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Economics
Standard level
Paper 2

Thursday 27 October 2022 (morning)

1 hour 45 minutes

Instructions to candidates
y Do not open this paper until instructed to do so.
y You are permitted access to a calculator for this paper.
y Unless otherwise stated in the question, all numerical answers must be given exactly or correct
to two decimal places.
y You must show all your working.
y Answer one question.
y Use fully labelled diagrams and references to the text/data where appropriate.
y The maximum mark for this examination paper is [40 marks].

8822 – 5109
9 pages © International Baccalaureate Organization 2022
 –2– 8822 – 5109

Answer one question.

1. Read the extracts and answer the questions that follow.

Text A — Bangladesh: the economic role of women

1 Bangladesh is a densely populated country in Asia. Its currency is the Bangladeshi taka (BDT).
The annual rate of growth of gross domestic product (GDP) has steadily increased from 5.6 %
in 2010 to 8.1 % in 2019. Absolute poverty has declined, but inequality has risen, partly due
to higher unemployment rates for women than men. Moreover, the labour force participation
rate for women is much lower than the rate for men. Over 80 % of the women’s jobs are in the
informal economy, and these jobs are low paid and insecure. Women need regular paid work,
which not only raises household income but also improves economic well-being in terms of
education and health.

2 The structure of the economy is changing. The growth of cities is due to the expansion of the
manufacturing sector, which now contributes a larger share to GDP than the agricultural sector.
These changes have increased the number of women in the labour force. In particular, the
growth of the ready-made garments (RMG) industry (mass-produced clothing) has given women
the opportunity to move into formal employment. The RMG industry provides jobs for almost
4 million low-skilled and semi-skilled workers, accounting for over 40 % of total manufacturing
employment. The majority of these jobs are being filled by women, with the result that the gap
between the wages of men and women is gradually being reduced.

3 There are concerns about working and safety conditions in the RMG factories. After an accident
in a factory in 2013, reforms are being implemented, partly in response to criticisms from
overseas retailers and consumers who purchase the garments. The minimum wage has been
increased, inspections are carried out, and there are fewer small, unsafe factories.

4 While working conditions are improving, such reforms raise the costs of manufacturing
garments. Furthermore, the international garment market is becoming more competitive, putting
pressure on Bangladeshi factories to reduce costs.

5 The overseas demand for Bangladeshi garments had been rising strongly until 2019. However,
demand has recently fallen, reducing firms’ revenue. The reduction in revenue and the need to
lower costs have forced certain firms to reduce the size of their labour force by dismissing some
of their female workers.

6 The number of ethically and environmentally concerned consumers is increasing globally.

Rather than trying to lower costs, firms can be more successful if they produce “green
ready-made garments” by implementing sustainable practices. About 100 garment factories
in Bangladesh have already been certified as producers that meet specified environmental
standards. In addition, global retailers and fashion brands are supporting recycling initiatives
through the Circular Fashion Partnership.

(This question continues on the following page)

 –3– 8822 – 5109

(Question 1 continued)

Text B — Trade prospects for exports of ready-made garments (RMG)

1 Exports of RMG account for over 84 % of Bangladesh’s total exports. At present, Bangladesh
is the world’s second largest garment exporter after China. Bangladeshi exports could further
increase as Chinese garments become more expensive due to rising wages in China.

2 Bangladesh is designated as an Economically Least Developed Country (ELDC) and is

therefore able to sell goods in Europe and China without any quotas or tariffs being imposed.
However, Bangladesh will graduate from ELDC status by 2026 and will then no longer be
eligible for preferential trade agreements. Moreover, the USA, which is the largest export market
for Bangladeshi garments, has applied a 15 % tariff on imports from Bangladesh since 2013,
citing concerns about working conditions in factories.

Text C — Role of foreign direct investment in the RMG sector

1 Vietnam and Myanmar have significantly increased their garment exports to China due to
foreign direct investment (FDI) from China. Chinese investors have set up factories that import
raw materials from China and re-export the finished goods back to China.

2 Consequently, to compete successfully in the huge Chinese market, Bangladesh needs to

attract more FDI from China. Bangladesh is developing the required infrastructure, such as
transport links. It is also necessary to diversify into expensive high-end fashion, market more
aggressively, and use branding strategies.

3 The funds from additional FDI would be helpful, because the relative contribution of Official
Development Assistance (ODA) to Bangladesh’s budget is declining. Furthermore, the foreign
exchange obtained from foreign investors assists in financing the current account deficit.

(This question continues on the following page)

Turn over
 –4– 8822 – 5109

(Question 1 continued)

Table 1: Economic data for Bangladesh

2010 2019

Real gross national income (GNI) per capita (US$) 844 1348

Population (million) 147.6 163.0

Labour force (million) 57.1 70.1

Number of unemployed (million) 1.93 2.96

FDI, net inflows (US$ billion) 1.23 1.91

Exports of goods and services (US$ billion) 18.5 46.4

Imports of goods and services (US$ billion) 25.1 64.9

Exchange rate (BDT per US$) 69.6 84.5

Table 2: Development data for Bangladesh

2010 2019

Gini coefficient 0.32 0.40*

Absolute poverty (% of population) 19.4 9.2

Urban population (% of population) 30.5 37.4

Female labour force participation rate

29.8 36.4
(% of female population ages 15+)

Male labour force participation rate

83.2 81.5
(% of male population ages 15+)

* estimate

(This question continues on the following page)

 –5– 8822 – 5109

(Question 1 continued)

(a) (i) Define the term absolute poverty indicated in bold in the text
(Text A, paragraph 1).[2]

(ii) Define the term informal economy indicated in bold in the text
(Text A, paragraph 1).[2]

(b) (i) Using information from Table 1, calculate the unemployment rate for Bangladesh
in 2019. [2]

Assume a shirt was made in Bangladesh and priced at 400 Bangladeshi taka (BDT400).
This was equivalent to a price of US$5.75 in 2010.

(ii) Using information from Table 1, calculate the price of this shirt in US$ in 2019. [2]

(iii) State whether the Bangladeshi exchange rate depreciated or appreciated

between 2010 and 2019. [1]

(c) Using a demand and supply diagram, explain why falling demand will reduce
Bangladeshi firms’ revenue (Text A, paragraph 5).[4]

(d) Using an international trade diagram for the US market, explain how the imposition of
a 15 % tariff on imported garments from Bangladesh would affect the revenue earned
by Bangladeshi producers (Text B, paragraph 2).[4]

(e) Using an exchange rate diagram, explain how the change in imports of goods
and services from 2010 to 2019 is likely to have affected the exchange rate of the
Bangladeshi taka (Table 1).[4]

(f) Using a Lorenz curve diagram, explain what happened to the distribution of income in
Bangladesh between 2010 and 2019 (Table 2).[4]

(g) Using information from the text/data and your knowledge of economics, discuss the
extent to which the ready-made garments (RMG) sector in Bangladesh contributes
to achieving the Sustainable Development Goal: “Promote sustained, inclusive, and
sustainable economic growth, full and productive employment, and decent work for all”. [15]

Turn over
 –6– 8822 – 5109

2. Read the extracts and answer the questions that follow.

Text D — Macroeconomic policies in Uruguay

1 Compared to many other Latin American countries, Uruguay has a high Human Development
Index (HDI). This is due to its higher gross national income (GNI) per capita and wider access to
health care and education.

2 One aim of Uruguay’s fiscal policy has been income redistribution. For example, in 2017 the
tax rate applied to the highest income bracket was raised from 25 % to 36 %. Spending on
social programmes, which are targeted towards the poor, has also increased. However, while
expenditure on schools is benefitting all families, expenditure on higher education still tends
to favour higher-income families, because there are relatively few students from low-income
families in universities.

3 Recently, concern about a growing budget deficit has led to new budget guidelines being
implemented. These guidelines aim to reduce borrowing and the national debt by encouraging
the government to increase tax revenue and/or reduce expenditures. The main policy goal of
Uruguay’s central bank is to keep a low rate of inflation. It has announced that it will reduce the
inflation target to below 6 % by September 2022.

4 Several constraints to growth remain, which may limit progress towards sustainable
development. Despite plans to upgrade road networks and construct a new central railway,
investment in infrastructure needs to be increased further. Education and training could also
be improved to meet the needs of new sectors, such as the information and communication
technology (ICT) industry.

5 State-owned enterprises, including railways and suppliers of fuel, water and electricity, are a
significant part of the Uruguayan economy. The prices charged by these enterprises tend to be
high relative to prices in other countries. As part of a strategy to eliminate excessive costs, the
government has proposed measures to improve efficiency in state-owned enterprises and to
gradually reduce prices.

6 The International Monetary Fund (IMF) considers that more labour market flexibility is needed
to make it easier for workers to change jobs and for firms in growing sectors such as ICT to hire
workers. The government is, therefore, considering deregulation of the labour market.

7 Overall, by boosting competitiveness and private investment through supply-side policies, the
government aims to raise growth and employment.

(This question continues on the following page)

 –7– 8822 – 5109

(Question 2 continued)

Text E — Health care system in Uruguay

The public and private sectors that offer health care in Uruguay were combined into one system
in 2007, with both overseen by the government and both eligible to receive subsidies. Most
medical care is free for low-income patients. The first row of data in Table 3 shows that per capita
demand for health care increased by 54.22 % from 2010 to 2018. The advantages are seen in
longer life expectancy figures, which imply an increase in productivity, and other benefits.

Table 3: Health care expenditure and GNI per capita for Uruguay

2010 2018

Expenditure on health care per capita (nominal US$) 1031 1590

GNI per capita (nominal US$) 10 440 15 910

Text F — Trade and exchange rates

1 Over 50 % of Uruguayan exports are forestry and agricultural goods, including soybeans, rice,
and cattle meat. Increasing global demand and a significant rise in commodity prices from
2000 to 2012 encouraged investment in the agricultural sector. However, the price of soybeans
has been declining since 2013, partly due to rising productivity in agriculture. Climate-related
shocks, such as droughts in 2017 and 2020, and economic crises in the major export markets of
Brazil and Argentina have also caused difficulties for producers.

2 Therefore, Uruguay aims to diversify its export markets. For example, with the growth of the ICT
sector, Montevideo (the capital city of Uruguay) has become a leading software development
centre. In addition, Uruguay is broadening its markets towards Europe and Asia. Under a
proposed trade agreement between the European Union (EU) and the South American trade
bloc, Mercosur (Argentina, Brazil, Paraguay, Venezuela, and Uruguay), 93 % of all tariffs will
gradually be eliminated. However, a quota will be imposed on cheese imports from the EU.

3 To help the economy adjust to external shocks and to avoid large fluctuations in the exchange
rate of the peso (Uruguay’s currency), the central bank uses its plentiful reserve assets of
foreign currencies. In 2019, the decline in agricultural export revenues put downward pressure
on the peso exchange rate. However, the central bank was able to prevent a large depreciation
by using its reserve assets in the foreign exchange market.

(This question continues on the following page)

Turn over
 –8– 8822 – 5109

(Question 2 continued)

Table 4: Economic data for Uruguay

2010 2019

Real gross domestic product (GDP)

7.80 0.22
(annual growth rate, %)

Unemployment rate (%) 7.2 9.4

Inflation rate (%) 6.7 7.9

Real interest rate on loans (%) 5.2 3.6

Balance of trade in goods and services (US$ million) 630 3400

Table 5: Development data for Uruguay

2010 2019

Human Development Index (HDI) 0.78 0.82

HDI Ranking 58 55

Life expectancy at birth (years) 76.8 77.9

Gini coefficient 0.45 0.40

Table 6: Balance of payments data for Uruguay in 2019

US$ billion

Exports of goods and services 16.3

Imports of goods and services 12.9

Net income and current transfers −2.65

Net foreign direct investment (FDI) 1.19

Net portfolio investment 1.33

(This question continues on the following page)

 –9– 8822 – 5109

(Question 2 continued)

(a) (i) Define the term budget deficit indicated in bold in the text (Text D, paragraph 3).[2]

(ii) Define the term portfolio investment indicated in bold in Table 6.[2]

(b) (i) Using information from Text E and Table 3, calculate the income elasticity of
demand for health care in Uruguay between 2010 and 2018. [3]

(ii) Using information from Table 6, calculate the current account balance in 2019. [2]

(c) Using an externalities diagram, explain why the government should subsidize health
care (Text E).[4]

(d) Using an AD/AS diagram, explain how climate-related shocks, such as droughts,
could affect real GDP growth (Text F, paragraph 1).[4]

(e) Using an international trade diagram, explain the effect on consumers in Uruguay if a
quota is imposed on cheese imports from the EU (Text F, paragraph 2).[4]

(f) Using an exchange rate diagram, explain how the central bank in Uruguay can use
reserve assets to prevent the depreciation of the peso (Text F, paragraph 3).[4]

(g) Using information from the text/data and your knowledge of economics, evaluate the
effectiveness of the government’s macroeconomic policies in achieving economic
growth and economic development in Uruguay. [15]


Disclaimer:
Content used in IB assessments is taken from authentic, third-party sources. The views expressed within them belong to their
individual authors and/or publishers and do not necessarily reflect the views of the IB.

References:

Text A Bossavie, Laurent; Cho, Yoonyoung; Heath, Rachel. 2019. The Effects of International Scrutiny on Manufacturing
Workers : Evidence from the Rana Plaza Collapse in Bangladesh. Policy Research Working Paper; No. 9065.
World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/32674 License:
CC BY 3.0 IGO.

Text B The Daily Star, 2018. Bangladesh faces stiffest tariff in US [online] Available at: https://www.thedailystar.net/
business/bangladesh-faces-stiffest-tariff-us-1560022 [Accessed 29 September 2021]. Source adapted.

Table 1 The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators

[Accessed 29 September 2021].

Table 2 The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators

[Accessed 29 September 2021].
Text D Bucheli, Marisa; Lara Ibarra, Gabriel; Tuzman, Diego. 2020. Assessing the Effects of Fiscal Policies on Poverty
and Inequality : The Case of Uruguay. Policy Research Working Paper; No. 9499. World Bank, Washington, DC.
© World Bank. http://localhost:4000//entities/publication/3e7d0f74-aa72-552c-b94d-239f7e89c243 License:
CC BY 3.0 IGO.
Table 3 The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators
[Accessed 29 September 2021].

Text F The European Commission, 2019. EU and Mercosur reach agreement on trade [online] Available at:
https://ec.europa.eu/commission/presscorner/detail/en/IP_19_3396 [Accessed 29 September 2021]. Source
adapted.

Table 4 The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators

[Accessed 29 September 2021].

Table 5 Country Economy, n.d. Uruguay - Human Development Index - HDI [online] Available at:
https://countryeconomy. com/hdi/uruguay United Nations Development Programme. [Accessed
29 September 2021].

The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators

[Accessed 29 September 2021].

Table 6 The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators

[Accessed 29 September 2021].

All other texts, graphics and illustrations © International Baccalaureate Organization 2022