4.5 Exchange rates questions for IB Economics

Explain why GDP per capita measured at purchasing power parity (PPP) may give a more accurate comparison of living standards between countries than GDP per capita at market exchange rates.

Using real-world examples, discuss whether differences in GDP per capita at PPP accurately reflect differences in economic well-being between countries.

Define the term depreciation indicated in bold in the text (Text A, paragraph 2).

Define the term scarce indicated in bold in the text (Text B, paragraph 1).

Using information from Table 2, calculate the opportunity cost of one tonne of soybeans when the Northern Province moves from combination C to combination D.

Using information from Table 2, state whether the opportunity cost of soybeans rises, falls or stays the same as more soybeans are produced.

Using information from Table 1 and Text C, paragraph 2, calculate the price in US$ of a hotel night in a southern eco-lodge in 2025.

Using an AD/AS diagram, explain how the central bank's increase in its interest rate is likely to affect inflation in Rendalia (Text A, paragraph 3).

Using an exchange rate diagram, explain why the rendal depreciated between 2015 and 2025 (Text A, paragraph 2 and Table 1).

Using a production possibilities curve (PPC) diagram, explain how soil erosion could affect the Northern Province's production possibilities (Text B, paragraph 4).

Using an externalities diagram, explain why the expansion of soy farming into the forest leads to a welfare loss (Text B, paragraph 4).

Using information from the text/data and your knowledge of economics, evaluate the government's new strategy (Text C) as a way of achieving economic growth and sustainable development in Rendalia.

Using Table 1, calculate Torvania's tea export revenue in 2023.

Using Table 1, calculate the price elasticity of demand (PED) for Torvania's tea between 2022 and 2023.

Using a demand and supply diagram and the information in Table 1, explain why the drought in 2024 increased Torvania's tea export revenue.

Real incomes in the high-income countries that import most of Torvania's tea are forecast to grow by 3 % a year. The income elasticity of demand (YED) in these countries is estimated at 0.2 for standard black tea and 1.4 for specialty teas (such as organic, single-estate and flavoured teas).

Calculate the expected annual increase in the quantity of standard black tea demanded from Torvania, in million kg, using the 2024 export volume and assuming that no other factors change.

Define the term primary commodity.

Outline why the low YED for standard black tea limits the growth of Torvania's export earnings.

A foreign firm has proposed building a packing plant in Torvania. It would buy 10 million kg of Torvanian tea leaf a year and export it as branded tea bags, earning US$9.00 per kg of leaf used.

Calculate the additional annual export revenue the plant would generate, compared with exporting the same quantity of leaf unprocessed at the 2024 auction price.

Using an exchange rate diagram, explain the likely effect of the fall in tea export revenue in 2023 on the value of the Torvanian shilling against the US dollar.

The government of Torvania is considering the following options:

• A tea revenue stabilization fund. Part of the export tax on tea would be saved in years of high prices and paid out to farmers when prices fall. The fund would need careful management; a similar fund in a neighbouring country was used to finance other government spending.

• A minimum price for tea leaf, paid by the state tea board. Farmers' incomes would be protected, but the board would have to buy and store any tea not sold at auction.

• Tax incentives for the proposed packing plant and for other processing firms. Branded tea markets in importing countries are dominated by a few large multinational firms, and the foreign firm may send most of its profits abroad.

• Support for farmers to grow specialty teas. Specialty teas have a YED of 1.4 and sell for about 30 % more than standard tea, but certification and new equipment are costly.

• Grants for farmers to diversify into avocados and macadamia nuts for export. These require irrigation and refrigerated transport, which few rural areas have.

• Weather-based crop insurance, subsidized by the government, paying farmers when rainfall is below a set level.

Using the information provided and your knowledge of economics, recommend a policy the government of Torvania could introduce to reduce the vulnerability of its export earnings to changes in tea prices.

Using the Keynesian multiplier, explain how a fall in export demand could lead to a larger fall in real GDP.

Using real-world examples, evaluate the view that expansionary fiscal policy is the most effective response to a recession caused by falling export demand.

Define the term mixed economy indicated in bold in the text (Text A, paragraph 1).

Define the term remittances indicated in bold in the text (Text A, paragraph 2).

Using information from Table 2, calculate Kesharo's unemployment rate in 2025.

Sketch a production possibilities curve (PPC) diagram to show the position of Kesharo's economy given the level of unemployment in 2025 (Table 2 and Text C, paragraph 1).

Using information from Table 1, state whether the kesh appreciated or depreciated against the US dollar between 2020 and 2025.

Using a demand and supply diagram, explain why there is a shortage of standard bread in Kesharo (Text B, paragraphs 1 and 2).

Using an AD/AS diagram, explain how higher natural gas export revenues have contributed to faster growth in Kesharo's real GDP (Text A, paragraph 2 and Table 1).

Using an exchange rate diagram, explain why the kesh appreciated between 2020 and 2025 (Text A, paragraph 3).

Using a production possibilities curve (PPC) diagram, explain how the vocational training programme could increase Kesharo's output (Text C, paragraphs 1 and 2).

Using information from the text/data and your knowledge of economics, discuss the appropriate balance between market forces and government intervention in Kesharo's economy.

The average auction price of a used car exported to Pemaru was US$3200 in both 2023 and 2025.

Using Table 1, calculate the change in the price of this car in pemars between 2023 and 2025.

Using Table 1, calculate the percentage change in the value of the pemar against the US dollar between 2023 and 2025. You must state whether the pemar appreciated or depreciated.

The government charges a tariff of 25 % on the value of every imported used car. In 2025, 18 000 used cars were imported at an average value at the border, before the tariff, of PMR 16 000.

Calculate the government's tariff revenue from imported used cars in 2025.

A 2025 government inspection of 600 imported used cars found that the odometer (mileage counter) of about one car in three had been wound back before export, so the car appeared to have been driven much less than it had.

Outline why odometer tampering is an example of asymmetric information.

Using a demand and supply diagram and the information provided, explain the effect of the change in the exchange rate on the market for imported used cars in Pemaru.

Some importers pay an independent agency to inspect each car before it is shipped and issue a certificate confirming its mileage and condition. In 2025, cars sold with a certificate sold for an average of PMR 21 600, while similar cars sold without a certificate sold for an average of PMR 17 400.

Calculate the percentage price premium earned by cars sold with a certificate.

Using the information provided, explain two consequences of odometer tampering for the market for used cars in Pemaru.

Outline one reason why an inspection certificate may not fully remove asymmetric information between importers and buyers.

The government of Pemaru is considering the following measures:

• Mandatory pre-shipment inspection: every imported used car must be inspected by a government-approved agency in the exporting country; the cost of about US$150 per car would be paid by importers.

• Age limit: a ban on imports of cars more than eight years old; about 45 % of cars imported in 2025 were older than this, and newer cars cost on average 60 % more.

• Vehicle register: the odometer reading of every car would be recorded on arrival and at each annual roadworthiness test, and buyers could check it online; the system would cost PMR 9 million to set up.

• Consumer protection law: buyers would have the legal right to a full refund if a car's mileage is shown to have been altered; courts are slow and legal advice is expensive.

• Higher tariff on older cars: the tariff on cars more than eight years old would rise from 25 % to 40 %.

Using the information provided and your knowledge of economics, recommend a policy that the government of Pemaru could introduce to reduce the effects of asymmetric information in the market for imported used cars.