4.6 Balance of payments questions for IB Economics

Distinguish between gross domestic product (GDP) and gross national income (GNI) as measures of a country's national output.

Using real-world examples, discuss whether GNI per capita is a more useful measure than GDP per capita for comparing living standards between countries.

Define the term cost-push inflation indicated in bold in the text (Text A, paragraph 2).

Define the term income elastic indicated in bold in the text (Text C, paragraph 2).

Using information from Text B, calculate the price elasticity of demand for Selvara's cotton exports (Text B, paragraph 2).

Using your answer to (b)(i), state whether Selvara's export revenue from cotton rose or fell in 2024.

Using information from Table 2, calculate Selvara's current account balance in 2024.

Using an aggregate demand/aggregate supply (AD/AS) diagram, explain how higher prices of imported fuel and fertilizer contributed to higher inflation in Selvara (Text A, paragraph 2).

Using an exchange rate diagram, explain how the fall in the world price of cotton may have contributed to the depreciation of the Selvaran shilling (Text A, paragraph 2 and Text B, paragraph 2).

Using a demand and supply diagram, explain the effect of rising urban incomes on the price of restaurant meals in Selvara's capital (Text C, paragraphs 1 and 2).

Using a Lorenz curve diagram, explain how the changes in urban and rural incomes in 2024 are likely to affect income inequality in Selvara (Text A, paragraph 4 and Text C, paragraph 1).

Using information from the text/data and your knowledge of economics, discuss the view that Selvara should reduce its dependence on raw cotton exports in order to achieve economic growth and economic development.

Using Table 1, calculate the change in Mabrenia's export revenue from cocoa between 2023 and 2024.

Economists estimate that, out of each additional US$1 of national income in Mabrenia, US$0.12 is saved, US$0.15 is paid in taxes and US$0.33 is spent on imports.

Using this information, calculate the value of the Keynesian multiplier in Mabrenia.

Using your answers to parts (a)(i) and (a)(ii), calculate the likely change in Mabrenia's real GDP resulting from the change in cocoa export revenue.

Using an AD/AS diagram and the information provided, explain the likely effect of the fall in cocoa export revenue on unemployment in Mabrenia.

The government has announced a programme of grants for farmers to replant cocoa trees, with a budget of MBR 97.2 billion. The exchange rate is MBR 540 per US$.

Calculate the value of the replanting programme in US$.

Outline why the fall in cocoa exports makes it more difficult for the government of Mabrenia to use expansionary fiscal policy.

Table 2: Selected current account items for Mabrenia, 2024 (US$ million)

Using Table 2, calculate Mabrenia's current account balance in 2024.

Explain two reasons why a fiscal stimulus in Mabrenia is likely to have a smaller effect on real GDP than the same stimulus in an economy with a lower marginal propensity to import.

The following information is also available:

• The government's budget deficit is 5.6 % of GDP, and government debt is 72 % of GDP, a third of it in US$.

• Foreign currency reserves are equal to 2.5 months of imports.

• About 800 000 households depend on cocoa farming, and rural poverty rates are high.

• A labour-intensive rural roads programme would cost US$150 million and could employ 40 000 workers for two years, using mostly local materials.

• An international development bank has offered a low-interest loan for agricultural diversification (cashew nuts, rice and vegetables).

• The central bank is concerned about inflation of 12 %, partly caused by higher prices of imported food.

Using the information provided and your knowledge of economics, recommend a policy that the government of Mabrenia could introduce to stabilize real GDP following the fall in cocoa export revenue.

Explain two reasons why a country's gross national income (GNI) may be significantly lower than its gross domestic product (GDP).

Using real-world examples, discuss whether attracting multinational corporations (MNCs) raises economic well-being in host countries.

Define the term current account deficit indicated in bold in the text (Text A, paragraph 3).

Define the term foreign direct investment (FDI) indicated in bold in the text (Text C, paragraph 1).

Using information from Table 2, calculate the price elasticity of supply (PES) of Matanga's mango exports between 2022 and 2023.

Using information from Table 1 and Table 2, calculate the change in Matanga's export revenue from mangoes, in MTS million, between 2022 and 2023.

Using an AD/AS diagram, explain how higher prices of imported fuel and fertilizer may have contributed to inflation in Matanga (Text A, paragraph 2).

Using an exchange rate diagram, explain how an increase in foreign direct investment in Matanga's food processing and cold storage could affect the value of the Matangan shilling (Text C, paragraph 1).

Using a demand and supply diagram, explain how the new cold store could reduce the fall in mango prices at the peak of the harvest (Text B, paragraphs 2 and 4).

Using a poverty cycle diagram, explain how post-harvest losses can keep smallholder mango farmers in poverty (Text B, paragraph 1).

Using information from the text/data and your knowledge of economics, evaluate Matanga's strategy of promoting horticultural exports as a way of achieving economic growth and economic development.

Using Table 1, calculate the percentage of Trevania's total exports of goods that went to RHCU members in 2025.

Using Table 1, calculate Trevania's balance of trade in goods in 2025.

The sugar market

Trevania imports refined sugar. The lowest-cost producer, a country outside the RHCU, sells sugar at a world price of US$400 per tonne. Kambala, an RHCU member, sells sugar at US$460 per tonne. Trevania currently applies a tariff of 25 % on all imported sugar, so it buys all its imported sugar from the lowest-cost producer.

Table 2: Trevania's market for sugar

Assume that the demand and domestic supply curves are straight lines.

Using Table 2, calculate the tariff revenue Trevania currently collects on imported sugar.

Using Table 2, calculate the change in consumer surplus in Trevania's sugar market if Trevania joins the RHCU.

If Trevania joins the RHCU, producer surplus of its sugar producers would fall by US$2.88 million. Using your answers to (a)(iii) and (a)(iv), calculate the net change in Trevania's economic welfare in the sugar market if it joins the RHCU.

Distinguish between trade creation and trade diversion.

The cement market

Trevania's two cement producers are protected by a 40 % tariff and have high costs. Cement from Lomwe, an RHCU member, would cost Trevanian buyers 30 % less than domestic cement if it entered tariff-free. Producers outside the RHCU would still face the 25 % CET and would be more expensive than Lomwe.

Using a tariff diagram and the information provided, explain how joining the RHCU would lead to trade creation in Trevania's cement market.

Further information

• If Trevania joins the RHCU, its tariff on imported tractors and irrigation equipment, almost all of which come from outside the RHCU, would rise from 5 % to the CET of 25 %.

• Trevania is negotiating a bilateral trade agreement with a large Asian economy that buys 30 % of its tea. As an RHCU member it could not sign this agreement on its own.

• Kambala produces 55 % of the RHCU's manufactured goods, and other members complain that new factories tend to locate there.

Using the information provided, explain two possible disadvantages, other than trade diversion, for Trevania of joining the RHCU.

Policy options under consideration in Trevania

• Join the RHCU as a full member. Exporters would gain tariff-free access to members, which buy 20 % of Trevania's exports, and FDI from firms serving the whole RHCU market is expected to rise. Tariff revenue (14 % of government revenue) would fall, and the government would lose control of its trade policy.

• Negotiate a free trade agreement with the RHCU instead of joining the customs union. Trevania would keep its own external tariffs and could sign the Asian agreement. Exporters would have to prove the origin of their goods; this paperwork is estimated to add 8 % to the cost of goods traded with the RHCU.

• Complete the bilateral agreement with the large Asian economy. It would remove the 15 % tariff on Trevania's tea and cut flowers, but Trevania would have to remove tariffs on most manufactured goods from that economy over ten years.

• Cut tariffs on imported capital goods to zero for all countries. This would lower costs for farmers and manufacturers but reduce tariff revenue by about 3 % of total government revenue.

• Invest in cross-border roads and one-stop border posts with RHCU neighbours. Delays at borders currently add about 20 % to the cost of moving goods to neighbouring capitals. The cost would be US$450 million over five years.

Using the information provided and your knowledge of economics, recommend a policy the government of Trevania could introduce to increase the gains it receives from international trade.