| Date | May 2022 | Marks available | 4 | Reference code | 22M.2.SL.TZ0.1 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 1 | Adapted from | N/A |
Question
Text A — Overview of North Macedonia
- North Macedonia is a small, landlocked nation that shares borders with five countries, including Bulgaria and Greece. Bulgaria and Greece are members of the European Union (EU) common market, which North Macedonia hopes to join soon. Since the country began negotiating for EU membership, trade with the EU has increased rapidly and now accounts for 75 % of North Macedonia’s exports and 62 % of its imports.
- Despite its small market, with a population of approximately 2 million, North Macedonia’s proximity to the EU, low wages and expected entry into the common market have attracted foreign investors. Greece, its richest neighbour, was its third highest source of foreign investment in 2019. The lower cost of living also appeals to Greek tourists.
- EU companies have invested in the financial, telecommunication, energy and food processing industries in North Macedonia. Many of the most profitable companies are from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may increase as firms located in North Macedonia will be allowed to bypass all custom checks and enjoy tariff-free trade within the common market. One particular challenge for North Macedonia, however, is that most of the profits of foreign companies are likely to be repatriated (sent back to the companies’ home countries).
- In 2018, North Macedonia’s export revenue was US$7.57 billion and its import expenditure was US$9.56 billion. The country’s main exports are iron and steel, clothing and accessories, and food products. Food, livestock and consumer goods account for 33 % of imports while the remainder are machinery, petroleum and other materials needed for the industrial production process.
- The manufacturing sector, which now employs 31 % of the labour force, has gained more importance. The agricultural sector remains strong, contributes over 10 % of North Macedonia’s gross domestic product (GDP) and employs about 16 % of the country’s workforce.
- The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However, youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty line. Unemployment and poverty contribute to high rates of emigration. More than 20 % of the North Macedonian population have emigrated since 1994, mostly to the EU. As a member of the EU, North Macedonia will enjoy free movement of labour which will make it easy for its citizens to live and work in other EU countries.
Text B — North Macedonia’s economic reforms
- To be considered for EU membership, North Macedonia implemented a series of supply-side policies to reform its economy. The EU imposes strict requirements for membership but provides financial assistance to countries preparing for membership. North Macedonia has received 633 million euros (the currency of the EU) to help with the reforms.
- Most of the supply-side policies seek to improve the international competitiveness of North Macedonia’s industries. The authorities are increasing access to education and training for workers. The expansion of the transport network and other infrastructure is also expected to increase efficiency.
- Protection of the environment is also on the list of requirements for EU membership. North Macedonia aims to reduce its dependence on coal and to instead promote the use of solar, wind and hydropower technologies. These low-carbon energy sources would help decrease its air pollution, which is among the worst in Europe.
- The reforms, which started in 2014, have shown progress. Exports and manufacturing output are more diversified and more concentrated on high-value products. To attract FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the region. The central bank also prevents the denar (North Macedonia’s currency) from appreciating against the euro through managing foreign reserves. However, skill shortages and a mismatch of skills with those required by companies discourage foreign firms from investing. Important investment gaps in public infrastructure also remain.
Text C — North Macedonia’s trade agreements
North Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.
Table 1: Consumer Price Index (CPI) for North Macedonia (base year = 2010)
Table 2: Economic data for North Macedonia
[Text A: World Bank Data Bank, n.d. North Macedonia economy briefing: Prospects for Macedonian-Greek Economic
Relations After the Prespa Agreement [online] Available at: https://data.worldbank.org/country/north-macedonia
[Accessed 20 April 2021]. Source adapted.]
Text C: World Trade Organization, n.d. WT/TPR/S/390 • The Republic of North Macedonia [online] Available at:
https://www.wto.org/english/tratop_e/tpr_e/s390_sum_e.pdf [Accessed 20 April 2021]. Source adapted.
Table 1 and 2: Data from The World Bank [online] Available at: https://data.worldbank.org/ [Accessed 20 April 2021]. Source adapted.]
Define the term foreign direct investment (FDI) indicated in bold in the text (Text A, paragraph [3]).
Define the term unemployment rate indicated in bold in the text (Text A, paragraph [6]).
Using information from Table 1, calculate North Macedonia’s annual rates of inflation between 2016 and 2019.
Using your answer to part (b)(i), identify the year disinflation set in.
Using information from Text A, paragraph [4], calculate North Macedonia’s balance of trade in 2018.
Using an AD/AS diagram, explain the likely impact of North Macedonia’s supply-side policies on its full employment level of output (Text B, paragraph [2]).
Using an externalities diagram, explain how dependence on coal could be a source of market failure (Text B, paragraph [3]).
Using an exchange rate diagram, explain how the central bank of North Macedonia is preventing an appreciation of the denar against the euro (Text B, paragraph [4]).
Using an international trade diagram, explain the likely impact of the removal of import quotas on North Macedonia’s production of wine (Text C).
Using information from the texts/data and your knowledge of economics, discuss the likely economic effects on North Macedonia of its entry into the European Union (EU) Common Market.
Markscheme
Inflation in 2017:
[(110.9 – 109.4)/109.4] x 100 = 1.37%
Inflation in 2018:
[(112.5 – 110.9)/110.9] x 100 = 1.44%
Inflation in 2019:
[(113.4 – 112.5)/112.5] x 100 = 0.8%
Award [1] for any valid working but incorrect inflation rates calculated or for figures rounded to less than 2 dp or figures without the % sign.
Award [2] for correct inflation rates (with or without workings).
Award [1] for identifying 2019 as the year disinflation sets in (“after 2018” or “between 2018 and 2019” are also valid answers).
OFR applies.
7.57 − 9.56
Any valid working should be rewarded with [1]
= −(US)$1.99 billion
An answer of –(US)$1.99 billion, (US)$1.99 billion, –1.99, 1.99 or a deficit of 1.99 without workings is sufficient for [1].
Candidates who label diagrams incorrectly can be awarded a maximum of [3].
For AD/AS, the vertical axis may be Average (General) Price Level, or Price Level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. Any abbreviation of the previous terms is acceptable. A Keynesian AS is acceptable. A title is not necessary.
Candidates who label diagrams incorrectly can be awarded a maximum of [3].
The y axis may be labelled price or P and/or costs and/or benefits, and the x axis labelled quantity or Q. A title is not necessary.
Candidates who label diagrams incorrectly can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of the denar in euro (other currency), euro (other currency)/denar or euro (other currency) per denar. The horizontal axis should be quantity, or quantity of denars. A title is not necessary.
Candidates may show the initial increase in demand for the denar leading to an appreciation, followed by the increase in supply due to intervention. If correctly drawn and explained, such an approach should be fully rewarded.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
The use of P and Q on the axes is sufficient for an international trade diagram. The world price line may be labelled as S(World), SW, S(EU), Pworld, PW, PEU or any similar label indicating the horizontal line is the world (EU) price/supply. A title is not necessary.
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
- The impact on the unemployment rate may be mixed:
- it could be argued that the inflows of FDI (Text A, paragraph [2]; Table 2) and greater exports to the EU could lead to job creation.
- The lower wages may attract EU firms which may help reduce the high unemployment rate (Text A, paragraph [6]; Table 2).
- Jobs may be lost in the agricultural sector (Text C) which still employs 16 % of the population (Text A, paragraph [5]).
- Funds from the EU have helped increase access to education and workers’ training which could help reduce the skills mismatch (Text B, paragraph [4]) and hence reduce the high (structural) unemployment rate (Text A, paragraph [6]).
- The impact on economic growth:
- the increase in trade could close the current account (balance of trade) deficit (Table 2, answer to b(ii)), lead to increase in AD and hence actual growth.
- more trade may raise efficiency in North Macedonia through increased competition, economies of scale from larger markets, and improved resource allocation
- it could be argued that trade may not increase significantly since North Macedonia is already enjoying free trade with the EU over most goods and services (Text C).
- as North Macedonia currently suffers a deficit in the balance of trade (Text A, paragraph [4], answer to b(ii)) and a current account deficit (Table 2), the removal of quotas may worsen its balance of trade position and could lead to a fall in AD.
- the various supply-side policies needed to meet the requirements for EU membership have allowed potential growth and kept the inflation rate low (Table 1).
- the net FDI inflow throughout the 4-year period (Table 2) reflects potential growth.
- Access to seaports would be easier since North Macedonia is landlocked (Text A, paragraph [1]). This would further attract investment.
- The free movement of labour which comes with the common market may worsen the emigration problem and contribute to a ‘brain drain’ problem (Text A, paragraph [6]).
- The EU is providing North Macedonia with financial assistance to finance supply-side policies, which will allow them to become more globally competitive (Text B, paragraph [1]).
- Increased trade with the EU has allowed for diversification (Text B, paragraph [4]) and the growth of the manufacturing sector (Text A, paragraph [5]).
- Once North Macedonia no longer receives financial assistance from the EU, it may have difficulties financing government expenditure.
- The removal of quotas may have some impact on the local agricultural sector (Text C) which could worsen the incidence of poverty (Text A, paragraph [6]) and lead to over-reliance on other countries for food security since North Macedonia is already a net importer of food (Text C).
- As a member of the EU common market, North Macedonia will continue to have unrestricted access to imported capital goods, enhancing productivity and potential growth (Text A, paragraph [4]).
- North Macedonia will have to adopt EU external tariffs which may negatively impact its trade position with non-members (3 neighbouring countries are not part of the common market - Text A, paragraph [1]).
- The repatriation of foreign firms’ profits (Text A, paragraph [3]) may lead to a worsening of the balance of payments and a shortage of financial capital.
- There could be a loss of sovereignty as North Macedonia will need to give unrestricted access to EU firms which have already invested in essential services (Text A, paragraph [3])
- Compliance with EU standards for environmental protection could lead to less pollution and an improved quality of life (Text B, paragraph [3]).
- Greater competition due to exposure to foreign firms may lead to innovation.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Examiners report
Most candidates scored at least 1 mark on both definitions. Many candidates had some idea of what FDI was, but could not provide two key points. On the other hand, the vast majority of candidates pointed out that the unemployment rate is the proportion of the labour force (and not the population) which is without a job and hence could score full marks for part (a)(ii).
Many could not calculate inflation rates correctly, often forgetting to divide the difference between two values of the CPI by the initial value or dividing that difference by the final value – and this suggest unfamiliarity with relative (%) change calculations. Otherwise, most candidates seemed to understand the meaning of disinflation – even though many scored a mark on (b)(ii) thanks to the principle of ‘own figure rule’ (OFR). Most could calculate the balance of trade correctly and remembered to provide the correct unit ($ billion) and sign (negative).
Unfortunately, many candidates shifted the SRAS instead of the LRAS. This suggests they did not understand the difference between real output and the full employment level of output, and/or the difference between the determinants causing a shift of SRAS and those causing a shift of LRAS.
Some candidates had issues with the labelling of curves (reversed MSC and MPC or confused MPB/MSB with MPC/MSC) but otherwise most did well for this question. Some did not score full marks because they explained the external cost (the environmental degradation) but not the source of market failure (the misallocation of resources).
Mislabelling of the vertical axis was a common error (often swapping the numerator and denominator when expressing the exchange rate as a fraction). Otherwise, most were able to draw a correct diagram showing an increase in supply of denar. Although quite a few did not explain how the central bank increases the supply of denar by buying foreign reserves/euros.
This proved to be the most difficult question on this paper with very few candidates being able to provide one of the correct quota diagrams to illustrate the changes in price and quantity as a result of the removal of the quota. All diagrams provided in IB-approved textbooks were considered to be acceptable. Diagrams and explanations were not marked in isolation and as such, so long as the explanation made sense of the diagram provided (regardless of which diagram had been used), it was fully rewarded. Some candidates also misread the question and assumed that the quotas were placed on Macedonian wine being exported to the EU. Candidates must be reminded to look at the indicated part of the text (Text C in this case) to ensure that the question is fully understood.
Most responses reflected some understanding of the features of a common market but those were often limited to the removal/reduction of trade barriers. Such responses seldom exceeded 7-9 marks since they did not provide a full examination of the consequences of membership to a common market. Stronger responses not only evaluated the impact of lower trade barriers on producers in North Macedonia, but also considered other potential impacts, such as the benefits to consumers, long term impacts as a result of the unrestricted movement of capital and labour, a possible loss of sovereignty as more EU firms may control essential services in North Macedonia, and changing trade position with non-member countries due to the imposition of a common tariff. Some candidates discussed the consequences of adopting the euro. While this would likely be the natural next step of integration for an EU member country, an evaluation of the impact of membership to a monetary union is beyond the scope of this question.
