ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

Exam practice for Paper 2 and Paper 3

calculation questions

Introductory note
The questions in this section provide students with the opportunity to practice all calculations they need to
be able to perform in IB exams. They prepare students for calculations in Paper 2 at SL, and in Paper 2
and Paper 3 at HL. They are organised by chapter in which the particular calculation is introduced.
Each chapter is headed by the calculation learning outcomes as they appear in the syllabus, and specify
whether the calculation is required of all students, SL and HL, or HL only.
You will find that in some instances there are additional questions that place the calculation in a
broader context.
Each question is organised around a specific topic, allowing you to use the questions as practice exercises
for your students, as tests or as the basis for group or class study on how to go about solving every possible
required calculation.
You may note that these questions are complemented by the Quantitative Test your understanding
questions, for which you will find mark schemes in the Teacher’s resource.

1 The foundations of economics

There are no calculations in Chapter 1.
P ($) 8
7 S
2 Competitive markets: Demand6 and supply
5
Learning outcomes
4
HL only calculations 3
2 a diagram.
•• Calculate consumer and producer surplus from
1
D
Question 1 Consumer and producer surplus
0
in free competitive markets
1 2 3 4 5 6 7 8 9 Q
Figure 1 shows the strawberry market in a country called Fruitland. Kg

a Initial equilibrium b Changes in supply

P ($) 8 P ($) 8 S2
7 S 7 S1
6 6 S3
5 5
4 4
3 3
2 2
1 1
D D
0 Q 0 Q
1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9
Kg Kg

Figure 1: The strawberry market in Fruitland

P ($) 8 S2
7 S1
6 S3
5
4
3
2
1
D
1 0 Q
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1 2 3 4 5 6 7 8 9
Kg
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a Figure 1a shows the initial free market equilibrium price and quantity of strawberries, given by
the intersection of D with S. Calculate consumer surplus, producer surplus and social (community)
surplus at the initial equilibrium. [3 marks]
b Due to bad weather conditions affecting8 the strawberry crop, theS supply curve shifts from
S1 to S2 shown in Figure 1b. Calculate consumer
7 surplus, producer surplus and social (community)
surplus at the new equilibrium. 6 [3 marks]
c Due to a fall in costs of production, the supply curve shifts from S2 to S3 shown in Figure 1b.
5
Calculate consumer surplus, producer surplus
4 and social (community) surplus at the new equilibrium. [3 marks]
d Outline what happens to consumer surplus 3 as the equilibrium price and quantity of strawberries
vary along the demand curve. 2 [2 marks]
1
D
Figure 2 shows the blueberry market in Fruitland.
0 1 2 3 4 5 6 7 8 9

a Initial equilibrium b Changes in demand

9
8 S 8
7 7 S
6 6
5 5
4 4
3 3
2 2
1 1
D D3 D1 D2
0 0 1 2 3 4 5 6 7 8 9
1 2 3 4 5 6 7 8 9

Figure 2: The blueberry market in Fruitland

9
8e Figure 2a shows the initial free market equilibrium given by S and D. Calculate consumer surplus,
7 producer surplusS and social (community) surplus at the initial equilibrium. [3 marks]
6f Due to reports on the health benefits of blueberries, demand increases from D1 to D2 shown
5 in Figure 2b. Calculate consumer surplus, producer surplus and social (community) surplus
4 at the new equilibrium. [3 marks]
3g Blueberries are a normal good. Due to a fall in income, the demand for blueberries decreases
2 from D2 to D3 shown in Figure 2b. Calculate consumer surplus, producer surplus and
1 social (community) [3 marks]
D3 D1 surplus
D2 at the new equilibrium.
h0 1Outline
2 3 what
4 5 happens
6 7 8 to9 producer surplus as the equilibrium price and quantity of blueberries
vary along the supply curve. [2 marks]
i Outline the significance of maximum social surplus. [2 marks]

3 Elasticities
Learning outcomes
Core (SL and HL) calculations
•• Calculate PED, change in price, quantity demanded or total revenue from data.
•• Calculate YED, change in income, quantity demanded from data.
•• Calculate PES, change in price, quantity supplied from data.

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Question 2 Price elasticity of demand

a The price of meat increases by 10% and the quantity demanded of meat falls by 12%. Calculate
the price elasticity of demand for meat, and state if the demand for meat is price elastic or inelastic. [1 mark]
b The price of pizzas falls by 15% and the quantity of pizzas demanded increases by 14%. Calculate
the price elasticity of demand for pizzas, and state if the demand for pizzas is price elastic or inelastic.[1 mark]
The following is a demand schedule for good Z.

Price per unit ($) 3 6 9 12 15 18

Q demanded per week 14 12 10 8 6 4
Total revenue

c Calculate price elasticity of demand (PED) for an increase in price from $3 to $6. [2 marks]
d Calculate price elasticity of demand (PED) for an increase in price from $15 to $18. [2 marks]
e Using your results of parts c and d, explain what happens to PED along a straight-line
demand curve. [2 marks]
f Calculate the percentage change in price that will result from an increase in quantity demanded
of 7% if PED = 1.5, noting if price increases or decreases. [2 marks]
g Calculate the percentage change in quantity demanded that will result from an increase in price of
10% if PED = 2, noting if quantity increases or decreases. [2 marks]
h Calculate total revenue that corresponds to each price and quantity combination. [2 marks]
i Using the concepts of price elastic and price inelastic demand and your calculations of PED in
parts a and b, explain what happens to total revenue as a result of the increase in price of good Z. [4 marks]
j State the numerical values of perfectly elastic and perfectly inelastic demand, and draw diagrams
to illustrate the difference between them. [4 marks]
k Explain what will happen to quantity demanded if price increases by 5% and PED = 0. [2 marks]
l Draw two demand curves on the same diagram and outline which is relatively more elastic and
which is relatively more inelastic. [4 marks]

Question 3 Income elasticity of demand

Your annual income increased from $16 000 to $20 000. Your spending on purchases of bread fell
by 5%, while your spending on purchases of food in general and eating out in restaurants increased
by 15% and 30% respectively. Answer parts c and d on the basis of this information.
a Identify the relevant elasticity of demand concept and use it to calculate this demand elasticity
for each of the three items. [7 marks]
b Using the elasticity values you have calculated, outline which item is likely to be an inferior good,
a necessity and a luxury good. [3 marks]
c Calculate the percentage change in quantity demanded of good Z that will result from an increase
in income of 14% if YED = 1.2, outlining (i) if quantity increases or decreases; (ii) what type of
good this is. [4 marks]
d Calculate the percentage change in income that can give rise to a decrease in quantity demanded
of 9% for good A if YED = 0.7, outlining (i) if income increases or decreases; (ii) what type of
good this is. [4 marks]

Question 4 Price elasticity of supply

It is found that when the price of good X increased by 5%, the quantity of X supplied increased by 2% after
one month and by 7% after one year. Answer parts a, b and c on the basis of this information.
a Calculate price elasticities of supply for the two time periods. [4 marks]
b Outline in which period supply was price elastic and in which it was price inelastic. [2 marks]

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c Outline two possible factors that might account for the different elasticity values. [2 marks]
d Explain what will happen to quantity supplied if price increases by 10% and PES = 0. [2 marks]
e State the numerical values of perfectly elastic and perfectly inelastic supply, and draw diagrams
to illustrate the difference between them. [4 marks]
f Draw two unitary elastic supply curves in the same diagram, showing the point where they meet. [2 marks]
g Draw a price elastic and a price inelastic supply curve, and outline how you distinguish
between them. [3 marks]

4 Government intervention in microeconomics

Learning outcomes
HL only calculations
•• Calculate effects on stakeholders and markets of:
•• price ceilings
•• price floors
•• indirect taxes
•• subsidies.

Question 5 Price ceilings

Figure 3 shows the free market equilibrium for good X, where price is in € and quantity is in thousand kg per day.

P( ) 7
6
5 S
4
3
2
1 D
0
1 2 3 4 5 6 7 8 9 101112 Q
thousand kg
per day
Figure 3: The market for good X

a The government imposes a price ceiling at P = €2 for good X. Draw the price ceiling in the diagram. [1 mark]
b Calculate the shortage (excess demand). [2 marks]
c Calculate the change in consumer expenditure that arises due to the price ceiling. [3 marks]
d Calculate the change in producer revenue that arises due to the price ceiling. [3 marks]
e Calculate the change in consumer surplus that arises due to the price ceiling. [3 marks]
f Calculate the change in producer surplus that arises due to the price ceiling. [3 marks]
g Calculate the welfare loss that arises due to the price ceiling. [2 marks]
h State one reason why government impose price ceilings. [1 mark]
i Identify two consequences for consumers arising from the imposition of the price ceiling. [2 marks]
j Outline the impact of a price ceiling on allocative efficiency. [2 marks]

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Question 6 Price floors

Figure 3 (as seen in Question 5) shows the free market equilibrium for good X, where price is in € and quantity is
thousand kg per day. Suppose the market for good X is an agricultural product market in which the government
imposes a price floor at P = €5, with government purchases of the excess supply.

P( ) 7
6
5 S
4
3
2
1 D
0
1 2 3 4 5 6 7 8 9 101112 Q
thousand kg
per day
Figure 3: The market for good X

a Draw the price floor in the diagram. [1 mark]

b Calculate the surplus (excess supply). [2 marks]
c Calculate the change in consumer expenditure that arises due to the price floor. [3 marks]
d Calculate the change in producer revenue that arises due to the price floor. [3 marks]
e Calculate government expenditure needed to purchase the surplus (excess supply) and maintain
the price floor. [2 marks]
f Calculate the welfare loss arising from the price floor. [2 marks]
g Calculate the change in consumer surplus that arises due to the price floor. [3 marks]
h Calculate the change in producer surplus that arises due to the price floor. [3 marks]
i State one reason why governments impose price floors. [1 mark]
j State one consequence of price floors for (i) consumers, (ii) producers, and (iii) the government. [3 marks]
Now suppose that the market above defines instead a labour market, where P denotes the hourly
wage in €, and D and S refer to demand and supply of labour in millions of unskilled workers.
The government imposes a minimum wage of €4.00 per hour.
k Draw a diagram illustrating the minimum wage in relation to the equilibrium wage and
quantity of labour. [2 marks]
l Calculate the number of unemployed workers, showing how many of these are due to the fall in
quantity of labour demanded and how many due to an increase in quantity of labour supplied. [3 marks]

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Question 7 Indirect taxes

Flatland has a market for good Kappa whose demand curve has a P intercept at P = $2.50 (the demand curve
begins at the point where P = 2.50) and the supply curve has a P intercept where P = $0.25 (the supply curve
begins where P = 0.25). Price is in $ and quantity is in units per day. The equilibrium price and quantity in this
market are P = $1.00 and Q = 6 units.
a Use the diagram below to draw the demand and supply curves for Kappa, indicating the
equilibrium price and quantity. [3 marks]

P ($) 2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0 Q
1 2 3 4 5 6 7 8 9
units
Figure 4: Indirect tax or subsidy

b Calculate social surplus in the market for Kappa before the imposition of the tax. [3 marks]
c The government of Flatland decides to impose an indirect tax of $0.75 per unit of Kappa.
Draw the new, post-tax supply curve in your diagram. [3 marks]
d Identify the new post-tax equilibrium price and quantity in the Kappa market. [2 marks]
e State the price paid by consumers, the price received by producers, and the quantity that is
bought and sold. [4 marks]
f Using your diagram, identify the areas that correspond to government revenue, after-tax
consumer surplus, after-tax producer surplus and welfare loss. [4 marks]
g Calculate government revenue that arises from the imposition of the tax. [1 mark]
h Calculate the change in consumer expenditure due to the imposition of the tax. [3 marks]
i Calculate the change in firm revenue due to the imposition of the tax. [3 marks]
j Calculate the change in consumer surplus due to the imposition of the tax. [2 marks]
k Calculate the change in producer surplus due to the imposition of the tax. [2 marks]
l Calculate the welfare loss that arises from the imposition of the tax. [2 marks]
m Explain the relationship between marginal benefits and marginal costs at the new post-tax
equilibrium, and describe the impact of the tax on allocative efficiency. [4 marks]
n Outline why social surplus (the sum of consumer surplus, producer surplus and government
revenue) after the imposition of the tax is less than social surplus before the imposition of the tax. [2 marks]

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Question 8 Subsidies
The government of Flatland decides it would like to encourage the production of Kappa, and so removes the
tax on Kappa (see question 7) and grants instead a subsidy of $0.75 per unit of Kappa. The initial, free market
equilibrium price and quantity were P = $1.00 and Q = 6 units, whereas the demand curve had a P intercept
at P = $2.50 (when Q = 0) and the supply curve had a P intercept where P = $0.25 (when Q = 0). The quantity
demanded and supplied are in units per day.
a Use the diagram below to draw the demand and supply curves showing the initial equilibrium. [3 marks]

P ($) 2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0 Q
1 2 3 4 5 6 7 8 9
units
Figure 4: Indirect tax or subsidy

b Draw the new post-subsidy supply curve in your diagram. [1 mark]

c Identify the new post-subsidy equilibrium price and quantity in the Kappa market. [2 marks]
d State the price paid by consumers, the price received by producers, and the quantity that is
bought and sold. [4 marks]
e Identify in your diagram the gain in consumer surplus and the gain in producer surplus that
results from the granting of the subsidy. [2 marks]
f Calculate the amount of government spending on the subsidy. [2 marks]
g Calculate the change in consumer expenditure due to the subsidy. [3 marks]
h Calculate the change in firm revenue due to the subsidy. [3 marks]
i Calculate the change in consumer surplus due to the subsidy. [3 marks]
j Calculate the change in producer surplus due to the subsidy. [3 marks]
k Calculate the welfare loss that arises from the subsidy. [2 marks]
l Outline why social welfare is reduced after the granting of the subsidy, even though consumer
and producer surplus have increased. [2 marks]
m Explain the relationship between marginal benefits and marginal costs at the new post-tax
equilibrium, and describe the impact of the subsidy on allocative efficiency. [4 marks]

5 Market failure and socially undesirable outcomes I: Common pool

resources and negative externalities
Learning outcomes
HL only calculations
•• Calculate welfare loss from a diagram.

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Question 9 Negative externalities

Consider Figure 5.

P ($) 7
6
5
4
3
2
1

0
1 2 3 4 5 6 7 Q
units
Figure 5: Negative externality

a Label the three curves, and state what kind of externality Figure 5 illustrates. [4 marks]
b Identify the welfare loss in the diagram. [1 mark]
c Calculate welfare loss. [2 marks]
d State whether the market overallocates or underallocates resources to the production of the good. [1 mark]

Consider Figure 6.

P ($) 7
6
5
4
3
2
1

0
1 2 3 4 5 6 7 8 Q
units
Figure 6: Negative externality

e Label the three curves, and state what kind of externality Figure 6 illustrates. [4 marks]
f Identify the welfare loss in the diagram. [1 mark]
g Calculate welfare loss. [2 marks]
h State whether the market overallocates or underallocates resources to the production of the good. [1 mark]

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6 Market failure and socially undesirable outcomes II: Positive externalities,

public goods, asymmetric information and inability to achieve equity
Learning outcomes
HL only calculations
•• Calculate welfare loss from a diagram.

Question 10 Positive externalities

Consider Figure 7.

P ($) 7
6
5
4
3
2
1

0
1 2 3 4 5 6 7 8 Q
units
Figure 7: Positive externality

a Label the three curves and state what kind of externality Figure 7 illustrates. [4 marks]
b Identify the welfare loss in the diagram. [1 mark]
c Calculate welfare loss. [2 marks]
d State whether the market overallocates or underallocates resources to the production of the good. [1 mark]

Consider Figure 8.

P ($) 8
7
6
5
4
3
2
1

0
1 2 3 4 5 6 Q
units
Figure 8: Positive externality

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e Label the three curves, and state what kind of externality Figure 8 illustrates. [4 marks]
f Identify the welfare loss in the diagram. [1 mark]
g Calculate welfare loss. [2 marks]
h State whether the market overallocates or underallocates resources to the production of the good. [1 mark]

7 Market failure and socially undesirable outcomes III: Market power (HL only)
Learning outcomes
HL only calculations.
•• Calculate the following from data:
•• MC
•• MR
•• AC
•• AR
•• profit.

Question 11 Revenues and costs

Consider the following data on output and total cost corresponding to each level of output.

Output (or total product) 0 1 2 3 4 5 6

(thousand units)
Total cost (TC) (thousand €) 10 50 60 65 75 95 140
Average cost (AC) (€) −
Marginal cost (MC) (€) −
Total revenue (TR) (thousand €)
Average revenue (AR) (€)
Profit = TR − TC
Marginal revenue (MR) (€) −

a Give the formula for AC and calculate it for each level of output. [4 marks]
b Give the formula for MC and calculate it for each level of output. [4 marks]
c Assuming that this firm has no influence over price and sells each unit of output at €20 per unit,
state the formula for TR and calculate TR for each level of output. [4 marks]
d Fill in the AR row. [1 mark]
e Using the total revenue and total cost approach, find the profit-maximising level of output.
(If there are two levels of output that give the same response, select the larger of the two.)  [2 marks]
f Calculate how much economic profit or loss will the firm earn. [2 marks]
g Give the formula for MR and calculate it for each level of output. [3 marks]
h Using the MC = MR rule, find the profit-maximising level of output, and check if your results
match with your answer for part e. [2 marks]
i Outline whether this firm could be a monopoly. [2 marks]

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Question 12 Profits, revenues and costs

Consider the following data.

Output (or total product) (units) 0 1 2 3 4 5

Price ($) – 30 25 20 15 10
Total cost (TC) ($) 5 25 40 50 65 85
Marginal cost (MC) ($) –
Total revenue (TR) ($) –
Average revenue (AR) ($) –
Marginal revenue (MR) ($) –

a For each level of output, calculate/state MC, TR, AR and MR. [8 marks]
b Calculate the amount of profit or loss earned by the profit-maximising firm, and state the
profit-maximising level of output, outlining how you arrived at your conclusion. [3 marks]
c State a level of output at which this firm earns negative profit (loss), and calculate this amount. [2 marks]
d State the relationship between average revenue and price. [1 mark]
e Outline whether this could be a perfectly competitive firm. [2 marks]
f State three alternative goals of firms (other than profit maximisation). [3 marks]

Question 13 Perfect competition

The following table provides output and cost data for a firm in perfect competition.

Units of output Total cost (TC) (£) Average cost (AC) (£) Marginal cost (MC) (£)
0 50
1 80
2 92
3 95
4 105
5 125
6 170

a Fill in the columns for AC and MC. [4 marks]

b Identify the price at which this firm will shut down in the long run, outlining the reason for
your choice. [2 marks]
c State the condition that is met when the firm earns normal profit. [1 mark]
d State the condition for allocative efficiency. [1 mark]
e Outline four assumed characteristics of perfect competition. [4 marks]
f Given a price of £10 per unit, find the level of output where this firm would maximise
profit or minimise loss, and calculate the amount of profit or loss that this firm would make. [4 marks]

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Question 14 Monopoly and imperfect competition

The following table shows price, quantity and cost data of a firm.

Price ($) Quantity Marginal cost Total revenue Marginal revenue Average
(units) (MC) ($) (TR) ($) (MR) ($) revenue (AR) ($)
6 1 5
5 2 3
4 3 2
3 4 3
2 5 5
1 6 7

a Calculate/state TR, MR and AR. [3 marks]

b Identify the market structure that cannot represent this firm, and outline your reasoning. [2 marks]
c (HL only) Outline how the price elasticity of demand changes along this demand curve
(no calculations necessary). [2 marks]
d Describe three assumed characteristics of a monopoly. [3 marks]
e Describe three assumed characteristics of monopolistic competition. [3 marks]
f If average costs of the firm at the profit-maximising level of output are $3, find the firm’s profit
or loss. [4 marks]

8 The level of overall economic activity

Learning outcomes
Core (SL and HL) calculations
•• Calculate (nominal) GDP from data using the expenditure approach.
•• Calculate (nominal) GNI from data.
•• Calculate real GDP and real GNI by use of a price deflator.
•• Calculate real GDP per capita and real GNI per capita.

11 Macroeconomic objectives II: Economic growth, sustainable

level of debt
Learning outcomes
Core (SL and HL) calculations
•• Calculate the rate of economic growth from data.
Note that Chapter 8 and Chapter 11 are grouped together because the calculations are logically linked.
Chapter 8 calculations involve GDP and GNI while Chapter 11 calculations involve growth in GDP and GNI.

Question 15 National income accounting and economic growth

The following are data from the national income accounts of the country of Lakeland for the year 2020
(in million Lkl, the national currency).

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Investment spending 300.7

Net income from abroad −147.4
Government spending 350.3
Income sent abroad 173.2
Exports of goods and services 95.3
Consumption spending 950.9
Income from abroad 25.8
Imports of goods and services 132.4

a Calculate Lakeland’s gross domestic product (GDP) in 2020. [2 marks]

b Calculate Lakeland’s gross national income (GNI) in 2020. [2 marks]
c Identify two factors that can account for the difference in Lakeland’s GDP and GNI. [2 marks]
d Lakeland’s population in 2020 was 1.2 million. Calculate Lakeland’s GDP per capita and
GNI per capita in 2020. [2 marks]
The following table shows data from Snowland’s national income accounts.

Year 2018 2019 2020

Real GDP (million Snl) 5000 5100 5151
Real GDP per capita (Snl) 2000 1980 1960

e Calculate the rate of growth in real GDP for 2019 and 2020. [2 marks]
f Calculate the rate of growth in real GDP per capita for 2019 and 2020. [2 marks]
g Explain how it is possible for real GDP to be increasing while real GDP per capita is falling. [2 marks]

Question 16 National income accounting and economic growth

The following data are from Flatland’s national accounts (in billion Ftl, the national currency).

Year 2017 2018 2019 2020

Nominal GDP (billion Ftl) 301.5 311.3 309.7 314.0
GDP deflator 100.0 104.2 102.7 103.9
Real GDP (billion Ftl)
Real GDP growth –

a Outline the difference between nominal GDP and real GDP. [2 marks]
b Calculate real GDP for 2017, 2018, 2019 and 2020. [4 marks]
c Calculate the rate of growth in real GDP for 2018, 2019 and 2020. (Chapter 11) [3 marks]
d For 2019, explain why the fall in nominal GDP was accompanied by an increase in real GDP. [2 marks]

9 Aggregate demand and aggregate supply

There are no calculations in Chapter 9.

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10 Macroeconomic objectives I: Low unemployment, low and stable rate

of inflation
Learning outcomes
Core (SL and HL) calculations
•• Calculate the unemployment rate from data.
•• Calculate the inflation rate from data where weights are quantities purchased.
HL only calculations
•• Calculate a weighted price index using data provided.

Question 17 Unemployment and inflation

The following labour statistics refer to Riverland in 2020.

Population Labour force Under-employed workers Part-time workers Full-time workers

4 500 200 2 500 000 150 000 200 000 1 900 000

a State the formula for calculating the unemployment rate and calculate Riverland’s
unemployment rate in 2020. [3 marks]
b In Lakeland, of the population in 2020 of 25.73 million, 47% were in the labour force,
and 2.3 million were without a job but actively looking for work. Calculate Lakeland’s
unemployment rate in 2020. [2 marks]
Consider the consumer price index below.

Year 2016 2017 2018 2109

CPI 103 100 115 127

c Calculate the rate of inflation or deflation in the periods 2016–2017, 2017– 2018 and 2018– 2019. [6 marks]
d Identify in which period there was (i) inflation, (ii) deflation or (iii) disinflation, outlining why. [6 marks]

Question 18 Inflation and the CPI (HL only)

Riverland’s basket of goods and services consumed by the average household in the course of a year includes
three items (X, Y and Z), as shown below.

Good or Quantity in Price per unit Price per unit Price per unit Price per unit
service basket (weight) (Rvl) 2017 (Rvl) 2018 (Rvl) 2019 (Rvl) 2020
X 3 5 5 6 5
Y 2 3 4 6 5
Z 7 6 7 7 7

a Calculate the value of the basket in 2017, 2018, 2019 and 2020. [8 marks]
b Using 2017 as the base year, construct a price index for the period 2017– 2020. [6 marks]
c Calculate the rate of inflation/deflation in Riverland in 2017–2018, 2018–2019 and 2019–2020. [3 marks]
d Distinguish between deflation and disinflation, and identify one year in which each occurred. [4 marks]

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12 Economics of inequality and poverty

Learning outcomes
HL only calculations
•• Construct a Lorenz curve from income quintile data.
•• Calculate the amount of indirect tax paid from an amount of expenditure, given the indirect tax rate.
•• Calculate total tax rates and average tax rates from data.

Question 19 Measure of inequality

The following table shows income shares of population quintiles in Riverland and Lakeland.

Lowest 20% 2nd 3rd 4th Highest 20%

20% 20% 20%
Lakeland 9% 14% 18% 23% 36%
Riverland 4% 7% 12% 19% 58%

a (HL only) Outline the meaning of ‘quintiles’ in the table. [2 marks]

b Analyse the data on income shares, and explain which of the two countries has a more
equal distribution of income. [4 marks]
c (HL only) Construct Lorenz curves for Lakeland and Riverland, and explain which of the
two countries has a more equal distribution of income. [6 marks]
d (HL only) Based on your curves for part c, explain which of the two countries, Lakeland or
Riverland, has a higher Gini coefficient, and what this means for its income distribution in
comparison with the other country. [4 marks]
e Outline the maximum and minimum values that can be taken by a Gini coefficient. [2 marks]
f Draw a diagram showing an initial Lorenz curve, and a possible Lorenz curve that would
result if the government of the country placed increased emphasis on indirect taxes and
lower emphasis on direct taxes as sources of government revenue. [2 marks]
g Outline whether income distribution is likely to become more or less equal following the
change in the government tax policies described in part f. [4 marks]

Question 20 Taxation (HL only)

The following table provides information on income tax rates in Mountainland (in Mnl, the national currency).

Annual income (Mnl) Marginal tax rate (%)

0–7,000 0
7001–20 000 10
20 001–45 000 25
45 001–100 000 35
100 001 or more 45

a Distinguish between marginal and average tax rates. [2 marks]

b Calculate the amount of income tax paid by families with an annual income of (i) 10 000 Mnl,
(ii) 35 000 Mnl and (iii) 107 000 Mnl. [6 marks]
c For each of the family incomes in part b, calculate the corresponding average tax rate,
and state the corresponding marginal tax rate. [6 marks]

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d The family with an annual income of 35 000 Mnl spends 25 000 Mnl on goods and services,
which includes spending on indirect taxes at a rate of 15%.
i Calculate the amount of indirect tax paid.
ii Calculate spending on indirect taxes as a percentage of annual income.
iii Calculate this family’s total average tax rate, including direct and indirect taxes. [6 marks]
e Explain whether a constant indirect tax rate applied uniformly on all spending is progressive,
proportional or regressive. [2 marks]

13 Demand-side and supply-side policies

Learning outcomes
Core (SL and HL) calculations
•• Calculate real interest rates from data.
HL only calculations
•• Calculate the Keynesian multiplier.
•• Calculate the effect on GDP of a change in an injection (investment, government spending
or exports) using the multiplier.

Question 21 The Keynesian multiplier (HL only)

a Explain verbally (i.e. not using formulae) how the Keynesian multiplier leads to changes in
real GDP. [4 marks]
b Outline why knowledge of the multiplier could be important to policy-makers. [4 marks]
c Outline the meaning of a marginal propensity to consume (MPC) of 0.75. [4 marks]
d If the MPC in an economy is 0.75, calculate the expected change in real GDP, given an
increase in investment spending of £200 million. [3 marks]
e Outline the meaning of the marginal propensity to save (MPS), marginal propensity to tax (MPT )
and the marginal propensity to import (MPM). [3 marks]
f State the relationship between the MPC and the MPS, MPT and MPM. [1 mark]
g Suppose Riverland has a real GDP of 470 million Rvl. If in Riverland, the MPS + MPT +
1
MPM = , calculate the new level of real GDP following a decrease in exports of 5 million Rvl. [2 marks]
4
h Riverland would like to increase its real GDP by 40 million Rvl and decides to do so through
an increase in government spending. Using the information in part g, calculate the amount
by which government spending should increase. [2 marks]

Question 22 Real versus nominal interest rates

a Suppose the nominal rate of interest is 7% and the rate of inflation is 3%. Calculate the real
rate of interest. [2 marks]
b Suppose you have savings of $1000, which you deposit in the bank at a nominal rate of interest
of 5%. The rate of inflation in your country is 2%. Calculate the value of your savings after
one year (i) in nominal terms, and (ii) in real terms. [2 marks]
c If the rate of inflation is 5% and the nominal rate of interest is 3%, outline what will happen
to the real value of your savings? [2 marks]

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14 International trade: Part I

Learning outcomes
HL only calculations
Calculate from international trade diagrams:
•• quantity of exports
•• export revenue
•• quantity of imports
•• import expenditure.
Calculate opportunity costs from data to identify comparative advantage.
Calculate from a diagram effects on stakeholders of:
•• tariffs
•• quotas
•• production subsidies
•• export subsidies.

Question 23 International trade: Importing versus exporting countries

The market for apples in Fruitland is shown in Figure 9. Answer the following questions.

P ($) 7
6
5 S
4
3
2
D
1

0
1 2 3 4 5 6 7 8 9 10 11 Q
thousand
tonnes
Figure 9: The apple market in Fruitland

a State the equilibrium price and quantity of apples in the domestic fruit market under conditions
of no trade.  [2 marks]
The government of Fruitland decides to open the apple market to international trade.
The world price of apples is $2.00 per kg. On the basis of this information, answer parts b–d
b State whether Fruitland will become an importer or exporter of apples, and outline why. [3 marks]
c Calculate the quantity of Fruitland’s exports or imports of apples. [2 marks]
d Calculate Fruitland’s export revenues or import expenditures resulting from trade in apples. [2 marks]

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P ($) 7
6
5
S
4
3
2
1 D

0
1 2 3 4 5 6 7 8 Q
thousand
tonnes
Figure 10: The kiwi market in Fruitland

The market for kiwis in Fruitland is shown in Figure 10. Answer the following questions.
e State the equilibrium price and quantity of kiwis in the domestic fruit market under conditions
of no trade. [2 marks]
The government of Fruitland decides to open the kiwi market to international trade. The world
price of kiwis is $4.00 per kg. On the basis of this information answer parts f–h.
f State whether Fruitland will become an importer or exporter of kiwis and outline why. [3 marks]
g Calculate the quantity of Fruitland’s exports or imports of kiwis. [2 marks]
h Calculate Fruitland’s export revenues or import expenditures resulting from trade in kiwis. [2 marks]

Question 24 Absolute and comparative advantage (HL only)

Suppose a simple world economy consists of two countries, Oceanland and Grassland, each of which
produces two goods, seafood and dairy products. Oceanland has an absolute advantage in the production
of both seafood and dairy products, while Grassland has a comparative advantage in the production of
dairy products.
a Draw a diagram showing the absolute and comparative advantages of each country. [3 marks]
b Referring to the theory of comparative advantage, state which products each country should
export and import. [3 marks]
The following data show the quantity of output that can be produced by country X and country Y
if all their resources are used to produce either good A or good B.
Production possibilities of country X and country Y.

Good A (units per day) Good B (units per day)

Country X 40 20
Country Y 50 100

c Calculate the opportunity cost of good A and good B in country X, and the opportunity cost of
good A and good B in country Y. [4 marks]
d State which country has a comparative advantage in good A, which in good B, and which
has an absolute advantage in both goods. [3 marks]
e Using the data in the table, draw a diagram illustrating the comparative advantage of each country. [4 marks]
f Referring to Figure 11, outline whether either country can benefit from specialisation and trade. [2 marks]

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good y
Country A

Country B

good x
Figure 11: Parallel PPCs

Question 25 Tariffs
Riverland had a tariff of 5 Rvl per kg of seafood. Domestic production of seafood with the tariff was 70 000 kg
per week, domestic consumption was 150 000 kg per week, and the price was 25 Rvl per kg. Because of World
Trade Organization (WTO) rules, the government of Riverland was forced to eliminate the seafood tariff. As a
result, domestic production fell to 50 000 kg per week and consumption increased to 180 000 kg per week.
a Calculate the price of seafood paid by consumers and the price received by producers in
Riverland after the tariff was removed. [2 marks]
b Using Figure 12, fill in the information given above and your answer to part a on price with and
without the tariff, domestic production with and without the tariff, and domestic consumption
with and without the tariff. [6 marks]

P (Rvl) 50
S
40

30

20
D
10

0 Q
thousand kg
per week
Figure 12: Tariff

c Calculate the quantity of seafood imports in Riverland with the tariff and the quantity of imports
after the tariff was eliminated. [4 marks]
d Calculate the change in import expenditure. [3 marks]
e Calculate the change in consumer expenditure on seafood in Riverland due to the removal of
the tariff. [3 marks]
f Calculate the change in domestic producer revenue from seafood in Riverland due to the removal
of the tariff. [3 marks]
g Calculate the change in the government budget in Riverland due to the removal of the tariff. [1 mark]
h Calculate the change in foreign producers’ export revenue from seafood exports to Riverland. [3 marks]
i Calculate the change in consumer surplus due to the removal of the tariff. [2 marks]

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j Calculate the change in producer surplus due to the removal of the tariff. [2 marks]
k Calculate the amount of welfare that was gained by Riverland when the tariff was eliminated
(i.e. welfare loss that was regained). [2 marks]
l State two stakeholders who gained from the removal of the tariff and outline why. [4 marks]
m State two stakeholders who lost from the removal of the tariff and outline why. [4 marks]
n (HL only) Given the information above about Riverland, explain who has a comparative or
absolute advantage in seafood production, Riverland or its trading partners. [4 marks]

Question 26 Quotas
Flatland had an import quota of 150 000 kg of dairy products per week, because it wanted to protect its dairy
industry. As a result of the quota, domestic producers were selling 350 000 kg of dairy products per week, at
a price of 20 Ftl (the domestic currency) per kg. Due to complaints by its World Trade Organization (WTO)
trading partners, Flatland was forced to eliminate the dairy quota. The elimination of the quota caused the price
of dairy products to fall to 15 Ftl per kg, domestic production dropped to 250 000 kg per week and imports
increased to 400 000 kg per week.

36.7
35 Sdomestic
30 S
with
25
quota
20
15 Sw
D
10
5
2.5
0 Q
thousand kg
Figure 13: Quota

a Using Figure 13, fill in the information given above on the quota, quantities produced with
and without the quota, quantity of imports without the quota. Note the figures on the diagram. [4 marks]
b State the price of dairy products with the quota and without the quota. [2 marks]
c Calculate the amount by which imports increased following the removal of the quota. [2 marks]
d Calculate the quantity of domestic consumption of dairy products before the removal of the
quota and after the removal of the quota. [4 marks]
e Calculate the change in consumer expenditure on dairy products in Flatland due to the removal
of the quota. [3 marks]
f Calculate the change in domestic producer revenue from dairy products in Flatland due to the
removal of the quota. [3 marks]
g Calculate the change in foreign producers’ export revenue from dairy exports to Flatland. [3 marks]
h Calculate the amount of quota revenue that was generated when the quota was in place. [1 mark]
i State two stakeholders who gained from the removal of the quota and outline why. [4 marks]
j State one stakeholder who lost from the removal of the quota and outline why. [2 marks]
k Outline one important difference between imposing a tariff and imposing an import quota. [2 marks]
l Referring to Figure 13, calculate the change in consumer surplus due to the removal of the quota. [2 marks]
m Referring to Figure 13 and using your answers to part d above, calculate the change in producer
surplus due to the removal of the quota. [2 marks]

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n Calculate the amount of welfare that was gained by Flatland when the quota was eliminated
(i.e. welfare loss that was regained). [2 marks]
o State two economic benefits for the Flatlander or global economy (other than impacts on
stakeholders) that might arise from the removal of the import quota. [2 marks]

Question 27 Production subsidies

Grassland used to grant a production subsidy on cereals of 5 Gsl (the local currency) per kg. Due to the subsidy,
domestic production was 150 000 kg per week, and imports amounted to 75 000 kg per week. The price paid
by consumers was 25 Gsl per kg. A number of Grassland’s trading partners complained that Grassland was
dumping its cereals in the international market, and threatened to impose anti-dumping tariffs. Grassland
therefore removed its subsidy on cereals. Following the removal of the subsidy, domestic cereal production fell to
80 000 kg per week.
a Using the information in the question and in Figure 14, calculate/state:
i the price received by producers when they were receiving the production subsidy and after
the removal of the subsidy. [2 marks]
ii the price paid by consumers after removal of the subsidy. [1 mark]

P (Gsl) 70

60

50

40
S
S with
30 subsidy
Sw
20
19.3 D
10

0
50 100 150 200 250 Q
thousand kg
per week
Figure 14: Production subsidy

b Calculate/state the total amount of cereals consumed per week in Grassland before the removal
of the production subsidy and after the removal of the subsidy. [2 marks]
c Calculate the quantity of imports per week after the removal of the production subsidy. [1 mark]
d Calculate the change in import expenditures due to the removal of the production subsidy. [3 marks]
e Calculate consumer expenditure on cereals, outlining if the production subsidy makes
any difference. [2 marks]
f Calculate the change in producer revenue from sales of cereals due to the removal of the
production subsidy. [3 marks]
g Calculate the change in the government’s budget due to the removal of the production subsidy. [2 marks]
h Calculate the change in foreign producers’ export revenue from cereal exports to Grassland after
removal of the production subsidy. [3 marks]
i Calculate consumer surplus outlining if the production subsidy makes any difference. [3 marks]

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j Calculate the change in producer surplus due to the removal of the production subsidy. [2 marks]
k Calculate the amount of welfare that was gained by Grassland when the production subsidy
was eliminated (i.e. welfare loss that was regained). [2 marks]
l State two stakeholders who gained from the removal of the production subsidy. [2 marks]
m State one stakeholder who lost from the removal of the production subsidy and outline why. [2 marks]
n State one stakeholder who was unaffected by the removal of the production subsidy and
outline why. [2 marks]

Question 28 Export subsidies

Coffenia used to grant an export subsidy on its exports of coffee of $0.50 per kg, until the conclusion of an
international agreement under the leadership of the World Trade Organization to eliminate export subsidies.
As a result, Coffenia was forced to abandon this trade policy, and coffee began to be exported at the world price
of $2 per kg. Domestic production and consumption of coffee with the subsidy were 40 and 10 thousand kg
per week, respectively. When the subsidy was removed domestic production and consumption were 30 and 20
thousand kg per week, respectively.
Use the information above and in Figure 15 to answer the questions that follow.

$
S
3
Pw
with subsidy
2 Pw

1
D
0.5

0
10 20 30 40 50 60 Q
thousand kg
per week
Figure 15: Export subsidy

a Calculate the price of coffee received by Coffenia’s producers and paid by consumers before the
subsidy was eliminated. [2 marks]
b State the price of coffee received by producers and the price paid by consumers after the subsidy
was eliminated. [2 marks]
c State the price of coffee received by exporters of coffee to Coffenia before the subsidy was eliminated.[1 mark]
d Calculate the change in the quantity of coffee exports due to the removal of the subsidy. [3 marks]
e Calculate the change in export revenues from coffee due to the removal of the subsidy.  [3 marks]
f Calculate the change in consumer expenditure. [3 marks]
g Calculate the change in producer revenue. [3 marks]
h Calculate the change in consumer surplus. [3 marks]
i Calculate the change in producer surplus. [3 marks]
j Calculate the amount of welfare that was gained by Coffenia when the export subsidy was
eliminated (i.e. welfare loss that was regained). [2 marks]
k Calculate the change in the government’s budget. [2 marks]
l Identify two stakeholders who gained from the removal of the export subsidy and outline why. [4 marks]
m Identify one stakeholder who was hurt by the removal of the production subsidy and outline why. [2 marks]

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15 International trade: Part II

There are no calculations in Chapter 15.

16 Exchange rates and the balance of payments

Learning outcomes
Core (SL and HL) calculations
•• Calculate the price of a good in different currencies using exchange rates.
•• Calculate changes in the value of a currency from data.
•• Calculate elements of the balance of payments from data.

Question 29 Exchange rates

Suppose a traveller from Riverland, whose currency is the Rvl, would like to visit Mountainland, whose
currency is the Mnl. The two currencies initially exchange at the rate of 1 Mnl = 2.5 Rvl.
a Find the value of 1 Rvl in terms of Mnl. [2 marks]
b The traveller from Riverland would like to bring 1500 Rvl with her to Mountainland converted
into Mnl. How many Mnl will she receive when she exchanges 1500 Rvl? [2 marks]
c While in Mountainland, the traveller from Riverland runs out of Mnl but wants to buy some
presents for her friends that cost 175 Mnl. Given the exchange rate above, how many Rvl must
she exchange in order to make these purchases in Mnl? [2 marks]
d While exchanging Rvl for Mnl, the traveller discovers that the exchange rate has changed,
and now stands at 1 Mnl = 2.7 Rvl. How many Rvl must she exchange to get 175 Mnl at the
new exchange rate? [2 marks]
e Distinguish between currency appreciation and depreciation, and state which currency
appreciated and which depreciated. [4 marks]
f Calculate the percentage appreciation of the appreciating currency. [2 marks]
g Identify three valid causes that may have led to the exchange rate change between the Mnl
and the Rvl. [6 marks]

Question 30 Balance of payments

The table below shows the balance of payments accounts of Oceanland for the year 2010 (all figures in billion
Ocl, the national currency).

Billion Ocl
Current account
Exports of goods +25
Imports of goods
Balance of trade in goods −11
Exports of services +3
Imports of services
Balance of trade in services +1
Balance of trade in goods and services
Income +3
Current transfers +2
Balance on current account

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Billion Ocl
Capital account
Capital transfers
Transactions in non-produced, non-financial assets +1
Balance on capital account −3
Financial account
Direct investment +6
Portfolio investment −2
Reserve assets +4
Balance on financial account
Balance

a Outline the role of the balance of payments. [2 marks]

b Fill in the blanks in the table above. [7 marks]
c State which of the three accounts are in deficit or surplus. [3 marks]
d Explain the role of reserve assets of +4 billion Ocl in the financial account. [4 marks]

Parts e–g are HL only

e The government and/or central bank decide to allow the Ocl to depreciate in order to correct the
problem in the current account. It is estimated that over the short term (less than 6 months),
on average the price elasticity of demand for exports is 0.49 and the price elasticity of demand
for imports is 0.39. Explain the likely effect of the depreciation of the Ocl on Oceanland’s current
account during this period. [4 marks]
f It is also estimated that 6 months or more following the depreciation, on average the price elasticity
of demand for exports is 0.75 and the price elasticity of demand for imports is 0.83. Explain the
likely effect of the depreciation of the Ocl on Oceanland’s current account during this later period. [2 marks]
g Explain the J-curve effect as it relates to the likely changes in Oceanland’s current account,
resulting from the depreciation of the Ocl. [4 marks]

Chapters 17–20
There are no calculations in these chapters.

24 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021