IB Economics 4.1 Benefits of International Trade Questionbank

(d) Using information from Table 3, calculate the amount of VAT a consumer would pay on a saffron purchase of US$200 (before tax).

(e) Define the term “progressive tax.”

(f) Using an AD/AS diagram, explain how an increase in government spending (such as the proposed US$2 billion infrastructure program) could affect Iran’s real GDP in the short run.

(g) Using Table 2, determine the excess supply or excess demand of saffron in Iran at the price of US$1000 per kg.

(h) Using information from the text, explain two ways in which income inequality (Gini coefficient of 0.42) might act as a barrier to long-term economic development in Iran.

(i) Using the text/data provided and your knowledge of economics, recommend a policy which could be implemented by the government of Iran in order to promote economic stability and growth.

The Evolving Economic Landscape of Zimbabwe

Zimbabwe, a landlocked country in southern Africa, has undergone significant economic changes in recent years. Once known as the “breadbasket of Africa,” the nation faced severe economic challenges in the late 2000s, including periods of hyperinflation and a collapse of key export industries. In 2019, the government introduced a new currency (the Zimbabwean dollar), seeking to stabilize prices and restore confidence in monetary policy. However, inflation has remained high, although not at the extremes experienced a decade ago.

According to government estimates, about 70% of Zimbabwe’s population resides in rural areas, heavily dependent on small-scale agriculture for income. The official population is approximately 15 million, and the poverty rate has hovered near 40% for much of the past decade. This has led policymakers to focus on poverty reduction strategies, especially through social protection programs and rural development projects aimed at boosting crop yields and productivity. Despite some progress, a chronic shortage of investment in education and healthcare continues to impede long-term development outcomes.

Agriculture remains a vital sector for Zimbabwe’s economy, representing about 20% of nominal GDP in 2022. Maize is the primary staple, and the government has intermittently provided subsidies for key inputs such as fertilizer. However, critics argue that these subsidies are expensive and can distort market signals, while others believe they are necessary to support smallholder farmers and safeguard food security. Additionally, tobacco, one of Zimbabwe’s main exports, generated around US$1.2 billion in revenue in 2022, with much of the crop sent to regional and international markets.

Beyond agriculture, Zimbabwe’s mining sector contributes significantly to exports, particularly gold and diamonds. Foreign direct investment (FDI) in mining has risen slightly since 2020, although concerns over policy unpredictability and currency regulations remain. Trade in regional markets is facilitated in part by the Southern African Development Community (SADC) agreements, which aim to reduce tariffs and enhance cross-border trade among member countries.

Unemployment in the formal sector remains high, leading many people to seek informal sector activities. With limited formal job creation, the government has tried to encourage entrepreneurship by providing low-interest loans to small and medium-sized enterprises (SMEs). Yet access to finance remains constrained by relatively high interest rates and perceived credit risk. In addition, external debt has increased as the government has relied on international loans for infrastructure projects, such as road upgrades and water supply systems.

Policymakers have emphasized the importance of improving living standards through investments in human capital. However, social services in rural areas are often underfunded, perpetuating a cycle of poverty and low productivity. Although some external aid agencies and local NGOs are involved in community-driven development, these efforts have not fully offset challenges posed by uneven government spending.

Infrastructure development is another area of focus, with projects to bolster energy supply and improve transportation corridors that connect Zimbabwe’s key markets. Proponents argue that these investments will lay the foundation for long-term economic growth and facilitate trade with neighboring countries. Skeptics, however, question whether the country can manage its growing external debt burden, especially given ongoing currency volatility and persistent budget deficits.

In short, Zimbabwe’s future economic trajectory depends on balanced macroeconomic measures, effective social spending, and the capacity to foster private-sector growth—particularly in higher-value sectors beyond agriculture and extractives. Whether the country can escape cyclical poverty and realize inclusive development depends on sustaining policy reforms, ensuring political stability, and building investor confidence in the long run.

Table 1: Zimbabwe’s Selected Macroeconomic Indicators (2019–2022)

Table 2: Data on Poverty and Development in Zimbabwe

(a) Define the term hyperinflation mentioned in the text (paragraph 1).

(b) Define the term foreign direct investment (FDI) mentioned in the text (paragraph 5).

(c) Using information from Table 1, calculate the percentage change in Zimbabwe’s nominal GDP between 2020 and 2022.

(d) Sketch an AD/AS diagram to show how changes in aggregate demand (possibly due to rising agricultural export revenues) might influence inflation in Zimbabwe, referring to the inflation data in Table 1.

Greenland is an autonomous territory within the Kingdom of Denmark. With a population of approximately 56 000, Greenland’s economy is heavily dependent on the fishing industry, which delivers the majority of the country's exports, primarily shrimp and halibut. The government is pushing to diversify into other sectors such as tourism and mining to reduce its reliance on fishing. However, climate change and fluctuations in fish stocks pose significant risks to Greenland’s growth prospects.
Tourism is a rapidly growing sector in Greenland, particularly cruise tourism. In the past two years, the country has launched marketing campaigns across North America and Europe. Despite rising visitor numbers, underdeveloped hotel capacity and limited transport infrastructure are constraints on further growth. The government has recently proposed extensive airport upgrades as a stimulus for the tourism industry.
Below are data regarding Greenland’s economy in 2021 and 2022, along with specific information about the shrimp market and Greenland’s taxation/income distribution statistics.

Table 1: Market Data for Shrimp in Greenland, 2022

Table 2: Selected Macroeconomic Indicators for Greenland (2021–2022)

Table 3: Income Distribution and Taxation in Greenland

(a) Using information from Table 2, calculate the approximate increase in real GDP (in billion DKK) from 2021 to 2022.

(b) Using the data in Table 1, calculate the price elasticity of demand (PED) for shrimp when the price increases from DKK 60 per kilogram to DKK 65 per kilogram.

(c) Using the information from Table 2, calculate the Keynesian multiplier if an increase in government spending of DKK 0.3 billion led to a DKK 0.45 billion increase in real GDP.

(d) Using Table 3, calculate the income tax paid by an individual who earns DKK 200,000 annually, assuming a marginal tax rate of 42% applies beyond the DKK 40,000 tax-free allowance.

Indonesia is the largest economy in Southeast Asia. In $2021$ its nominal GDP reached US$ $1\,190$ billion, up from US$ $1\,050$ billion in $2020$. Over these two years the GDP deflator ($2015 = 100$) rose from $102$ to $110$. Inflation, as measured by the consumer price index, averaged $4.4$ percent in $2021$. The labour force of $141$ million is distributed roughly as follows: $40$ percent in agriculture ($12$ percent of GDP), $23$ percent in industry ($38$ percent of GDP) and $37$ percent in services ($50$ percent of GDP).

In $2021$ the Indonesian rupiah appreciated by $8$ percent against the US dollar, driven by strong capital inflows.

Palm Oil Market and Trade
Palm oil is Indonesia’s largest agricultural export. Indonesia is a small country in world palm-oil markets, so it takes the world price as given. In $2021$ there was a global supply shock, causing the world price to fall from US$ $800$ to US$ $600$ per tonne.

Table $2$ shows Indonesia’s domestic demand at those two world prices (domestic supply is not binding at world prices).

Table 1: Indonesia—GDP Data

Table 2: Domestic Demand for Palm Oil

Fiscal Policy and the Multiplier
The government of Indonesia plans a fiscal stimulus of IDR $50$ trillion. The marginal propensity to consume (MPC) in the economy is estimated at $0.75$.

Income Inequality and Development
Despite rapid growth, income inequality remains high. Table $3$ compares Indonesia to two neighbours.

Table 3: Development and Inequality Indicators (2021)

(a) Using Table 1, calculate the real GDP growth rate of Indonesia between 2020 and 2021.

(b) Using the information about the MPC, calculate the value of the fiscal multiplier for Indonesia.

(d) Calculate the change in the value of Indonesia’s palm oil exports (in US$ billion) resulting from the fall in the world price, assuming export quantity equals the quantities shown in Table 2.

Recent Economic Developments in Israel

Israel, located in the Middle East along the Mediterranean Sea, has built a reputation as a high-tech powerhouse, with technology exports accounting for almost $40\%$ of total exports in $2021$. Despite its advanced economic status, certain segments of the population still face persistent poverty, particularly among ultra-Orthodox communities and some minorities. In $2020$, the official poverty rate stood at $20.4\%$, prompting the government to expand targeted social assistance programs. At the same time, policymakers continue to grapple with balancing macroeconomic stability, fostering innovation, and ensuring inclusive growth.

From $2018$ to $2021$, Israel’s real GDP growth was highly influenced by both global economic cycles and domestic factors such as rising consumption, strong export performance in the high-tech sector, and fluctuating tourism revenues. Periodic geopolitical tensions introduced volatility in foreign direct investment (FDI), as did global shocks that affected investor confidence. Meanwhile, the Bank of Israel generally maintained an accommodative monetary policy to counter moderate inflation pressures, which averaged around $1\%$ over this period—slightly below the mid-point of the central bank’s target range.

A major source of economic concern for Israel is structural unemployment, especially for workers lacking the skills needed in technology-driven industries. In specific regions, poor infrastructure and limited transportation links further hinder access to higher-paying jobs, reinforcing what some analysts describe as a local poverty trap. To address these challenges, government initiatives include investing in education and vocational training, especially in areas with higher concentrations of low-income populations. Beyond domestic considerations, Israel is party to various free trade agreements with key markets such as the United States and the European Union. These agreements have reduced tariff barriers and spurred export growth, although domestic producers in traditional manufacturing sectors sometimes struggle to remain competitive.

The government’s budget deficit has oscillated in recent years. In $2020$, increased spending to support households and businesses during the global economic downturn pushed the fiscal deficit above $5\%$ of GDP. Nonetheless, Israel’s current account balance remained in surplus, aided by robust exports in software, pharmaceuticals, and defense technology. Concurrently, the Israeli new shekel (ILS) exhibited a slight trend toward appreciation, partly due to a steady flow of incoming FDI in technology start-ups.

Despite the nation’s strong high-tech profile, around $14\%$ of the working-age population remains in low-paid service jobs. Many among these workers lack the qualifications necessary to transition into more lucrative sectors. Poverty rates also remain stubbornly high in certain demographic groups, underscoring the potential for a “poverty cycle”, in which limited education and weak earning potential perpetuate lower living standards across generations. Critics argue that the government must undertake more targeted social spending and refine its labor market policies to break the cycle of intergenerational poverty.

In the international arena, trade ties with both developed and emerging markets continue to evolve. Israel has considered further reductions in non-tariff barriers as well as new bilateral agreements to diversify export destinations beyond traditional partners. Supporters of these measures point to larger consumer markets for Israeli products, while critics worry about the competitiveness of domestic industries that may not be ready to face unfettered global competition.

Israel’s technology-driven growth strategy has indeed lifted per capita income above US$47,000 in$2021$, but it has also accentuated regional income disparities. To leverage opportunities for sustainable development, policymakers are exploring enhanced public–private partnerships targeting infrastructure in peripheral regions, alongside educational reforms that promote STEM and vocational skills. Government officials argue that strategic policies to foster technological innovation, matched with effective social programs, could bolster productivity and reduce poverty in the longer term.

Below are two tables summarizing key macroeconomic and development indicators from $2018$ to $2021$:

Table 1: Israel’s Selected Macroeconomic Indicators ($2018$–$2021$)

Table 2: Selected Poverty and Development Indicators

(c) Using Table 2, calculate the price elasticity of demand (PED, unitless) for saffron when the price increases from US$900 per kg to US$1000 per kg.

(c) Using Table 2, calculate the price elasticity of demand for palm oil in Indonesia when the world price falls from US$ $800$ to US$ $600$ per tonne.

(a) Define the term structural unemployment indicated in the text (paragraph $3$).

(b) Define the term free trade agreement indicated in the text (paragraph $4$).

(c) Using information from Table $1$, calculate the absolute change in Israel’s nominal GDP (in US$billion) between$2018$and$2021$.

(d) Using Table $1$, sketch an AD/AS diagram showing how higher consumer spending could have contributed to inflation in $2021$.