IB Economics 4.8 Measuring Development Questionbank

(e) Define the term “Keynesian multiplier.”

(h) Using information from the text, explain two ways in which reliance on remittances may act as a barrier to economic development in Tajikistan.

(i) Using the information in the text and your knowledge of economics, evaluate the extent to which reliance on remittances is a barrier to economic development in Tajikistan.

ANGOLA’S ECONOMIC LANDSCAPE

Angola, situated on the southwest coast of Africa, is the continent’s second-largest oil exporter after Nigeria. Although oil revenue still accounts for over 50% of government income, policymakers have been striving to diversify the economy since the end of the civil war in 2002. In 2022, Angola’s real GDP reached approximately US 84 billion, an increase from about US$70 billion five years prior, highlighting mild but steady growth. Yet, persistent reliance on oil has exposed the country to volatile global energy prices, leading to frequent currency fluctuations.

In an attempt to stabilize macroeconomic conditions, the National Bank of Angola has gradually increased interest rates from 15% to 20% between 2019 and 2021. Inflation remained elevated at around 25%, partly driven by strong consumer demand for food imports and costs associated with transporting goods within the country’s underdeveloped infrastructure. Meanwhile, reserve assets, totaling roughly US$14 billion in 2021, have helped manage exchange rate volatility but remain vulnerable to shifts in oil exports.

Microeconomic policies aim to support food security. The government introduced minimum prices on maize and cassava to encourage domestic production. However, some economists argue that price floors risk creating surpluses if local producers oversupply, especially when distribution channels are inefficient. A program of fertilizer subsidies has further impacted agricultural practices, with the government allocating US$150 million to subsidize domestic fertilizer production in 2022.

Angola’s trade profile is heavily weighted toward oil economies in Asia, and more than half of the country’s exports go to China. However, there has been a recent push to explore regional trade partnerships with neighboring countries, hopefully to reduce tariffs and thereby to mitigate reliance on a single export destination. Angola’s membership in OPEC guides national oil production targets, which often influences fiscal planning and export revenues.

Alongside oil sector reforms, the government emphasizes foreign direct investment (FDI) in infrastructure and manufacturing. In 2021, inward FDI increased to US 2.8 billion, up from US$2.2 billion the previous year. Some of these investments target the expansion of road networks linking major cities, aiming to reduce logistical costs for domestic firms. Additionally, the Ministry of Industry has offered tax incentives to foreign companies that build local processing facilities, supporting value-added exports beyond crude oil.

While there are signs of rising income levels in urban areas, Angola still has an estimated 30% of people living below the national poverty line. The Gini coefficient, although not officially updated since 2018, was estimated at about 0.55 indicating substantial income inequality. Unemployment rates remain high, hovering near 28%. Many unemployed individuals move to the informal sector, which provides short-term income but offers limited access to social protections.

The Angolan government also confronts environmental and public health challenges. Rapid urbanization in Luanda has led to congestion and pollution issues. In rural areas, land degradation, partly linked to overreliance on subsistence farming, raises concerns about long-term agricultural productivity. The Ministry of the Environment has discussed a new environmental tax policy on major polluters, but it remains in the preliminary stages of calculation and regulatory design.

Going forward, policymakers must balance efforts at economic diversification, social welfare, and external stability. Tax reforms have been proposed to expand the revenue base and reduce dependency on oil receipts. These reforms might introduce progressive tax rates targeting higher earners while granting relief to lower-income households. Providing consistent electricity supply and stable financial markets are additional priorities, as they are crucial to attracting both domestic and foreign investment. While Angola’s medium-term prospects appear favorable, success will hinge on the effective implementation of structural reforms and prudent management of oil windfalls.

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

Table 2: Angola’s External and Development Indicators

(*No official update; estimated from partial surveys.)

(a) Define the term price floor mentioned in the text (Paragraph 3).

(b) Define the term reserve assets mentioned in the text (Paragraph 2).

(c) Using information from Table 1, calculate the increase (in US$ billions) in Angola’s nominal GDP between 2019 and 2022.

(d) Sketch a demand-and-supply diagram to show how the introduction of minimum prices for maize (Paragraph 3) might create a surplus in the agricultural market.

Finland is a Nordic country with a population of approximately 5.5 million people. It has long maintained high living standards and one of the world’s most comprehensive welfare systems. Exports play a significant role in Finland’s economy, particularly in forestry products (timber, pulp, and paper) and technology equipment. In recent years, Finland’s real GDP growth has fluctuated due to global economic conditions and the COVID-19 pandemic.

Finland is also renowned for having one of the highest per capita coffee consumption rates in the world. Domestic coffee producers face strong competition from international suppliers, yet Finnish consumers display relatively high brand loyalty. In addition, Finland’s top marginal personal income tax rates are steep by international standards, helping to fund generous social programs. However, some policymakers are concerned about maintaining competitive tax rates to attract more foreign direct investment and to stimulate economic growth.

Table 1: Selected Macroeconomic Indicators for Finland (2019–2022)

*Estimate based on provisional data

Table 2: Income Distribution and Inequality Measures (2021)

Table 3: Coffee Consumption in Finland

Figure 1: Hypothetical Domestic Demand and Supply for Finnish Forestry Exports (Price measured in EUR per cubic meter; D and S represent domestic demand and supply functions. Pw indicates the world price. A shift from Pw to Pw1 represents a 10% increase in the world price for forestry exports.)

Assume the following:
• When the price for forestry exports rises from Pw to Pw1, Finland’s forestry export quantity remains the same (perfectly elastic world demand).
• The value of forestry exports before the price increase was EUR 8 billion per year.

Finland’s government has recently announced a new social infrastructure program worth EUR 2 billion to stimulate the economy. The marginal propensity to consume (MPC) is estimated at 0.75. Some policymakers argue that Finland should reduce its top personal income tax rate (currently 31% for the national share, excluding municipal taxes) to promote innovation, attract more businesses, and reduce the risk of a slowdown in growth. Others worry that reducing taxes too much could threaten Finland’s commitment to strong social services.

(a) Using the information in Table 1, calculate Finland’s real GDP growth rate from 2019 to 2020, showing your working.

(c) Using the data in Table 3, calculate the price elasticity of demand (PED) for coffee in Finland when the price increases from EUR 4.00 to EUR 5.00 per 500 g pack.

(d) Referring to Figure 1, calculate the percentage increase in the value of Finland’s forestry exports if the world price rises by 10% (from Pw to Pw1).

Vietnam’s Path to Development: Growth and Structural Change

Over the last few decades, Vietnam has undergone a significant economic transformation. Since the introduction of the "Doi Moi" reforms in 1986, the nation has shifted from a centrally planned economy dependent on agriculture to a market-oriented economy driven by manufacturing and export-led growth. This transition has resulted in one of the world’s highest rates of real GDP growth, lifting millions of people out of absolute poverty.

However, development economists argue that economic growth alone does not equate to economic development. While Vietnam's Gross National Income (GNI) per capita has risen substantially, the country faces challenges in ensuring that these gains are distributed equitably. Rising income inequality, measured by the Gini coefficient, has become a concern as the wealth gap between urban industrial centers and rural agricultural regions widens. Furthermore, rapid industrialization has led to environmental degradation, raising questions about the sustainability of its current growth model.

To better capture the multidimensional nature of progress, the United Nations uses the Human Development Index (HDI). This composite indicator reflects achievements in health, education, and standard of living. In Vietnam, improvements in life expectancy and mean years of schooling have contributed to a steady rise in its HDI score, placing it in the "high human development" category. Despite this, some critics suggest that even composite indicators like the HDI may overlook crucial factors such as gender empowerment, political freedom, and environmental quality.

Investment in infrastructure and human capital remains a priority for the Vietnamese government. By improving vocational training and health outcomes, the government aims to increase the productivity of its workforce and expand the nation's productive capacity. However, as the economy matures, the challenge lies in balancing the pursuit of higher income levels with the need for social equity and environmental preservation.

Table 1: Vietnam’s Key Development Indicators (2018–2022)

Table 2: Inequality and Environmental Indicators

(a) Define the term economic growth.

(b) Define the Gini coefficient.

(c) Using information from Table 1, calculate the percentage change in Vietnam's GNI per capita between 2020 and 2022.

(d) Using a correctly labeled diagram, sketch a Lorenz curve that illustrates the increase in income inequality in Vietnam between 2018 and 2022.

(a) With the aid of a correctly labelled circular flow of income diagram, explain the different approaches to national income accounting.

(b) Using real-world examples, discuss the view that a rise in GNI per capita will always lead to a rise in living standards in an economy.

(c) Using the cotton market data provided above, calculate the price elasticity of demand (PED) for cotton when the price changes from TJS $10$ to TJS $12$ per bale. Provide the absolute value of the PED in your answer.

(d) Using the cotton market data provided above, calculate the change in total revenue for cotton producers in Tajikistan following the increase in price from TJS $10$ to TJS $12$ per bale.

(f) Using an appropriate AD/AS diagram, explain how an injection of TJS $600$ million into the economy (with an MPC of $0.75$) might affect Tajikistan’s real GDP.

(g) Using the information provided, calculate the total value of Tajikistan’s stimulus package as a percentage of its real GDP in $2021$.

(b) The government invests an additional EUR 2 billion in social infrastructure. Given an estimated marginal propensity to consume (MPC) of 0.75, calculate the potential total increase in real GDP resulting from this government spending (the Keynesian multiplier effect).