Global Economy — Free Economics HL Practice Questions

Country X imposes a tariff on imported shoes. Before the tariff, consumers paid USD 50 per pair for imported shoes. After the tariff, the domestic price rises to USD 70 per pair. The government collects tariff revenue of USD 20 per pair on the 100 000 pairs still imported. Domestic producers increase output as a result of the tariff.

The government of Country X imposes a tariff on imported rice. Before the tariff, the domestic price equals the world price of USD 30 per kg. After the tariff, the domestic price rises to USD 34.50 per kg. Domestic consumption falls from $10$ million kg to $8$ million kg, and domestic production rises from $4$ million kg to $6$ million kg.

The Nigerian government announced a policy to attract foreign direct investment (FDI) into its lithium mining sector: a 10-year tax holiday, improved infrastructure in mining regions, and streamlined approval processes. Simultaneously, political instability in a neighbouring country increased perceived risk foreign investors considering the region.

Country B is heavily reliant on oil exports. Its government wishes to diversify the economy and achieve sustainable economic growth. It introduces a fiscal policy measure by providing subsidies to firms in the renewable energy sector.

India's inflation rate has risen to $6\%$, while the inflation rate in the United Kingdom has remained at $2\%$. Assume a floating exchange rate between the Indian rupee (INR) and the British pound (GBP).

The Central African CFA franc is pegged to the euro at $655.957$ CFA francs per euro. In 2024, a sharp fall in global demand for cotton — a major export of CFA franc countries — causes a large decrease in export revenues.

The Swiss National Bank (SNB) has historically intervened to prevent the Swiss franc (CHF) from appreciating too much against the euro (EUR). In 2023, the SNB sold Swiss francs and bought euros on the foreign exchange market.

A developing nation, Country Y, has pursued rapid industrialisation to boost economic growth. Its GDP has grown by $6\%$ annually for five years. Air pollution levels in its capital city have tripled, and the incidence of respiratory diseases has increased by $25\%$.

A coastal community relies on fishing for its livelihood. A factory is built nearby, creating 200 jobs and increasing local GDP by $10\%$. The factory releases untreated wastewater into the sea, reducing local fish stocks by $30\%$.

The North American Free Trade Agreement (NAFTA), established in 1994, eliminated most tariffs on goods traded between Canada, Mexico, and the United States. It did not create a common external tariff or allow free movement of labour and capital between member countries.

The European Union (EU) is a customs union. In 2021, the EU imposed a common external tariff of $10\%$ on electric vehicles (EVs) imported from non-member countries. EU member states simultaneously eliminated all internal tariffs on EVs traded between themselves. Consumers in France, an EU member, previously purchased EVs from both Germany (an EU member) and China (a non-member). Assume the pre-tariff world price of Chinese EVs is lower than the German domestic price of EVs.

The European Union (EU) operates as both a customs union and a common market. After joining the EU, a small member state experienced a $15\%$ increase in trade with other EU members but also faced increased competition from firms in larger member states.

Country X imposes a specific tariff of USD 200 per tonne on imported steel. The world price of steel is USD 500 per tonne. Before the tariff, domestic producers supply $2$ million tonnes and domestic consumers demand $5$ million tonnes. After the tariff, the domestic price rises to USD 700 per tonne, domestic supply increases to $3$ million tonnes, and domestic demand falls to $4$ million tonnes.

Country X is a low-income developing nation where $70\%$ of the population works in subsistence agriculture. The government has recently discovered significant oil reserves. However, due to a lack of infrastructure, skilled labour, and a weak legal system, international oil companies are hesitant to invest. The government is considering using foreign aid to build roads and schools, but critics argue this will increase the country's debt burden without guaranteeing long-term development.

Country Y is a landlocked developing nation in Sub-Saharan Africa. Its adult literacy rate is $45\%$ and its infant mortality rate is $78$ per $1{,}000$ live births. The government spends $25\%$ of its budget servicing external debt, severely limiting expenditure on health and education. A UN report identifies high levels of corruption as a further factor diverting resources away from public services.

Country Z is a small island developing state. Its economy relies heavily on tourism and fishing. In recent years, rising sea levels have damaged coastal infrastructure, and more frequent tropical storms have disrupted the tourist season. The government lacks the financial resources to build sea walls or relocate communities. The World Bank has classified Country Z as having "low economic resilience."

The government of Country Z provides a subsidy of USD 5 per kilogram to domestic rice farmers. The world price of rice is USD 20 per kilogram. Before the subsidy, domestic farmers produce $10$ million kg and the country imports $5$ million kg. After the subsidy, domestic farmers produce $14$ million kg and imports fall to $1$ million kg. The domestic consumer price remains at USD 20 per kilogram.

Country A imposes a tariff on imported textiles. The tariff raises the domestic price from $\text{USD }50$ to $\text{USD }65$ per unit. As a result, domestic production rises from $100{,}000$ to $130{,}000$ units, and domestic consumption falls from $200{,}000$ to $170{,}000$ units.

The government of Country B provides a subsidy to domestic wheat farmers to help them compete with cheaper imports. The world price of wheat is USD 200 per tonne. The subsidy is USD 40 per tonne. Before the subsidy, domestic farmers produced $500{,}000$ tonnes and the country imported $300{,}000$ tonnes. After the subsidy, domestic production rises to $650{,}000$ tonnes and imports fall to $150{,}000$ tonnes. The domestic price remains at USD 200 per tonne.

Country X, a developing nation in Southeast Asia, has recently imposed a tariff of $15\%$ on imported rice. Prior to the tariff, the world price of rice was USD 400 per tonne, and Country X imported $2$ million tonnes annually. Domestic producers supplied $1$ million tonne at this price. After the tariff, the domestic price rose to USD 460 per tonne. Domestic consumption fell to $2.5$ million tonnes and domestic production increased to $1.5$ million tonnes. The government argues the tariff is necessary to protect domestic farmers from volatile world prices and to ensure food security.

Country Y, a high-income European nation, has a domestic steel industry in decline due to competition from lower-cost Asian producers. In 2023, the government imposed a quota limiting steel imports to $500{,}000$ tonnes per year, down from $1.2$ million tonnes previously. The domestic price of steel rose from USD 800 per tonne to USD 950 per tonne. Domestic steel output increased from $2.0$ million tonnes to $2.3$ million tonnes. Consumer groups argue the quota harms manufacturing firms that use steel as an input, while the government claims it preserves jobs in the steel industry.

The following data refer to Kenya's balance of payments in 2022. Account — Balance (USD billion) Current account — $-5.8$ Capital account — $+0.1$ Financial account — $+6.2$ Kenya relies heavily on imports of machinery and fuel, and exports tea, coffee, and cut flowers. Foreign direct investment (FDI) inflows into Kenya's technology sector increased by $15\%$ in 2022.

In 2023, Brazil recorded a current account surplus of USD 12 billion, driven by strong exports of soybeans, iron ore, and crude oil. The financial account recorded a deficit of USD 10 billion, as Brazilian firms and investors increased their holdings of foreign assets. The capital account recorded a deficit of USD 2 billion, mainly due to debt forgiveness granted to other developing nations. Brazil's central bank did not intervene in foreign exchange markets.

The Southeast Asian nation of Meridian has experienced strong economic growth. In 2024, its balance of payments recorded the following: - Current account: surplus of USD 60 billion - Capital account: deficit of USD 2 billion - Financial account (excluding reserve assets): deficit of USD 55 billion - Change in official reserve assets: increase of USD 3 billion

Country X is a small, open economy that has operated a fixed exchange rate system against the US dollar for 15 years. The currency of Country X is the X-peso. The fixed rate is $1\,\text{USD} = 50\,\text{X-pesos}$. Country X's central bank holds foreign exchange reserves of USD 120 billion. In 2023, a significant increase in global interest rates led by the US Federal Reserve caused a large capital outflow from Country X as investors sought higher returns in US dollar-denominated assets. To maintain the fixed exchange rate, the central bank has been selling US dollars and buying X-pesos in the foreign exchange market. In six months, USD 40 billion of reserves have been spent. Economists are debating whether Country X should abandon the fixed exchange rate and allow the X-peso to float freely.

The government of Costa Rica is considering a new policy to expand copper mining in the Osa Peninsula. Costa Rica has a Human Development Index (HDI) of $0.809$ and a strong ecotourism sector. The Osa Peninsula contains $3\%$ of the world's biodiversity. The proposed mine would generate USD 1.2 billion in export revenue annually and create 4,000 direct jobs. Environmental groups warn it would destroy 15,000 hectares of primary rainforest and increase the country's carbon emissions by $8\%$. Costa Rica currently generates $98\%$ of its electricity from renewable sources and has pledged to be carbon neutral by 2050.

Bangladesh has experienced average annual GDP growth of $6.5\%$ over the last decade, lifting millions out of poverty. However, its rapid industrialisation — particularly in the ready-made garment sector — has led to severe air and water pollution, and carbon emissions have risen by $150\%$ since 2000. The country is also among the most vulnerable to climate change, with rising sea levels threatening $17$ million people in coastal areas.

The African Continental Free Trade Area (AfCFTA) came into effect in 2020, linking 54 African nations with a combined GDP of USD 3.4 trillion. The United Nations Economic Commission for Africa estimates that AfCFTA could increase intra-African trade by $52\%$ by 2025, primarily by reducing non-tariff barriers (NTBs) such as cumbersome customs procedures and divergent product standards, rather than tariffs, which averaged only $6\%$. Smaller economies such as Malawi fear that their nascent manufacturing sectors will be unable to compete with larger producers such as South Africa or Nigeria.

Country X and Country Y are two small open economies. Country X can produce $100$ tonnes of wheat or $50$ tonnes of steel using all its resources. Country Y can produce $80$ tonnes of wheat or $50$ tonnes of steel using all its resources. Currently, both countries operate in autarky, allocating half their resources to each good. The world price for wheat is $1.2$ tonnes of steel per tonne of wheat.

Consider two neighbouring countries, Alpha and Beta. In one day, Alpha can produce 60 units of textiles or 40 units of electronics. Beta can produce 40 units of textiles or 20 units of electronics. Both countries have linear production possibility frontiers (PPFs). Before trade, each country divides its resources equally between the two goods.

Country X has experienced the following changes over the past decade: - Real GDP per capita has increased by an average of $5\%$ per year - The Gini coefficient has risen from $0.35$ to $0.55$ - The adult literacy rate has remained stagnant at $60\%$ - Access to improved sanitation has fallen from $70\%$ to $55\%$ of the population - The Human Development Index (HDI) value has increased from $0.550$ to $0.600$

Country X is a low-income country in sub-Saharan Africa with the following development indicators: - GDP per capita: USD 1,200 (PPP-adjusted) - Life expectancy at birth: 58 years - Mean years of schooling: 4.5 years - Gini coefficient: 0.52 - Access to improved sanitation: 35 percent of the population - Carbon dioxide emissions per capita: $0.8$ metric tons - Human Development Index (HDI) value: 0.412 The government of Country X is considering two alternative development strategies: - Strategy A: Attract foreign direct investment (FDI) into large-scale mining operations, projected to increase GDP per capita by $15\%$ over five years, requiring the resettlement of 20,000 rural farmers and increasing $\text{CO}_2$ emissions by $25\%$. - Strategy B: Invest USD 200 million in primary schools and rural health clinics, projected to increase mean years of schooling to 6.0 years and life expectancy to 62 years over five years, with minimal environmental impact.

Country Y is a middle-income country in Southeast Asia with the following development characteristics: - GDP per capita: USD 8,500 (PPP-adjusted) - Human Development Index (HDI): $0.735$ - Gender Inequality Index (GII): $0.467$ (where $0 =$ perfect equality, $1 =$ maximum inequality) - Labour force participation rate: $68\%$ male, $52\%$ female - Access to electricity: $97\%$ of urban areas, $68\%$ of rural areas - Under-five mortality rate: $22$ per $1{,}000$ live births (urban: $15$; rural: $35$) - Multidimensional Poverty Index (MPI): $0.089$; $18\%$ of the population in multidimensional poverty The government of Country Y has implemented a policy promoting export-oriented manufacturing in urban Special Economic Zones (SEZs). GDP growth has risen to $6.5\%$ per year, but the urban–rural gap in access to services has widened.

The Republic of Santorini is a small island nation in the Mediterranean Sea. It has a Human Development Index (HDI) of $0.620$, a Gini coefficient of $0.58$, and an adult literacy rate of $72\%$. The economy relies heavily on tourism and the export of a single crop, olives. A recent World Bank report identified that $40\%$ of the population lives in rural areas with limited access to electricity, clean water, and paved roads. The government allocates $12\%$ of its budget to education, $4\%$ to healthcare, and $25\%$ to military expenditure. Santorini has an external debt-to-GDP ratio of $85\%$ and experiences frequent political instability due to contested elections.

The West African nation of Kourouma has experienced steady GDP growth of $4.5\%$ per year over the last decade, yet its Human Development Index (HDI) value has barely changed, remaining at $0.42$. The country has a high Gini coefficient of $0.58$. A recent World Bank report identified three critical structural challenges: - Infrastructure Deficiency: Only $30\%$ of rural roads are paved. Power outages occur daily in major cities, forcing firms to rely on expensive diesel generators. - Educational Shortcomings: The adult literacy rate is $55\%$. Net primary school enrolment is $78\%$, but only $35\%$ of students complete secondary school. The curriculum is not aligned with labour market needs. - Institutional Weaknesses: Property rights are poorly enforced. Corruption is widespread, with a Corruption Perceptions Index (CPI) score of $28/100$. Starting a business requires $45$ days of bureaucratic procedures. The government of Kourouma is considering two policy options: - Option A: A large-scale loan from the International Development Association (IDA) to build a national highway network and a reliable power grid. - Option B: A conditional cash transfer (CCT) programme that pays poor families USD 50 per month for each child who attends school regularly.

Country Gamma, a developed nation, currently imports most of its steel from Country Delta, which has a comparative advantage in steel production. Gamma's government is considering a quota on steel imports, limiting them to $500{,}000$ tonnes per year, down from the current $800{,}000$ tonnes. Gamma's domestic steel industry argues the quota is necessary for national security, ensuring domestic production capacity during a crisis. Domestic construction companies, which use steel as an input, argue the quota will increase their costs and reduce their international competitiveness.

The government of Andovia is considering the imposition of a specific tariff on imported rice, a staple food. The domestic market for rice is currently in free trade equilibrium. The world price of rice is USD 200 per tonne. Domestic demand supply schedules (in thousands of tonnes per year) are: $$Q_d = 500 - 0.5P \qquad Q_s = -100 + P$$ where $P$ is the price in USD per tonne. The demand intercept (choke price) is USD 1000 per tonne.