Global Economy — Free Economics SL Practice Questions

The European Union (EU) is a regional trading bloc that has evolved through successive stages of economic integration: from a free trade area to a customs union, then to a common market, and finally to an economic and monetary union.

The European Union (EU) operates a customs union with a common external tariff (CET) applied to all imports from non-member countries. The United States–Mexico–Canada Agreement (USMCA), like its predecessor NAFTA, is a free trade area in which each member country sets its own external tariffs independently.

Country X operates under a freely floating exchange rate system. Recently, there has been a significant increase in demand for Country X's exports of lithium batteries.

The Japanese yen (JPY) operates under a floating exchange rate system against the US dollar (USD). In 2023, Japan's central bank unexpectedly raised interest rates while the US Federal Reserve held rates steady. The JPY/USD exchange rate moved from $145$ JPY per USD to $130$ JPY per USD.

The following data refers to Japan's balance of payments in 2022. In 2022, Japan recorded a current account surplus of USD 120 billion, primarily driven by exports of automobiles and machinery. The financial account showed a net outflow of USD 115 billion as Japanese firms invested heavily in overseas factories.

In 2023, the government of Vietnam introduced a package of policies targeting its electronics sector. The measures included: permitting foreign investors to own $100\%$ of the equity in domestic technology firms; removing restrictions on repatriating profits abroad; and offering a five-year corporate income tax holiday to foreign-owned factories in the electronics sector.

The below shows the relationship between a country's GDP per capita and its Environmental Performance Index (EPI) score. Point A represents Country Alpha ($\text{GDP per capita} = \text{USD } 5{,}000$, $\text{EPI} = 45$). Point B represents Country Beta ($\text{GDP per capita} = \text{USD } 40{,}000$, $\text{EPI} = 85$). Point C represents Country Gamma ($\text{GDP per capita} = \text{USD } 60{,}000$, $\text{EPI} = 82$).

The production possibilities frontier (PPF) for a small island economy, Atoll, shows fish ($F$) on the horizontal axis ($0$ to $100$ tonnes per year) and tourism services ($T$) on the vertical axis ($0$ to $5000$ visitor-days per year). The PPF is a straight line from $(0,\ 5000)$ to $(100,\ 0)$. Point A is at $(30,\ 3000)$, inside the PPF. Point B is at $(60,\ 2000)$, on the PPF. The maximum sustainable fish catch is $50$ tonnes per year; beyond this, fish stocks collapse.

A country produces two goods: textiles and rice. Its production possibility frontier (PPF) has intercepts at $600$ million USD of textiles (horizontal axis) and $300$ million USD of rice (vertical axis). In 2023, the country produces at point $A$: $500$ million USD of textiles and $200$ million USD of rice. The world price ratio is $1$ unit of rice $= 2$ units of textiles.

Japan can produce $20$ cars or $10$ electronics per worker per day. South Korea can produce $15$ cars or $30$ electronics per worker per day.

The government of Country X imposes a specific tariff of USD 2 per unit on imported shoes. The world price of shoes is USD 10 per unit. Before the tariff, domestic production is 2000 units, domestic quantity demanded is 7000 units, and imports are 5000 units. After the tariff, the domestic price rises to USD 12 per unit, domestic production increases to 3000 units, domestic quantity demanded falls to 6000 units, and imports fall to 3000 units.

The government of Country Y imposes an import quota on foreign-made electronics, limiting imports to $1$ million units per year. The world price is USD $100$ per unit, which was also the domestic price before the quota. Before the quota, domestic firms supplied $2$ million units and domestic demand was $5$ million units. After the quota, the domestic price rises to USD $130$, domestic supply increases to $3$ million units, and domestic demand falls to $4$ million units.

The country of Andolia has a Gini coefficient of $0.58$, indicating severe income inequality. A large proportion of its population lives in rural areas with limited access to formal banking services. The government is considering a policy to provide microfinance loans to rural women to start small businesses.

In the developing country of Morova, the population growth rate is $3.2\%$ per year, while real GDP growth is $2.1\%$ per year. $45\%$ of the population is under the age of 15. The country has limited arable land freshwater resources.

The government of a country imposes a tariff on imported electronic goods.

Country X, a developing nation, currently imposes a tariff on imported textiles, raising the domestic price above the world price. The government is considering removing this tariff.

Country X is a developed nation currently experiencing a recessionary gap. The government announces an increase in spending on infrastructure projects as part of an expansionary fiscal policy.

Country Z is a developing nation with a large informal sector and high unemployment. The government is considering reducing corporate income tax rates a supply-side policy to promote long-run economic growth.

The United Kingdom completed its withdrawal from the European Union in 2021. Trade between the UK and EU is now governed by the Trade and Cooperation Agreement (TCA), a free trade agreement (FTA), rather than continued EU single market and customs union membership. UK exporters to the EU now face customs declarations, rules of origin checks, and regulatory barriers that did not exist before 2021. The UK Office for Budget Responsibility estimated that UK trade intensity (trade as a share of GDP) could be $15\%$ lower in the long run than if the UK had remained in the EU. Supporters of Brexit argue that the UK can now negotiate trade deals with faster-growing economies outside Europe.

The Pacific Alliance is a regional trade bloc formed in 2011 by Chile, Colombia, Mexico, and Peru. Member countries have eliminated tariffs on $92\%$ of traded goods and coordinate investment regulations. Since its formation, intra-bloc trade has grown by $120\%$ and foreign direct investment (FDI) inflows into member states have increased by $85\%$. However, agricultural producers in Chile report that cheaper imports from Mexico have reduced their market share, while Mexican consumers have gained access to lower-priced Chilean wine.

The European Union (EU) is a deep regional trading bloc with a single market, customs union, and common currency (the euro) used by 20 of its 27 member states. The United Kingdom left the EU in 2020 (Brexit), ending its participation in the single market and customs union. Since Brexit, UK trade with the EU has faced new non-tariff barriers (customs checks, rules-of-origin requirements), and the British pound has depreciated against the euro by approximately $15\%$. Proponents of Brexit argued that leaving the EU would allow the UK to sign independent trade agreements (e.g., with Australia, New Zealand, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — CPTPP) and regain regulatory sovereignty. A 2023 study by the UK Office for Budget Responsibility (OBR) estimated that Brexit has reduced UK long-run productivity by $4\%$ compared with remaining in the EU.

Japan is a major exporter of automobiles and electronics and imports large quantities of oil, natural gas, and raw materials. In 2023, the Japanese yen depreciated against the US dollar, falling from $\yen130$ per dollar to $\yen150$ per dollar. The Bank of Japan maintained an ultra-loose monetary policy during this period, while the US Federal Reserve raised interest rates aggressively to combat inflation. Japanese consumers reported sharp increases in the price of imported food and fuel, while Toyota and Sony reported record profits from overseas sales.

Nigeria's fixed exchange rate and parallel market, 2022 In 2022, the Central Bank of Nigeria (CBN) maintained a fixed exchange rate of $410$ naira per US dollar. On the parallel ("black") market, the naira traded at approximately $700$ naira per dollar. Nigeria is Africa's largest oil exporter but imports most manufactured goods, food, and fuel. Official foreign exchange reserves fell from USD 40 billion in 2018 to USD 35 billion in 2022. The CBN restricted access to foreign currency for importing certain goods, including rice and textiles, to protect domestic industries.

In 2022, the Central Bank of Country X, a small open economy heavily reliant on tourism exports, abandoned its long-standing fixed exchange rate against the US dollar (pegged at $1\,\text{USD} = 2.50$ X-dollars) and adopted a floating exchange rate system. In the first six months after the float, the X-dollar depreciated by $15\%$ against the USD. The government had previously argued that the fixed rate provided stability for international trade and investment. However, tourism industry revenues fell by $8\%$ in the year following the float, while foreign direct investment (FDI) inflows decreased by $12\%$. Simultaneously, the domestic inflation rate rose from $2\%$ to $5.5\%$. The Minister of Finance now claims the float was a mistake and is considering re-pegging the currency.

Country X is a lower-middle-income economy in Southeast Asia. In 2020, it received USD 2.5 billion in Foreign Direct Investment (FDI) inflows, primarily in garment manufacturing and food processing. In the same year, it experienced USD 4 billion in net outflows of portfolio investment (equities and bonds) as international investors sold domestic assets amid global financial uncertainty. The government of Country X is considering two policy options to attract more foreign capital: - Option A: Offering ten-year corporate tax holidays to multinational corporations establishing factories - Option B: Deregulating its stock market to allow easier purchase and sale of shares by foreign investors

A country, Meridia, recorded a current account deficit of USD 45 billion in 2023. The capital account recorded a surplus of USD 3 billion. Meridia's central bank sold USD 12 billion of foreign exchange reserves during the year. Economists noted that Meridia's net international investment position (NIIP) worsened by USD 30 billion over the same period. All figures are in nominal terms.

Country Alpha, a low-income nation in Sub-Saharan Africa, has experienced rapid economic growth averaging $7\%$ per year over the last decade, driven largely by the extraction and export of crude oil. Its GDP per capita has doubled from USD 1,200 to USD 2,400. However, the World Bank reports that Alpha's adjusted net savings — a measure of genuine savings accounting for resource depletion and pollution damage — have turned negative. UNICEF data shows that primary school enrolment rates have fallen from $78\%$ to $65\%$ over the same period, and the Gini coefficient has risen from $0.38$ to $0.52$. The government of Alpha has announced a policy to double oil production over the next five years to fund infrastructure projects.

Country Beta, a middle-income nation in Southeast Asia, has seen its Human Development Index (HDI) rise from $0.620$ to $0.745$ over the past fifteen years. However, its Ecological Footprint per capita has grown from $2.1$ global hectares to $3.8$ global hectares, while its biocapacity per capita is only $1.2$ global hectares. The government is considering two policy options: - Policy X: Subsidise the adoption of solar panels and electric vehicles to reduce carbon emissions. - Policy Y: Continue current growth strategies focused on manufacturing exports, which have raised incomes but increased pollution.

Country X is a lower-middle-income country in sub-Saharan Africa with a Human Development Index (HDI) of $0.520$. In 2023, Country X discovered significant deposits of rare earth minerals used in smartphones, electric vehicle batteries, and wind turbines. A multinational corporation (MNC) has offered to develop the mines, promising: - $15{,}000$ direct jobs - Construction of $200\,\text{km}$ of paved roads - Annual royalty payments of $2.5\%$ of revenue to the government, estimated at USD $120$ million per year Environmental impact assessments predict: - Deforestation of $8{,}000$ hectares of tropical forest - Acid mine drainage affecting two major rivers used for drinking water and irrigation - A $40\%$ increase in local air particulate matter ($\text{PM}_{10}$) during the 20-year mining phase The Minister of Economic Development argues the project is essential for poverty reduction. The Minister of Environment argues it violates the principles of sustainable development.

The table below shows labour requirements for producing wheat and textiles in Country X and Country Y in 2023. Both countries have $1000$ units of labour available. Country X — $2$ — $4$ Country Y — $5$ — $8$

Landia can produce $100$ units of food or $50$ units of electronics using all its resources. Techia can produce $80$ units of food or $120$ units of electronics using all its resources. Currently, both countries are in autarky, each consuming half of each good they produce.

In 2023, Country A can produce $1$ tonne of rice using $2$ worker-hours and $1$ tonne of textiles using $1$ worker-hour. Country B can produce $1$ tonne of rice using $6$ worker-hours and $1$ tonne of textiles using $4$ worker-hours. Both countries have $1000$ worker-hours available per week.

Country X has experienced steady growth in its real GDP per capita (PPP) of $4\%$ per year for the past decade. Over the same period, the country's Gini coefficient has risen from $0.35$ to $0.48$. The government of Country X claims its development strategy has been highly successful, citing rising GDP per capita as evidence. *

Country Y is a low-income country in Sub-Saharan Africa. Its GDP per capita has risen from USD 800 to USD 1,100 over the last five years. However, the country has an infant mortality rate of $85$ per $1{,}000$ live births, an adult literacy rate of $45\%$, and frequent power outages that disrupt economic activity. A recent World Bank report notes that Country Y's HDI rank is $175$ out of $189$ countries, while its GDP per capita rank is $165$. - GDP per capita $=$ Gross Domestic Product $\div$ total population. - The Human Development Index (HDI) is a composite index based on: (i) life expectancy at birth, (ii) mean and expected years of schooling, and (iii) GNI per capita (PPP). - Infant mortality rate $=$ number of deaths of infants under one year old per $1{,}000$ live births.

Country X is a lower-middle-income nation in Southeast Asia. In 2023, its GDP per capita was USD 4,200 (PPP). Its Human Development Index (HDI) value was 0.620, with life expectancy at birth of 68 years, expected years of schooling of 11.2, and mean years of schooling of 6.8. The Gini coefficient was 0.45. The economy relies heavily on garment manufacturing ($35\%$ of exports) and remittances from overseas workers ($12\%$ of GDP). The government has announced 'Vision 2030', which aims to double GDP per capita by attracting foreign direct investment (FDI) into electronics assembly, while simultaneously introducing a universal basic education programme to raise mean years of schooling to 9.0.

The government of Country X, a developing nation in Southeast Asia, is considering imposing a tariff on imported rice. Currently, domestic farmers supply $40\%$ of the rice consumed domestically at a price of USD 300 per tonne, while the remainder is imported at the world price of USD 250 per tonne with no trade barriers. The government argues the tariff will protect domestic farmers and improve food security. Consumer groups argue it will raise food prices and harm the urban poor, who spend $30\%$ of their income on rice.

Country A and Country B are two large economies. Country A has a highly efficient automobile manufacturing industry and exports cars to Country B. Country B's government has imposed a $25\%$ ad valorem tariff on imported cars, arguing this will protect its fledgling electric vehicle (EV) industry, create jobs, and reduce its trade deficit with Country A. Country A has threatened retaliatory tariffs on agricultural products exported from Country B.

Country Alpha is a developing nation in Southeast Asia with a comparative advantage in textile production. In 2023, the government imposed a $25\%$ ad valorem tariff on imported footwear to protect its domestic shoe manufacturing industry. The domestic shoe industry employs $120{,}000$ workers and contributes $4\%$ to Alpha's GDP. Consumer groups argue that the tariff has raised the average price of shoes by USD 18 per pair, disproportionately affecting low-income households who spend $8\%$ of their income on footwear. The World Bank has urged Alpha to remove the tariff, claiming it violates WTO principles and harms Alpha's export competitiveness in textiles.

The country of Andolia is a low-income nation in sub-Saharan Africa. Its economic development is severely constrained by internal barriers. Andolia has a Gini coefficient of $0.58$, indicating extreme income inequality. The adult literacy rate is only $52\%$ and life expectancy at birth is $58$ years. The government spends $2\%$ of GDP on healthcare and $3\%$ on education. Most of the population relies on subsistence agriculture, and there is limited access to formal credit for small-scale farmers. Infrastructure is poor: only $15\%$ of roads are paved an unreliable electricity grid causes frequent power outages.

A landlocked nation in Central Asia, Karzakhstan, has experienced modest economic growth of 3 percent per year over the last decade, yet its economic development indicators remain low. The Human Development Index (HDI) stands at $0.52$, placing it in the low human development category. Copper accounts for 70 percent of export earnings; the mining sector is capital-intensive and employs only 2 percent of the labour force. The government has accumulated a large sovereign wealth fund from copper revenues, but public-service spending remains low. A persistent gender gap in education exists: only 40 percent of girls complete secondary school, compared to 65 percent of boys.

Country X is a low-income country in sub-Saharan Africa with an HDI of $0.425$ (2022). Its economy depends primarily on subsistence agriculture, which accounts for $60\%$ of employment and $25\%$ of GDP. The country has a Gini coefficient of $0.58$. The government has recently discovered significant deposits of rare earth minerals. A multinational corporation (MNC) has offered to extract these minerals in exchange for a 30-year concession paying a $5\%$ royalty on revenue to the government. Local civil society groups oppose the deal, arguing it will deepen existing barriers to economic development.

Country X is a developing nation with a fledgling steel industry. Currently, it imports $80\%$ of its steel from Country Y, a developed nation with a highly efficient steel sector. The government of Country X is considering imposing a $25\%$ tariff on imported steel to protect its domestic industry. Domestic steel producers argue this will allow them to grow and become competitive. Domestic construction companies argue the tariff will raise their costs and harm the economy.

In 2023, the government of Country Z, a high-income nation, removed all tariffs on imported textiles from developing countries. The policy aimed to lower consumer prices and promote free trade. Domestic textile workers' unions protested, claiming the policy would destroy the local industry. A local economist argued the policy was theoretically sound but would cause short-term adjustment costs.

Country X is a developing nation in Southeast Asia with a growing manufacturing sector. Its government is considering two policy options for the electronics industry: - Option A: Remove all tariffs and quotas on imported electronic components, allowing free trade. - Option B: Maintain a $15\%$ tariff on imported electronic components to protect domestic producers. Currently, domestic firms supply only a fraction of total demand for electronic components. Local manufacturers argue they need protection to grow, while consumer electronics assemblers claim tariffs raise their input costs and reduce competitiveness in export markets for finished goods.

Country X is a developed nation. In 2023, its inflation rate was $2\%$ and its unemployment rate was $5\%$. The government implemented a combination of expansionary fiscal and monetary policies to stimulate economic growth. The fiscal policy involved an increase in government spending on infrastructure of USD 50 billion, funded by borrowing. The monetary policy involved a reduction in the central bank's policy interest rate from $3\%$ to $1.5\%$.

Country Y is a developing nation with an unemployment rate of $12\%$ and an inflation rate of $1\%$. Its government is considering two supply-side policies to promote long-term economic growth: - Policy 1: Reducing corporate income tax from $30\%$ to $20\%$ - Policy 2: Deregulating the labour market by reducing the minimum wage and making it easier for firms to hire and fire workers

Country X is a developing economy in South-East Asia with an average real GDP growth rate of $2.5\%$ per year over the last decade, an unemployment rate of $7.5\%$, and annual inflation rate of $1.8\%$. The government is considering two alternative strategies to boost economic growth: - Strategy A: A significant increase in government spending on infrastructure (roads, ports, and digital networks), financed by borrowing from domestic financial markets. - Strategy B: A reduction in the central bank's policy interest rate from $4.5\%$ to $2.5\%$, combined with a decrease in the reserve requirement for commercial banks.