| Date | November 2021 | Marks available | 2 | Reference code | 21N.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
Table 5 shows selected items of the balance of payments for Laylaland in 2020. Figures are in millions of US dollars (US$).
Table 5
Laylaland has a current account deficit of US$1865 million.
Chia seeds are an agricultural good produced in many countries and priced in US dollars (US$).
Figure 1 illustrates the market for chia seeds in a small country called Nofiberland. D is the domestic demand and S is the domestic supply for chia seeds. Chia seeds can be initially imported at the current world price of US$15.00 per kg. Sw is therefore the world supply faced in Nofiberland with free trade. To protect Nofiberland producers, the government decides to impose a US$6.00 tariff on chia seed imports. St is therefore the world supply faced in Nofiberland after the tariff is imposed.
Figure 1
Quinoa is a great source of protein and is thus considered a “super food”. As a result, the demand for quinoa in advanced economies has lately been rising very fast while global supply has not changed. A small country called Proteinland gets 80 % of its export revenues from exporting quinoa to advanced economies.
Distinguish between credit and debit items in the balance of payments.
State one example of a debit item from the financial account of the balance of payments.
Using Table 5, calculate the value of net current transfers for Laylaland in 2020.
Using Table 5, calculate the net exports of goods and services for Laylaland in 2020.
Explain two methods that Laylaland’s government could use to correct the current account deficit.
List two administrative barriers that Nofiberland could have used to limit imports of chia seeds.
Calculate the price elasticity of demand for chia seeds in Nofiberland following the imposition of the tariff.
Calculate the change in consumer expenditure on imported chia seeds in Nofiberland resulting from the imposition of the tariff.
Calculate the total welfare loss resulting from the imposition of the tariff on chia seeds.
Outline one reason why the imposition of the tariff would lead to a welfare loss.
Describe the impact of the rise in demand for quinoa on the terms of trade of Proteinland.
Explain how the increase in world demand for quinoa would likely affect the current account balance of Proteinland.
Markscheme
Correct examples include:
- (net) outward portfolio investment
- (net) outward FDI
- increase in forex reserves
- (net) outflow of “hot money”.
OR examples of any of the above, such as:
Domestic residents purchasing foreign bonds / setting up a new company abroad or acquiring controlling percentage of shares of a foreign company / the central bank buying foreign currency / domestic residents buying foreign currency.
For any correct example award [1].
539 − 1397 = −858
An answer of −$858 million or −858 is sufficient for [1].
NX + Net Income + Net Current Transfers = −1865
(Net Income = 412 − 1075 = −663)
NX = 663 + 858 − 1865
Any valid working is sufficient for [1]. Valid working may constitute identifying the three figures (663, 858, 1865) regardless of their +/− signs.
NX = $344 million
An answer of −$344 without any valid working is sufficient for [1].
OFR applies if current transfers have been calculated incorrectly in part (c).
PED =
Any valid working (correct %Δ Qd(X) or %Δ P(X), provided the formula is not inverted) is sufficient for [1]. However, simply stating the correct % (e.g. a denominator of 40 %) is not sufficient.
PED = 0.43 or −0.43 or
An answer of 0.43 or −0.43, without any valid working is sufficient for [1].
If a % sign is used in the final answer, a maximum of [1] may be awarded.
− = 462 − 465
Any valid working is sufficient for [1].
= −$3 million
An answer of −$3 million or 3 without any valid working is sufficient for [1].
Any valid working is sufficient for [1]. If the response provides a correct calculation of one relevant triangle, then [1] may be awarded.
= $27 million
An answer of $27 million or 27 without any valid working is sufficient for [1].
PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
For stating that the terms of trade have improved/risen/increased or that there has been a favourable movement [1].
Examiners report
Mostly correct.
Many students did not know the items in the financial account of the balance of payments and instead stated a current account item. Others failed to show that FDI needed to be qualified as being “overseas” to be a debit item.
There were several unit errors, including the omission of the negative sign.
This was not a straightforward question but was generally done well, signifying a good understanding of the current account. Again, there were some unit errors.
Lower-achieving responses stated rather than explained — stating that import tariffs could be used but not how this would impact the current account. A small number of candidates used two very similar methods e.g. two forms of trade protection — and were awarded L1 only.
Many candidates suggested that tariffs and quotas were administrative barriers.
Calculation of PED should be very straightforward for HL candidates. However, many were careless and used the incorrect denominator or mixed initial values with final values.
This question was done poorly. Candidates overlooked “imported” and calculated the change in consumer spending on chia seeds.
Most candidates were able to calculate the area of two triangles — although some, in error, assumed that they were congruent.
Some candidates explained correctly that the loss in consumer surplus would outweigh the gains in producer surplus and tax revenue. However, it was pleasing to see the majority explaining that production would be switched from more efficient foreign producers to less efficient domestic producers.
Well-answered.
Although candidates generally grasped the issue, many found it difficult to explain clearly and earn full marks. A number of scripts argued that the PED would be significant (and so the current account could worsen) whereas this is not the case following an increase in demand.
