed to bypass all custom checks and enjoy tariff-free trade within the common market. One particular challenge for North Macedonia, however, is that most of the profits of foreign companies are likely to be repatriated (sent back to the companies’ home countries).
  4. In 2018, North Macedonia’s export revenue was US$7.57 billion and its import expenditure was US$9.56 billion. The country’s main exports are iron and steel, clothing and accessories, and food products. Food, livestock and consumer goods account for 33 % of imports while the remainder are machinery, petroleum and other materials needed for the industrial production process.
  5. The manufacturing sector, which now employs 31 % of the labour force, has gained more importance. The agricultural sector remains strong, contributes over 10 % of North Macedonia’s gross domestic product (GDP) and employs about 16 % of the country’s workforce.
  6. The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However, youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty line. Unemployment and poverty contribute to high rates of emigration. More than 20 % of the North Macedonian population have emigrated since 1994, mostly to the EU. As a member of the EU, North Macedonia will enjoy free movement of labour which will make it easy for its citizens to live and work in other EU countries.

 Text B — North Macedonia’s economic reforms

  1. To be considered for EU membership, North Macedonia implemented a series of supply-side policies to reform its economy. The EU imposes strict requirements for membership but provides financial assistance to countries preparing for membership. North Macedonia has received 633 million euros (the currency of the EU) to help with the reforms.
  2. Most of the supply-side policies seek to improve the international competitiveness of North Macedonia’s industries. The authorities are increasing access to education and training for workers. The expansion of the transport network and other infrastructure is also expected to increase efficiency.
  3. Protection of the environment is also on the list of requirements for EU membership. North Macedonia aims to reduce its dependence on coal and to instead promote the use of solar, wind and hydropower technologies. These low-carbon energy sources would help decrease its air pollution, which is among the worst in Europe.
  4. The reforms, which started in 2014, have shown progress. Exports and manufacturing output are more diversified and more concentrated on high-value products. To attract FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the region. The central bank also prevents the denar (North Macedonia’s currency) from appreciating against the euro through managing foreign reserves. However, skill shortages and a mismatch of skills with those required by companies discourage foreign firms from investing. Important investment gaps in public infrastructure also remain.

Text C — North Macedonia’s trade agreements

North Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.

Question

▶️Answer/Explanation

Using your answer to part (b)(i), identify the year disinflation set in.

2019 or “between 2018 and 2019”

Text D — Overview of Sierra Leone

  1. Sierra Leone is located on the west coast of Africa. Economic activity is concentrated on agriculture and mining, which together contribute 70 % of gross domestic product (GDP) and 77 % of export revenue.
  2. Economic growth rates fluctuated from +20.1 % in 2013 to −21.5 % in 2015. The economic slowdown in China contributed to a significant drop in mining activities and a fall in Sierra Leone’s export revenue. China is Sierra Leone’s largest market for exported minerals.
  3. Economic growth rates in Sierra Leone have improved in recent years due to increased activity in agriculture, mining and construction. Increased employment in these labour-intensive sectors could help reduce poverty, which remains widespread in the country. Sierra Leone’s ranking in the Inequality adjusted Human Development Index (IHDI) is very low.
  4. The fall in export revenue has led to a 50 % depreciation of the leone (Sierra Leone’s currency) over the past five years. Even recent increases in the price of commodities have not been sufficient to offset the high import expenditure on food, medication, cars and capital equipment.
  5. The depreciation of the leone has led to inflationary pressures. The removal of a fuel subsidy resulted in an increase in the price of fuel and pushed the inflation rate from 16.8 % in 2018 to 17.2 % in 2019.
  6. To make matters worse, access to essential, life-saving health care services in Sierra Leone is often disrupted by regional conflicts. Healthcare in Sierra Leone is generally charged for and is provided by a mixture of government, private and non-governmental organizations (NGOs). NGOs are relied on to protect the health and wellbeing of citizens. NGOs help to achieve this by distributing medicine and teaching families about hygiene and proper sanitation.
  7. Another area of concern is the government debt, which stood at 62 % of GDP in 2019. The government has reduced its budget deficit from 5.7 % to 3.4 % of GDP by minimizing non-payment of taxes and implementing cost-saving measures such as the automation of some government services.
  8. The newly elected government has made good progress in its fight against corruption, but it is facing many macroeconomic challenges. Foreign aid has been reduced, infrastructure is inadequate and many economic activities remain untaxed. Youth unemployment is also high due to low literacy rates and a lack of skills required in the job market.

Text E — Sierra Leone’s new development plan

  1. In 2019, the government of Sierra Leone introduced a new five-year development plan. The plan includes policies aimed at increasing the welfare of Sierra Leone’s citizens by working towards the Sustainable Development Goals.
  2. The development plan ensures access to free primary and secondary education in all public schools. The cost of education is the main reason that many households are not sending their children, particularly girls, to school. For those paying private education fees, switching to public education would allow more of their household income to be spent on other essential services and farming equipment.
  3. The expected increase in human capital should facilitate economic activities and lead to investment. Schools now teach modern farming practices, such as those involving the use of farm machinery and fertilizers. These would benefit rice farmers and help achieve food security (ensuring people have access to enough food).
  4. The provision of technical education should not only increase agricultural output but also allow for the diversification of the economy. The manufacturing sector contributes only 2 % of the country’s GDP and could provide an alternative source of employment. The five-year plan also addresses the lack of infrastructure, in particular for electricity generation, which has so far restricted the development of the manufacturing sector.

Text F — Investment in Sierra Leone

  1. The World Bank ranked Sierra Leone 160th among 190 countries in 2018 for the ease of doing business, citing difficulties in accessing electricity and in obtaining loans and business permits. Government borrowing from the banking sector has increased in recent years, resulting in high interest rates and limited credit availability for the private sector. Foreign investors, however, usually bring capital from abroad.
  2. Despite the challenges, Sierra Leone offers significant opportunities for investment. Foreign investors are involved in the energy sector, infrastructure, agriculture, tourism, and natural resources. Reduced tax rates on corporate income are offered for investments in agriculture and tourism

Question

Using an AD/AS diagram, explain how the increase in the price of fuel might have contributed to inflation (Text D, paragraph [5]).

▶️Answer/Explanation

For an AD/AS diagram showing a shift of the SRAS to the left and an increase in the (average) price level AND an explanation that an increase in the price of fuel would increase the cost of production of goods, leading to (cost-push) inflation (upward pressure on prices).

Text D — Overview of Sierra Leone

  1. Sierra Leone is located on the west coast of Africa. Economic activity is concentrated on agriculture and mining, which together contribute 70 % of gross domestic product (GDP) and 77 % of export revenue.
  2. Economic growth rates fluctuated from +20.1 % in 2013 to −21.5 % in 2015. The economic slowdown in China contributed to a significant drop in mining activities and a fall in Sierra Leone’s export revenue. China is Sierra Leone’s largest market for exported minerals.
  3. Economic growth rates in Sierra Leone have improved in recent years due to increased activity in agriculture, mining and construction. Increased employment in these labour-intensive sectors could help reduce poverty, which remains widespread in the country. Sierra Leone’s ranking in the Inequality adjusted Human Development Index (IHDI) is very low.
  4. The fall in export revenue has led to a 50 % depreciation of the leone (Sierra Leone’s currency) over the past five years. Even recent increases in the price of commodities have not been sufficient to offset the high import expenditure on food, medication, cars and capital equipment.
  5. The depreciation of the leone has led to inflationary pressures. The removal of a fuel subsidy resulted in an increase in the price of fuel and pushed the inflation rate from 16.8 % in 2018 to 17.2 % in 2019.
  6. To make matters worse, access to essential, life-saving health care services in Sierra Leone is often disrupted by regional conflicts. Healthcare in Sierra Leone is generally charged for and is provided by a mixture of government, private and non-governmental organizations (NGOs). NGOs are relied on to protect the health and wellbeing of citizens. NGOs help to achieve this by distributing medicine and teaching families about hygiene and proper sanitation.
  7. Another area of concern is the government debt, which stood at 62 % of GDP in 2019. The government has reduced its budget deficit from 5.7 % to 3.4 % of GDP by minimizing non-payment of taxes and implementing cost-saving measures such as the automation of some government services.
  8. The newly elected government has made good progress in its fight against corruption, but it is facing many macroeconomic challenges. Foreign aid has been reduced, infrastructure is inadequate and many economic activities remain untaxed. Youth unemployment is also high due to low literacy rates and a lack of skills required in the job market.

Text E — Sierra Leone’s new development plan

  1. In 2019, the government of Sierra Leone introduced a new five-year development plan. The plan includes policies aimed at increasing the welfare of Sierra Leone’s citizens by working towards the Sustainable Development Goals.
  2. The development plan ensures access to free primary and secondary education in all public schools. The cost of education is the main reason that many households are not sending their children, particularly girls, to school. For those paying private education fees, switching to public education would allow more of their household income to be spent on other essential services and farming equipment.
  3. The expected increase in human capital should facilitate economic activities and lead to investment. Schools now teach modern farming practices, such as those involving the use of farm machinery and fertilizers. These would benefit rice farmers and help achieve food security (ensuring people have access to enough food).
  4. The provision of technical education should not only increase agricultural output but also allow for the diversification of the economy. The manufacturing sector contributes only 2 % of the country’s GDP and could provide an alternative source of employment. The five-year plan also addresses the lack of infrastructure, in particular for electricity generation, which has so far restricted the development of the manufacturing sector.

Text F — Investment in Sierra Leone

  1. The World Bank ranked Sierra Leone 160th among 190 countries in 2018 for the ease of doing business, citing difficulties in accessing electricity and in obtaining loans and business permits. Government borrowing from the banking sector has increased in recent years, resulting in high interest rates and limited credit availability for the private sector. Foreign investors, however, usually bring capital from abroad.
  2. Despite the challenges, Sierra Leone offers significant opportunities for investment. Foreign investors are involved in the energy sector, infrastructure, agriculture, tourism, and natural resources. Reduced tax rates on corporate income are offered for investments in agriculture and tourism.

Question

▶️Answer/Explanation

Using the information in Table 3, calculate Sierra Leone’s rate of economic growth between 2017 and 2018.

\(\frac{3617-3497}{3497}\times 100% \)

= 3.43%

Text A — Bangladesh: the economic role of women

  1. Bangladesh is a densely populated country in Asia. Its currency is the Bangladeshi taka (BDT). The annual rate of growth of gross domestic product (GDP) has steadily increased from 5.6% in 2010 to 8.1% in 2019. Absolute poverty has declined, but inequality has risen, partly due to higher unemployment rates for women than men. Moreover, the labour force participation rate for women is much lower than the rate for men. Over 80
     

    % of the women’s jobs are in the informal economy, and these jobs are low paid and insecure. Women need regular paid work, which not only raises household income but also improves economic well-being in terms of education and health.

  2. The structure of the economy is changing. The growth of cities is due to the expansion of the manufacturing sector, which now contributes a larger share to GDP than the agricultural sector. These changes have increased the number of women in the labour force. In particular, the growth of the ready-made garments (RMG) industry (mass-produced clothing) has given women the opportunity to move into formal employment. The RMG industry provides jobs for almost 4 million low-skilled and semi-skilled workers, accounting for over 40
     

    % of total manufacturing employment. The majority of these jobs are being filled by women, with the result that the gap between the wages of men and women is gradually being reduced.

  3. There are concerns about working and safety conditions in the RMG factories. After an accident in a factory in 2013, reforms are being implemented, partly in response to criticisms from overseas retailers and consumers who purchase the garments. The minimum wage has been increased, inspections are carried out, and there are fewer small, unsafe factories.
  4. While working conditions are improving, such reforms raise the costs of manufacturing garments. Furthermore, the international garment market is becoming more competitive, putting pressure on Bangladeshi factories to reduce costs.
  5. The overseas demand for Bangladeshi garments had been rising strongly until 2019. However, demand has recently fallen, reducing firms’ revenue. The reduction in revenue and the need to lower costs have forced certain firms to reduce the size of their labour force by dismissing some of their female workers.
  6. The number of ethically and environmentally concerned consumers is increasing globally. Rather than trying to lower costs, firms can be more successful if they produce “green ready-made garments” by implementing sustainable practices. About 100 garment factories in Bangladesh have already been certified as producers that meet specified environmental standards. In addition, global retailers and fashion brands are supporting recycling initiatives through the Circular Fashion Partnership.


Text B — Trade prospects for exports of ready-made garments (RMG)

  1. Exports of RMG account for over 84
     

    % of Bangladesh’s total exports. At present, Bangladesh is the world’s second largest garment exporter after China. Bangladeshi exports could further increase as Chinese garments become more expensive due to rising wages in China.

  2. Bangladesh is designated as an Economically Least Developed Country (ELDC) and is therefore able to sell goods in Europe and China without any quotas or tariffs being imposed. However, Bangladesh will graduate from ELDC status by 2026 and will then no longer be eligible for preferential trade agreements. Moreover, the USA, which is the largest export market for Bangladeshi garments, has applied a 15
     

    % tariff on imports from Bangladesh since 2013, citing concerns about working conditions in factories.


Text C — Role of foreign direct investment in the RMG sector

  1. Vietnam and Myanmar have significantly increased their garment exports to China due to foreign direct investment (FDI) from China. Chinese investors have set up factories that import raw materials from China and re-export the finished goods back to China.
  2. Consequently, to compete successfully in the huge Chinese market, Bangladesh needs to attract more FDI from China. Bangladesh is developing the required infrastructure, such as transport links. It is also necessary to diversify into expensive high-end fashion, market more aggressively, and use branding strategies.
  3. The funds from additional FDI would be helpful, because the relative contribution of Official Development Assistance (ODA) to Bangladesh’s budget is declining. Furthermore, the foreign exchange obtained from foreign investors assists in financing the current account deficit.

Question

Using information from Table 1, calculate the unemployment rate for Bangladesh in 2019

▶️Answer/Explanation

Unemployment rate = \(\frac{2.96}{70.1} \times 100\)

= 4.22%

Text D — Macroeconomic policies in Uruguay

  1. Compared to many other Latin American countries, Uruguay has a high Human Development Index (HDI). This is due to its higher gross national income (GNI) per capita and wider access to health care and education.
  2. One aim of Uruguay’s fiscal policy has been income redistribution. For example, in 2017 the tax rate applied to the highest income bracket was raised from 25
     

    % to 36

     

    %. Spending on social programmes, which are targeted towards the poor, has also increased. However, while expenditure on schools is benefitting all families, expenditure on higher education still tends to favour higher-income families, because there are relatively few students from low-income families in universities.

  3. Recently, concern about a growing budget deficit has led to new budget guidelines being implemented. These guidelines aim to reduce borrowing and the national debt by encouraging the government to increase tax revenue and/or reduce expenditures. The main policy goal of Uruguay’s central bank is to keep a low rate of inflation. It has announced that it will reduce the inflation target to below 6
     

    % by September 2022.

  4. Several constraints to growth remain, which may limit progress towards sustainable development. Despite plans to upgrade road networks and construct a new central railway, investment in infrastructure needs to be increased further. Education and training could also be improved to meet the needs of new sectors, such as the information and communication technology (ICT) industry.
  5. State-owned enterprises, including railways and suppliers of fuel, water and electricity, are a significant part of the Uruguayan economy. The prices charged by these enterprises tend to be high relative to prices in other countries. As part of a strategy to eliminate excessive costs, the government has proposed measures to improve efficiency in state-owned enterprises and to gradually reduce prices.
  6. The International Monetary Fund (IMF) considers that more labour market flexibility is needed to make it easier for workers to change jobs and for firms in growing sectors such as ICT to hire workers. The government is, therefore, considering deregulation of the labour market.
  7. Overall, by boosting competitiveness and private investment through supply-side policies, the government aims to raise growth and employment.

Text E — Health care system in Uruguay

The public and private sectors that offer health care in Uruguay were combined into one system in 2007, with both overseen by the government and both eligible to receive subsidies. Most medical care is free for low-income patients. The first row of data in Table 3 shows that per capita demand for health care increased by 54.22

 

% from 2010 to 2018. The advantages are seen in longer life expectancy figures, which imply an increase in productivity, and other benefits.

Text F — Trade and exchange rates

  1. Over 50
     

    % of Uruguayan exports are forestry and agricultural goods, including soybeans, rice, and cattle meat. Increasing global demand and a significant rise in commodity prices from 2000 to 2012 encouraged investment in the agricultural sector. However, the price of soybeans has been declining since 2013, partly due to rising productivity in agriculture. Climate-related shocks, such as droughts in 2017 and 2020, and economic crises in the major export markets of Brazil and Argentina have also caused difficulties for producers.

  2. Therefore, Uruguay aims to diversify its export markets. For example, with the growth of the ICT sector, Montevideo (the capital city of Uruguay) has become a leading software development centre. In addition, Uruguay is broadening its markets towards Europe and Asia. Under a proposed trade agreement between the European Union (EU) and the South American trade bloc, Mercosur (Argentina, Brazil, Paraguay, Venezuela, and Uruguay), 93
     

    % of all tariffs will gradually be eliminated. However, a quota will be imposed on cheese imports from the EU.

  3. To help the economy adjust to external shocks and to avoid large fluctuations in the exchange rate of the peso (Uruguay’s currency), the central bank uses its plentiful reserve assets of foreign currencies. In 2019, the decline in agricultural export revenues put downward pressure on the peso exchange rate. However, the central bank was able to prevent a large depreciation by using its reserve assets in the foreign exchange market.

 

Question

Define the term budget deficit indicated in bold in the text (Text D, paragraph [3]).

▶️Answer/Explanation

An understanding that it occurs when the government spending is greater than government revenue/ taxation revenue.

Burundi

  1. Burundi is a small landlocked African country. Densely populated, it has a population of approximately 10.6 million inhabitants. The economy is dominated by subsistence agriculture, which employs 90 % of the population, though cultivatable land is extremely scarce. More than a decade of conflict led to the destruction of much of the country’s physical, social and human capital. However, substantial improvements have occurred since the conflict ended in 2006, thanks largely to the success of measures implemented to reduce the excessive control of the military.
  2. Even though Burundi is enjoying its first decade of sustained economic growth, poverty remains widespread. Burundi’s ranking on the Human Development Index (HDI) increased by 2.5 % per year between 2005 and 2013 as education and health outcomes have significantly improved over the period, yet the country still ranks low at 180th out of 187 countries in 2013. Per capita gross national income more than doubled between 2005 (US$130) and 2013 (US$280).
  3. Burundi is making the transition from a post-conflict economy to a stable and growing economy. Economic reforms and institution building are ongoing. After significant improvements to achieve peace and security, the country’s development program is shifting gradually towards modernizing public finance. However, the government has limited “fiscal space” because tax collection is very hard to carry out and tax receipts are low.
  4. With its limited resources, the government is attempting to strengthen basic social services and upgrade infrastructure and institutions, particularly in the energy, mining, and agricultural sectors. This has been accompanied by increasing participation of the private sector. The goal now is to grow a more stable, competitive and diversified economy with enhanced opportunities for employment and improved standards of living.
  5. Over the last decade, annual economic growth in Burundi has been between 4 % and 5 %. Inflation continues to decline reaching 3.9 % in July 2016, down from 24 % in March 2012, reflecting a careful monetary policy helped by a recent decrease in the prices of imports, especially oil, which is an essential commodity.
  6. Burundi’s main exports are agricultural; coffee and tea account for 90 % of foreign exchange earnings, and exports are a relatively small share of Gross Domestic Product (GDP).

Question

Using a production possibilities curve (PPC) diagram, explain the effect on economic growth of the “destruction of much of the country’s physical, social and human capital” (paragraph [1]).

▶️Answer/Explanation

A PPC diagram showing an inward shift of the PPC and an explanation that the destruction of capital represents a fall in the quantity of factors of production (resources); and that this will then lead to a fall in production possibilities (potential output).

Text A — Overview of North Macedonia

  1. North Macedonia is a small, landlocked nation that shares borders with five countries, including Bulgaria and Greece. Bulgaria and Greece are members of the European Union (EU) common market, which North Macedonia hopes to join soon. Since the country began negotiating for EU membership, trade with the EU has increased rapidly and now accounts for 75 % of North Macedonia’s exports and 62 % of its imports.
  2. Despite its small market, with a population of approximately 2 million, North Macedonia’s proximity to the EU, low wages and expected entry into the common market have attracted foreign investors. Greece, its richest neighbour, was its third highest source of foreign investment in 2019. The lower cost of living also appeals to Greek tourists.
  3. EU companies have invested in the financial, telecommunication, energy and food processing industries in North Macedonia. Many of the most profitable companies are from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may increase as firms located in North Macedonia will be allowed to bypass all custom checks and enjoy tariff-free trade within the common market. One particular challenge for North Macedonia, however, is that most of the profits of foreign companies are likely to be repatriated (sent back to the companies’ home countries).
  4. In 2018, North Macedonia’s export revenue was US$7.57 billion and its import expenditure was US$9.56 billion. The country’s main exports are iron and steel, clothing and accessories, and food products. Food, livestock and consumer goods account for 33 % of imports while the remainder are machinery, petroleum and other materials needed for the industrial production process.
  5. The manufacturing sector, which now employs 31 % of the labour force, has gained more importance. The agricultural sector remains strong, contributes over 10 % of North Macedonia’s gross domestic product (GDP) and employs about 16 % of the country’s workforce.
  6. The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However, youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty line. Unemployment and poverty contribute to high rates of emigration. More than 20 % of the North Macedonian population have emigrated since 1994, mostly to the EU. As a member of the EU, North Macedonia will enjoy free movement of labour which will make it easy for its citizens to live and work in other EU countries.

 Text B — North Macedonia’s economic reforms

  1. To be considered for EU membership, North Macedonia implemented a series of supply-side policies to reform its economy. The EU imposes strict requirements for membership but provides financial assistance to countries preparing for membership. North Macedonia has received 633 million euros (the currency of the EU) to help with the reforms.
  2. Most of the supply-side policies seek to improve the international competitiveness of North Macedonia’s industries. The authorities are increasing access to education and training for workers. The expansion of the transport network and other infrastructure is also expected to increase efficiency.
  3. Protection of the environment is also on the list of requirements for EU membership. North Macedonia aims to reduce its dependence on coal and to instead promote the use of solar, wind and hydropower technologies. These low-carbon energy sources would help decrease its air pollution, which is among the worst in Europe.
  4. The reforms, which started in 2014, have shown progress. Exports and manufacturing output are more diversified and more concentrated on high-value products. To attract FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the region. The central bank also prevents the denar (North Macedonia’s currency) from appreciating against the euro through managing foreign reserves. However, skill shortages and a mismatch of skills with those required by companies discourage foreign firms from investing. Important investment gaps in public infrastructure also remain.

Text C — North Macedonia’s trade agreements

North Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.

Question

Using information from Table 1, calculate North Macedonia’s annual rates of inflation between 2016 and 2019.

▶️Answer/Explanation

Inflation in 2017 :

\(\frac{110.9-109.4}{109.4} \times 100 = 1.37%\)

Inflation in 2018 :

\(\frac{112.5-110.9}{110.9} \times 100 = 1.44%\)

Inflation in 2019 :

\(\frac{113.4-112.5}{112.5} \times 100 = 0.8%\)

Question

Define the term sustainability indicated in bold in the text (Text B, paragraph 4).

▶️Answer/Explanation

For an understanding that is preserving resources (or the environment) so that they can still be used in the future.

Question

Using the information in Table 3, calculate the inflation rate in Cameroon in 2019.

▶️Answer/Explanation

Inflation in 2019

\(\frac{118.6-115.8}{115.8} \times 100% \)

= 2.42%

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