Supply Paper 2

IBDP Economics  SL – Microeconomics – Supply -Paper 2  Exam Style Practice Questions

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Exam Style Question for Supply -Paper 2

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

Using a demand and supply diagram, explain why the global price of coffee beans dropped when “countries such as Vietnam, Indonesia and Ethiopia increased their exports” (paragraph [2]).

▶️Answer/Explanation

For drawing a correctly labelled demand and supply diagram, with equilibrium price falling due to an increase in supply AND for an explanation that the supply has increased (leading to a fall for the equilibrium price)

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.

Table 3: Economic data for Sierra Leone

Question

Using a demand and supply diagram, explain how modern farming practices could affect the market for rice (Text E, paragraph [3]).

▶️Answer/Explanation

For a demand and supply diagram showing a shift of supply to the right, with a decrease in price and an increase in quantity AND an explanation that modern farming practices could increase productivity/efficiency (improvements in technology) and hence increase supply, resulting in a lower price and/or a higher quantity.

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