Real World Examples_ IB Economics
Real World Examples_ IB Economics
Concept Example
MICROECONOMICS
Government Situation -
intervention (indirect UK (April 2018), The Soft Drinks Industry Levy, charged at different rates according to the
tax) total sugar content, with companies having to pay 18p per litre of drink if the product contains
more than 5 grams of sugar per 100 millilitres, and 24p per litre if it contains more than 8
UK grams per 100 millilitres. Pure fruit juices and drinks with a high milk content are exempt.
2018 Dr
Criticism - When originally announced, it was thought that revenue from the levy would be in
the region of £520 million, which was intended to be used to encourage children to participate
in sport. However, on the day the levy came into effect, this estimate had been reduced to
£240 million. Some firms had taken action before the introduction of the levy, by cutting the
sugar content from the drinks.
Government China 2022, suffered from energy bottlenecks, suffered from power cuts due to electricity
intervention (subsidy) shortages, slowed economic growth, THUS to stimulate production Chinese govt
implemented heavy subsidies ($546b) - investment in energy projects, and especially
CHINA renewable energy (wind & solar energy, electric vehicles)
2022
Consequences - govt faced significant opportunity cost, budget deficits ($500bn), national
debt rose to 80% of GDP, positive production externality
Government Singapore government, directly provides national defence and street lighting
intervention (direct Financed through taxation
provision) HOWEVER, due to free-rider problem and non-excludable and non-rivalrous nature of public
goods, state-owned enterprises providing these goods may be productively inefficient,
compared to private firms
Government In September 2018, in Venezuela, in the food industry, due to hyperinflation, government set
intervention (price strict regulations for over 20 products (milk, sugar, coffee), preventing prices for basic food
ceiling - max price) commodities from skyrocketing so the general population can still afford it, price ceiling at
$0.30 from $0.50
VENEZUELA Criticism: producers and distributors could not cover costs, produced shortages (5% →
2018 82.6%), led to malnutrition, generating rationing problems, can create black markets,
allocative inefficiency, and generates welfare loss
Government Between 2021-2022, in Australia, in the labour market, there was a rise in costs of living,
intervention (price increasing inflation eroding workers wages, govt imposed 5.5% increase in minimum wage,
floor - min price) helped those with lower fixed incomes, higher costs of production, govt intervened by raising
the price floor, increased revenue received by firms, offset the increased costs of production
AUSTRALIA due to higher wages, reduced layoffs, raised standards of living
2021-2022
Criticism: may cause minimum wage to go backwards in the future, may result in real wage
reductions for award-reliant workers
Market failure In 2018, in Macau, a bridge of 55 km was built to connect Hong Kong and Macau together.
(positive production This created a large number of jobs and reduced transportation costs to get from HK to
externalities) Macau.
MSC<MPC because the producers have to pay for the cost of the production rather than the
MACAU society
2018 This results in a lower quantity produced at higher price leading to an under-allocation of
resources, smaller amount produced (Qm) than the socially optimal output (Qopt)
Inefficient allocation of resources from the society’s POV (underallocation) and the potential
welfare gain is the max amount of welfare society could have gained if resources were
allocated efficiently
Solutions: government can grant subsidies to make sure MPC = MPS again, government can
directly provide the good
Evaluation: strain on government budget, leads to national debt, opportunity costs arise
Market failure In 2022, in Singapore, in the healthcare industry, the government provided subsidies, with
(positive consumption higher subsidies for the lower income group (50-70%). This provides financial support as
externalities) medical costs are increasing since the Covid-19 pandemic
In SG, the Covid-19 vaccines were free, preventing the spread of Covid-19
Criticism: increases government expenditure and opportunity cost
The MSB>MPB as the demand for goods or services does not take into consideration the
positive external effects it has on a society as a whole, but only the benefits to the private
individual
A smaller amount of the good is consumed than the socially optimal output, and is under
allocated form the society’s POV
Solutions: government subsidy, legislation (by making the good compulsory like vaccines in
SG), positive advertising
Market failure In 2016, in UK, soft drinks were a major contributor to the high sugar intakes of children,
(negative consumption particularly teenagers - also contribute to country’s obesity crisis
externalities)
Solution: 20% tax on sugary drinks (tax per unit of sugar content), increased costs of
UK production, lower supply (S1=MPC → S2=MPC+sugar tax), higher price (7.5p → 33.6p per
2016 litre) ––– lower demand, lower sugar consumption (reduced by 35%), MSB<MPB, MPB
shifts inwards closer to MSB
Common pool
resource + Solution In Australia in 2014
Problem: Tourism, rising demand for coral, pollutants from boats and nearby hotels/resorts
AUSTRALIA, 2014 caused a great deal of damage to coral reef habitats. This is threatening the sustainability of
the Great Barrier Reef.
Rivalrous, Solution: Educating tourist on the ecological importance of the coral reef and managing
non-excludable recreational activity (e.g restricting access, strict licensing)
Price elasticity of
supply (elastic +
inelastic)
Income elasticity of
demand (elastic +
inelastic) - normal
goods, inferior goods
and necessities
Cross elasticity of
demand (elastic +
inelastic) - substitutes,
complements
MACROECONOMIC
S
Stagflation Slow economic growth, high unemployment, rising prices occur simultaneously
Solutions:
Subsidise job creation - France govt paid €2000 for companies that hire and retain full-time
employees for more than 6 months
Reduce unemployment benefits to encourage people to find work + provide these people with
vocational training
Tax reductions - less tax on profit would encourage private investors to invest in the economy
- increased investment (increases I component of AD) ultimately stimulates economic activity
and leads to employment
Solution 2018: national minimum wage implemented in UK at £7.38 for those aged 21-24
Subsequently increased to £7.70 in 2019 for ages 21-24
Policy was implemented to raise income of poorest households and reduce income inequality
Solution: President Roosevelt launched “New Deal” in 1933 - substantial fiscal expansion
programme - designed to improve country’s infrastructure and bring people into employment
Govt expenditure on infra and other sectors with potential for growth - unemp fell in short run
from 25%
BUT, since increased govt exp was funded by increased rates of tax, fall in rate of unemp did
not sustain and by 1938, still relatively high unemployment rate 19% (partial correction)
Abenomics: 2012-2018
PM Shinzo Abe
Problem: economic slowdown, unemployment 4.3%
Goals: stimulate economic growth, end deflation (AD curve shifts outwards, from Ye to Yfe)
HOWEVER, significant time lag - even after 4 years, 2017, Japan had only begun to
experience moderate growth, while deflation was still persistent under the target level
Expansionary UK 2015-2016
monetary policy Problem: inflation fell below inflation target, even turning negative in some months - partially
due to weakening prospects of growth following the EU referendum result
Solution: in AUGUST 2016, Monetary Policy Committee agreed to cut bank rate to 0.25% to
bring inflation back towards the target - caused increase in private sector spending due to
increased borrowing, less saving - increased AD - resulted in inflation moving back into target
range
To allay worries over higher living costs - govt rolled out measures to offset impact of GST
such as higher grants for lower-income households and higher subsidies for public services
like education and healthcare
Corporate tax cut 28% → 20% - increased investment - increased quantity and quality of
production of goods & services - increase in AS + increase in quality of life (addresses BOTH
economic growth and development)
Feb 2012, Greece implemented 22% cut in minimum wage, lowered labour costs, increased
SRAS of Greece economy, reduced layoffs, and increased employment level, resulting in
better standards of living and quality of life (addresses BOTH economic growth and
development)
Trade liberalisation (SG) - Retail Electricity Market - Energy Market Authority (EMA) has
progressively opened the retail electricity market to competition. Since 2001, steadily more
consumers have been given freedom to switch from buying electricity at the regulated tariff
from SP Services to buying from an electricity retailer which offers packages with different
price plans → THUS, number of electricity retailers has surged from 2013-2017 (7 → 25) →
increasingly, consumers are introduced to a wider variety of options – Incumbent firms are
also opting to produce more green electricity, which incurs lower costs of production in the
long run – rates for consumption have also decreased, allowing consumers to enjoy cheaper
prices – Firms are now more incentivized to innovate as well, given the rising level of
competition (addresses economic growth AND economic development)
The number of SOEs decreased by more than half from 238000 in 1998 to 116000 in 2007
Largest, centrally administered enterprises were kept under state control, but most local SOEs
were sold to private hands
Led to increased in productivity as privatisation has led to increased competition and
innovation
Improved quantity and quality of SG’s labour force - fall in structural unemployment -
improved quality of human capital - led to improvements in productive capacity
Total capacity of economy shifts outwards Yp→Yp1, increases rGDP, economic growth
Increases likelihood of SGs obtaining job in future - more knowledgeable, have useful skills -
structural unemployment
AGRICULTURAL SECTOR EG
INDIA 2022 (reduction in tariffs)
India dropped tariffs on lentils
2017 - 33%, dropped to 2020 - 11%
Prior to introduction of tariff, India was world’s largest customer for lentils and trade was
valued at ~$1 billion
Australian farmers recorded a good grain harvest in 2022, and it is expected that many
farmers would have lentils ready to trade to India
Tariff elimination was praised by Aus govt
Improved competitiveness of Indian firms → increased efficiency → increased output and
quality (shifting rGDP from Ye to Yp and living standards improved), led to economic growth
→ lower cyclical unemployment 3.2% as more labour was needed to support increased levels
of output → higher incomes, lower prices together led to increased affordability and access to
basic needs → poverty fell to 10.2%
Protectionism
(subsidies)
Inflation: lower price of imports that are factor inputs, fall in costs of production, increase in
supply of goods and services, fall in market price of good or service, fall in (cost-push)
inflation → BUT depends on PED of good or service (inflation 2020→2021: 2.08%→1.23%)
Economic growth: due to fall in quantity of exports, fall in economic growth, BUT ALSO,
due to fall in COP (lower price of import factor inputs with elastic PED), leads to increased
incentive to increase output, increases rGDP → economic growth (1.6%)
Unemployment: exports more expensive, lower overseas demand (assuming elastic PED),
lower quantity exports produced, fall in demand for labour (human capital), BUT ALSO, fall
in COP and increased incentive to increase output in domestic firms, leads to increase in
demand for labour to take advantage of low COP and earn higher revenues - 0.99% (fall from
2020)
Current account balance: exports more expensive, imports cheaper, quantity of exports >
imports, leads to current account deficit - 1.7% of rGDP
Living standards: increased affordability of goods and services (domestic due to fall in COP
and imports due to lower prices), increased standards of living
Solution: Bank of Thailand (central bank) relaxed regulations regarding investment in foreign
securities, led to increase in supply of Baht because domestic consumers sold Baht in
exchange for foreign currencies, led to fall in value of Baht → depreciation
Depreciation
INDIA 2011 - Rupee
Value of INR fell by 20% from Jan 2011 - Jan 2012
Created inflationary pressure due to rising cost of raw materials
Forced central bank to increase interest rates
Corrected large pre-existing current account deficit of India
HOWEVER, many Indian exporters rely on imported raw materials → increased COP, led to
cost-push inflation of 9%
Jan 2023, Croatia was the 20th member of the Eurozone; Euro currency is seen to be stronger
and more stable than Croatian currency, THUS will allow it to better withstand imported
inflation, and by being integrated with the Euro-bloc, it is expected to allow it to better
withstand looming economic uncertainties; Can also boost trade especially since its main
trading partners are Eurozone economies anyway; Currency conversion costs can now be
eliminated.
● COMMON MARKET
an agreement between two or more countries removing all trade barriers between themselves,
establishing common tariff and non-tariff barriers for importers, and also allowing for the free
movement of labour, capital and services between themselves
● CUSTOMS UNION
South African Customs Union (1910)
SACU is an African regional economic integration
World’s oldest customs unions, founded in 1910
Members: Botswana, Lesotho, Namibia, South African, Swaziland
Members maintain common external tariff, share customs revenue and coordinate policies and
decision-making on a wide range of trade issues
● MONETARY UNION
Latvia and Eurozone 2014
In 2014, Latvia became 18th country to join Eurozone
Many Latvians were reluctant to let go of national currency due to worries around instability
that could initially be caused by a change in currency
Ministry of Finance announced that they expect the change to the euro to alleviate the burden
of debt servicing, boost trade and benefit society through more economic development
BOP SURPLUS
SWITZERLAND 2012
Switzerland recorded a current account surplus of 11% of GDP in 2012 - increase from 9% of
GDP from the previous year
This increase in CA surplus was caused mainly by an increase in investment income, which
nearly doubled to CHF40 billion
In terms of trade in G&S, a surplus of CHF57 billion was recorded, compared with CHF59 in
2011
The decline was due to the fact that there was a 3% increase in expenditure on G&S, but only
a 2% increase in revenue from exports of G&S
DEFICIT
TURKEY 2017
According to forecasts from IMF, Turkey’s CA deficit is expected to rise with 4.4% of GDP in
2016 to 5.6% of GDP in 2017, with rGDP falling from 3.3% in 2016 to 2.9% in 2017
The CA deficit is perceived to be the biggest problem for Turkey’s economy
An international credit agency has reduced Turkey’s credit rating to “negative” because the
risks to the country’s credit profile have risen significantly in recent months
The CA deficit has contributed to massive depreciation of the Turkish lira, which dropped by
20% against the USD over the previous year
This is a significant problem for Turkey, which relies on a steady inflow of overseas
investment to finance its CA deficit
INDONESIA 2014
Bank of Indonesia (Central Bank) kept its main interest rate steady due to a large CA deficit
which limited its ability to lower borrowing costs to support a slowing economy
The CA deficit is expected to reach USD27b by the end of the year
The deficit widened due to seasonal factors, such as foreign debt payments and the transfers
of funds overseas by MNCs repatriating profits
Indo’s CA has been in deficit for 11 consecutive quarters as the clump in commodity prices in
recent years has reduced exports revenues, while import expenditure has remained high as a
consequence of the country’s strong economic expansion
ECONOMIC
DEVELOPMENT
Under-developed
countries
BUT (microfinance):
Initially, run by NGOs as a poverty-alleviation strategy following war
Microfinance institutions (MFIs) and commercial banks took over microfinance with the
purpose of profit maximisation - if did not repay in squeezed time period, threatened to sell
land (main source of collateral for households)
As a result, to manage high debt levels, Cambodians are migrating for work, eating less and
pulling children out of school - majority of income for consumption of basic necessities
As of 2021, Cambodia became the most indebted country due to the volume of microfinance
debt
Literacy rate - 78%
Barriers to economic
development (under,
developing,
developed)
Sources to overcome
barrier (natural
capital, physical
capital, human capital)
Foreign aid
Foreign direct
investment
Foreign debt
Economic growth UKRAINE 2017 - criticism of using rGDP as measure of living standards
does not lead to Ukraine has low GDP per capita ($8700) and is ranked 148/229 countries in 2017
economic BUT classified as a country with high levels of human development with an HDI of 0.743
development (ranked 84/188 countries)
Since HDI is a composite indicator which covers many dimensions, including national
income, while Ukraine faced slowing economic growth from 2015, other indicators - Life
expectancy + expected years of schooling - have consistently grown over the same period of
time