IBDP Economics 4.2 Types of trade protection SL Paper 2- New Syllabus
Question
Read the extracts and answer the questions that follow.
Text A — Overview of the economy and government policies in Kenya
Kenya, in East Africa, is achieving high annual economic growth rates, averaging above 5 %. Living standards are improving and employment is increasing in the manufacturing, tourism, construction and education sectors. Kenya’s high growth is also changing the distribution of income and affecting the environment. However, climate change and high levels of inequality may reduce future growth rates.
Floods and droughts are severe and frequent. In 2022–2023, droughts caused agricultural output to fall, affecting the employment of 40 % of the population and doubling the number of people with insufficient food. The government took measures to increase food supplies, such as reducing the tariff on imports of rice.
The rising price of food is the main cause of inflation in Kenya. The central bank used a contractionary monetary policy in 2022 and 2023 to reduce inflation and to prevent the depreciation of the country’s currency (Kenyan shilling, KES).
The budget deficit as a percentage of gross domestic product (GDP) became smaller in 2023 because government expenditure grew more slowly than GDP. Moreover, economic growth resulted in higher tax revenue from both income tax and a 16 % indirect tax on goods and services. The government is also receiving revenue from the sale of some state-owned enterprises (SOEs). A World Bank programme, aimed at an expansion of “green” energy in Kenya, provides financial and technological support to the Kenya Power and Lighting Company, an SOE that has been making losses.
The currency depreciation in 2022 boosted exports. Services, which are approximately 38 % of total exports and include tourism and financial services, are growing faster than exports of goods. Manufactured goods account for 37 % of total exports and agricultural goods account for 25 %. Revenue from exports of tea, flowers, vegetables, meat, and coffee are volatile and unpredictable. The droughts in 2022–2023 reduced output, which lowered export revenue from vegetables and flowers by almost 20 %.
Text B — Unequal distribution of the benefits of economic growth in Kenya
Although economic growth has reduced absolute poverty, inequality remains a problem, particularly between the formal and informal sectors and between the urban and rural areas. Rural poverty is caused by low agricultural productivity and farmers’ limited access to markets, finance, and technology.
However, the level of education has improved significantly, with a literacy rate of over 90 %. Secondary school attendance rates have increased from 13 % in 2003 to 49 % in 2022, despite the costs of attending school. In 2022, the government introduced a fund (the Hustler Fund), partly financed by foreign aid. The fund provides low-interest loans to women, young people, and small firms, for education or investment.
Text C — Reducing and adapting to climate change in Kenya
Global warming is affecting the Kenyan economy. Consequently, agricultural output and tourism, which account for 70 % of employment and most exports, will probably decline. Therefore, GDP could fall by 2 % annually. However, Kenya has relatively low carbon emissions, particularly because renewable resources generate 90 % of electricity, a figure that is planned to rise to 100 % by 2030.
Measures taken by other economies to reduce carbon emissions provide opportunities for Kenya, because the markets for “green” goods are expanding. Kenya is able to sell tradable permits (carbon credits) to high-emitting countries due to its reforestation programmes. However, there are challenges for Kenya. The production of exports, such as coffee, needs to meet strict sustainability regulations imposed by the European Union (EU) on imports.
The International Monetary Fund (IMF) recommends that climate-related considerations should be part of macroeconomic and infrastructure policies. It also recommends that carbon taxes should be imposed to reduce the use of fossil fuels by firms. Rapid urbanization is increasing the need for electric vehicles and improved public transport. Energy efficiency measures, fuel substitution, and switching to rail transport will not only lower transportation costs but also reduce the trade deficit. This is because fossil fuels used for transportation and manufacturing are imported.
Kenya is able to obtain finance and technology for investment in climate-related projects, such as renewable energy and forestry programmes, through foreign aid and partnerships with the private sector. Overall, these policies will reduce environmental disasters and increase economic growth and jobs in the formal sector.
Table 1: Tea production in Kenya
| 2021 | 2022 | |
|---|---|---|
| Price per kg (KES) | 324 | 340 |
| Quantity produced in kg (million) | 3700 | 4800 |
Table 2: Economic data for Kenya
| 2015 | 2022 | |
|---|---|---|
| Real GDP (USD billion) | 70.12 | 94.80 |
| Real GDP per capita (USD) | 1497 | 1755 |
| Exchange rate (KES per USD) | 98 | 118 |
Table 3: Development data for Kenya
| 2015 | 2022 | |
|---|---|---|
| Population (million) | 46.85 | 54.03 |
| Gini coefficient | 0.408 | 0.387* |
| Employment in informal sector (% of total employment) | 83 | 83 |
| Human Development Index (HDI) | 0.561 | 0.601 |
* estimate
(a) (i) Define the term inflation indicated in bold in the text (Text A, paragraph 3). [2]
Show Answer
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
(a) (ii) Define the term foreign aid indicated in bold in the text (Text B, paragraph 2). [2]
Show Answer
Foreign aid is the transfer of financial resources, goods, services or technical assistance from one country or international organization to another country, usually to support economic development or humanitarian needs.
(b) (i) Using information from Table 1, calculate the price elasticity of supply for tea in Kenya when the price changes from 324 KES per kilogram (kg) in 2021 to 340 KES per kg in 2022. [2]
Show Answer
The formula is:
\(PES = \frac{\%\Delta Q_s}{\%\Delta P}\)
Percentage change in quantity supplied:
\(\%\Delta Q_s = \frac{4800-3700}{3700}\times100 = 29.73\%\)
Percentage change in price:
\(\%\Delta P = \frac{340-324}{324}\times100 = 4.94\%\)
Therefore:
\(PES = \frac{29.73}{4.94} \approx \mathbf{6.02}\)
Answer: PES = 6.02.
This indicates that the supply of tea was relatively price elastic over this period.
(b) (ii) Using information from Table 1, calculate the total revenue earned by Kenyan tea growers in 2022 in millions of KES. [1]
Show Answer
\(TR = P \times Q\)
\(TR = 340 \times 4800 = 1\,632\,000\)
Since quantity is given in millions of kg:
Total revenue = 1,632,000 million KES.
This is equivalent to 1.632 trillion KES.
(b) (iii) Sketch a demand and supply diagram to indicate how droughts caused the price of food to rise in Kenya (Text A, paragraphs 2 and 3). [2]
Show Answer
Droughts reduce agricultural output, causing the supply of food to decrease. Therefore, the supply curve shifts left from \(S_1\) to \(S_2\). With demand unchanged, the equilibrium price rises from \(P_1\) to \(P_2\).
(c) Using an international trade diagram, explain how the quantity demanded of rice in Kenya will change if the tariff on imports of rice is reduced (Text A, paragraph 2). [4]
Show Answer
A tariff is a tax imposed on imported goods. Reducing the tariff lowers the additional cost of importing rice, causing the domestic price of imported rice to fall.
On the international trade diagram, the domestic price falls from the world price plus the original tariff to the world price plus the lower tariff.
The lower domestic price causes a movement down along the demand curve for rice. Therefore, the quantity demanded of rice increases.
At the same time, the lower price reduces the quantity supplied by domestic rice producers, while the quantity of rice imported increases.
(d) Using an exchange rate diagram, explain how a contractionary monetary policy could prevent the depreciation of the Kenyan currency (KES) (Text A, paragraph 3). [4]
Show Answer
Contractionary monetary policy involves an increase in interest rates. Higher interest rates make Kenyan financial assets more attractive to foreign investors, increasing the demand for Kenyan shillings.
In the foreign exchange market, the demand curve for KES shifts to the right. This increases the equilibrium exchange rate and therefore causes the KES to appreciate or prevents it from depreciating.
Therefore, contractionary monetary policy can help prevent depreciation by increasing demand for the Kenyan currency through increased financial inflows.
(e) Using an AD/AS diagram, explain the likely effect of the improvement in the level of education on Kenya’s full employment level of output (potential output) (Text B, paragraph 2). [4]
Show Answer
Improved education increases the quality of human capital. Better-educated workers are likely to become more skilled and productive, increasing labour productivity and the productive capacity of the economy.
On an AD/AS diagram, this causes LRAS to shift right from \(LRAS_1\) to \(LRAS_2\). Therefore, the full-employment level of output, or potential output, increases from \(Y_1\) to \(Y_2\).
Thus, improvements in education can contribute to long-run economic growth by increasing the economy’s productive capacity.
(f) Using a Lorenz curve diagram, explain what happened to the distribution of income in Kenya between 2015 and 2022 (Table 3). [4]
Show Answer
The Gini coefficient fell from 0.408 in 2015 to 0.387 in 2022.
A lower Gini coefficient indicates a more equal distribution of income. Therefore, income inequality in Kenya decreased between 2015 and 2022.
On a Lorenz curve diagram, the 2022 Lorenz curve would lie closer to the line of perfect equality than the 2015 Lorenz curve. This indicates that the distribution of income became more equal.
(g) Using information from the text/data and your knowledge of economics, discuss the likely impact of high economic growth on environmental sustainability in Kenya. [15]
Show Answer
Economic growth is an increase in the real output of an economy, usually measured by an increase in real GDP. Environmental sustainability means meeting current economic needs without reducing the ability of future generations to meet their needs.
High economic growth in Kenya could have negative effects on environmental sustainability. As economic activity increases, production, consumption, transport and demand for natural resources are likely to increase. If these activities rely heavily on fossil fuels, they can create negative externalities of production such as air pollution and greenhouse-gas emissions.
This is particularly relevant to Kenya because rapid urbanization is increasing demand for transport. Fossil fuels are used in transportation and manufacturing, so higher economic activity could increase their consumption and contribute to environmental damage.
Economic growth may also place greater pressure on Kenya’s natural resources. The population increased from 46.85 million in 2015 to 54.03 million in 2022. Combined with higher output and consumption, this could increase demand for land, water, energy and other scarce resources.
Agriculture is another important concern. Agriculture accounts for a large proportion of employment and exports, while droughts and climate change are already affecting agricultural output. Rapid expansion of agricultural production without sustainable methods could lead to soil degradation, water depletion and other environmental problems.
Similarly, growth in tourism can have both positive and negative effects. Higher tourism can generate employment and export earnings, but excessive tourism may place pressure on ecosystems and natural resources. Therefore, the environmental impact depends on the nature and scale of economic growth.
However, economic growth does not necessarily reduce environmental sustainability. Higher economic growth can increase government tax revenue, giving the government greater resources to invest in environmental protection, renewable energy and sustainable infrastructure.
Kenya already has a relatively low-carbon electricity sector. Renewable resources generate 90 % of electricity, and the government plans to increase this to 100 % by 2030. Therefore, Kenya can potentially achieve economic growth without a proportionate increase in carbon emissions if growth is increasingly based on renewable energy.
Economic growth can also encourage the development of green industries. The text states that expanding global markets for green goods provide opportunities for Kenya. Kenya can also sell carbon credits through its reforestation programmes, creating potential export revenue while encouraging environmental protection.
Foreign aid and private-sector partnerships can provide Kenya with finance and technology for climate-related projects such as renewable energy and forestry programmes. These investments can support economic growth while improving environmental sustainability.
Government intervention can further reduce the negative environmental effects of economic growth. The IMF recommends the use of carbon taxes to reduce firms’ use of fossil fuels. Carbon taxes increase the private cost of polluting activities, providing firms with an incentive to switch towards cleaner technologies and energy sources.
Similarly, energy-efficiency measures, fuel substitution, electric vehicles and greater use of rail transport could reduce fossil-fuel consumption. These policies may have the additional benefit of reducing Kenya’s trade deficit because fossil fuels used for transportation and manufacturing are imported.
There may therefore be a trade-off between rapid economic growth and environmental sustainability if growth is based on resource-intensive and polluting activities. However, this trade-off can be reduced through appropriate government policies, renewable energy investment and technological development.
Overall, the effect of high economic growth on environmental sustainability in Kenya depends largely on the composition and management of that growth. Growth based heavily on fossil fuels, intensive agriculture and environmentally damaging activities could increase pollution, resource depletion and greenhouse-gas emissions. In contrast, growth based on renewable energy, green technology, sustainable infrastructure and reforestation can improve both economic performance and environmental sustainability.
Kenya’s high share of renewable electricity, carbon-credit opportunities and access to climate-related finance suggest that economic growth and environmental sustainability can coexist. Therefore, high economic growth is not inherently environmentally damaging, but without effective environmental policies it is likely to place increasing pressure on Kenya’s natural resources and environment.
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