User interface language: English | Español

Date May 2022 Marks available 4 Reference code 22M.2.HL.TZ0.1
Level Higher level Paper Paper 2 Time zone Time zone 0
Command term Explain Question number 1 Adapted from N/A

Question

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.

Table 1: Economic data for Vietnam

Table 2: Development data for Vietnam

Text A The World Bank, 2020.The World Bank in Vietnam [online] Available at: https://www.worldbank.org/en/country/vietnam/overview [Accessed July 2020]. Source adapted.

Food and Agricultural Organization of the United Nations, 2018. Small Family Farms Country factsheet: Vietnam [online] Available at: http://www.fao.org/publications/card/en/c/I8358EN/ [Accessed July 2020]. Source adapted.

Text B Hoang Tien, N., 2020. Analysis of Japan’s international trade and investment activities in Vietnam [online]
Available at: https://www.researchgate.net/publication/338719794_Analysis_of_Japan’s_international_trade_and_
investment_activities_in_Vietnam [Accessed July 2020]. Source adapted.

Minh, A., 2020. After years of negotiations, Vietnam finally sells lychees to Japan [online] Available at: https://e.vnexpress.net/news/business/economy/after-years-of-negotiations-vietnam-finally-sells-lychees-to-japan-4119587.html [Accessed July 2020]. Source adapted.

Table 1 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/reports.aspx?source=2&country=VNM [Accessed July 2020]. Source adapted.

Table 2 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/reports.aspx?source=2&country=VNM [Accessed July 2020]. Source adapted.

Define the term debt servicing indicated in bold in Table 1.

[2]
a.i.

Define the term Gini coefficient indicated in bold in Table 2.

[2]
a.ii.

Sketch a demand and supply diagram to show the effect on revenue earned by Vietnamese farmers with improved access to the Japanese market (Text B, paragraph [1]).

[3]
b.i.

Using information from Table 1, calculate the change in the surplus on Vietnam’s balance of trade in goods with Japan between 2015 and 2019.

[2]
b.ii.

Explain two economies of scale which may not be available to smaller farms (Text A, paragraph [2]).

[4]
c.

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]).

[4]
d.

Using a demand and supply of money diagram, explain the likely effect on interest rates of a reduction in the minimum reserve requirement for banks (Text C, paragraph [1]).

[4]
e.

Using an exchange rate diagram, explain how the central bank in Vietnam could prevent the dong from depreciating by using its reserve assets (Text C, paragraph [2]).

[4]
f.

Using information from the texts/data and your knowledge of economics, discuss the view that trade with Japan is more beneficial for Vietnam’s economic development than foreign direct investment (FDI) from Japan.

[15]
g.

Markscheme

a.i.

a.ii.

The diagram has three requirements:

Candidates who incorrectly label diagrams can be awarded a maximum of [2].

For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.

The increase in revenue could alternatively be indicated by labelling the corners of the revenue boxes or by referring in writing an increase in revenue from P x Q to P1 x Q1.

b.i.

2015: (15 141 − 12 531)             2610
2019: (22 475 − 16 484)             5991

any valid working should be rewarded with [1]

(Change in surplus) (US)$ 3381 million

An answer of 3 381, without workings or without units, is sufficient for [1].

Own figure rule applies.

b.ii.

N.B. Alternatively, if a student answers in terms of the economies of scale that large farms can get, the answer may be fully rewarded.

c.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

For a diagram showing comparative advantage, the PPC lines could be linear or curved and they could intersect or be non-intersecting. They should show that Japan has a comparative advantage in machinery production while Vietnam has a comparative advantage in seafood production. However, the labelling could be reversed from the examples below. Either one of the examples below is satisfactory or two diagrams can be drawn, with one for Vietnam and one for Japan, but the PPCs should have different slopes that correctly convey the comparative advantages. A title is not necessary.

d.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

For a money demand and supply diagram, the vertical axis should be labelled interest rate, i, ir or r. The horizontal axis may be labelled Quantity (Q) or Q of Money. A title is not necessary.

e.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

For an exchange rate diagram, the vertical axis may be exchange rate, price of dong in another currency, other currency/dong or other currency per dong. The horizontal axis should be quantity, or quantity of dong. A title is not necessary.

Alternatively, a candidate may draw a diagram showing the dong depreciating (due to S shifting right or D shifting left) and the D curve then shifting right to restore the exchange rate to its initial level. If explained properly, this can be fully rewarded.

f.

Answers that only deal with trade or only deal with FDI should be rewarded a maximum of level 3.

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.

Answers may include:

Economic models / theories may include:

Points that support the view that trade is more beneficial:
Benefits of trade with Japan:

Costs of FDI from Japan:

Points that support the view that FDI is more beneficial:
Benefits of FDI from Japan
:

Costs of trade with Japan:

Synthesis of relative benefits of trade vs FDI:

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

g.

Examiners report

Many were unable to get full marks for the definition of debt servicing as they did not identify either or both principal/initial amount and interest so were only awarded one mark.

a.i.

This was often partially answered, with students simply stating it was a measure of inequality. A minority provided a complete description.

a.ii.

Most candidates sketched the demand and supply diagram and showed a shift in the demand curve to the right. However, a large number of candidates forgot to highlight the change in revenue in the diagram. Many offered extensive explanations, which were not asked for and wasted valuable time.

b.i.

Most candidates were able to perform well on this question, showing their workings, although some ignored the currency or million in their final answer and so lost a mark.

b.ii.

A limited number gave a clear, applied explanation of two economies of scale. Answers were often too vague and imprecise. Some misread the question, focusing on the benefits to large firms, rather than economies of scale not available to small firms. Those students who were well prepared scored well.

c.

Most candidates were able to perform well on the diagram, but many were not able to explain the comparative advantage theory in terms of opportunity cost.

d.

This question was generally well understood and answered effectively. The significance of the minimum reserve ratio in terms of lending by the banks, coupled with the effect on the money supply and interest rates, was well understood but many students were unaware of the perfectly interest inelastic nature of supply, so lost a mark for the diagram. A minority confused reserved assets and minimum reserve requirements.

e.

Exchange rate diagrams were generally drawn correctly, although there were still too many labelling errors of the vertical axis. Most students were able to effectively explain how reserve assets could be used to prevent depreciation. This is an area of the syllabus where understanding of the question has improved.

f.

A large number of students’ answers strayed away from what was being asked and did not clearly focus on economic development.

Often the evaluation was very superficial, especially for some who found it difficult to identify the separate impact on economic development of trade and FDI as these are heavily interwoven.

In several of the responses, the students understood the effect that trade and FDI might have on Vietnam's economy in general, they used diagrams, theories and terminologies, but focused entirely on economic growth and so were not awarded beyond 6 marks as these responses do not clearly indicate an understanding of the “specific demands of the question”.

In some instances, some appeared to present pre-prepared answers and thus the work matched the descriptor for 1-3 marks.

g.

Syllabus sections

First exams 2022 » Unit 4: The global economy » 4.5 Exchange rates » 4.5.5 Managed exchange rates
First exams 2022 » Unit 4: The global economy » 4.5 Exchange rates
First exams 2022 » Unit 4: The global economy
First exams 2022

View options