The global economy practice questions (IB Economics)

Sample questions

All 2 free IB Economics questions on this unit, from the free IB Economics Paper 1 Practice Exam and the free IB Economics Paper 2 Practice Questions (Data Response) with Answers. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 125 marks · International trade, tariffs, protectionism, welfare analysis
   Question 3 — The global economy: tariffs and protectionism.
   (a)

   Explain, using a diagram, the effects of a tariff on the domestic market for an imported good.

   [10]
   (b)

   Using real-world examples, evaluate the arguments for and against a government adopting protectionist policies.

   [15]
   Show answerFrom the free IB Economics Paper 1 Practice Exam →
2. Question 229 marks · Exchange rates, current account, Marshall-Lerner & J-curve (macro / global)
   Study the following extract and answer the questions that follow. — "Tavoria's currency slide." Over the past twelve months Tavoria's currency, the tavo, has fallen from 5.00 to 6.25 tavos per US dollar. The slide began when world copper prices fell by 30 percent, cutting the earnings of Tavoria's largest export industry, and accelerated when the US central bank raised interest rates and short-term capital left Tavoria for dollar assets. Tavoria's central bank spent 4 billion dollars of its foreign reserves trying to hold the tavo up before abandoning the defence. Tavoria runs a current account deficit of 6 percent of GDP and imports all of its fuel and most of its machinery. Garment exporters report that foreign orders are up 12 percent since the depreciation, but fuel prices have risen by 25 percent in tavos and consumer price inflation has reached 9 percent. The finance ministry estimates the price elasticity of demand for Tavoria's exports at 0.6 and for its imports at 0.3 in the first year, rising to 0.9 and 0.5 after three years. Opposition politicians are calling for tariffs on imported consumer goods.
   (a)

   Define the following terms from the text: (i) depreciation (of a currency) [2]; (ii) current account deficit [2].

   [4]
   (b)

   Using an exchange rate diagram, explain how the rise in US interest rates has affected the value of the tavo.

   [4]
   (c)

   Using information from the text, calculate the change in the price, in tavos, of an imported machine costing 40 000 US dollars as a result of the depreciation.

   [2]
   (d)

   Using the elasticity estimates in the text, explain why the depreciation is likely to worsen Tavoria's current account in the first year before improving it.

   [4]
   (e)

   Using information from the text and your knowledge of economics, evaluate the view that the depreciation of the tavo will benefit the Tavorian economy.

   [15]
   Show answerFrom the free IB Economics Paper 2 Practice Questions (Data Response) with Answers →

Key terms

The definitions and formulas IB Economics expects for the global economy, typeset as they appear on the paper.

Comparative advantage

A country has a comparative advantage in a good it can produce at a lower opportunity cost than its trading partner. Specialising along those lines and trading lets both countries consume beyond their own PPCs.

Tariff

A tax on imports. It raises the domestic price, so domestic producers gain surplus and the government gains revenue, while consumers lose more than those gains combined: the two welfare-loss triangles on the tariff diagram.

Exchange rate

The price of one currency in terms of another. Under a floating system it is set by demand for and supply of the currency; a fall is a depreciation (devaluation under a fixed system) and makes exports cheaper abroad and imports dearer at home.

Current account

The part of the balance of payments recording trade in goods, trade in services, primary income (investment income) and secondary income (transfers). A current account deficit is matched by a surplus on the financial account.

Marshall-Lerner condition and the J-curve (HL)

A depreciation improves the current account only if the price elasticities of demand for exports and imports sum to more than one. Because elasticities are low in the short run, the balance often worsens before it improves, tracing a J shape.

$$|PED_X| + |PED_M| > 1$$

Human Development Index (HDI)

A composite measure of development combining life expectancy, years of schooling and GNI per capita at purchasing power parity. It shows that growth and development are not the same thing.

Terms of trade (HL)

The ratio of an index of export prices to an index of import prices. An improvement means each unit of exports buys more imports; for commodity exporters it can swing sharply with world prices.

$$\text{terms of trade} = \frac{\text{index of export prices}}{\text{index of import prices}} \times 100$$

Frequently asked questions

Other IB Economics topics

• Introduction to economics
• Microeconomics
• Macroeconomics

All IB Economics topics · IB Economics exam guide · All free practice exams