Paper 3 (4) [60 marks]
1. [Maximum mark: 30] 23M.3.HL.TZ0.2
Experts have predicted that the naira (Nigeria’s currency), which operates under
a fixed exchange rate system, will be devalued in the coming months.
Many Nigerians convert their savings into foreign currencies as protection
against the falling value of the naira and surging inflation, according to a recent
research paper published by the Central Bank of Nigeria.
Africa’s largest economy devalued the naira twice last year after a crash in the
price of oil. While oil contributes less than 10 % to Nigeria’s gross domestic
product (GDP), it accounts for nearly all foreign exchange earnings.
The naira has lost 66 % of its official value since 2009 when it exchanged at ₦149
per US dollar (US$).
An economics professor predicts that the naira will be further devalued due to
foreign investors selling their currency and choosing to invest elsewhere.
Another economist says that the naira has fallen in value due to the balance of
trade deficit. Most of the rice consumed in Nigeria is imported because domestic
production is not sufficient to satisfy the needs of the population. Consumer
goods such as cooking oil, cars, fuel and clothes are mostly imported.
The economist recommends, “If you have naira, you should go and exchange
into dollars or pounds or any foreign exchange.”
Table 1: Selected economic data for Nigeria
Nigeria’s fixed exchange rate
Nigeria maintains a fixed exchange rate for its currency, despite demands for
reform from the International Monetary Fund and The World Bank. These
institutions say a floating naira would help the economy withstand future
shocks. But Nigerian authorities fear inflation stemming from a sharp
depreciation could throw millions into poverty. Inflation has risen steadily since
mid-2019, reaching nearly 18 % in May 2021. Although inflationary pressure is
partly due to cost-push factors, it is also caused by the government’s
expansionary fiscal policy.
The global recession and oil price crash damaged Africa’s largest economy, 90 %
of whose foreign exchange earnings come from oil exports, pushing it into its
second recession in four years. The recession ended by the fourth quarter, but the
drop in oil revenues led to a current account deficit of US$16 billion last year and
has depleted its foreign reserves.
Table 2
[Source: National Bureau of Statistics, 2021. CPI and Inflation Report December 2021 [online] Available at:
https://nigerianstat.gov.ng/elibrary/read/1241113 [Accessed 12 July 2023] Source adapted.
(a.i) Using the information provided in Table 1, calculate the
inflation rate for Nigeria between 2020 and 2021. [2]
(a.ii) Using the information provided in Table 1, calculate the real [2]
GDP in naira for Nigeria in 2020.
(a.iii) Using the information provided in Table 1 and your answer to
part (a)(ii), calculate the real GDP per capita in naira for Nigeria [2]
in 2020.
(a.iv) A Nigerian business pays US$14 000 every year to a consultant
in the United States. Using the information in Table 2, calculate
the increase in the cost of this payment, in naira, between 2018
and 2020. [2]
(a.v) Define the term overvalued currency. [2]
(a.vi) Using an exchange rate diagram, explain how the Central Bank
of Nigeria might attempt to maintain a fixed exchange rate. [4]
(a.vii) Calculate the cost of this shipment in US$ at the official
exchange rate (Table 2). [2]
(a.viii) Using an AD/AS diagram and information from Table 2, explain
how the change in the official value of the naira between 2018
and 2020 might have influenced the rate of inflation for Nigeria. [4]
(b) Using the text/data provided and your knowledge of
economics, recommend a policy which could be introduced in
Nigeria to stabilize the value of the naira. [10]
2. [Maximum mark: 30] 22M.3.HL.TZ0.1
Burundi is a landlocked country in Central Africa. Its economy is heavily reliant
on the agricultural sector, which employs 92 % of the labour force but
contributes only 40 % of gross domestic product (GDP). Most of the 11.5 million
population live in poverty, especially in rural areas. The level of food insecurity
(people without access to enough food) is almost twice as high as the average
for sub-Saharan African countries with more than 60 % of the population living
below the poverty line.
Infrastructure in Burundi is poor. There are no railroads and only three major
routes through the country, two of which involve water transport, across Lake
Tanganyika. Access to clean water is low, while fewer than 5 % of the population
have access to electricity. The literacy rate for those aged 15 and over is 61.6 %,
while only 1 % of secondary schools have access to the internet.
Table 1: Labour market data for Burundi (2019)
(a.i) Using the information provided in Table 1, calculate the rate of
unemployment for Burundi in 2019. [2]
Approximately 92 % of the labour force are employed in agriculture, which
contributes 40 % of Burundi’s GDP.
(a.ii) Explain why dependence on primary sector production may be
considered a barrier to economic development. [4]
Trade
The main exports of Burundi in 2018 were gold (41.4 %), coffee (17.3 %) and tea
(9.5 %), while refined petroleum (17.3 %) was its main import. Although the
current account deficit was reduced to 10 % of GDP in 2019, there remains a
huge imbalance between exports and imports. Reserve assets do not cover more
than one month of imports, while the economy relies on foreign aid and foreign
direct investment (FDI) to finance the deficit. The low level of foreign aid is likely
to be insufficient to finance the deficit.
On the upside, Burundi has an abundance of minerals, including 6 % of the
world’s nickel reserves. It is the only African country producing rare-earth
minerals, which are used in many hi-tech products, such as smartphones. The
United States (US) has been keen to diversify its supply of rare-earth minerals
because of its trade dispute with China.
Figure 1 shows the market for gold in Burundi. Dd and Sd represent the yearly
domestic demand and supply functions for gold, while Sw and Sw1 represent the
world supply of gold in 2019 and 2020 respectively. The price of gold is measured
in US dollars (US$) per ounce (oz). The world price increased from US$1500 per
oz to US$1800 per oz between July 2019 and July 2020.
Figure 1
(a.iii) Using the information in Figure 1, calculate the price elasticity
of demand for gold in Burundi when price increases from
US$1500 per oz to US$1800 per oz. [2]
(a.iv) Using the information in Figure 1, calculate the change in the
value of Burundi’s gold exports resulting from the increase in
the price of gold from US$1500 per oz to US$1800 per oz. [2]
Government finance
The budget deficit of Burundi increased in 2019, partly due to an inefficient
system for collection of taxes. Tax rates in Burundi are given in Table 2.
Table 2
* Top rates of personal income tax in other countries are often much higher,
such as 57.2 % in Sweden and 35 % in Mexico.
(a.v) Define the term progressive tax. [2]
A firm in Burundi paid 32 000 Burundi francs (Fbu), including VAT, in order to
purchase a piece of industrial equipment. The rate of VAT for this equipment is
20 %.
(a.vi) Calculate the amount of VAT which was paid on the purchase of
this equipment. [2]
(a.vii) Sketch an AD/AS diagram to illustrate the possible effect on the
Burundian economy in the long run if the government reduces
the rate of corporate income tax from 30 % to 26 %.
[2]
Gender inequality in Burundi
Table 3 illustrates selected indicators of gender inequality in Burundi compared
with Mexico and Sweden.
Table 3
(a.viii) With reference to the data in Table 3, explain two ways in
which gender inequality might act as a barrier to economic
development in Burundi. [4]
[Source: United Nations Development Programme, 2020. The Next Frontier: Human
Development and the Anthropocene [online] Available at:
http://hdr.undp.org/sites/default/files/Country-Profiles/BDI.pdf [Accessed 20
April 2020]. Source adapted.
The World Bank, n.d. Population, total – Burundi [online] Available at:
https://data.worldbank.org/indicator/SP.POP.
TOTL?locations=BI [Accessed 20 April 2020]. Source adapted.
United Nations Development Programme, n.d. Human Development Reports [online]
Available at:
http://www.hdr.undp.org/en/countries/profiles/BDI [Accessed 20 April 2020].
Source adapted.]
(b) Using the text/data provided and your knowledge of
economics, recommend a policy which could be introduced by
the government of Burundi to reduce income inequality in
Burundi. [10]
© International Baccalaureate Organization, 2025
