Economics International Baccalaureate (IB) Practice Question: Nigeria and Ghana Nigeria and Ghana are neighboring countries in West Africa. Nigeria Nigeria's economy is dominated by...

Use of formula and correct value substitution:

$\text{Trade Balance} = \text{Total Exports} - \text{Total Imports}$

For Nigeria: $\text{Trade Balance} = \text{US\$ 45.3 billion} - \text{US\$ 52.1 billion}$

For Ghana: $\text{Trade Balance} = \text{US\$ 14.7 billion} - \text{US\$ 19.2 billion}$

1 mark

Correct result:

For Nigeria:

$= \text{US\$ -6.8 billion}$ (Final Answer) 1 mark

For Ghana:

$= \text{US\$ -4.5 billion}$ (Final Answer) 1 mark

• The Lorenz curve in the diagram shows significant income inequality in Ghana, with a large gap between the line of perfect equality and the actual income distribution.
• The case study indicates high income inequality in Ghana despite its relatively high per capita GDP for the region.
• This inequality is reflected in the mining sector which generates 45% of foreign exchange earnings but employs only 1.5% of the population, concentrating wealth in a small segment.
• Income inequality limits domestic consumption and economic growth, as a large portion of the population has limited purchasing power.
• The economic vulnerability to commodity price fluctuations (particularly in gold) is exacerbated by inequality, as economic shocks disproportionately affect the poor.
• Ghana's high income inequality contributes to its need to import approximately 45% of food requirements, as agricultural development may be underfunded while resources flow to extractive industries.
• This inequality hampers Ghana's efforts toward economic diversification, as mentioned in the case study, by limiting broad-based entrepreneurship and human capital development.

2 marks for correct diagram OR explanation

4 marks for correct diagram AND explanation

• The diagram shows how trade based on comparative advantage benefits Ghana, where the world price (Pw) is below domestic price (Pd) for imports and above domestic price for exports.
• Ghana's membership in ECOWAS allows it to export goods where it has a comparative advantage (like gold and minerals) at a price (Pw) higher than would be achieved in a closed economy.
• As shown in the right diagram, Ghana can export the quantity (Qd-Qs) of mining products at the higher regional price (Pw), increasing producer surplus.
• Simultaneously, Ghana can import goods where it has a comparative disadvantage (like food products, which it imports 45% of its requirements) at lower prices, as shown in the left diagram.
• ECOWAS membership increases consumer welfare in Ghana by allowing imports at lower prices (Pw) than domestic production would cost (Pd).
• The case study mentions Ghana "maintains strong ties with regional partners through ECOWAS," facilitating this mutually beneficial trade relationship.
• This regional integration helps Ghana address its economic vulnerabilities to global commodity price fluctuations by diversifying its trading partners within the West African region.

2 marks for correct diagram OR explanation

4 marks for correct diagram AND explanation

• The diagram above illustrates the likely impact of falling oil prices on Nigeria's economy, as oil accounts for 65% of GDP and 90% of exports.
• A decrease in oil prices represents a negative supply shock for Nigeria, causing the SRAS curve to shift leftward (from SRAS1 to SRAS2).
• This would move the economy from equilibrium E1 to E2, resulting in a lower real GDP (from Y1 to Y2) and higher price level (from PL1 to PL2).
• Table 1 confirms this effect, showing Nigeria's GDP growth declined from 2.7% in 2015 to 1.9% in 2018 following the 2014-2015 oil price crash mentioned in the case study.

2 marks for correct diagram OR explanation

4 marks for correct diagram AND explanation</marks

• As mentioned in the text, "fuel subsidies have been significantly reduced, though not eliminated".
• The diagram shows that reducing fuel subsidies in Nigeria shifts the supply curve leftward from Ssub1 (original subsidy) to Ssub2 (reduced subsidy), as producers face higher costs.
• The initial subsidy market equilibrium at price Pc1, quantity Qsub (with producers receiving Pp1) shifts to a new equilibrium at price Pc2, quantity Q2 (with producers receiving Pp2).
• This policy results in higher fuel prices for consumers (from Pc1 to Pc2)
• The quantity of fuel consumed decreases from Qsub to Q2, reducing the government's subsidy expenditure.
• Producers receiving less price per unit sold (from Pp1 to Pp2).
• This policy helps address Nigeria's fiscal challenges resulting from declining oil revenues (75% of government revenue) during periods of low global oil prices.

2 marks for correct diagram OR explanation

4 marks for correct diagram AND explanation

Answers may include:

Definition

• Economic growth: An increase in a country's real output (real GDP) over a period time.

• Economic development: The process of increasing real per capita income while improving living standards and reducing poverty within an economy as whole.

• Economic growth refers to increases in real output over time, whereas economic development refers to a process that leads to improved living standards for a population as a whole.

• Increasing levels of output and incomes resulting from economic growth do not, by itself, guarantee economic development.

Impact of Oil Dependence on Growth Volatility

Lack of Diversification and Exposure to Global Oil Prices

• Nigeria’s economy is heavily reliant on oil, with oil accounting for 65% of GDP, 75% of government revenue, and over 90% of exports.
• This creates vulnerability to external shocks, especially in oil prices, as shown during the 2014–2015 oil crash, where GDP growth dropped to 2.7% in 2015, down from previous higher rates.
• Despite a slight recovery to 3.4% in 2021, growth remains unstable and below potential, largely due to the sluggish performance of non-oil sectors and continued oil price fluctuations (Table 1).
• Overdependence on oil creates resource curse dynamics, where the booming oil sector crowds out investment in other sectors like agriculture and manufacturing.

Diagram: AD/AS Model with Supply-Side Shocks

• A fall in global oil prices causes a leftward shift in AD, as export revenue and investment decline.
• With high reliance on oil exports, this leads to stagnant growth and rising unemployment, reflecting reduced national income (Y1 < Yfe).

Reduction of Fuel Subsidies and Fiscal Efficiency

Improved Government Budget Space

• Reducing fuel subsidies can help reallocate government expenditure toward infrastructure, education, or healthcare, supporting long-term development goals.
• Subsidy removal improves fiscal balance, reducing dependency on external borrowing (foreign debt = US$75.4 billion, Table 2).
• It also helps address allocative inefficiency, as subsidies often benefit wealthier households with higher fuel consumption, exacerbating income inequality.

Limitations and Risks

• Reduction of subsidies increases fuel prices, which can be regressive and lead to public backlash, especially in a country where many live below the poverty line.
• Without robust social safety nets, the real income of vulnerable groups may fall, worsening short-term living standards, undermining development.
• Fuel price hikes may also cause cost-push inflation, harming purchasing power and business input costs.

Infrastructure Investment and Foreign Borrowing

Potential to Stimulate Long-Term Growth

• Loans from China, World Bank, and African Development Bank were secured to develop infrastructure, which is crucial for long-term economic development.
• Improved roads, ports, and power infrastructure reduce transaction costs, support private sector expansion, and enhance regional trade competitiveness.
• Infrastructure development can stimulate job creation, particularly in non-oil sectors, diversifying the economic base and boosting inclusive growth.

Limitations and Sustainability Concerns

• Many infrastructure projects were suspended during the oil price crash, showing fiscal vulnerability due to reliance on oil revenue.
• Nigeria’s foreign debt of US$75.4 billion (Table 2) raises concerns about debt sustainability, especially when growth rates are low and fiscal revenues remain oil-dependent.
• High levels of corruption, particularly in the oil sector, risk misallocation of borrowed funds, reducing their effectiveness in achieving development objectives.

Import Restrictions and Domestic Production

Promoting Local Industry and Reducing Import Dependence

• Import restrictions aim to protect domestic industries, reduce reliance on foreign goods, and improve the current account balance.
• Nigeria runs a trade deficit (exports: US$45.3B, imports: US$52.1B, Table 2), indicating excessive dependency on imported goods, including food despite a large agricultural workforce.
• By restricting imports, the policy could incentivize domestic production in sectors like agriculture and light manufacturing, leading to job creation and rural development.

Potential Drawbacks

• Import restrictions may lead to higher domestic prices, reducing consumer welfare and possibly causing shortages if domestic supply is insufficient.
• Protectionism can also lead to inefficient industries, especially if not combined with productivity-enhancing reforms and investment in human capital.
• May provoke retaliatory trade measures, reducing export opportunities and harming long-term growth prospects.

Overall Impact on Economic Growth and Development

Strengths

• Efforts to reduce subsidies and secure infrastructure funding are growth-enabling policies if managed transparently and efficiently.
• Import restrictions may promote domestic production, enhancing self-sufficiency and reducing external vulnerability.
• Investment in infrastructure could improve long-run aggregate supply, stimulating sustainable economic growth.

Weaknesses

• Overreliance on oil continues to cause volatility, delaying structural transformation and increasing fiscal vulnerability.
• Reduction of fuel subsidies without adequate safety nets may harm the poorest, reducing short-term development outcomes.
• High levels of corruption and foreign debt limit the effectiveness and sustainability of growth strategies.
• Import restrictions, while protective, may reduce efficiency and competitiveness in the absence of broader industrial policy.

Conclusion

Nigeria’s measures reflect a mix of growth-oriented and protectionist policies, with potential for long-term economic transformation if managed effectively. However, structural weaknesses including oil dependence, corruption, and debt burden continue to undermine both growth and development outcomes. Policies need to be paired with governance reform, diversification, and inclusive safety nets to ensure sustainable progress in both economic growth and human development.