Home / IBDP Economics / IBDP Economics HL / Benefits of international trade Paper 2

Benefits of international trade Paper 2

IBDP Economics  HL – The global economy – Benefits of international trade -Paper 2 Exam Style Practice Questions

IBDP Physics
IBDP Biology
IBDP Chemistry
IBDP Maths
IBDP - All Courses

Benefits of international trade Paper 2? 

Exam Style Questions..

Subject Guide IBDP Economic IBO

IBDP Economic HL- All Topics

Exam Style Question for IBDP Economics HL- Benefits of international trade -Paper 2

 

South Sudan joins the East African Community

  1. The East African Community (EAC) is the most integrated trading bloc in Africa. In 2005, the members established a customs union, and then in 2010 it became a common market. There are ambitious plans to establish a monetary union by 2024.

  2. According to a recent report, the region is wealthier and more peaceful as a result of the increased integration. Economic models suggest that bilateral trade between member countries was 213 % higher in 2011 than it would have been without the integration. This is despite the fact that progress on fully eliminating trade barriers has been rather slow and there are still a large number of non-tariff barriers.

  3. Until recently the customs union was made up of Burundi, Kenya, Rwanda, Tanzania and Uganda. Very recently, South Sudan joined the bloc. This presents a tremendous opportunity for South Sudan, which was recently recognized as an independent country.

  4. South Sudan is one of many developing countries that are dependent on oil exports for the majority of its export revenues and oil prices have been falling due to increased supply of oil in the market. The deteriorating terms of trade have resulted in a worsening of the current account and lower government revenues. Regional economic integration might help South Sudan to diversify its economy.

  5. Agriculture is one potential area that South Sudan could focus on to diversify its economy. According to some estimates, 70 % of land is suitable for agriculture, but less than 4 % is currently being cultivated. The large flood plains in the country are suitable for rice production and the hope is that South Sudan can develop a comparative advantage in this essential food.

  6. South Sudan is landlocked and most of its road network is unpaved. This is just one example of its poor infrastructure. Since infrastructure is an expensive investment, regional cooperation will be vital for improving its road systems. Furthermore, effective transport links to sea ports in Kenya and Tanzania will allow for greater trade and therefore economies of scale.

  7. In the short term, there will be challenges for South Sudan associated with joining the common market. For example, before Rwanda joined the EAC in 2007, there were lower tariffs on many imported inputs. However, the cost of living for the poor population rose because of trade diversion that occurred after joining the EAC. South Sudan is likely to face the same problem.

  8. Labour costs in South Sudan are higher than those of other member countries and years of conflict have left the population with low levels of education and skills. This may present a barrier for South Sudan in attracting foreign direct investment, despite being part of the common market.

Question

Define the term comparative advantage indicated in bold in the text (paragraph [5]).

▶️Answer/Explanation
An explanation that is when a country can produce a product at a lower supply opportunity cost than another country

The Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP), Australia and Japan

  1. In 2018, Australia signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)*. The agreement creates the third largest free trade area in the world, covers nearly 500 million people and is worth more than US$12 trillion. The members of the agreement have stated that economic integration and free trade is important to help foster good political relations and inclusive growth for all nations.

  2. The trade agreement will aim to gradually eliminate most trade protection within the member countries. The agreement will see tariffs eliminated for Australian cheese and beef exports to Japan, and increased quotas for the export of rice to Japan from 4400 to 8400 tonnes. Nikkei Asian Review reported that “Fast-food restaurants in particular are embracing the import as a way to cut costs to cope with rising wages.” Additionally, Japanese food manufacturers will be able to lower production costs for rice-based meals and benefit from increased stability of input prices. The benefits from the agreement for Japan’s economy are projected to exceed US$70 billion, but some industries would be negatively affected.

  3. Japanese farmers are worried about the increase in imported food from Australia. Furthermore, the Japanese government is concerned about the effects of the CPTPP on Japan’s food self-sufficiency—Japan relies on other countries for over 60 % of its food. In response to these concerns the Japanese government has offered support for domestic farmers to diversify production into other crops. The government also plans to subsidize the rice farmers through the initial phase of lowering trade barriers.

  4. The agreement is said to be worth more than US$37 billion to Australian agricultural exports. It is hoped that CPTPP and the falling value of the Australian dollar will help Australia to reduce its current account deficit, but some economists have argued that this can take a long time. According to some estimations, the short-run price elasticity of demand (PED) for Australian exports is 0.2 and the short-run PED for imports in Australia is 0.4. However, the long-run PED for Australian exports is 1.1 and the long-run PED for imports in Australia is 1.3.

  5. There have also been concerns about the CPTPP from trade unions in Australia. They argue that it deregulates the labour markets and gives corporations from other countries an ability to take legal action against governments for implementing laws that raise wages or protect the environment, if the foreign corporation can prove that the law hurt their commercial interests. One university lecturer said that the future costs to the taxpayer could be significant if foreign companies take the Australian government to court.

  6. The trade agreement would allow workers from other countries to work in Australia without employers being required to check if Australian citizens are available to fill the jobs before the migrant workers are employed. It is estimated this may risk 39 000 jobs in Australia. Furthermore, environmental activists have expressed concerns that the negative environmental and social effects of the agreement have not been well considered. This may lead to conflicts with Australia’s commitment to the United Nations’ Sustainable Development Goals.

Question

Using information from the text/data and your knowledge of economics, evaluate the view that free trade is beneficial to Japan’s economy.

▶️Answer/Explanation

Responses may include:

  • Definition of current account surplus.

Economic analysis may include:

  • economic integration theory
  • economies of scale
  • balance of payments
  • protectionism
  • externalities
  • AD/AS
  • economic growth
  • employment
  • inflation
  • comparative advantage.

For free trade:

  • Third largest free trade area in the world (paragraph [1]) larger market leading to possible economies of scale.
  • Encourages good political relations and inclusive growth (paragraph [1]).
  • Worth in excess of US$70 billion to Japan’s economy (paragraph [2]) – exports increasing, may lead to economic growth.
  • Lower prices of imported products, such as Australian cheese and beef for restaurant owners (costs of production), reducing the impact of higher wage costs in Japan. (paragraph [2]).
  • Lower prices of rice for Japanese consumers.
  • Farmers may access an opportunity to diversify into other crops (paragraph [3]).
  • Japanese may have job opportunities in Australia (paragraph [6])
  • May help with trade imbalances between Japan and other countries like Australia.

Against free trade:

  • Concerns of food self-sufficiency/food security (paragraph [3]), over 60 % already imported. This may have long-term implications if there is an overreliance on food imports.
  • Subsidies for Japanese farmers are needed to help diversification (paragraph [3]), results in opportunity costs and production inefficiencies.
  • Removing some forms of trade barrier may only be replaced by others – subsidies (paragraph [3]) and the benefits may be mitigated.
  • Some industries negatively affected (paragraph [2]), may lead to structural unemployment issues.

Fiji’s challenges and opportunities

  1. In 2016, the island nation of Fiji suffered from cyclone Winston (a tropical storm), costing more than 40 lives and damaging its infrastructure. One of the country’s four sugar mills was severely damaged, harming raw sugar processing. Processed sugar is, in addition to bottled water and tourism, a major export in Fiji. A recent study found that the damage from the cyclone continues to have a lasting effect on communities as fisherwomen report fewer and smaller crabs and fishes. The social safety net is limited and there are calls for the government to help the citizens who have been affected by the cyclone. However, the government had to use its budget to rebuild infrastructure.

  2. The government has prepared several strategies to strengthen the economy. These include financial support for sugar cane producers, diversification of its agricultural produce, better access to finance and encouragement of investment. The government has committed to provide equal opportunities for all: promoting the participation of women in education and political leadership, because Fiji has one of the lowest female participation rates in politics in the world.

  3. To support its sugar cane farmers, the government provides a 55 % subsidy on pesticides (products that kill weeds) used in farming. However, small farmers are complaining about the excessive paperwork that needs to be completed to receive the subsidy and there is potential for corruption. Fiji competes with Brazil, which has an absolute advantage, in the world market for sugar.

  4. To diversify, the government plans to expand the ginger and coconut industries. Both industries are economically and environmentally sustainable. The industries provide an increased number of Fijians with a worthwhile income. Coconut production plays a very important role in Fiji’s economy, particularly in the more isolated rural communities, where formal employment is scarce and where alternative cash crops (crops grown to be sold for profit) do not exist. Coconut is a staple food and is vital for food security (ensuring that people have access to enough food), but is also important for health, economic and cultural reasons. New market opportunities have emerged in high-value products – green coconut products, such as coconut water, are becoming increasingly popular throughout the world.

  5. The Asian Development Bank encourages Fijian farmers to access “green finance”. These financial investments support economic development through sustainable development initiatives and policies. Under the government’s new reforms, farmers are able to use assets such as crops and contracts as collateral for loans, creating improved access to finance. However, to increase incomes, farmers will also need to improve their financial knowledge.

  6. To create an investment-friendly environment, the government must develop more infrastructure, create market access through greater economic integration and reduce asymmetric information between farmers and wholesale buyers. Australia has decided to help Fiji by financing infrastructure through grants and concessional loans.

Question

Define the term absolute advantage indicated in bold in the text (paragraph [3]).

▶️Answer/Explanation
An explanation that is the ability of one country to produce a good using fewer resources than another country

Filipino rice farmers prepare for trade liberalization

  1. To meet its obligations under World Trade Organization (WTO) rules, the president of the Philippines has asked the government to eliminate the current quota system for rice imports. As an important part of food security measures, the government wants to achieve self-sufficiency in the production of rice. To support this goal, the WTO allowed the Philippines to extend its rice quota until June 2017 to allow more time for local farmers to prepare for free trade.

  2. The current quota system for rice imports makes domestic prices rise dramatically during periods of low domestic supply.

  3. Eliminating the quota on rice aims to make the rice market more competitive, which could reduce the price of rice by as much as 7 Philippine pesos (PH₱) per kilogram (kg). The National Economic and Development Authority has estimated that lower rice prices could save Filipino households as much as PH₱2362 per year. However, if the rice quota is eliminated, economists have warned that the government must prepare local rice producers so that they can either compete with rice imports or move to producing other crops. “Currently Filipino farmers cannot compete with Vietnamese farmers who may enjoy economies of scale” declared one economist. “The solution is to bring down the cost of production of rice.”

  4. To help Filipino farmers to adjust to competition from lower-priced rice imports, the government has allocated funds to the Rice Competitiveness Enhancement Fund. This fund will provide support to farmers in order to increase productivity by supplying high-yield seeds and fertilizer. It will also provide subsidies to encourage the use of agricultural machinery and will offer support services and training to farmers.

  5. Apart from being an essential food for many Filipinos, rice is also an important input for the food industry. The plan to remove the import quota will reduce the inflation rate in the Philippines by up to 0.4 %. In July 2018, the central bank governor reported that inflation had reached 5.7 %, well above the government’s target range of 2 % to 4 %. He stated that “supply-side factors are the main drivers of the present inflation. These factors include rising international oil prices, higher indirect taxes and poor weather conditions that have affected food supply”. The president stated that the removal of the rice quota was one solution to ease the rising inflation.

Question

Define the term free trade indicated in bold in the text (paragraph [1]).

▶️Answer/Explanation
An explanation that it is the absence of (government) restrictions/barriers to trade between countries

Free Trade Agreement between the European Union and Indonesia

  1. The European Union (EU) and Indonesia are currently negotiating a free trade agreement (FTA). The agreement will aim to increase trade, avoid trade protection and expand foreign direct investment (FDI). Indonesia has the largest economy and population in Southeast Asia. The EU is Indonesia’s third-largest trading partner.

  2. The FTA could see the clothing and footwear industry in Indonesia increase by over 10 %. However, the labour-intensive manufacturing industry has historically been known for poor working conditions and low wages. On the other hand, increased output could decrease the high unemployment in Indonesia (currently at 12 %). The EU expects its car industry to benefit from the FTA. The agreement would encourage the EU to specialize in cars, and Indonesia to specialize in clothing, therefore both countries could benefit from comparative advantage.

  3. Since Indonesia’s main competitors already have trade agreements with the EU, establishing an FTA is a priority for the Indonesian government. The EU has a potential market of 510 million consumers, and may offer areas for growth during a time of lower global trade and uncertainty due to the trade war between the United States and China.

  4. However, recent trade issues between the EU and Indonesia have slowed down negotiations. The EU announced that palm oil biodiesel is unsustainable and will phase these fuels out by 2030. Experts say that palm oil causes excessive deforestation and contributes to climate change. Indonesia is the world’s largest exporter of palm oil.

  5. The EU has imposed tariffs on biodiesel exports from Indonesia, which may result in Indonesia losing a market worth over US$450 million. Palm oil represents 12 % of Indonesia’s total exports, contributes approximately 2.6 % to gross domestic product (GDP), and the industry employs more than 15 million people. The EU is Indonesia’s largest palm oil customer. Additionally, some EU manufacturing businesses are unhappy with the tariffs as they rely on palm oil to produce their products, such as processed foods.

  6. In response, Indonesia filed a lawsuit with the World Trade Organization (WTO), stating that the EU’s policy on biodiesel is unfair and is damaging the international image of palm oil. Indonesia claims it is committed to sustainable production practices and to protecting its forests.

  7. To make up for losing the EU’s market, Indonesia is actively exploring other markets to boost its exports of palm oil. Other countries like China, India and Russia have a more relaxed policy on palm oil and have growing demand for it. Indonesia has also retaliated to the tariff through an investigation into whether EU dairy products exported to Indonesia benefited from subsidies, and has recommended a 20 %–25 % tariff on EU dairy products.

  8. However, the EU has tried to lower tensions by offering a US$17 million grant to improve trade conditions and capacity in preparation for the FTA. Experts have said that the FTA could support the development of legal and sustainable palm oil production through supporting good governance and capacity building. Indonesia has stated it would welcome help to decrease any market failure caused by palm oil.

Question

Using a production possibilities curve (PPC) diagram to illustrate comparative advantage, explain why the EU would export cars to Indonesia and Indonesia would export clothing to the EU (paragraph [2]).

▶️Answer/Explanation
For drawing a correctly labelled PPC diagram illustrating comparative advantage showing that the EU has a comparative advantage in cars and Indonesia has a comparative advantage in clothing
AND
an explanation that the EU has a lower opportunity cost in producing cars so would specialize in the production of cars, while Indonesia has lower opportunity cost in clothing, so would specialize in clothing.

Text A — Overview of Vietnam

  1. Economic reforms in Vietnam during the past 30 years have led to rapid economic growth, which has transformed a poor nation into a lower middle-income economy. The percentage of the population with an income of less than US$1.90 a day declined from 38 % in 2002 to below 2 % in 2018.

  2. Vietnam used to be a food-insecure nation, in which many people sometimes lacked access to affordable food, but it is now a leading exporter of basic food commodities. It also aims to become an exporter of high quality and processed food products. However, agricultural production only accounts for 18 % of gross domestic product (GDP), although it uses 40 % of the land and employs 43 % of the labour force. Due to the growing rural population, land is often divided up between a greater number of farmers, causing some farms to become smaller. These farms have fewer opportunities to benefit from economies of scale and lower average costs of production.

  3. Vietnam’s rapid growth and industrialization, focused on export-oriented manufacturing, have had a harmful impact on the environment. Electricity consumption has tripled since 2010, growing faster than GDP. Electricity generation, which mainly uses fossil fuels, accounts for approximately 60 % of Vietnam’s carbon emissions. Demand for water continues to increase. Unsustainable exploitation of natural resources, such as land, fisheries, and timber, could negatively affect prospects for long-term growth. In addition, Vietnam’s primary sector is highly vulnerable to the climate and is therefore subject to supply shocks.

  4. Vietnam has signed several free trade agreements (FTAs). Its first FTA was a partnership with Japan in 2008. Both Vietnam and Japan are members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which took effect at the beginning of 2019. These FTAs also promote inward foreign direct investment (FDI). In addition, Vietnam has introduced policies to attract foreign investment, such as tax incentives and spending on infrastructure.

  5. Japan is the biggest provider of foreign aid to Vietnam and the largest source of FDI. Japanese firms and aid agencies are jointly financing large-scale projects, including port infrastructure and a high-speed railway, which will reduce the Hanoi to Ho Chi Minh journey time from about 35 hours to under six hours. Other Japanese-funded aid projects are in the areas of health care, education, and the environment.

Text B — Trade and investment flows between Vietnam and Japan

  1. Japan imports seafood and consumer products such as textiles, leather shoes and processed foods from Vietnam, because Vietnam has a comparative advantage in such items. Conversely, Vietnam imports machinery, technology, and raw materials for production from Japan. Gradually barriers to trade are being removed. In 2020, Vietnam began exporting lychees (a luxury fruit) to Japan after five years of negotiations on quality standards. The improved access to the Japanese market has increased the number of consumers and the revenue earned by Vietnamese lychee farmers.

  2. Japanese firms invest in Vietnam, particularly in urban areas, because wages are low and they can export from Vietnam to other CPTPP members and to China and Indonesia. Panasonic, a Japanese multinational company (MNC), relocated a major factory, which manufactures refrigerators and washing machines, from Thailand to Vietnam in 2020. The construction of a coal-fired power plant is mainly funded by Japanese firms. The Japanese government is promoting further investment by subsidizing over 30 firms that are relocating from China to Vietnam. Most of these firms are food processors or producers of manufactured goods (for example, medical equipment).

Text C — Roles of the central bank in Vietnam

  1. The central bank in Vietnam has been lowering interest rates since mid-2019. However, it has kept the minimum reserve requirement at 3 % of commercial bank deposits, despite suggestions that this requirement could be lowered.

  2. The central bank also regulates the exchange rate of the dong (Vietnam’s currency). It actively intervenes in the foreign exchange market to stabilize the rate when necessary. In April 2020, there was downward pressure on the dong due to the lower interest rates and fewer foreign tourists. However, the central bank has a large amount of reserve assets, which were used to prevent the dong from depreciating.

Question

Using a production possibilities curve (PPC) diagram to show comparative advantage, explain why Vietnam would export seafood to Japan while Japan would export machinery to Vietnam (Text B, paragraph [1]).

▶️Answer/Explanation

For a diagram with two PPCs showing that Japan has a comparative advantage in machinery while Vietnam has a comparative advantage in seafood AND stating that Japan has a lower opportunity cost in machinery [1], therefore Japan has comparative advantage or lower opportunity cost than Vietnam [1]
(or explained in terms of Vietnam).

Scroll to Top