| Date | May 2018 | Marks available | 2 | Reference code | 18M.3.HL.TZ0.3 |
| Level | Higher level | Paper | Paper 3 | Time zone | Time zone 0 |
| Command term | Calculate | Question number | 3 | Adapted from | N/A |
Question
The following diagram illustrates the production possibilities of two countries, Country A and Country B, in the production of cotton and bananas.
Table 5 provides information relating to the Balance of Payments for Urbania for 2017.
Table 5
Urbania has a current account deficit of $125 million in 2017.
Using the diagram, calculate the opportunity cost of producing one tonne of bananas in Country A.
Using information provided in the diagram to support your answer, determine which country should specialise in the production of cotton.
Distinguish between the terms absolute advantage and comparative advantage.
Explain two reasons why specialisation in a narrow range of primary products according to the theory of comparative advantage might not benefit an economically less developed country.
Calculate the value of V (exports of services) for Urbania in 2017.
Distinguish between direct investment and portfolio investment.
Using the information in Table 5, calculate the financial account balance.
Using your answer to part (g)(i), calculate the value of W (reserve assets) in Table 5.
Using your answer to part (g)(ii), describe how the level of reserve assets in Urbania changed by the end of 2017.
The government of Urbania is concerned that the rate of inflation is significantly higher than in its close trading partners.
Outline how Urbania’s relatively high rate of inflation might affect its current account balance.
Outline one method, other than attempting to reduce the value of its currency, which may be used by the government of Urbania to reduce its current account deficit.
Explain how a depreciation of the Urbanian dollar ($) might result in a J-curve effect.
Markscheme
of a tonne of cotton (0.375 tonne cotton or 375 kilograms of cotton or 0.38 tonne cotton).
1527 + V − 1393 − 954 − 35 − 49 = −125
Any valid working is sufficient for [1].
V = $779 million
An answer of 779 without working is sufficient for [1].
Current account + capital account + financial account = 0
− 125 + (6 + 11) + financial account = 0
Any valid working is sufficient for [1].
Financial account = $108 million
Net portfolio + net direct + W = financial account
285 − 196 + W = 108
W = $19 million
OFR applies.
The level of reserve assets in Urbania has decreased.
OFR applies.
N.B.: A sketch of a J curve, without any explanation, would only be sufficient for 1 mark (only if it is properly labelled).
