ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

Paper 2 (SL and HL)

In paper 2, students must answer one question out of a choice of two. Questions are drawn from the four parts
of the syllabus. Each question is split into seven parts: (a), (b), (c), (d), (e), (f) and (g). The total marks for
paper 2 are 40. (For more information, see Introduction to IB Economics assessment: Exam papers and internal
assessment in the Digital Coursebook.)

Question 1
Most question parts of Question 1 come from material covered in microeconomics. Part f comes from material
covered in macroeconomics.

Text A Environmental impacts of meat production

1 Numerous studies have shown that agriculture, and especially production of meat, has devastating effects on
the environment. According to a major study, the production of animal products creates the most greenhouse
gas (GHG) emissions within agriculture (about 75% of total agricultural emissions) and 15% of total global
GHG emissions.
2 The most important reasons include: (i) deforestation (cutting down trees) to create more space for livestock,
and loss of grasses for growing feed crops, (ii) methane (a greenhouse gas) emissions from cattle, and (iii)
fertiliser used to produce feed crops.
3 According to the study noted above, to avoid increases in environmental pressures leading to climate change,
it will be necessary for people on average globally to eat 75% less beef, 90% less pork and half the number of
eggs, while tripling pulses (beans) and quadrupling nuts and seeds. However, because meat consumption is far
greater in rich countries, the reductions in meat consumption there should be much larger. In the US and UK,
beef would have to be cut by 90%, while pulses would have to increase by four to six times. Meat consumption
among undernourished people in poor countries would have to increase.
4 Argentina, Australia, Brazil, Canada, China, the EU, New Zealand and the US are responsible for over 60%
of global emissions from meat and dairy, double that of the rest of the world (per capita).
5 To deal with these problems, the study recommends education of the public, taxes on meat, and subsidies on
plant-based food and meat alternatives. Cuts to subsidies on livestock are also important. Within the OECD,
livestock subsidies were $53 billion, including $190 per cow.
6 While new technologies could make livestock production more environmentally friendly, this will not
do enough if meat consumption continues to grow globally. According to present trends, global meat
consumption will increase by 75% by 2050, making it impossible to reach the internationally agreed goal of
keeping temperature increases to below 1.5ºC.
Text B Health impacts of meat consumption
1 According to the World Health Organization, processed meat (hotdogs, ham, bacon) is a carcinogen (causes
cancer) while unprocessed red meat is a probable carcinogen. In addition, numerous studies have confirmed
that consumption of meat is linked to heart disease, stroke and diabetes, resulting in huge health care costs
and premature deaths. Yet people in developed countries, as well as people on higher incomes in developing
countries, on average eat far more than the recommended amounts of both processed and unprocessed meat.
According to a ‘planetary diet’ developed by the EAT-Lancet Commission, it is estimated that in North
America people eat 6.5 times the recommended quantity of red meat, while in South Asia people eat only half.
Text C Germany proposes to introduce a tax on meat
1 The idea of taxing meat has become increasingly popular. According to one study, a 20% tax on unprocessed
red meat and a 110% tax on processed meat in developed countries, with lower taxes in developing
countries, would lead to a reduction of 220 000 deaths, while raising $170 billion, and cutting health care
costs by $41 billion.

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2 In Germany, there was a proposal in 2019 to increase the value added tax (VAT) on meat from the current rate
of 7% (which applies to most foods) to 19%. Another proposal was to impose an indirect tax on meat (as in
the case of cigarettes). German meat consumption per capita is two times the global average, being the second
highest in the world (after the US).
3 Opponents to taxes argue that indirect taxes disproportionately hurt people on lower incomes, and could
make them turn to consuming lower quality alternatives, such as cheaper meat, with negative consequences for
health.
4 There have also been disagreements over how the tax revenues should be spent. Some argue it should be spent
on animal welfare, in view of unfavourable and cruel treatment of livestock. Others note that it should be used
to support livestock farmers to help them restructure as meat production is reduced.
5 Additional proposals made by opponents to taxes is to lower the VAT on organic or less environmentally
harmful food products, or alternatively to subsidise organic and less environmentally harmful foods.
Text D International collaboration on livestock GHG emissions
1 A number of collaborative efforts are involved with research on how to reduce GHG emissions in agriculture.
One of these, led by New Zealand scientists, made an important discovery on how to reduce methane animal
emissions in 2019. Another is the Global Network Project which similarly carries out research on how to
reduce animal emissions. Conferences organised by the Food and Agriculture Organization (FAO) of the
United Nations as well as others, such as the Global Research Alliance on Agricultural Greenhouse Fases, are
examining ways to bring new research results to practices at the level of the farm.
2 Other innovative approaches which are under discussion are taxes on livestock and tradable permits on
methane (the GHG emitted by livestock).

Region Price elasticity of demand (PED) Income elasticity of demand (YED)

(absolute values)
North America 0.62 0.71
Latin America 0.54 0.74
East Asia 0.66 0.82
Asia Other 0.53 0.71
European Union 0.49 0.69
European Other 0.54 0.41
Former Soviet Union 0.55 0.71
Middle East 0.59 0.67
North Africa 0.52 0.69
Sub Saharan Africa 0.60 0.80
Oceania 0.39 0.51
Source: https://hal.archives-ouvertes.fr/hal-02103880/document
Table 1: Demand elasticities for meat by world regions

Questions (Question set 2*)

* Note that Question set 1 appears in the Digital Coursebook.
a Given the YED values in Table 1, outline whether meat is a:
i normal or inferior good. [2 marks]
ii luxury or necessity. [2 marks]

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b i Define the term indirect tax (Text C, par 2). [2 marks]

ii  ermany is in the European Union. Assuming the PED and YED values in Table 1
G
for the European Union apply to Germany, calculate the percentage change in income
that would lead to a 7% increase in the German demand for meat. [3 marks]
c Using an appropriate diagram, explain how eliminating livestock subsidies can help address
the problem of GHG emissions created by livestock farming. [4 marks]
d Given the PED values in Table 1, explain which region can expect the highest tax revenues
from the imposition of a tax on meat. [4 marks]
e Using an appropriate diagram, explain what type of unemployment may arise when livestock
farmers restructure as meat production is reduced. [4 marks]
f Using an externality diagram, explain how the production of livestock may be a type of
market failure. [4 marks]
g Using information from the text and your knowledge of economics, evaluate alternative policies
that the global community may adopt to deal with the overuse of common pool resources
(the global climate, forests, grasslands) caused by livestock production. [15 marks]

Question 2
The question parts of Question 2 are taken from microeconomics, macroeconomics, international economics
and development economics.

Text A Egypt’s economic reform under the IMF

1 During the 1950s and 1960s, Egypt followed a programme of import substitution. In the 1970s, Egypt began
to liberalise its economy. In the 1980s and 1990s, Egypt suffered from serious debt problems and went through
a programme of debt relief that succeeded in bringing debt down to sustainable levels.
2 In 2016, Egypt received a $12 billion loan from the International Monetary Fund (IMF). The purpose of the
loan was to restore macroeconomic stability. It included the following objectives and measures:
•  move from a pegged (fixed) exchange rate to a floating exchange rate in order to improve the functioning
of the foreign exchange market
• lower the budget deficit and reduce government debt, which had again reached very high levels
• pursue contractionary monetary policy to limit inflation
• reduce fuel subsidies that were putting pressures on the budget
• protect the most vulnerable social groups during the adjustment.
3 According to the Governor of the Central Bank of Egypt, in 2019, the IMF praised Egypt’s economic reform
as the world’s most successful one.
Text B Achievements of the reforms
1 As a result of the reforms, economic growth improved, reaching an estimated 5.5% in 2019, one of the highest
in the region. Inflation, which had climbed to 35%, has come down and it is expected that it will reach single
digits by the end of 2019. The budget for 2018–2019 has a primary surplus (not including interest payments).
Public debt has begun to fall. Unemployment has fallen to less than 9%, which is the lowest in more than a
decade. Following the move to floating exchange rates, foreign exchange reserves of the central bank (reserve
assets) are at an all-time high. Reductions in fuel subsidies have meant that prices are better able to perform
their resource allocation function. Savings from government spending on the fuel subsidies can go toward
targeted spending on goods and services and provision of merit goods.
2 Further reforms recommended by the IMF include strengthening governance and competition, improving the
integration of women and youth in the labour market, increasing the role of the private sector in the economy
and increasing non-oil exports.

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Text C The Egyptian pound

1 For many years, Egypt had its currency, the Egyptian pound, pegged (fixed) against the US dollar. Among
the reasons for this were exchange rate stability and to prevent currency depreciation that would increase
the prices of imports. In 2016, the IMF made abandonment of the peg a condition for lending to Egypt.
Following the move to a floating exchange rate system, the pound depreciated relative to the US dollar by
about 50%. Following this, inflation in Egypt went as high as 35%.
Text D Challenges involving exports
1 Net exports became the most important factor driving growth, helped by the depreciated currency. However,
the increase in exports involved mainly gas and to a lesser extent tourism. Egypt has a comparative advantage
in certain goods including carpets, fabrics, textiles, salt and stones, but many of these face weak global
demand, suggesting limited growth potential.
2 Egypt has signed several preferential trade agreements, but the benefits have been limited to tariff reductions
while other significant non-tariff and administrative barriers remain, creating important obstacles to
expansion of exports. Some barriers come not only from trading partners but also from the Egyptian side,
involving inspection and certification procedures as well as infrastructure weaknesses like cooling and storage
facilities as well as domestic transport systems. As a result Egypt has been unable to fully take advantage of
the depreciation of its currency.
3 The current account also benefits from remittances. This is important because hundreds of thousands of
families depend on these.
Text E Other challenges
1 In 2019, an estimated 32% of the Egyptian population lives below the national poverty line, up from 28% in
2015. Inequality is also increasing. The poverty line is set at $45 a month, which is too low according to some
economists. The rise in inflation following the depreciation made numerous food items unaffordable to people
on low incomes, while the cuts in fuel subsidies raised transport costs. Household expenditures have been
rising faster than incomes. Public school fees have increased while a new indirect tax (value added tax) of 14%
has been introduced. Cash transfer programmes cover about 10% of the population.
2 While unemployment fell, so did the labour force participation rate (the number of people of working age in
the labour force), suggesting an increase in long-term unemployment. Youth unemployment remains high at
22%. Furthermore, many of the new jobs being created are in the informal economy.
3 According to the constitution, spending on health care and education should increase to 3% and 6%
respectively, yet spending on education fell from 3.6% of GDP in 2016 to 2.5% in 2018 and is planned at 2.2%
in 2019. Spending on health care was 1.6% in 2018.

GDP deflator 2018* 121.4

GDP (current US$) 2018 250.9 billion
GDP per capita (current US$) 2018 2549.1
GDP per capita (US$ PPP) 2018 12,390
GNI (current US$) 2018 275.4 billion
GNI per capita (current US$) 2018 2800
GNI per capita (US$ PPP) 2018 12,080
GDP growth in 2019 (estimated)* 5.5%
Government debt 2018 227.1 billion
Source: https://data.worldbank.org/indicator?tab=all
*https://knoema.com/atlas/Egypt/topics/Economy/National-Accounts-Gross-Domestic-Product/GDP-deflator
Table 1: Egypt: data on economic performance

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Questions (Question set 2*)

* Note that Question set 1 appears in the Digital Coursebook.
a i Define the term preferential trade agreement (Text D, par 2). [2 marks]
ii Define the term informal economy (Text E, par 2). [2 marks]
b i Using the information in Table 1, calculate the value of real GDP in 2018. [2 marks]
ii  sing the information in Table 1 and your answer to question b i, calculate the
U
value of real GDP in 2019. [3 marks]
c Using an appropriate diagram, explain the likely effects of contractionary monetary policy
on the economy (Text A, par 2). [4 marks]
d Using an appropriate diagram, explain the effect of a reduction of fuel subsidies on the
price and quantity of fuel (Text A, par 1). [4 marks]
e Using an appropriate diagram, explain the effect of remittances on the value of the
Egyptian pound (Text D, par 3). [4 marks]
f Using a Lorenz curve diagram, explain the likely impact on income distribution of the
introduction of indirect taxes (Text E, par 1). [4 marks]
g Using information in the text and your knowledge of economics, discuss the strengths
and weaknesses of market-based versus interventionist policies to achieve economic
growth and development. [15 marks]

Questions (Question set 3*)

* Note that Question set 1 appears in the Digital coursebook.
a i (HL only) Define the term comparative advantage (Text D, par 1). [2 marks]
ii State two functions of the International Monetary Fund (IMF) (Text A, par 2). [2 marks]
b i Referring to the information in Table 1 and the text (D par 3), outline why GNI is greater
than GDP. [2 marks]
ii (HL only) Calculate government debt as a share of nominal GDP. [3 marks]
c (HL only) Explain four likely costs of high levels of debt (Text A, par 1, 2). [4 marks]
d Using an appropriate diagram, explain the effect of remittances on Egypt’s real GDP
(Text D, par 3). [4 marks]
e Using an exchange rate diagram, explain the likely effects of contractionary monetary
policy on the value of the Egyptian pound (Text A, par 2). [4 marks]
f Using an international trade diagram, explain how removal of tariffs by Egypt’s trading partners
in the preferential trade agreements is expected to affect export revenues (Text D, par 2). [4 marks]
g (HL only) Using information in the text and your knowledge of economics, discuss
advantages and disadvantages of fixed versus floating exchange rate systems. [15 marks]

Sources
Question 1
Text A
Springmann, M. et al., 2018, Options for keeping the food system within environmental limits. Nature, 10 October
2018. Available at: <www.cambridge.org/links/ecibtd8054>.
Scientific American, 2019, How Meat Contributes to Global Warming.
Available at: <www.cambridge.org/links/ecibtd8055>.

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 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

Gabbatiss, J., 2018, Meat and dairy companies to surpass oil industry as world’s biggest polluters, report finds.
The Independent, 18 July 2018. Available at: <www.cambridge.org/links/ecibtd8056>.
Wardrop, M., 2009, Lord Stern: ‘People should give up eating meat to halt climate change’. The Telegraph,
27 October 2009. Available at: <www.cambridge.org/links/ecibtd8040>.
Carrington, D., 2015, Meat tax far less unpalatable than government thinks, research finds. The Guardian, 24
November 2015. Available at: <www.cambridge.org/links/ecibtd8041>.

Text B
DW Akademie, 2019. Pass the beans, hold the beef to save yourself and the planet. 17 January 2019. Available at:
<www.cambridge.org/links/ecibtd8042>.

Text C
DW Akademie, 2019. Germany: ‘Meat tax’ on the table to protect the climate. 7 August 2019. Available at:
<www.cambridge.org/links/ecibtd8043>.
Fleischmann, A., 2019, Germany’s meat tax: Step forward, or wurst idea? 13 August 2019. Available at:
<www.cambridge.org/links/ecibtd8044>.
Carrington, D., 2018, Taxing red meat would save many lives, research shows. 6 November 2018. Available at:
<www.cambridge.org/links/ecibtd8045>.

Text D
AgResearch, 2019, Important discovery in quest to lower methane emissions from animals. 1 July 2019. Available
at: <www.cambridge.org/links/ecibtd8046>.
Food and Agriculture Organization of the United Nations, 2017, Livestock solutions for climate change.
Available at: <www.cambridge.org/links/ecibtd8047>.
Federal Ministry of Food and Agriculture (Germany), 2018, Summary Report: International Conference on
Agricultural GHG Emissions and Food Security – Connecting research to policy and practice. Available at:
<www.cambridge.org/links/ecibtd8048>.
Leip, A. et al., 2010, Evaluation of the livestock sector’s contribution to the EU greenhouse
gas emissions (GGELS). 30 November 2010. Joint Research Centre, European Commission.
Available at: <www.cambridge.org/links/ecibtd8049>.

Question 2
Text A
IMF, 2019, Egypt: A Path Forward for Economic Prosperity, 24 July 2019. International Monetary Fund.
Available at: <www.cambridge.org/links/ecibtd8050>.
MENA, 2019, IMF: Egypt’s economic reform program world’s most successful. 17 June 2019. Egypt Today.
Available at: <www.cambridge.org/links/ecibtd8051>.

Text C
The National, 2018, Egypt inflation falls sharply as currency devaluation impact eases. 10 January 2018.
Available at: <www.cambridge.org/links/ecibtd8052>.

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Text D
Egypt Economic Monitor, 2019, From Floating to Thriving – Taking Egypt’s Exports to New Levels. July 2019.
World Bank Group. Available at: <www.cambridge.org/links/ecibtd8053>.

Text E
The Economist, 2019, Poverty on the Nile, August 10–16 2019.

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