Practice 1. Introduction to Economics with authentic IB Economics exam questions for both SL and HL students. This question bank mirrors Paper 1, 2, 3 structure, covering key topics like microeconomics, macroeconomics, and international trade. Get instant solutions, detailed explanations, and build exam confidence with questions in the style of IB examiners.
Azerbaijan, situated at the crossroads of Eastern Europe and Western Asia, has experienced significant economic reforms over the past decade. Historically reliant on hydrocarbons-mainly oil and natural gas—for export revenues, the country has sought to diversify its production base through agriculture, tourism, and technology sectors. In 2019, oil and gas accounted for about 85% of Azerbaijan's total exports, providing substantial government revenue but leaving the country vulnerable to global commodity price fluctuations.
In recent years, policymakers have introduced multiple initiatives to modernize infrastructure and reduce dependence on hydrocarbons. Between 2019 and 2022, the government invested over US$3 billion in roads, railways, and energy transmission lines, aiming to expand the country's capacity to produce and transport goods. According to the State Statistical Committee, Azerbaijan's real GDP grew by 2.2% in 2020 and rebounded to 4.6% in 2022, partly due to a recovery in global oil prices. However, structural unemployment persists, especially in rural areas, where older agricultural practices lag behind modern production techniques.
Inflation, driven by rising global commodity costs, reached 8.4% in 2022, up from 2.6% in 2019. The Central Bank of Azerbaijan responded with conservative monetary policies that have stabilized the exchange rate of the Azerbaijani manat. Meanwhile, the government introduced tariffs on certain imported agricultural goods in 2021, aiming to protect local farmers from competition and stimulate domestic production. Critics argue that these tariffs lead to higher prices for consumers, while supporters believe they create incentives for farmers to modernize and invest in capital-intensive farming techniques.
Foreign direct investment (FDI) centered on the energy sector remains strong, although officials are eager to attract in manufacturing and services. Improvements in transport connectivity-facilitated by ongoing infrastructure projects-have encouraged discussions about further liberalizing trade regulations to boost exports of textiles, food products, and tech services. Yet logistical barriers at border checkpoints persist, contributing to delays and raising costs for exporters looking to access regional markets.
Socially, Azerbaijan has implemented targeted measures to address income inequality, including subsidies for utilities and food staples. Observers note that the impact of these subsidies can be uneven; while they help low-income households cope with rising prices, they can also create fiscal pressure if oil revenues decline. The government has recently introduced pilot programs that tie subsidies to specific income thresholds, with the objective of reducing misuse of public funds.
Despite ambitious diversification plans, the oil sector continues to dominate. Economic analysts warn that reliance on hydrocarbons could impede sustainable growth, especially if global oil prices weaken or external demand slows. As part of its long-term development strategy, the government is promoting investment in green energy, incentivizing solar and wind power projects in the hope of creating new export opportunities for electricity.
Nonetheless, concerns about structural unemployment remain. Skill mismatches persist between job seekers and the needs of modern industries, particularly in the technology sector. Rural-urban migration has become more common, pressuring housing and public services in Baku, while leaving some villages with labor shortages. Recognizing these challenges, the Ministry of Education has partnered with private companies to revamp vocational education programs, aiming to align training with rapidly evolving market demands.
Table 1: Selected Macroeconomic Indicators for Azerbaijan (2019-2022)
| Indicator | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Nominal GDP (US$ billion) | 47.0 | 42.5 | 45.8 | 52.0 | |
| Real GDP Growth Rate (%) | 2.2 | 2.2 | 3.4 | 4.6 | |
| Inflation Rate (%) | 2.6 | 3.0 | 4.5 | 8.4 | |
| Unemployment Rate (%) | 5.3 | 6.5 | 6.2 | 5.9 | |
| Exchange Rate (AZN per US$) | 1.70 | 1.70 | 1.70 | 1.69 | |
| Govt. Capital Spending (US$ billion) | 0.9 | 1.4 | 2.2 | 2.4 |
Table 2: Trade and Social Indicators
| Indicator | 2019 | 2021 | 2022 |
|---|---|---|---|
| Oil/Gas Exports as % of Total Exports | 85% | 85% | |
| Agricultural Tariff Rate (selected products) | 0% | 10% | |
| Gini Coefficient | 0.33 | 0.34 | 0.35 |
| Avg. Monthly Household Subsidy (utilities & food) | US$40 | US$45 | |
| FDI Inflows (US$ billion) | 4.2 | 3.7 | 4.0 |
Define the term tariffs indicated in the text (paragraph 3).
Define the term structural unemployment indicated in the text (paragraph 2).
Azerbaijan, situated at the crossroads of Eastern Europe and Western Asia, has experienced significant economic reforms over the past decade. Historically reliant on hydrocarbons-mainly oil and natural gas—for export revenues, the country has sought to diversify its production base through agriculture, tourism, and technology sectors. In 2019, oil and gas accounted for about 85% of Azerbaijan's total exports, providing substantial government revenue but leaving the country vulnerable to global commodity price fluctuations.
In recent years, policymakers have introduced multiple initiatives to modernize infrastructure and reduce dependence on hydrocarbons. Between 2019 and 2022, the government invested over US$3 billion in roads, railways, and energy transmission lines, aiming to expand the country's capacity to produce and transport goods. According to the State Statistical Committee, Azerbaijan's real GDP grew by 2.2% in 2020 and rebounded to 4.6% in 2022, partly due to a recovery in global oil prices. However, structural unemployment persists, especially in rural areas, where older agricultural practices lag behind modern production techniques.
Inflation, driven by rising global commodity costs, reached 8.4% in 2022, up from 2.6% in 2019. The Central Bank of Azerbaijan responded with conservative monetary policies that have stabilized the exchange rate of the Azerbaijani manat. Meanwhile, the government introduced tariffs on certain imported agricultural goods in 2021, aiming to protect local farmers from competition and stimulate domestic production. Critics argue that these tariffs lead to higher prices for consumers, while supporters believe they create incentives for farmers to modernize and invest in capital-intensive farming techniques.
Foreign direct investment (FDI) centered on the energy sector remains strong, although officials are eager to attract in manufacturing and services. Improvements in transport connectivity-facilitated by ongoing infrastructure projects-have encouraged discussions about further liberalizing trade regulations to boost exports of textiles, food products, and tech services. Yet logistical barriers at border checkpoints persist, contributing to delays and raising costs for exporters looking to access regional markets.
Socially, Azerbaijan has implemented targeted measures to address income inequality, including subsidies for utilities and food staples. Observers note that the impact of these subsidies can be uneven; while they help low-income households cope with rising prices, they can also create fiscal pressure if oil revenues decline. The government has recently introduced pilot programs that tie subsidies to specific income thresholds, with the objective of reducing misuse of public funds.
Despite ambitious diversification plans, the oil sector continues to dominate. Economic analysts warn that reliance on hydrocarbons could impede sustainable growth, especially if global oil prices weaken or external demand slows. As part of its long-term development strategy, the government is promoting investment in green energy, incentivizing solar and wind power projects in the hope of creating new export opportunities for electricity.
Nonetheless, concerns about structural unemployment remain. Skill mismatches persist between job seekers and the needs of modern industries, particularly in the technology sector. Rural-urban migration has become more common, pressuring housing and public services in Baku, while leaving some villages with labor shortages. Recognizing these challenges, the Ministry of Education has partnered with private companies to revamp vocational education programs, aiming to align training with rapidly evolving market demands.
Table 1: Selected Macroeconomic Indicators for Azerbaijan (2019-2022)
| Indicator | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Nominal GDP (US$ billion) | 47.0 | 42.5 | 45.8 | 52.0 | |
| Real GDP Growth Rate (%) | 2.2 | 2.2 | 3.4 | 4.6 | |
| Inflation Rate (%) | 2.6 | 3.0 | 4.5 | 8.4 | |
| Unemployment Rate (%) | 5.3 | 6.5 | 6.2 | 5.9 | |
| Exchange Rate (AZN per US$) | 1.70 | 1.70 | 1.70 | 1.69 | |
| Govt. Capital Spending (US$ billion) | 0.9 | 1.4 | 2.2 | 2.4 |
Table 2: Trade and Social Indicators
| Indicator | 2019 | 2021 | 2022 |
|---|---|---|---|
| Oil/Gas Exports as % of Total Exports | 85% | 85% | |
| Agricultural Tariff Rate (selected products) | 0% | 10% | |
| Gini Coefficient | 0.33 | 0.34 | 0.35 |
| Avg. Monthly Household Subsidy (utilities & food) | US$40 | US$45 | |
| FDI Inflows (US$ billion) | 4.2 | 3.7 | 4.0 |
Define the term tariffs indicated in the text (paragraph 3).
Define the term structural unemployment indicated in the text (paragraph 2).
Explain the difference between actual growth in production possibilities.
Explain the three basic economic questions (what/how much to produce, how to produce and for whom to produce?).
Explain the meaning of laissez-faire as proposed by Adam Smith.
Explain how choice arises from scarcity.
Explain the different factors of production used in producing goods and services.
The Maldives, an archipelagic nation in the Indian Ocean, has long been renowned for its pristine beaches and vibrant marine life. Tourism remains the main pillar of the Maldivian economy, contributing more than one-third of its gross domestic product (GDP) and employing a significant portion of the workforce. Real GDP growth averaged 4% between 2018 and 2019, but declined to 1.6% in 2020 due to global economic disruptions. In 2021, it rebounded to 3.5%, supported by a surge in tourist arrivals and partial recovery in global travel demand. However, economic volatility continues to pose challenges, especially as the country relies heavily on imports for food and fuel.
Alongside tourism, the fisheries sector is economically and culturally significant. The government enforces a price floor on tuna purchases from local fishermen to ensure they receive a fair income. While this policy helps sustain small-scale fishers, it can create surplus fish if international demand weakens. In recent years, fish exports to Asia and Europe accounted for nearly 12% of total export earnings in 2021.
Inflation in the Maldives has been modest, averaging around 3% over the past few years. Yet, persistent unemployment in some atolls remains a problem, particularly among young people not employed in tourism or fishing. To address income disparities and develop remote islands, the government subsidizes electricity for households located far from the main grid. These subsidies aim to reduce the social cost of living in isolated regions, but they also place pressure on the public budget, which has recorded deficits above 7% of GDP since 2019.
Foreign direct investment (FDI) plays an important role in funding large-scale resort developments. However, the proportion of FDI directed toward sectors beyond tourism such as manufacturing or technology remains limited. To encourage economic diversification, authorities have started offering tax incentives for investors in renewable energy projects, hoping to reduce heavy reliance on diesel-fueled power generation.
The Maldives is highly vulnerable to climate change and rising sea levels, which threaten its tourism infrastructure and coastal communities. Large infrastructure programs are underway to shore up coastal defenses, particularly around the capital, Malé. Supporters of these projects argue they are crucial for long-term survival, while critics highlight the growing external debt. With the country depending substantially on tourism-related foreign exchange inflows, shocks to global travel can rapidly affect government revenues and reserves.
Although official poverty rates have declined over the past decade, some communities still slip into cycles of low income and limited access to education, known as a “poverty trap.” Government data suggest that around 5% of the population lived below the national poverty line in 2021, with rates higher in outer atolls than in the capital region. To reduce poverty, government initiatives include vocational training, microfinance programs, and short-term public works.
Investment in human capital is on the rise, with increased spending on tertiary education. Policymakers believe that building a skilled workforce can support service-oriented industries beyond tourism, such as financial services and software development. Yet educational disparities persist, as remote island communities struggle to attract qualified teachers. A shift toward high-value tourism models featuring luxury resorts risks exacerbating inequality unless local populations gain easier access to job-training programs.
Improving trade relationships is also a priority. The Maldives primarily imports machinery, fuel, and some staple foods, while exporting tourism services and fish products. Exchange rate stability remains a focus of the central bank, which manages the Maldivian rufiyaa (MVR) within a narrow band. Nonetheless, local businesses frequently use foreign currencies, especially the U.S. dollar, to pay for imports and resort-related transactions.
The long-term trajectory of the Maldives will hinge on its ability to diversify beyond tourism, protect fragile marine ecosystems, and ensure more inclusive development. Structural reforms and targeted government interventions such as subsidies for essential services and price floors in fisheries aim to balance social welfare with fiscal prudence. Whether these measures can create lasting gains in living standards depends on consistent policy implementation, increased resilience to climate risks, and the success of attracting FDI to a broader range of sectors.
Table 1 (Macroeconomic Indicators, 2018–2021)
| Indicator | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|
| Real GDP (US$ billions) | 4.9 | 5.1 | 4.7 | 4.9 |
| Real GDP Growth Rate (%) | 4.0 | 4.2 | 1.6 | 3.5 |
| Inflation Rate (%) | 2.8 | 3.1 | 3.2 | 3.0 |
| Unemployment Rate (%) | 5.8 | 5.5 | 6.7 | 6.2 |
| Budget Deficit (% of GDP) | -6.5 | -7.3 | -7.8 | -7.5 |
| Exchange Rate (MVR per US$) | 15.4 | 15.4 | 15.5 | 15.5 |
Table 2 (Selected Development and Trade Indicators, 2019–2021)
| Indicator | 2019 | 2020 | 2021 |
|---|---|---|---|
| Tourist Arrivals (millions) | 1.70 | 0.55 | 1.10 |
| Fish Exports (US$ millions) | 310 | 290 | 325 |
| FDI Inflows (US$ millions) | 550 | 400 | 470 |
| Gini Coefficient | 0.36 | 0.37 | 0.35 |
| Population Below Poverty Line (%) | 6.0 | 7.0 | 5.0 |
| Electricity Subsidies (US$ million) | 40 | 45 | 42 |
Define the term “price floor” mentioned in the text (paragraph 2)
List two ways in which tourism revenue can support the Maldivian economy (paragraph 1).
Using information from Table 1, calculate the absolute change (in US$ billions) in real GDP between 2018 and 2021.
Sketch an AD/AS diagram to show how changes in tourism activity, as reflected in Table 1, could influence real GDP.
Using a demand-and-supply-of-labour diagram, explain how government-sponsored vocational training might affect the employment situation in the Maldives (paragraph 8).
Using a demand-and-supply-of-currency diagram, explain how fluctuations in tourist arrivals (Table 2) could impact the exchange rate of the Maldivian rufiyaa.
Using a subsidy diagram, explain how subsidizing electricity in remote atolls (paragraph 4) can affect consumer spending and government expenditure.
Using a poverty cycle diagram, explain how poverty in some outer atolls (paragraph 7) can become self-perpetuating.
Using information from the text/data and your knowledge of economics, evaluate how the heavy reliance on tourism and targeted government interventions (such as price floors, subsidies, and vocational training) may influence the Maldives’ long-term economic development.
Explain how choices and opportunity costs arise from scarcity.
Practice 1. Introduction to Economics with authentic IB Economics exam questions for both SL and HL students. This question bank mirrors Paper 1, 2, 3 structure, covering key topics like microeconomics, macroeconomics, and international trade. Get instant solutions, detailed explanations, and build exam confidence with questions in the style of IB examiners.
Azerbaijan, situated at the crossroads of Eastern Europe and Western Asia, has experienced significant economic reforms over the past decade. Historically reliant on hydrocarbons-mainly oil and natural gas—for export revenues, the country has sought to diversify its production base through agriculture, tourism, and technology sectors. In 2019, oil and gas accounted for about 85% of Azerbaijan's total exports, providing substantial government revenue but leaving the country vulnerable to global commodity price fluctuations.
In recent years, policymakers have introduced multiple initiatives to modernize infrastructure and reduce dependence on hydrocarbons. Between 2019 and 2022, the government invested over US$3 billion in roads, railways, and energy transmission lines, aiming to expand the country's capacity to produce and transport goods. According to the State Statistical Committee, Azerbaijan's real GDP grew by 2.2% in 2020 and rebounded to 4.6% in 2022, partly due to a recovery in global oil prices. However, structural unemployment persists, especially in rural areas, where older agricultural practices lag behind modern production techniques.
Inflation, driven by rising global commodity costs, reached 8.4% in 2022, up from 2.6% in 2019. The Central Bank of Azerbaijan responded with conservative monetary policies that have stabilized the exchange rate of the Azerbaijani manat. Meanwhile, the government introduced tariffs on certain imported agricultural goods in 2021, aiming to protect local farmers from competition and stimulate domestic production. Critics argue that these tariffs lead to higher prices for consumers, while supporters believe they create incentives for farmers to modernize and invest in capital-intensive farming techniques.
Foreign direct investment (FDI) centered on the energy sector remains strong, although officials are eager to attract in manufacturing and services. Improvements in transport connectivity-facilitated by ongoing infrastructure projects-have encouraged discussions about further liberalizing trade regulations to boost exports of textiles, food products, and tech services. Yet logistical barriers at border checkpoints persist, contributing to delays and raising costs for exporters looking to access regional markets.
Socially, Azerbaijan has implemented targeted measures to address income inequality, including subsidies for utilities and food staples. Observers note that the impact of these subsidies can be uneven; while they help low-income households cope with rising prices, they can also create fiscal pressure if oil revenues decline. The government has recently introduced pilot programs that tie subsidies to specific income thresholds, with the objective of reducing misuse of public funds.
Despite ambitious diversification plans, the oil sector continues to dominate. Economic analysts warn that reliance on hydrocarbons could impede sustainable growth, especially if global oil prices weaken or external demand slows. As part of its long-term development strategy, the government is promoting investment in green energy, incentivizing solar and wind power projects in the hope of creating new export opportunities for electricity.
Nonetheless, concerns about structural unemployment remain. Skill mismatches persist between job seekers and the needs of modern industries, particularly in the technology sector. Rural-urban migration has become more common, pressuring housing and public services in Baku, while leaving some villages with labor shortages. Recognizing these challenges, the Ministry of Education has partnered with private companies to revamp vocational education programs, aiming to align training with rapidly evolving market demands.
Table 1: Selected Macroeconomic Indicators for Azerbaijan (2019-2022)
| Indicator | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Nominal GDP (US$ billion) | 47.0 | 42.5 | 45.8 | 52.0 | |
| Real GDP Growth Rate (%) | 2.2 | 2.2 | 3.4 | 4.6 | |
| Inflation Rate (%) | 2.6 | 3.0 | 4.5 | 8.4 | |
| Unemployment Rate (%) | 5.3 | 6.5 | 6.2 | 5.9 | |
| Exchange Rate (AZN per US$) | 1.70 | 1.70 | 1.70 | 1.69 | |
| Govt. Capital Spending (US$ billion) | 0.9 | 1.4 | 2.2 | 2.4 |
Table 2: Trade and Social Indicators
| Indicator | 2019 | 2021 | 2022 |
|---|---|---|---|
| Oil/Gas Exports as % of Total Exports | 85% | 85% | |
| Agricultural Tariff Rate (selected products) | 0% | 10% | |
| Gini Coefficient | 0.33 | 0.34 | 0.35 |
| Avg. Monthly Household Subsidy (utilities & food) | US$40 | US$45 | |
| FDI Inflows (US$ billion) | 4.2 | 3.7 | 4.0 |
Define the term tariffs indicated in the text (paragraph 3).
Define the term structural unemployment indicated in the text (paragraph 2).
Azerbaijan, situated at the crossroads of Eastern Europe and Western Asia, has experienced significant economic reforms over the past decade. Historically reliant on hydrocarbons-mainly oil and natural gas—for export revenues, the country has sought to diversify its production base through agriculture, tourism, and technology sectors. In 2019, oil and gas accounted for about 85% of Azerbaijan's total exports, providing substantial government revenue but leaving the country vulnerable to global commodity price fluctuations.
In recent years, policymakers have introduced multiple initiatives to modernize infrastructure and reduce dependence on hydrocarbons. Between 2019 and 2022, the government invested over US$3 billion in roads, railways, and energy transmission lines, aiming to expand the country's capacity to produce and transport goods. According to the State Statistical Committee, Azerbaijan's real GDP grew by 2.2% in 2020 and rebounded to 4.6% in 2022, partly due to a recovery in global oil prices. However, structural unemployment persists, especially in rural areas, where older agricultural practices lag behind modern production techniques.
Inflation, driven by rising global commodity costs, reached 8.4% in 2022, up from 2.6% in 2019. The Central Bank of Azerbaijan responded with conservative monetary policies that have stabilized the exchange rate of the Azerbaijani manat. Meanwhile, the government introduced tariffs on certain imported agricultural goods in 2021, aiming to protect local farmers from competition and stimulate domestic production. Critics argue that these tariffs lead to higher prices for consumers, while supporters believe they create incentives for farmers to modernize and invest in capital-intensive farming techniques.
Foreign direct investment (FDI) centered on the energy sector remains strong, although officials are eager to attract in manufacturing and services. Improvements in transport connectivity-facilitated by ongoing infrastructure projects-have encouraged discussions about further liberalizing trade regulations to boost exports of textiles, food products, and tech services. Yet logistical barriers at border checkpoints persist, contributing to delays and raising costs for exporters looking to access regional markets.
Socially, Azerbaijan has implemented targeted measures to address income inequality, including subsidies for utilities and food staples. Observers note that the impact of these subsidies can be uneven; while they help low-income households cope with rising prices, they can also create fiscal pressure if oil revenues decline. The government has recently introduced pilot programs that tie subsidies to specific income thresholds, with the objective of reducing misuse of public funds.
Despite ambitious diversification plans, the oil sector continues to dominate. Economic analysts warn that reliance on hydrocarbons could impede sustainable growth, especially if global oil prices weaken or external demand slows. As part of its long-term development strategy, the government is promoting investment in green energy, incentivizing solar and wind power projects in the hope of creating new export opportunities for electricity.
Nonetheless, concerns about structural unemployment remain. Skill mismatches persist between job seekers and the needs of modern industries, particularly in the technology sector. Rural-urban migration has become more common, pressuring housing and public services in Baku, while leaving some villages with labor shortages. Recognizing these challenges, the Ministry of Education has partnered with private companies to revamp vocational education programs, aiming to align training with rapidly evolving market demands.
Table 1: Selected Macroeconomic Indicators for Azerbaijan (2019-2022)
| Indicator | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Nominal GDP (US$ billion) | 47.0 | 42.5 | 45.8 | 52.0 | |
| Real GDP Growth Rate (%) | 2.2 | 2.2 | 3.4 | 4.6 | |
| Inflation Rate (%) | 2.6 | 3.0 | 4.5 | 8.4 | |
| Unemployment Rate (%) | 5.3 | 6.5 | 6.2 | 5.9 | |
| Exchange Rate (AZN per US$) | 1.70 | 1.70 | 1.70 | 1.69 | |
| Govt. Capital Spending (US$ billion) | 0.9 | 1.4 | 2.2 | 2.4 |
Table 2: Trade and Social Indicators
| Indicator | 2019 | 2021 | 2022 |
|---|---|---|---|
| Oil/Gas Exports as % of Total Exports | 85% | 85% | |
| Agricultural Tariff Rate (selected products) | 0% | 10% | |
| Gini Coefficient | 0.33 | 0.34 | 0.35 |
| Avg. Monthly Household Subsidy (utilities & food) | US$40 | US$45 | |
| FDI Inflows (US$ billion) | 4.2 | 3.7 | 4.0 |
Define the term tariffs indicated in the text (paragraph 3).
Define the term structural unemployment indicated in the text (paragraph 2).
Explain the difference between actual growth in production possibilities.
Explain the three basic economic questions (what/how much to produce, how to produce and for whom to produce?).
Explain the meaning of laissez-faire as proposed by Adam Smith.
Explain how choice arises from scarcity.
Explain the different factors of production used in producing goods and services.
The Maldives, an archipelagic nation in the Indian Ocean, has long been renowned for its pristine beaches and vibrant marine life. Tourism remains the main pillar of the Maldivian economy, contributing more than one-third of its gross domestic product (GDP) and employing a significant portion of the workforce. Real GDP growth averaged 4% between 2018 and 2019, but declined to 1.6% in 2020 due to global economic disruptions. In 2021, it rebounded to 3.5%, supported by a surge in tourist arrivals and partial recovery in global travel demand. However, economic volatility continues to pose challenges, especially as the country relies heavily on imports for food and fuel.
Alongside tourism, the fisheries sector is economically and culturally significant. The government enforces a price floor on tuna purchases from local fishermen to ensure they receive a fair income. While this policy helps sustain small-scale fishers, it can create surplus fish if international demand weakens. In recent years, fish exports to Asia and Europe accounted for nearly 12% of total export earnings in 2021.
Inflation in the Maldives has been modest, averaging around 3% over the past few years. Yet, persistent unemployment in some atolls remains a problem, particularly among young people not employed in tourism or fishing. To address income disparities and develop remote islands, the government subsidizes electricity for households located far from the main grid. These subsidies aim to reduce the social cost of living in isolated regions, but they also place pressure on the public budget, which has recorded deficits above 7% of GDP since 2019.
Foreign direct investment (FDI) plays an important role in funding large-scale resort developments. However, the proportion of FDI directed toward sectors beyond tourism such as manufacturing or technology remains limited. To encourage economic diversification, authorities have started offering tax incentives for investors in renewable energy projects, hoping to reduce heavy reliance on diesel-fueled power generation.
The Maldives is highly vulnerable to climate change and rising sea levels, which threaten its tourism infrastructure and coastal communities. Large infrastructure programs are underway to shore up coastal defenses, particularly around the capital, Malé. Supporters of these projects argue they are crucial for long-term survival, while critics highlight the growing external debt. With the country depending substantially on tourism-related foreign exchange inflows, shocks to global travel can rapidly affect government revenues and reserves.
Although official poverty rates have declined over the past decade, some communities still slip into cycles of low income and limited access to education, known as a “poverty trap.” Government data suggest that around 5% of the population lived below the national poverty line in 2021, with rates higher in outer atolls than in the capital region. To reduce poverty, government initiatives include vocational training, microfinance programs, and short-term public works.
Investment in human capital is on the rise, with increased spending on tertiary education. Policymakers believe that building a skilled workforce can support service-oriented industries beyond tourism, such as financial services and software development. Yet educational disparities persist, as remote island communities struggle to attract qualified teachers. A shift toward high-value tourism models featuring luxury resorts risks exacerbating inequality unless local populations gain easier access to job-training programs.
Improving trade relationships is also a priority. The Maldives primarily imports machinery, fuel, and some staple foods, while exporting tourism services and fish products. Exchange rate stability remains a focus of the central bank, which manages the Maldivian rufiyaa (MVR) within a narrow band. Nonetheless, local businesses frequently use foreign currencies, especially the U.S. dollar, to pay for imports and resort-related transactions.
The long-term trajectory of the Maldives will hinge on its ability to diversify beyond tourism, protect fragile marine ecosystems, and ensure more inclusive development. Structural reforms and targeted government interventions such as subsidies for essential services and price floors in fisheries aim to balance social welfare with fiscal prudence. Whether these measures can create lasting gains in living standards depends on consistent policy implementation, increased resilience to climate risks, and the success of attracting FDI to a broader range of sectors.
Table 1 (Macroeconomic Indicators, 2018–2021)
| Indicator | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|
| Real GDP (US$ billions) | 4.9 | 5.1 | 4.7 | 4.9 |
| Real GDP Growth Rate (%) | 4.0 | 4.2 | 1.6 | 3.5 |
| Inflation Rate (%) | 2.8 | 3.1 | 3.2 | 3.0 |
| Unemployment Rate (%) | 5.8 | 5.5 | 6.7 | 6.2 |
| Budget Deficit (% of GDP) | -6.5 | -7.3 | -7.8 | -7.5 |
| Exchange Rate (MVR per US$) | 15.4 | 15.4 | 15.5 | 15.5 |
Table 2 (Selected Development and Trade Indicators, 2019–2021)
| Indicator | 2019 | 2020 | 2021 |
|---|---|---|---|
| Tourist Arrivals (millions) | 1.70 | 0.55 | 1.10 |
| Fish Exports (US$ millions) | 310 | 290 | 325 |
| FDI Inflows (US$ millions) | 550 | 400 | 470 |
| Gini Coefficient | 0.36 | 0.37 | 0.35 |
| Population Below Poverty Line (%) | 6.0 | 7.0 | 5.0 |
| Electricity Subsidies (US$ million) | 40 | 45 | 42 |
Define the term “price floor” mentioned in the text (paragraph 2)
List two ways in which tourism revenue can support the Maldivian economy (paragraph 1).
Using information from Table 1, calculate the absolute change (in US$ billions) in real GDP between 2018 and 2021.
Sketch an AD/AS diagram to show how changes in tourism activity, as reflected in Table 1, could influence real GDP.
Using a demand-and-supply-of-labour diagram, explain how government-sponsored vocational training might affect the employment situation in the Maldives (paragraph 8).
Using a demand-and-supply-of-currency diagram, explain how fluctuations in tourist arrivals (Table 2) could impact the exchange rate of the Maldivian rufiyaa.
Using a subsidy diagram, explain how subsidizing electricity in remote atolls (paragraph 4) can affect consumer spending and government expenditure.
Using a poverty cycle diagram, explain how poverty in some outer atolls (paragraph 7) can become self-perpetuating.
Using information from the text/data and your knowledge of economics, evaluate how the heavy reliance on tourism and targeted government interventions (such as price floors, subsidies, and vocational training) may influence the Maldives’ long-term economic development.
Explain how choices and opportunity costs arise from scarcity.