Sample IB Question-Past Paper 1

4. a. Analyse the methods by which Gross Domestic Product (GDP) may be measured.

Outline:

• Define analyze.
• Break down in order to bring out the essential elements or structure.
• Define GDP.
• GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets.
• Explain components of GDP.
• GDP = I + C + G + (net exports)
• Investment, Consumption, Government expenditure, and Exports minus Imports.
• 3 methods for analyzing GDP:
• Expenditure method.
• Explain how it's calculated.
• Income method.
• Explain how it's calculated.
• Output method.
• Explain how it's calculated.
• Add diagram of circular flow of income.
• Explain diagram.
• Include example if appropriate.

Answer to Question:

This essay will break down the methods by which GDP may be measured in order to bring out the essential elements or structure. GDP can be defined as the measure of all incomes within the borders of the country, regardless of who owns the assets. GDP has the following components: GDP = I + C + G + (net exports). I = investment, C = consumption, G = government expenditures, and net exports = exports minus imports.

Figure 1.3: The different methods of measuring GDP.

There are the three methods for analyzing GDP: the income, expenditure, and output method. The income method is calculated by adding up all of the "rent, wages, interest, and profits" in order to measure GDP. This method refers to c. The expenditure method measures a. It measures the total expenditures on goods and services in the economy to find GDP. The output method, however, measures b, which is done by looking at the value of the output of the goods and services.

The circular flow of income model (figure 1.3) shows a very basic way of understanding economic activity. Households spend money on goods and services (a), and provide land, labor, capital, and management as factors of production. Firms receive the factors of production and money, and in turn grant households wages, rent, interest, and profit (c), as well as the goods and services (b) that they purchased. So, the households receive goods and services, as well as the components of (c). This model, however, doesn't address injections and outflows, and hence is a very simple model.

All three methods of measuring GDP should yield the same value more or less - they are simply different methods of finding the same value.

4. b. “Using real Gross Domestic Product (GDP) data is a very useful means of comparing economic activity between countries.” Discuss this statement.

Outline:

• Define discuss:
• Offer a considered and balanced review that includes a range of arguments, factors, or hypotheses.
• Define GDP:
• GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets.
• GDP = I + C + G + (net exports)
• Investment, Consumption, Government expenditure, and Exports minus Imports.
• Claim:
• Populations vary among countries, so while China for example may have a higher GDP than Canada, its GDP per capita is a lot smaller, because China's population is a lot bigger than Canada's. Therefore, GDP per capita would be a more useful way of comparing economic activity.
• Counterclaim:
• However, a large portion of the economic activity in the country may actually be from foreign direct investment (FDI), which would include assets not owned by the country, but instead, by other countries. FDI is long-term investment by multinational corporations (MNCs) in countries overseas. In some developing countries, a large portion of their GDP comes from FDI. Consequently, while it may seem that the developing country has a certain GDP, countries that own the FDI in that country are actually making a large contribution to the country's GDP, which would make it seem like the country itself is doing better than it really is. So perhaps GNI per capita would be an even better measure of economic activity, because GNI (Gross National Income) per capita only measures the total income of the country's owned assets. GNI doesn't include FDI, and does include its own FDI in other countries, as well as the incomes of its citizens that are not within the country's borders.
• Conclusion:
• While GDP may be a useful means of measuring economic activity between similar countries in terms of population and levels of FDI, since most countries differ from one another in many respects, it may be more useful to instead compare economic activity through GNI per capita figures.

Answer to question:

This essay will offer a considered and balanced review that includes a range of arguments, factors, or hypotheses in order to answer the question above. GDP is the measure of all incomes within the borders of the country, regardless of who owns the assets. Its components are: GDP = I + C + G + (net exports), where I = Investment, C = Consumption, G = Government expenditure, and (net exports) = Exports minus Imports. Populations vary among countries, so while China for example may have a higher GDP than Canada, its GDP per capita is a lot smaller, because China's population is a lot bigger than Canada's. Therefore, GDP per capita would be a more useful way of comparing economic activity. 

However, a large portion of the economic activity in the country may actually be from foreign direct investment (FDI), which would include assets not owned by the country, but instead, by other countries. FDI is long-term investment by multinational corporations (MNCs) in countries overseas. In some developing countries, a large portion of their GDP comes from FDI. Consequently, while it may seem that the developing country has a certain GDP, countries that own the FDI in that country are actually making a large contribution to the country's GDP, which would make it seem like the country itself is doing better than it really is. So perhaps GNI per capita would be an even better measure of economic activity, because GNI (Gross National Income) per capita only measures the total income of the country's owned assets. GNI doesn't include FDI, and does include its own FDI in other countries, as well as the incomes of its citizens that are not within the country's borders.

To conclude, while GDP may be a useful means of measuring economic activity between similar countries in terms of population and levels of FDI, since most countries differ from one another in many respects, it may be more useful to instead compare economic activity through GNI per capita figures.

Haiti Day Zero- Role of Domestic Facotrs, International Trade

1. In your opinion, what is Haiti’s most valuable resource endowment? Explain. [10 Marks]

Haiti's most valuable resource endowment, in my opinion, is labor. Since "40% of the population is under 14 years of age," Haiti has a young, low-skilled workforce that could be used to produce goods and services. Haiti's has suffered a lot, making its people more resilient. The people may be motivated to aid the country by producing goods and services. They can work in the T-shirt factories, because the work doesn't require high-skilled labor. This would provide wages to more people in Haiti, allowing them to dramatically improve their living standards (relatively speaking). Since 2/3 of the population is unemployed, firms could produce their goods in Haiti by using the available cheap labor to do so. Cheap labor will attract firms, and Haiti's people will increase their incomes.

2. Choose two development or growth strategies and explain how these could be implemented in Haiti. [15 Marks]

Fairtrade Schemes: One development strategy that could benefit Haiti massively could be the implementation of fair trade schemes. Fairtrade labeling allows producers to certify their products, allowing consumers to know that the producers were payed a fair price. Trade companies may want to certify their products, because it may increase demand for their products. Since "66% of all Haitian's work in the agricultural sector on small subsistence farms," the FLO could spark a lot of development and growth in Haiti. To qualify for the International Fairtrade Certification Mark, the trading company must meet certain criteria. One criteria is to purchase the producer's product at least at the Fairtrade minimum price, ensuring that the producer covers production costs and can earn a living income. The trading company must commit to a long-term contract with the producer, ensuring security. Producers can receive credit from the trading company, and money to aid local community development. If Haiti's people engaged in Fairtrade schemes, they would receive all of those benefits. This would ensure most of Haiti's people with a living income, money for local development, security, and credit.

Import Substitution: Another development strategy Haiti could implement would be import substitution, which is an inward-oriented growth strategy. The government would have to adopt a policy stating which goods to produce domestically, provide subsidies to domestic producers, and implement a protectionist system with tariff barriers to keep competition out.

3. Evaluate the strengths and weaknesses of each strategy. [15 Marks]

Fairtrade Schemes: As previously stated, Haiti's people will benefit immensely from these schemes, because most of the workforce is in the agriculture industry. They will receive money for their production and living costs, and money for local community development. Those who produce organic products will receive even more benefits. They will be able to receive credit from the trading companies, and will have security from long-term contracts. This may put Haiti out of poverty and really spark growth and development in the country. However, there may not be enough trading companies willing to participate in the Fairtrade Schemes, so it's unlikely that everyone will benefit from it. The traders will also experience higher costs, which may offset the benefits of having the certification mark. This strategy may be more effective with less emphasis on agricultural production in Haiti.

Import Substitution: Since Haiti has a current account deficit, by implementing an import substitution they could reduce the deficit and therefore improve their balance of payments. The strategy would protect domestic jobs (increasing jobs in Haiti, which it's really lacking), protect local culture and social habits, and would protect Haiti from multinational corporations. There are many weaknesses of this strategy, however. Jobs may only be protected in the short-run. In the long run, there may be lower growth, which may hinder job creation. Haiti will experience higher prices, due to inefficiency. Research and development will be reduced due to a lack of competition, and the strategy may lead to higher inflation rates. Other countries may take retaliatory protectionist measures against Haiti. This strategy may only benefit Haiti in the short run. In the long run, however, it would need to employ other strategies. Also, since its workforce isn't skilled, it is doubtful that they'll be able to produce most imported products domestically, since they're manufactured goods that require certain skills and capital to make.

4. How could corruption be a barrier to the future development of Haiti? [10 Marks]

Corruption is a huge barrier to future development in Haiti. Haiti has been found to be one of the most corrupt countries in the world, so it definitely is experiencing corruption's evils. Corruption is more likely to occur under the following conditions: when there's high government spending on capital investment projects, when accounting practices are not being formulated or controlled well, when there are underpaid government officials, when there are uncontrolled political elections, when there's a weak legal structure, and a lack of freedom of speech. Obviously, Haiti must be experiencing at least one of these situations, causing corruption.

Corruption could be a barrier to the future development of Haiti in a number of ways. Electoral corruption will lead to people being elected that won’t adopt policies that people want, reducing satisfaction in the country and causing conflict. Corruption allows people to surpass the law, therefore increasing incentives to break the law. Corruption leads to market failure, because the most efficient producers won’t always get the contract they should be getting. Bribes increase costs of businesses, leading to higher prices. This will reduce people's spending abilities, and may lead to more people importing goods instead. This will increase the current account deficit, harming the balance of payments. Contracts may not be followed, reducing foreign direct investment (FDI) and trust. FDI is very valuable to developing countries, especially Haiti, because it can provide employment (by MNC's entering the country), education, and training. Education and training would greatly help Haiti, because it has a young and unskilled workforce. FDI will also increase government tax revenue, which it can then use to invest in Haiti's economic development. Construction and environment regulations may not be followed, affecting peoples’ welfare. Monetary gains from corruption often leave the country, reducing available capital.

5. What do you think Haiti will be like in 20 years? [10 Marks]

In 20 years, I think that Haiti could go either way. It's rather difficult to predict the future of anything, yet alone the future of something in two decades. If Haiti's corruption, disasters, and overspecialization in agriculture and textiles continues, it will not see much economic growth or development. However, if the country finds a way to implement Fairtrade Schemes, then, as stated previously, that may spark some real progress. Haiti's most valuable asset right now is its unemployed, low-skilled workforce, that could be used to increase exports and change the current account balance. The country must also find a way to reduce corruption, so that more FDI enters the country, which could provide education, training, and employment to Haiti. It could also aid development in ways discussed previously.

IB Economics 2016 Prediction

My economic prediction for 2016 is that real estate prices in China will decrease. The justification and reasoning of this includes that since real estate has been becoming increasingly expensive in China, due to the increase in middle class in China, "ghost cities" are being created. The supply of real estate will not meet demand and thus the price of Chinese real estate will soon decrease.

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