IB Economics 3.7 Supply Side Policies Questionbank

(c) Using Table 1, calculate the approximate percentage change in Nigeria’s real GDP from 2020 to 2022. Give your answer in %.

(d) Sketch an AD/AS diagram to show the likely impact of the Central Bank’s contractionary monetary policy on Nigeria’s price level and real output.

(e) Using a negative externalities diagram, explain how oil spills create external costs in Nigeria and why government intervention may be needed.

(f) Using an international trade diagram for Nigeria’s domestic market, explain how removing tariffs under the proposed free trade agreement (FTA) with ECOWAS could affect local producers.

(g) Using a labour market diagram, explain how the expansion of the private healthcare sector might affect wages and employment levels in that sector.

(h) Using an AD/AS (or LRAS) diagram, explain how the government’s supply-side reforms could shift Nigeria’s potential output.

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.

(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.

Explain how interventionist supply-side policies can achieve economic growth in the long run.

UZBEKISTAN’S ONGOING ECONOMIC TRANSFORMATION

Over the last decade, Uzbekistan, a doubly landlocked country in Central Asia with a population of approximately 34 million in 2021, has embarked on a series of ambitious reforms aimed at liberalizing its economy. Real GDP growth averaged around 5.8% per year between 2018 and 2021, supported by rising exports of cotton, gold, and natural gas. However, dependence on primary commodities poses risks to external balance, and the government has signaled intentions to diversify into textile manufacturing, tourism, and information technology.

State-led modernization has included partial price liberalization in agriculture, attracting foreign direct investment (FDI). A notable policy change involved easing bureaucratic barriers for foreign investors, enabling the launch of new small and medium-sized enterprises (SMEs). While privatization of state assets in the textile and apparel industries has progressed, concerns remain regarding efficiency gains for local businesses. Anecdotal evidence shows that some domestically owned farms still struggle to access affordable credit, hampering investments in irrigation systems and modern equipment.

The government’s push toward a more open economy coincided with substantial exchange rate reforms. In 2017, the som was devalued, and the central bank began allowing more market-driven fluctuations. This policy aimed to improve exporters’ competitiveness and encourage remittance inflows. By 2021, the exchange rate stood at around UZS 10,600 per US dollar. Although this move pleased some international organizations, it also contributed to temporary spikes in imported inflation, which reached 12.4% in 2021.

Meanwhile, Uzbekistan contends with persistent poverty, especially in rural regions. While official estimates showed a poverty rate of nearly 15% in 2021, independent analyses suggest it could be higher when accounting for underemployment in the informal sector. The government has introduced targeted cash transfers and expanded vocational training to help break the so-called “poverty cycle,” in which low income, limited savings, and lack of education reinforce each other. Development agencies recommend further investments in human capital and infrastructure to tackle income inequality—whose Gini coefficient has hovered around 0.36 in recent years.

On the trade front, Uzbekistan has moved to reduce average tariff rates on specific imports, particularly machinery crucial for agribusiness modernization. In addition, the country is in deliberations to join several regional trade blocs to increase export opportunities. Critics argue that remaining administrative barriers continue to complicate cross-border exchanges and inflate the costs of imports, which could stifle productivity growth in domestic industries that rely on foreign technology.

Monetary policy remains aimed at managing high inflation. Although the central bank has softened some liquidity constraints to facilitate credit expansion, the policy rate has been kept relatively high to stem inflationary pressures. The government hopes that stable macroeconomic conditions, alongside structural reforms, will draw in greater inflows of both portfolio investments and FDI to diversify the economic base beyond raw materials.

Infrastructure improvements are also underway, including the construction of new road and railway links to neighboring countries. Advocates argue these projects enhance regional integration, while skeptics caution that excessive reliance on foreign loans could worsen external debt burdens. Moreover, concerns about corruption and inefficient public spending persist, calling for enhanced transparency measures.

Human development indicators reflect a mixed picture. Literacy rates exceed 99%, but the national unemployment rate for youth reached 9.1% in 2021. The government has responded by emphasizing job creation through SME support programs and rural development projects. Uzbekistan’s World Bank “Ease of Doing Business” ranking has improved significantly since 2016, yet some local entrepreneurs still cite unpredictable regulations and limited access to finance as ongoing constraints.

Although reforms are moving Uzbekistan toward a more market-oriented economy, policymakers face complex trade-offs among controlling inflation, safeguarding impoverished communities, and ensuring stable economic growth. The trajectory of these reforms—and especially their impact on poverty—will depend on consistent policy implementation, regional integration initiatives, and continued progress in governance and institutional capacity.

Below are two tables that provide more detailed information on Uzbekistan’s recent economic indicators and development progress:

Table 1: Key Macroeconomic Indicators (2018–2021)

Table 2: Selected Development Indicators (2021)

(a) (i) Define the term “bureaucratic barriers” (paragraph 2).

(b) (ii) Define the term “tariff” (paragraph 7).

(c) (i) Using information from Table 1, calculate the absolute increase in Uzbekistan’s nominal GDP (in US$ billions) from 2018 to 2021.

(d) (ii) Sketch an AD/AS diagram to show how rising inflation (Table 1) could be influenced by changes in aggregate demand.

(i) Using the stimulus and your economic knowledge, evaluate the potential impact of the proposed FTA with ECOWAS on Nigeria’s balance of trade, domestic industries, and overall economic performance.

(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.