IB Economics 2.6 Elasticity of Supply Questionbank

(d) Using the data in Table 2, calculate the price elasticity of supply (PES) for Polish apples over the same price range.

(e) Define the term income inequality.

(f) Using an aggregate demand and aggregate supply (AD/AS) diagram, explain one possible impact on Poland’s real GDP and price level if rising inflation continues to reduce households’ real incomes.

(h) Using information from Table 1 and the text, explain how a rising Gini coefficient may affect long-term economic growth in Poland.

(i) Using the stimulus data, recommend one policy that the government of Poland could implement to address the challenges posed by both high inflation and rising income inequality. Justify your recommendation.

(a) With the aid of a supply diagram, explain how the mobility of factors of production affects price elasticity of supply (PES).

(b) Using real-world examples, evaluate the extent to which factor mobility is the main determinant of PES in different industries, considering the short run and the long run.

The island nation of Arcadia has historically been a manufacturing hub, but it is currently transitioning toward a more diversified economy with a growing technology sector. Policymakers are concerned with accurately measuring the nation's progress and the environmental impact of its industrial activities. The government is evaluating different macroeconomic indicators to better understand the standard of living and the long-term sustainability of the island's resources.

Table 1: Macroeconomic Data for Arcadia (2023)

In 2022, Arcadia's Real GDP was recorded at $680 billion. For the year 2023, the GDP deflator is 108 (using 2022 as the base year where the deflator was 100). The current population of Arcadia is 15 million people.

Figure 1: The Business Cycle

(a) Using the expenditure method and the data in Table 1, calculate the Nominal GDP for Arcadia in 2023.

(b) Using your answer to the previous part and the provided GDP deflator, calculate Arcadia’s Real GDP for 2023.

(c) Using the data in Table 1 and your calculated Nominal GDP, calculate Arcadia’s Gross National Income (GNI) for 2023.

(d) Calculate the economic growth rate for Arcadia between 2022 and 2023 based on the change in Real GDP.

Lithuania is a small, open economy in Northern Europe with a population of approximately 2.8 million people. After joining the European Union in 2004, Lithuania has seen significant economic restructuring, experiencing notable growth in exports and a steady increase in real GDP over the past decade. However, challenges remain in addressing income inequality, diversifying exports, and maintaining sustainable growth.

Table 1: Kay macroeconomic indicators of Lithuania (2021–2022)

According to official estimates, persistent inflationary pressures have been attributed to rising global energy prices and supply chain disruptions. Meanwhile, rapid economic growth has been driven partly by strong consumer spending and robust export performance. However, there are concerns about increasing income inequality, illustrated by the country’s Gini coefficient (reflected in Table 3).

A key export sector for Lithuania is dairy products. Lithuanian dairy firms have recently begun to export cheese and other related products to various EU and non-EU countries. Table 2 shows the changes in market data for Lithuanian cheese exports between 2021 and 2022.

Table 2: Market Data for Lithuanian cheese exports

Producers of dairy products in Lithuania face competition from other EU countries with similar climates and farming traditions. As a result, price fluctuations can affect both the quantity demanded abroad and the willingness of domestic producers to supply cheese to international markets.

Lithuania has a system of personal income tax that is partly progressive, although the corporate tax rate of 15% has remained unchanged in recent years. The government also levies indirect taxes such as value-added tax (VAT) on many consumer goods. Table 3 compares Lithuania’s Gini coefficient with that of selected countries, illustrating concerns about rising income disparity.

Table 3: Income Distribution comparison (2021)

Increasing government expenditure has raised questions about potential multiplier effects on the Lithuanian economy. Analysts estimate that the marginal propensity to consume (MPC) in Lithuania stands at 0.8, which could amplify any injection of government spending in the short run.

(a) Using information from Table 1, calculate Lithuania’s real GDP (in euros) in 2021 and 2022, assuming that the nominal GDP figures in Table 1 are in current prices but the real growth rates given apply to real GDP.

(b) Using the information from Table 2, calculate the price elasticity of demand (PED) for Lithuanian cheese exports when the average export price rises from €4.00 per kg to €4.40 per kg.

(c) With reference to Table 2, calculate the price elasticity of supply (PES) for Lithuanian cheese exports over the same price change.

(d) With reference to Table 2, calculate the price elasticity of supply (PES) for Lithuanian cheese exports over the same price change.

Nigeria, located in West Africa, has Africa’s largest population of over 220 million people. Despite significant natural resource wealth, especially in oil and natural gas, a large proportion of the population lives below the international poverty line. In recent years, diversification into agriculture and manufacturing has gained momentum. However, infrastructure shortfalls and income inequality remain major challenges.

Agriculture accounts for about 23% of Nigeria’s GDP, with cocoa among its leading non‐oil exports. The country’s heavy reliance on crude oil as a major source of export revenue makes it vulnerable to volatile global commodity prices. Meanwhile, an increasing share of government budget is allocated to capital projects—such as roads, electricity grids, and telecommunications—to stimulate long‐term growth.

Despite these initiatives, the government faces pressure to generate higher tax revenue and improve the standard of living. The highest personal income tax rate is 24%, while corporate taxation is set at 30%. Nigeria’s value‐added tax (VAT) rate was recently raised from 5% to 7.5%, although many essential food products remain VAT‐exempt in an effort to protect low‐income households.

Table 1 provides selected macroeconomic and labor market indicators for Nigeria:

Table 1: Selected Macroeconomic and Labour Market Indicators for Nigeria

Despite a slight slowdown in 2020, the economy rebounded by 2022 with growing output in both the oil and non‐oil sectors. However, unemployment rates and underemployment remain high, reflecting rapid population growth and limited formal job opportunities.

Nigeria’s cocoa output has also increased, largely due to policy support and higher global cocoa prices. Table 2 shows how domestic demand for cocoa beans in Nigeria changed when the global price rose from US$2,000 per tonne to US$2,300 per tonne between 2021 and 2022:

Table 2: Cocoa Market Data in Nigeria

Meanwhile, Nigeria’s government is committed to infrastructure spending to spur economic development. The marginal propensity to consume (MPC) in Nigeria is estimated at 0.8, though this may vary across income groups. Policymakers hope that infrastructure projects financed partly by new corporate taxes will reduce production costs for businesses, boost employment, and narrow Nigeria’s Gini coefficient of 0.38.

(a) Using information from Table 1, calculate Nigeria’s real GDP growth rate from 2021 to 2022.

(b) Using information from the text and Table 3, calculate the amount of VAT that was paid on the ₦5,400,000 machinery purchase.

(c) Using information from Figure 1, calculate the price elasticity of supply for cocoa in Nigeria when the price increases from US$2,400 per metric ton to US$2,700 per metric ton.

(d) Using information from Figure 1, calculate the change in Nigeria’s total cocoa export revenue resulting from the price increase. Assume that the quantity exported remains the same as in 2022.

(g) Using information from Table 3, calculate the corporate income tax that the furniture manufacturer would pay on its net profit in $2022$. Show your working.