Measuring economic activity and illustrating its variations Paper 2

IBDP Economics  SL – Macroeconomics – Measuring economic activity and illustrating its variations -Paper 2  Exam Style Practice Questions

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Measuring economic activity and illustrating its variations Paper 2? 

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Exam Style Question for Measuring economic activity and illustrating its variations -Paper 2

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

Define the term real gross domestic product (GDP) indicated in bold in the text (paragraph [2]).

▶️Answer/Explanation

The (total) value of all output (goods and services) produced in an economy (over a given period of time) adjusted for inflation (changes in price level).

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 gross domestic product (GDP) indicated in bold in the text (paragraph [3]). 

▶️Answer/Explanation

An understanding that it is the total value/output of all goods and services produced in an economy (in a given time period).

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

Define the term gross domestic product (GDP) indicated in bold in the text (Text D, paragraph [1]).

▶️Answer/Explanation

An understanding that it is the value of all (final) goods and services produced within an economy (over a period of time, usually a year or a quarter).

Question

Define the term gross domestic product (GDP) indicated in bold in the text (Text A, paragraph 2).

▶️Answer/Explanation

For an understanding that it is the (market) value of all (final) goods (and services) (or output) produced within an economy/country (over a period of time).

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