IB Economics Teacher Resource 3ed Paper 1 Markscheme 2

ECONOMICS FOR THE IB DIPLOMA: MARKSCHEMES
Paper 1 (SL and HL)

markscheme
1 The foundations of economics
Core (SL and HL)
Chapter 1 has only Part (a) questions.
1.4 a Answers may include:
•• Definitions: scarcity, opportunity cost, choice, production possibilities
•• Explanation: Production on the PPC presupposes that all resources are used fully and efficiently,
which cannot occur in the real world. Therefore production will take place somewhere inside the
curve. The point of production illustrates the extent of unemployment and inefficiency, while points
outside the curve are unattainable. This therefore illustrates scarcity of resources in relation to
unlimited human needs and wants. Scarcity forces choices that involve opportunity costs, which are
central concepts in economics. The model therefore does have usefulness.
•• Diagram: production possibilities model
HL only
Chapter 1 has no HL only questions that are examined in Paper 1.
2 Competitive markets: Demand and supply

Core (SL and HL)
Chapter 2 has only Part (a) questions at SL, but both Part (a) and Part (b) questions at HL.
•• Definitions: demand, quantity demanded, law of demand, non-price determinants of demand
•• Explanation: of the law of demand indicating an inverse relationship between price and quantity
demanded; of a decrease in demand and factors that can cause a decrease, resulting in a lower price
as well as lower quantity
•• Diagram: demand and supply diagram showing initial equilibrium and a leftward shift in the
demand curve, resulting in a lower equilibrium price and quantity
•• Definitions: supply, quantity supplied, law of supply, non-price determinants of supply
•• Explanation: of the law of supply indicating a positive relationship between price and quantity
supplied; of an increase in supply and of the factors that can cause an increase, resulting in a lower
price and higher quantity, with reference to changes in supply and factors that can cause changes
in supply
•• Diagram: demand and supply diagram showing initial equilibrium and a rightward shift in the
supply curve, resulting in a lower equilibrium price and greater equilibrium quantity
1 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021

•• Definitions: normal good, demand, excess demand, reallocation of resources
•• Explanation: of demand and supply with reference to excess demand as demand increases, the
factors that can cause shifts in the demand curve and the role of price as a signal and incentive,
resulting in a higher price
•• Diagram: demand and supply diagram showing initial and final equilibrium price and quantity
following a rightward shift in the demand curve leading to excess demand
•• Definitions: supply, excess supply, reallocation of resources
•• Explanation: of demand and supply with reference to excess supply as supply increases, the factors
that can cause shifts in the supply curve and the role of price as a signal and incentive, resulting in a
lower price
•• Diagram: demand and supply diagram showing initial and final equilibrium price and quantity
following a rightward shift in the supply curve leading to excess supply
•• Definitions: allocative efficiency, consumer surplus, producer surplus
•• Explanation: that in a competitive market consumer surplus is the greatest it can be, therefore
consumers get the maximum benefit from buying the product at a lower price than what they are
willing to pay; that producer surplus is the greatest it can be, therefore producers get the maximum
benefit from producing the good by selling it at a higher price than they are willing to receive;
equivalence to MB = MC
•• Diagram: competitive market showing maximum consumer and producer surplus
HL only
•• Definitions: income effect, substitution effect, marginal utility, law of demand
•• Explanation: of how a change in the price of a good will lead to income and substitution effects
which give rise to an inverse relationship between price and quantity demanded; of law of
diminishing marginal utility and how it also gives rise to an inverse relationship between price and
quantity demanded, and therefore the law of demand
•• Diagram: demand curve illustrating law of demand
•• Definitions: marginal product, marginal cost
•• Explanation: of law of diminishing marginal returns; how marginal product of a variable input is
related to the firm’s marginal costs
•• Diagram: not necessary for this question
2.10 b Answers may include:
•• Definitions: firm, profit, profit maximisation
•• Explanation: of profit maximisation and alternative firm objectives, such as corporate social
responsibility, market share, satisficing, growth
•• Diagram: after completing Chapter 2 no diagram necessary; after completing Chapter 7 profit
maximisation by a firm in any market structure (HL only)
•• Synthesis (evaluate): advantages and limitations of the standard assumption of profit maximisation;
the degree of realism of this assumption; advantages and disadvantages of the other possible
objectives
•• Examples: real-world examples where firms pursue various goals, such as growth maximisation or
corporate social responsibility, which perhaps can be shown more easily
3 Elasticities
Core (SL and HL)
•• Definitions: price elasticity of supply, perfectly inelastic supply
•• Explanation: of a PES value of zero for Picasso’s painting, as there is zero responsiveness of
quantity to changes in price; a value of PES > 0 for copies of Picasso’s paintings that may depend
on availability of qualified artists who can make reproductions or the time needed to make these
•• Diagram: showing a supply curve with PES = 0 and another with PES > 0
•• Definitions: indirect tax, price elasticity of demand, price elastic and price inelastic demand
•• Explanation: of indirect taxes in relation to price elasticity of demand and tax revenues, including
explanation of likely range of values of PED for yachts and cigarettes
•• Diagram: showing tax revenues following the imposition of an indirect tax
•• Synthesis (examine): consideration of how the imposition of an indirect tax on yachts may be an
appropriate policy to redistribute income as yachts are a luxury good, but such a tax is likely to lead
to lower tax revenue than a tax on cigarettes.
•• Examples: real-world examples illustrating the popularity of indirect taxes on goods with inelastic
demand, such as cigarettes, gasoline (petrol) and alcohol versus indirect taxes on luxuries
HL only
•• Definitions: primary commodities, manufactured goods, price elasticity of demand
•• Explanation: of price elasticity of demand (PED), price elastic demand, price inelastic demand;
reference to the factors of presence of substitutes and degree of necessity that determine why PED
for primary commodities is generally low (PED < 1) and why PED for manufactured goods is
relatively high (PED > 1)
•• Diagram: showing elastic and inelastic demand
•• Definitions: income elasticity of demand, primary sector
•• Explanation: of income elasticity of demand for goods that are necessities
•• Diagram: Engel curve showing the range where goods are necessities
•• Synthesis (examine): Agriculture involves the production of food which is a necessity therefore has
a YED<1. Therefore as an economy grows over time, the relative share of agriculture shrinks.
•• Examples: real-world examples showing the declining share of agriculture in GDP or in total
employment as countries grow over time, while the corresponding share of the manufacturing and
especially the services sectors increase
4 Government intervention in microeconomics

Core (SL and HL)
•• Definitions: price ceilings, price floors, allocative efficiency/inefficiency
•• Explanation: of competitive market equilibrium and achievement of allocative efficiency in relation
to social surplus and marginal benefits (MB) and marginal costs (MC); of a price ceiling with
MB > MC and underproduction, shortage, welfare loss and hence allocative inefficiency; of a price
floor, with MC > MB and overproduction, surplus, welfare loss and hence allocative inefficiency;
reference to why governments impose price ceilings and price floors
•• Diagram: one showing effects of a price ceiling, another showing effects of a price floor
•• Definitions: indirect taxes, subsidies and price controls (price ceilings, price floors)
•• Explanation: of market demand and supply, and market equilibrium at the point of intersection of
the demand curve and the supply curve; of the imposition of an indirect tax and a subsidy, which
lead to a new market equilibrium at the point where the demand curve intersects the new supply
curve; of the imposition of a price ceiling and a price floor, which do not allow the market to clear,
i.e. to achieve a new equilibrium, therefore resulting in a shortage (price ceiling) or surplus (price
floor)
•• Diagram: price ceiling and a price floor, which do not allow the market to clear; or tax or
subsidy diagram
•• Definition: indirect tax
•• Explanation: of the free competitive market (demand and supply) and the effects of indirect taxes;
the tax drives a wedge between the price paid by consumers and the price received by producers,
leading to a higher price for consumers, a lower price for producers and a lower equilibrium
quantity produced and consumed, involving an underallocation of resources to the good, lower
producer revenue (due to the lower price and lower quantity produced)
•• Diagram: showing an indirect tax and its effects
•• Definition: indirect tax
•• Explanation: of government intervention taking the form of imposition of an indirect tax, with
reference to effects on consumers, producers, workers, the government and society in the form of
welfare loss and allocative inefficiency due to lower than desired output
•• Diagram: indirect tax and its effects
•• Synthesis (discuss): consideration of possible factors that led the government to impose the
indirect tax; the possibility that government objectives in imposing the tax may outweigh the loss
of allocative efficiency; weighing up of pros and cons of the tax from the perspective of various
stakeholders and society
•• Examples: real-world examples where a government has imposed an indirect tax on wine
HL only
5 Market failure and socially undesirable

outcomes I: Common pool resources and
negative externalities
Core (SL and HL)
•• Definitions: negative production externality, market failure, sustainability
•• Explanation: with a negative production externality, the marginal social cost (MSC) of production
is greater than the marginal private cost (MPC); the difference between the two is the cost to society
of the negative externality, which is the cost of the pollution; the market overallocates resources to
the production of the good; may also refer to unsustainable production
•• Diagram: negative production externality
•• Definitions: negative production externality, market failure
•• Explanation: of possible responses such as legislation and regulations to limit emissions or the
quantity of output produced, imposition of an indirect tax on output or emissions (carbon tax),
tradable permits, education and awareness creation
•• Diagram: showing how each of the selected policy responses works to correct the externality,
bringing production closer to the optimal level
•• Synthesis (evaluate): taxes and tradable permits are market-based solutions, and are preferred
by economists to legislation and regulations because they create incentives for firms to reduce
the pollutants they emit. However, both taxes and tradable permits require detailed technical
information on the amount of pollution created, which is not easily available to governments;
it is moreover very difficult to calculate the size of a tax that will be equal to the spill-over cost.
Legislation, regulations and awareness-creation may be even less effective, as they require similar
technical information, and are unlikely to lead to the desired shift in the MPC curve.
•• Examples: real-world examples where governments have pursued the particular policies selected
for evaluation
•• Definitions: negative consumption externality, market failure
•• Explanation: by using biomass fuels for heating and cooking, consumers create external costs in
the form of pollution inside the home that is highly detrimental to people’s – especially children’s –
health, leading to numerous health problems
•• Diagram: negative consumption externality
•• Definitions: demerit goods, negative consumption externality, market failure
•• Explanation: of negative consumption externalities and policies to address these, such as legislation
and regulations, education and awareness creation, consumer nudges (HL only), indirect taxes
•• Diagram: showing how each of the selected policies works to correct the externality
•• Synthesis (evaluate): the market-based solution of indirect taxes is often preferred by economists
as it is based on incentives, rather than the command mechanism. However, as goods with negative
consumption externalities often have inelastic demand (gasoline/petrol, cigarettes, alcohol), the
tax may have a greater impact on increasing government revenues than on decreasing quantity
produced and consumed. All measures are subject to the limitation that it is exceedingly difficult
to have accurate information on the value of external costs. It is also difficult to determine
how large the tax should be, as well as the relative effectiveness of advertising, legislation and
consumer nudges
•• Examples: real-world examples where government have pursued the particular policies selected
for evaluation
•• Definitions: tradable permits, allocation of resources
•• Explanation: of negative production externalities in relation to market failure, allocative efficiency
and social welfare (MSC > MPC, or MSC > MSB); reference to how tradable permits are intended
to work as a market-based solution to the problem of pollution
•• Diagram: showing the demand and supply for tradable permits; showing a negative production
externality with welfare loss, and correction of the externality due to the use of tradable permits,
leading to an improvement in allocative efficiency
•• Definition: tradable pollution permits
•• Explanation: of market failure arising from the use of fossil fuels (negative production
externalities); of alternative policies to deal with fossil fuel emissions: tradable permits, carbon
taxes, legislation and funding for clean technologies
•• Diagram: one or more showing how the alternative policies may reduce fossil fuel emissions
•• Synthesis (discuss): potential advantages/disadvantages of tradable pollution permits as a method
to deal with fossil fuel emissions; relative strengths and weaknesses of some alternative policies
(carbon taxes, legislation and funding for clean technologies); the relative strengths and weaknesses
of market-based policies versus government regulation and legislation; the likely need for
international collaboration, as pollution is a global problem; discussion of whether tradable permits
might be the most effective method to deal with fossil fuel emissions; impacts on stakeholders
•• Examples: real-world examples of tradable permit schemes, as well as other possible policies such as
carbon taxes
•• Definitions: resources, common pool resources, sustainability
•• Explanation: of resources bought by firms as goods or services that are rivalrous and excludable,
and therefore rationed to their prospective users through the market system; common pool
resources are rivalrous but non-excludable therefore are likely to be overused, therefore causing a
threat to sustainability
•• Diagram: demand and supply diagram to show price rationing; or negative production externality
diagram
•• Definitions: common pool resources, unsustainability, collective self-governance
•• Explanation: of collective self-governance as a method to use common pool resource sustainably;
undertaken by communities where it is recognised that working cooperatively is in the best interests
of the group
•• Synthesis (evaluation): consideration of strengths and limitations of this approach
•• Examples: real-world examples where collective self-governance has been implemented
HL only
6 Market failure and socially undesirable outcomes

II: Positive externalities, public goods, asymmetric
information and inability to achieve equity
Core (SL and HL)
•• Definitions: positive production externality, market failure, resource allocation, social welfare
•• Explanation: of a positive production externality where marginal social costs lie below marginal
private costs; of the external benefits; underallocation of resources by the market to the production
of robots, market failure, welfare loss
•• Diagram: showing a positive production externality
•• Definitions: positive production externality, market failure
•• Explanation: of possible policies, including direct government provision and subsidies in order to
address the problem of underallocation of resources by the market
•• Diagram: showing the effect of policies that increase the supply of the good with the external effects
bringing the economy closer to the social optimum
•• Synthesis: discussion of advantages and limitations of the policies with respect to their ability to
address the problem of underallocation by the market (such as increasing quantity and lowering
price, along with difficulties in making correct choices and opportunity costs)
•• Examples: real-world examples of policies used by governments to address the issue of positive
production externalities
•• Definitions: positive consumption externalities, market failure, resource allocation, social welfare
•• Explanation: of a positive consumption externality where marginal social benefits lie above
marginal private benefits; of the external benefits; underallocation of resources by the market to the
production of research to develop new medicines; market failure, welfare loss
•• Diagram: showing a positive consumption externality
•• Definitions: positive consumption externalities, market failure
•• Explanation: of market failure arising from the consumption of education and alternative policies
to deal with the external benefits: legislation and regulations, advertising, consumer nudges (HL
only), direct government provision, subsidies
•• Diagram: showing how the alternative policies may correct the problem of these externalities by
increasing demand or increasing supply
•• Synthesis: relative strengths and weaknesses of alternative policies; the relative strengths and
weaknesses of market-based policies versus government regulation and legislation; consideration of
what may be more effective to address the problem of underallocation of resources by the market
•• Examples: real-world examples of policies used by governments to address the issue of positive
consumption externalities
•• Definitions: merit goods, public goods, market failure, rivalry, excludability
•• Explanation: of merit goods that are rivalrous and excludable, in contrast to public goods that are
non-rivalrous and non-excludable; both lead to market failure for different reasons: merit goods are
underprovided by the market while public goods are not provided at all by the market
•• Diagram: showing a positive consumption externality for a merit good; no diagram is necessary for
a public good
•• Definitions: merit goods, positive consumption externalities, public goods
•• Explanation: of direct government provision correcting the problem of underprovision by the
market of merit goods and no provision by the market of public goods
•• Diagram: showing merit goods as goods with positive consumption externalities and direct
government provision to correct the externality problem; no diagram necessary of public goods
•• Synthesis (discussion): in contrast to merit goods, lack of public goods can mainly be corrected by
direct government provision; opportunity costs of government spending on merit goods and public
goods; issues regarding which public and merit goods should be provided by the government, and
in what quantities; the lack of a market for public goods makes it more difficult to attach a value to
public goods (whereas merit goods are usually provided by the market); efforts made by government
to estimate the value of benefits through cost-benefit analysis; impacts on stakeholders
•• Examples: real-world examples where governments directly provide particular merit goods and
public goods
HL only
•• Definitions: free market, income and wealth distribution
•• Explanation: of distribution that depends on factors of production that are owned and sold in the
market without any government intervention; since ownership is unequally distributed, the resulting
distribution of income and wealth will be unequal
•• Diagram: circular flow of income (leakages and injections are not necessary) or Lorenz curve (after
completing Chapter 12)
•• Definitions: signalling, screening, adverse selection, information asymmetries, market failure
•• Explanation: of the problem of market failure due to adverse selection, how signalling and
screening attempt to deal with this; consideration of alternative methods involving government
intervention such as provision of information and licensure
•• Synthesis (evaluation): consideration of the advantages and limitations of alternative methods;
which policies might be more effective under various circumstances
•• Examples: real-world examples illustrating the use of signalling and screening as methods to deal
with information asymmetries
7 Market failure and socially undesirable

outcomes III: Market power
HL only
•• Definitions: total revenue, total cost, marginal revenue, marginal cost, profit
•• Explanation: that in one method, profit is maximum when the difference between TR and TC is the
largest possible; in the other method, profit is maximum when MR = MC; if MC > MR, the firm
should reduce the output it produces until equality is reached at MC = MR; if MC < MR, the firm
should increase the output it produces until equality is reached at MC = MR
•• Diagram: showing profit maximisation by the MC = MR approach by any market structure of the
student’s choice
•• Definitions: barriers to entry, the four market structures
•• Explanation: of barriers to entry with examples (economies of scale, natural monopoly, legal
barriers, control of essential resources, or others); perfect competition has no barriers, therefore
large number of very small firms; in the long run, firms earn normal profit; monopolistic
competition has no or low barriers, therefore large number of small to medium-size firms; in the
long run, firms earn normal profit; oligopoly has high barriers, so difficult (but not impossible)
for new firms to enter, ensuring a small number of very large firms that are interdependent; high
barriers ensure abnormal profit in the long run; monopoly has very significant barriers, therefore
only one firm (or one dominant firm) in the industry; large economies of scale, especially in case of
a natural monopoly, are especially important in leading to the monopoly market structure, although
the other barriers are also important; complete absence of entry ensures absence of no abnormal
profits in the long run
•• Diagram: showing one firm with normal profit in the long run; another firm with abnormal profit
in the long run
•• Definitions: monopoly, natural monopoly
•• Explanation: of the firm that is a monopoly and the particular assumptions that underlie this model,
as well as the importance of barriers to entry; results with respect to allocative inefficiency, welfare
analysis (consumer and producer surplus, social surplus and welfare loss) and the possibility of
achieving economies of scale large enough that price is lower and quantity is greater in comparison
with perfect competition
•• Diagram: showing monopoly, illustrating the profit-maximising position of the firm
•• Synthesis (evaluate): consideration of benefits to producers, including the possibility of abnormal
profits in the long run, an increase in the amount of producer surplus at the expense of consumer
surplus; consideration of benefits of consumers, including the advantages of research and
development due to supernormal (abnormal) profits, the need to be technologically innovative in
order to maintain the monopoly position and abnormal profits, the possibility of economies of
scale and hence lower prices, and innovations that benefit consumers
•• Examples: real-world examples of monopoly illustrating potential benefits for producers as well as
other stakeholders
•• Definitions: demand, average revenue, marginal revenue, perfect competition, imperfect competition
•• Explanation: of the equality between price, demand, the demand curve and marginal revenue
in perfect competition as opposed to the relationships between them in imperfect competition;
reference to a horizontal versus a downward-sloping demand curve
•• Diagram: showing a horizontal demand curve for perfect competition where D = P = AR = MR;
a downward-sloping demand curve where D = P = AR and MR lying below
•• Definitions: market power, abuse of market power, monopoly, oligopoly
•• Explanation: of the advantages of large firms, including economies of scale, natural monopoly,
abnormal profits in the long run with the possibility to carry out research and development, leading
to new products and new technologies; possible risks in terms of lower output, higher prices, loss of
consumer surplus, negative effects on income distribution
•• Diagram: showing monopoly earning abnormal profit, possibly in comparison with perfect
competition showing higher prices, lower quantities and welfare loss
•• Synthesis (discuss): consideration of the degree to which the potential advantages and risks will
materialise; for example, research and development and innovation may not occur due to absence of
competition, while prices may be lower and quantities higher due to natural monopolies, especially
if they are regulated
•• Examples: real-world examples of advantages and risks arising from firm behaviour in highly
concentrated markets
•• Definitions: perfect competition, abnormal profit, short run, long run
•• Explanation: perfect competition consisting of a structure in which there are no barriers to entry or
exit ensures that in the long run, firms exit loss-making industries or enter profit-making ones, such
that in the long run all firms will make normal profit
•• Diagram: showing perfect competition in the short run earning abnormal profit; in the long run
earning normal profit
•• Definitions: perfect competition, monopolistic competition
•• Explanation: of the models of perfect and monopolistic competition, including that due to free
entry and exit in both market structures, firms earn zero economic profit in the long run (normal
profit); however, the achievement or not of allocative efficiency depends on whether the firm
is a price-taker (perfect competition facing a perfectly elastic demand curve) or a price-maker
(monopolistic competition facing a downward-sloping demand curve)
•• Diagram: showing short-run and long-run equilibrium position of perfectly and monopolistically
competitive firms
•• Synthesis (compare and contrast): consideration of points of similarity, including the large number
of firms, free entry and exit, normal profit in the long run and abnormal profit or loss in the short
run; points of difference, including market power, allocative efficiency, incentive to differentiate
products, product variety, possibly higher prices in monopolistic competition due to market power
•• Examples: real-world examples of firms in monopolistic competition, such as restaurants that
practise product differentiation compared with producers of agricultural product that are difficult
to differentiate
•• Definitions: product differentiation, non-price competition, monopolistic competition, monopoly
•• Explanation: of the meaning of a price-maker (imperfect competition) with respect to the
downward-sloping demand curve; the importance of product differentiation (with examples) as a
kind of non-price competition that provides monopolistically competitive firms with a degree of
market power, therefore making them similar to monopolies
•• Diagram: showing monopolistic competition and profit-maximising position
•• Definitions: non-price competition, monopolistic competition, oligopoly
•• Explanation: of the two different market models and the role of non-price competition
•• Diagram: showing monopolistic competition facing a downward-sloping demand curve that
becomes steeper as non-price competition becomes greater; the more successful the non-price
competition the greater the market power
•• Synthesis (discuss): both monopolistic competition and oligopoly depend on non-price competition
and product differentiation for partly different reasons: monopolistic competition to increase its
market power, oligopoly because firms need to compete with each other on a non-price basis
•• Examples: real-world examples of firms in monopolistic competition and oligopoly, and their use
of non-price competition
•• Definitions: oligopoly, collusive oligopoly, non-collusive oligopoly
•• Explanation: of collusion when firms make an agreement to fix prices or share output in some way,
so that they end up operating like a monopoly; of non-collusive oligopoly where firms compete with
each other, usually on the basis of non-price factors involving product differentiation
•• Diagram: showing collusive oligopoly, which is the same as the monopoly diagram
•• Definitions: collusion, prisoner’s dilemma, payoff matrix
•• Explanation: of interdependence of the oligopolistic firms as the decision of each one affects the
other, and of the conflicting incentives they face by use of the information in the payoff matrix;
firms have the incentive to collude as they increase their profits, but also face the incentive to cheat
so that they end up being worse off at the same time that each tries to do the best for itself
•• Diagram: showing collusive oligopoly, which is the same as the monopoly diagram
•• Synthesis (examine): consideration of the advantages and disadvantages of collusion versus
competition for firms and society; for example firms benefit with greater profits from collusion, but
it is illegal, may face fines if discovered, and functions like a monopoly with higher prices, lower
quantities, significant welfare loss; competition – usually non-price, resulting in new products or
technologies – is beneficial for consumers and firms
•• Example: real-world examples of firms that collude and compete or cheat, such as by informing the
authorities of the cartel in order to avoid a penalty if the cartel is discovered
•• Definitions: price elasticity of demand, perfect competition, monopolistic competition, monopoly
•• Explanation: of PED, and how this determines the demand curve faced by each of the market
structures
•• Diagram: showing the demand curves faced by each of the three market structures
•• Definitions: monopoly, natural monopoly
•• Explanation: of the market model of monopoly, and the particular case of natural monopoly with
very large economies of scale
•• Diagram: showing a natural monopoly
•• Synthesis (evaluate): consideration of the shortcomings of monopoly, such as high price, low
quantity, allocative inefficiency and welfare loss, alongside the benefits of natural monopoly of low
average costs that are in society’s interest; the need for government regulation of natural monopoly
•• Example: real-world examples of natural monopolies that are regulated by the government
8 The level of overall economic activity

Core (SL and HL)
•• Definitions: business cycle, long-term growth trend
•• Explanation: of the various phases, including expansion, peak, contraction, trough; the long-term
growth trend representing potential output with unemployment equal to the natural rate
•• Diagram: business cycle

•• Definitions: circular flow of income
•• Explanation: of the circular flow model where factor incomes flow from firms to households, and
consumer expenditures on goods and services flow from households to firms; of the effects of
leakages and injections; exports are an injection that make the income flow larger, while taxes are a
leakage that make the income flow smaller, therefore the change in the level of income will depend
on which of the two effects is larger
•• Diagram: circular flow of income with leakages and injections
HL only
9 Aggregate demand and aggregate supply

Core (SL and HL)
•• Definitions: short-run aggregate supply, real GDP
•• Explanation: of possible factors such as a fall in prices of factors of production or fall in business
taxes, which will result in an increase in SRAS, a fall in the price level and an increase in real GDP
•• Diagram: an AD-AS diagram (of the monetarist/new classical model) showing a rightward shift of
the SRAS curve
•• Definitions: aggregate demand, real GDP
•• Explanation: of possible factors such as improved consumer confidence or lower interest rates,
which will result in an increase in AD; in the short run, this will involve an upward movement along
the SRAS curve, hence a higher price level and real GDP; in the long run, it will involve an upward
movement along the LRAS curve and an increase in the price level with no change in real GDP
•• Diagram: AD-AS model showing an increase in AD along SRAS and along LRAS
•• Definitions: aggregate supply, short run and long run in macroeconomics, monetarist/new classical,
Keynesian, economic growth
•• Explanation: of shifts in the LRAS and Keynesian AS curves and increases in potential output,
with reference to factors that can cause these, such as changes in quantity or quality of factors of
production, technological improvements, institutional changes, improvements in efficiency
•• Diagrams: the two curves shifting to the right
•• Definitions: inflationary and recessionary gaps
•• Explanation: of short-run equilibrium with reference to the point that the actual equilibrium
of an economy may differ from potential output; inflationary gaps, with an excess of aggregate
demand relative to what is needed to achieve potential (full employment) output correspond to
real GDP above the long-term growth trend in the business cycle; and recessionary gaps with a
deficiency of aggregate demand corresponding to real GDP above the long-term growth trend in
the business cycle
•• Diagrams: inflationary and recessionary gaps (either the monetarist/new classical or
Keynesian models)

•• Definitions: monetarist/new classical, Keynesian, full employment output
•• Explanation: of the distinction between the short run and long run in the monetarist/new classical
model, where the assumption of wage-price flexibility in the long run makes the economy return
to potential (full employment) output where the vertical LRAS curve is situated; of the Keynesian
model, according to which there is downward wage-price inflexibility so that equilibrium occurs
anywhere along the AS curve, indicating the presence of an inflationary gap, recessionary gap or
full employment output
•• Diagram: the two AD-AS models illustrating the possible points of equilibrium in each
•• Synthesis (discuss): arguments may include: points of similarity, such as possible short-run
equilibrium, where in both models it is possible to illustrate inflationary and recessionary gaps;
points of difference, including the differing assumptions regarding the existence or not of a long
run, and of full wage and price downward flexibility; differing implications of the two models with
respect to inflation, recession, economic policy
•• Examples: real-world examples of wages and prices falling very infrequently; of an economy in
recession, which is addressed by the use of expansionary policies as waiting for the economy to self-
adjust would take too long, resulting in long-term recession and unemployment that governments
would be unwilling to tolerate, therefore lending support to the Keynesian perspective
HL only
10 Macroeconomic objectives I: Low

unemployment, low and stable rate of inﬂation
Core (SL and HL)
•• Definitions: unemployment, structural unemployment
•• Explanation: of structural unemployment, with reference to different causes, including changes in
demand for particular labour skills, labour market rigidities, changes in the geographical location
of industries
•• Diagrams: illustrating different types of structural unemployment
•• Definition: deflation
•• Explanation: of the risk of a deflationary spiral due to deferred consumption along with other
negative effects of deflation, which may arise not only from a fall in AD but also from an increase
in SRAS, because once expectations of a falling price level continue there will be continuous falls in
AD with a deepening recession and cyclical unemployment
•• Diagram: AD-AS model with AD falling
•• Definitions: unemployment, hidden unemployment
•• Explanation: of unemployment, with reference to how it is measured, difficulties in measurement,
including the presence of hidden unemployment, underemployment and the nature of the
unemployment rate as an average over an entire population group that ignores regional and
other disparities
•• Diagram: not necessary, but may use to illustrate one or more types of unemployment

•• Definition: unemployment
•• Explanation: of unemployment with reference to costs and consequences, including the different
types of unemployment and their economic, personal and social costs
•• Diagram: illustrating one or more types of unemployment
•• Synthesis (discuss): consideration of the length of unemployment depending on what type it is;
which are the more serious types of unemployment imposing greater costs (loss of output, income
and tax revenues, costs to government of unemployment benefits, social problems, etc.); the
problem of hysteresis often associated with long-term unemployment; consideration of policies to
reduce unemployment and the relative costs associated with different policies; impacts on various
stakeholders; short- and long-term consequences with consideration for other macro objectives
•• Examples: real-world examples of economies experiencing high unemployment and the
consequences
•• Definitions: inflation, cost-push inflation, demand-pull inflation
•• Explanation: of the factors that can cause each type of inflation, such as rising input costs for cost-
push and increasing government spending for demand-pull
•• Diagram: AD-AS diagrams showing a fall in SRAS for cost-push and an increase in AD for demand-
pull
•• Definition: inflation
•• Explanation: of redistribution effects, increased income inequality, uncertainty causing a fall
in investment spending, loss of export competitiveness, negative effects on resource allocation,
personal and social costs
•• Diagram: showing demand-pull or cost-push inflation
•• Synthesis (examine): consideration of how high inflation is, of the relative importance of the
various consequences such as redistribution effects, uncertainty, reduced export competitiveness or
others
•• Examples: real-world examples of economies experiencing a high rate of inflation
HL only
•• Definitions: long-run aggregate supply, long-run Phillips curve
•• Explanation: of long-run equilibrium at potential output where unemployment equals the natural
rate in the monetarist/new classical model; of the idea that a deflationary gap with equilibrium real
GDP less than potential GDP in the AD-AS model corresponds to a movement down a short-
run Phillips curve where unemployment increases above the natural rate (cyclical unemployment);
an inflationary gap with equilibrium real GDP greater than potential GDP in the AD-AS model
corresponds to a movement up a short-run Phillips curve where unemployment falls below the
natural rate
•• Diagram: AD-AS model with an inflationary or deflationary gap corresponding to a Phillips curve
diagram showing a long-run and short-run Phillips curve
•• Definitions: inflation, unemployment
•• Explanation: the short-run and long-run Phillips curve, indicating a trade-off between inflation and
unemployment in the short run, and a rate of unemployment at the natural rate that is independent
of the rate of inflation in the long run
•• Diagrams: showing short-run and long-run Phillips curves
•• Synthesis (discuss): consideration of expansionary demand-side policies (fiscal and monetary) to

lower unemployment; consideration of long-run versus short-run consequences; the possibility that
in the short run, a lower rate of unemployment may result alongside a higher rate of inflation (an
upward movement along the short-run Phillips curve); further decreases in unemployment below
the natural rate in theory occur only in the short run as unemployment returns to the natural rate in
the long run, even as the rate of inflation increases further (an upward movement along the long-
run Phillips curve)
•• Examples: real-world examples of policies to lower unemployment and their consequences for
inflation (expansionary fiscal and monetary policies); examples of the flat Phillips curve where
inflation does not increase even as unemployment falls
11 Macroeconomic objectives II: Economic growth,

sustainable level of debt
Core (SL and HL)
•• Definition: economic growth
•• Explanation: of the importance of education to the formation of human capital; external benefits
of education, how more education can positively affect economic growth
•• Diagram: PPC diagram showing an outward shift of the PPC due to improved quality of the
labour force, or a positive consumption externality
•• Definition: economic growth
•• Explanation: of short-term growth caused by improved efficiency or lower unemployment in the
PPC model, and by an increase in aggregate demand (or increase in short run aggregate supply) in
the AD-AS model; of long-term growth caused by increases in quantity, improvement in quality of
factors of production and technological change in both the PPC and the AD-AS models
•• Diagram: of a diagram showing a movement of a point closer to the PPC and an outward shift of
the PPC in the PPC model; and a diagram showing an increase in AD and rightward shift of the
LRAS in the AD-AS model
•• Definitions: economic growth, inflation
•• Explanation: of economic growth, with reference to possible effects on inflation: increase in AD
may lead to demand-pull inflation if the economy is close to full employment output
•• Diagrams: AD-AS model showing how increases in AD lead to demand-pull inflation
•• Synthesis (discuss): positive or negative impacts on inflation depending on where the economy
is in the business cycle; agreement between monetarist/new classical and Keynesian perspectives
that economic growth occurring when the economy is at or near potential output is inflationary;
however economic growth arising when the economy is in a deflationary gap is not inflationary
(Keynesian model); long-term growth due to rightward shifts in LRAS or Keynesian AS reduces
inflation pressures
•• Examples: real-world examples where increases in AD may or may not result in higher inflation,
depending on where the economy is in its business cycle; increases in AD in a deep recession are
unlikely to be inflationary whereas they tend to become inflationary as the economy approaches
potential output

•• Definitions: production possibilities, economic growth
•• Explanation: economic growth in the context of the production possibilities model, with reference
to the factors that can cause increases in actual output (reduction in unemployment and increase
in productive efficiency, causing movement of a point closer to the PPC) and the factors causing
increases in production possibilities (improvements in technology and resources quality, increases in
resource quantity, causing an outward shift of the PPC)
•• Diagram: of the PPC showing increases in actual output and increases in production possibilities
•• Definitions: economic growth, sustainability
•• Explanation: economic growth with respect to its possible impacts on sustainability, with
reference to negative impacts when growth is pursued without regard for the environment and
positive impacts if care is taken to make economic growth consistent with the preservation of the
environment
•• Diagram: illustrating economic growth (PPC or LRAS or Keynesian AS)
•• Synthesis (evaluate): the problem of unsustainable resource use; the neglect by economics of
the factor of production ‘land’; the use of alternative accounting methods that include the
environment; consideration of a variety of types of growth and government policies that can make
the pursuit of growth consistent with sustainability (market-based policies to correct negative
externalities, the promotion of green technologies and green investments, greater emphasis on
human capital); consideration of the extent to which there is an inevitable trade-off
•• Examples: real-world examples illustrating the point that economic growth and sustainability may
sometimes conflict but may sometimes be compatible
HL only
Chapter 11 has no Part (b) HL only questions that are examined in Paper 1 (it may be noted that the Phillips
curve appeared in Chapter 10).
•• Definitions: government debt, sustainable level of government debt
•• Explanation: of the importance of avoiding negative consequences of high debt levels which include
debt servicing, poor credit rating, increased income inequality, lower private investment
12 Economics of inequality and poverty

Core (SL and HL)
•• Definitions: Lorenz curve, Gini coefficient, income distribution
•• Explanation: of measurement of income distribution with reference to the use of data on income
shares (quintiles, deciles); of the Lorenz curve; of how the Gini coefficient is derived from the
Lorenz curve
•• Diagram: Lorenz curve
•• Definitions: direct taxes, progressive taxes, transfer payments, income distribution
•• Explanation: of effects of increasing direct taxes, of more progressive taxes, of increased transfer
payments on income distribution
•• Diagram: showing Lorenz curve moving closer to the line of perfect equality
•• Synthesis (evaluate): possible disincentive effects of higher taxes or more progressive taxes which
might have a negative effect on economic growth; on the other hand, more progressive taxes and
more transfer payments are likely to make income distribution more equal, which in turn is likely to
have a positive effect on growth
•• Examples: real-world examples of countries that use progressive taxes and transfer payments as
methods to redistribute income
•• Definitions: poverty, absolute poverty, relative poverty
•• Explanation: of the different meanings of poverty; of different measurement approaches such as
on the basis of income or on the basis of deprivations; a number of difficulties in measurement;
differences in cost of living that affect the poverty line; difficulties surrounding the poverty line
•• Definitions: poverty, income redistribution, transfer payments, merit goods
•• Explanation: of income distribution and redistribution, with reference to taxes, transfer payments,
provision of merit goods by the government, universal basic income, minimum wages, reducing
discrimination, reducing inequality of opportunity, as methods to redistribute income
•• Diagram: Lorenz curve shifting toward the line of perfect income equality illustrating income
redistribution in favour of lower income groups
•• Synthesis (evaluate): consideration of potential advantages and disadvantages of alternative
methods
•• Examples: real-world examples of the selected policies used by governments
•• Definitions: economic inequality, poverty
•• Explanation: of any three of: inequality of opportunity, differences in resource ownership, levels of
human capital, status and power, discrimination, globalisation, technological change, tax policies
and benefits, supply-side policies
•• Diagram: showing Lorenz curve shifting away from the line of perfect equality
•• Definitions: wealth, income inequalities, standards of living
•• Explanation: of lower levels of economic growth; reduced access to health care and education;
lower levels of human capital; increasing inequality of opportunity; more preventable diseases with
higher health care costs; greater social problems; greater social instability
•• Diagram: showing Lorenz curve shifting away from the line of perfect equality
•• Synthesis (discuss): the factors leading to lower economic growth are strongly interlinked with
reduced standards of living and increased social instability, all of which result from growing income
and wealth inequalities
•• Examples: real-world examples of countries where increasing inequalities impact negatively on
economic growth, standards of living and social stability
HL only
13 Demand-side and supply-side policies

Core (SL and HL)
•• Definitions: demand-side effect, supply-side effect, demand-side policy, supply-side policy
•• Explanation: of a demand-side effect of a supply-side policy, such as lower taxes to encourage firms
to invest more, which results in an increase in aggregate demand; of a supply-side effect of a demand-
side policy, such as government spending on human capital, which results in an increase in long-run
aggregate supply
•• Diagram: showing an increase in AD or increase in LRAS or both
•• Definitions: aggregate supply, demand-side policies
•• Explanation: of the Keynesian AS with its three segments, so that an increase in AD results in an
increase in real GDP only in the horizontal part, an increase in both the price level and real GDP
in the upward-sloping part and an increase only in the price in the vertical part; of the SRAS where
an increase in AD results in increase in both the price level and real GDP; of the LRAS where an
increase in AD results in an increase only in the price level
•• Diagram: the Keynesian AS, the SRAS, the LRAS
•• Definitions: fiscal policy, monetary policy, inflationary gap, deflationary gap, supply-side
•• Explanation: when there is a deflationary or inflationary gap due to insufficient or excess aggregate
demand, both fiscal and monetary policies can be used to try to bring the economy to the level
of potential output by shifting the aggregate demand curve; but if there is a contraction due to
a leftward shift in SRAS, expansionary policy will lead to greater inflation, while contractionary
policy will lead to greater recession
•• Diagram: showing AD-AS diagram with SRAS shifting to the left with the effects of an increase or
a decrease in AD
•• Definitions: economic growth, supply-side policies, demand-side policies
•• Explanation: of the distinction between short-term growth and long-term growth; that supply-side
policies are intended to lead to long-term growth; that demand-side policies to increase AD can lead
to short-term growth but in addition they may have supply-side effects that can also contribute to
long-term growth; demand-side policies can also create a stable macroeconomic environment that is
conducive to long-term growth
•• Diagram: AD-AS model with AD and LRAS increasing, resulting in greater real GDP
•• Synthesis (evaluate): consideration of advantages and disadvantages of the various policies with
respect to achieving economic growth
•• Examples: real-world examples of countries achieving economic growth through the use of
demand-side policies or supply-side policies
•• Definitions: inflation, inflation targeting, monetary policy
•• Explanation: of the stabilisation objectives of monetary policy, including a low rate of inflation
and full employment, as opposed to the policy of inflation targeting, which aims at maintaining a
particular targeted rate of inflation
•• Diagram: of the business cycle, showing how monetary policy aims at reducing the intensity of the
business cycle; business cycle or AD-AS diagrams showing recessionary and inflationary gaps that
monetary policy tries to eliminate by bringing the economy toward potential output

•• Definitions: demand-side policy, fiscal policy, monetary policy, inflation
•• Explanation: of the use of contractionary fiscal and monetary policy to lower aggregate demand,
which may be useful to address the problem of demand-pull inflation
•• Diagram: showing an AD-AS diagram with AD shifting to the left
•• Synthesis (evaluate): if inflation is cost-push, contractionary demand-side policies may address
the problem of inflation, but will make the recession deeper; alternative policies that could be used
supply-side, although these take a long time to take effect; consideration of the advantages and
disadvantages of fiscal and monetary policies
•• Examples: real-world examples of the use of demand-side policies to lower inflation
•• Definitions: demand-side policies, supply-side policies, unemployment, long-term economic growth
•• Explanation: of demand-side policies that can be used to reduce short-term fluctuations and
achieve short-term growth through increases in AD; they also affect long-term growth by creating
a stable macroeconomic environment, by overlapping with interventionist supply-side policies and
by contributing to increased capital formation through low interest rates; supply-side policies can
promote not only long-term growth, but also short-term growth through increases in AD, such as
by interventionist supply-side policies and lower taxes
•• Diagram: AD-AS diagram showing LRAS and AD shifting to the right
•• Definitions: demand-side policies, unemployment
•• Explanation: of the use of expansionary fiscal and monetary policy to increase aggregate demand,
which may be useful to address the problem of cyclical unemployment
•• Diagram: showing an AD-AS diagram with AD shifting to the right
•• Synthesis (evaluate): if unemployment is structural, seasonal or frictional, demand-side polices will
be ineffective; instead, supply-side policies are better for dealing with these types of unemployment;
consideration of advantages and disadvantages of fiscal and monetary policies
•• Examples: real-world examples of the use of demand-side policies to reduce unemployment
•• Definitions: labour market reforms, economic growth
•• Explanation: of the expected effects of labour market reforms (reducing minimum wages, labour
union power, unemployment benefits, job security) and their potential positive effects on lowering
labour costs, increasing firm profitability and increasing investment, and therefore increasing
potential output
•• Diagrams: labour market showing lower labour costs that arise from a reduction or elimination
of the minimum wage; of the AD-AS model showing the LRAS curve shifting to the right and
therefore indicating a higher level of potential output
•• Definitions: labour market reforms, economic growth, equity
•• Explanation: labour market reforms (reduction of minimum wages, labour union power,
unemployment benefits, job security) and their potential effects on employment, inflation, economic
growth, equity
•• Diagrams: labour market showing an increase in employment that arises from a reduction/
elimination of the minimum wage; of the AD-AS model showing the LRAS curve shifting to the
right, and therefore illustrating economic growth and lower inflationary pressures
•• Synthesis (evaluate): consideration of the positive and negative effects of different kinds of labour
market reforms (listed above) on employment, inflation, economic growth and equity (in the sense
of income equality)
•• Example: real-world examples of countries that have pursued labour market reforms and
their consequences
HL only
Chapter 13 has no Part (b) HL only questions that are examined in Paper 1 (except automatic stabilisers; see
question 13.2 b in the digital coursebook).
•• Definitions: central bank, interest rates
•• Explanation: how interest rates are determined by the interaction of the supply of money,
influenced by policies of the central bank and the demand for money; reference to the role of
central banks in the economy
•• Diagram: the money market showing interest rate determination
•• Definitions: inflationary gap, central bank tools, monetary policy
•• Explanation: of any two of open market operations (central bank sells bonds), minimum reserve
requirements (central bank increases reserve requirements), minimum lending rate (increase it)
•• Diagram: money market diagram for interest rate determination or AD-AS showing how an
inflationary gap can be corrected
•• Definitions: recessionary gap, demand-side policies, unemployment, natural rate of unemployment
•• Explanation: of the short-run Phillips curve indicating a trade-off between inflation and
unemployment, and the long-run Phillips curve indicating that the rate of unemployment – situated
at the natural rate – is independent of the rate of inflation; as the unemployment rate falls in
response to expansionary demand-side policies, it hits the natural rate of unemployment of 7%,
beyond which the continued use of expansionary policies will only result in inflation rather than
further reduction of unemployment
•• Diagrams: short-run and long-run Phillips curves
14 International trade: Part I

Core (SL and HL)
•• Definitions: economies of scale
•• Explanation: of how larger markets can expand an exporting firm’s size due to increasing sales
and lowering costs of production; can cause growth in the exporting country due to an increase in
exports; can lead to greater efficiency in the importing country due to increased competition; can
lead to greater choice of goods for consumers, as well as lower prices and increased consumption;
can fill a resource void and/or lead to less expensive imported factors of production; can lead to
acquisition of foreign exchange for the exporting country; may lead to reduced hostilities between
countries; can improve the flow of innovative ideas and technology
•• Diagram: international trade diagram for importers with a world supply curve below the domestic
price; international trade diagram for exporters with a world supply curve above the domestic price;
AD-AS diagram showing an increase in AD for the exporting country
•• Definitions: export subsidy, production subsidy, trade protection
•• Explanation: of the intent and purpose behind using export subsidies and production subsidies as
forms of trade protection
•• Diagram: an international trade diagram showing an export subsidy, a production subsidy
•• Synthesis (compare and contrast): that export subsidies cause higher prices for domestic consumers
and lower quantity consumed, while production subsidies do not raise the consumer’s price and do
not affect quantity consumed; that both subsidies raise the price received for domestic producers
and they sell higher quantities; that both subsidies help domestic employment increase; that both
subsidies negatively affect the government budget/taxpayers; that foreign exporters lose with both
subsidies; that income distribution worsens under an export subsidy, but not with a production
subsidy; that both subsidies involve welfare loss due to inefficient production, but only export
subsidies cause welfare loss for consumers
•• Example: real-world examples of countries that use export subsidies and countries that use
production subsidies
•• Definitions: quota, export subsidy
•• Explanation: of how a quota results in increase in domestic supply, rise in domestic price, increase
in domestic production, decrease in domestic consumption, government revenue, reduced imports;
export subsidy results in increase in domestic supply, rise in domestic price, decrease in domestic
consumption, increase in production, increase in exports
•• Diagram: an international trade diagram showing a quota, an export subsidy
•• Definitions: tariff, quota, production subsidy
•• Explanation: of tariffs as a form of trade protection that reduce imports, generate revenue and
increase domestic production
•• Diagram: international trade diagram showing a tariff, quota or production subsidy
•• Synthesis (examine): revenues could be used to provide merit goods; tariffs hurt consumers through
higher prices and lower quantities, unlike production subsidies; tariffs could face retaliation; quotas
are less harmful to foreign producers but do not generate domestic revenue; tariffs are regressive
taxes while production subsidies are not; production subsidies might be better to protect an infant
industry or for national defence; government revenue will be small if the good has elastic demand,
but larger if it has inelastic demand; if the good is an imported input then a tariff will hurt
domestic producers who need that input and international competitiveness
•• Example: real-world examples of countries that produce a particular good domestically and use
tariffs on that good
HL only
•• Definitions: comparative advantage, absolute advantage, specialisation
•• Explanation: that when a country has the absolute advantage in the production of all traded goods,
that country can still specialise and trade to consume outside of their PPC so long as there are
differing opportunity costs
•• Diagram: linear PPCs showing one country with the absolute advantage in both goods
•• Definitions: factor endowments, opportunity cost, specialisation
•• Explanation: that factor endowments describe the quantity and quality of factors of production,
and determine opportunity costs when facing choices of what to produce
•• Diagram: linear PPCs of goods related to appropriate factor endowments
•• Synthesis (discuss): that the source of comparative advantage depends on the quantities and
qualities of factors of production (factor endowments); for example, an abundance of fish, trees,
oil and other natural capital, labour quality/quantity and the quality/quantity of physical capital/
technology
•• Example: real-world examples of countries with differing resource quantities and qualities that
trade, usually countries in the same region or even trading bloc
•• Definitions: comparative advantage
•• Explanation: that comparative advantage is determined by differing opportunity costs, and relies on
specialisation to be realised
•• Diagram: PPCs with appropriate axis labels
•• Synthesis (discuss): strengths and weaknesses of the comparative advantage theory: assumptions of
fixed factors and technology, mobility and full employment of resources, free trade, homogeneous
products and no transportation costs; discussion of the potential drawbacks of specialisation not
allowing sectoral change and the dependence on few products to drive an economy
•• Example: real-world examples of countries with a high degree of specialisation on a particular
good that bring both advantages and disadvantages through trade; examples of disadvantaged
countries will often be developing countries that lack diversity in exports and focus on exporting
primary commodities
15 International trade: Part II

Core (SL and HL)
•• Definitions: trade protection, examples such as tariffs, quotas, etc.
•• Explanation: that countries will choose to use a variety of trade protection measures depending
on their circumstances; they may want to achieve export promotion and argue they need to protect
an infant industry; generate revenue so they use tariffs; decrease unemployment due to a high
unemployment rate; produce a particular good, claiming it is a matter of national security; use
administrative barriers to protect themselves against a good that could be harmful to health; any
other acceptable trade protection arguments presented with an explanation for each
•• Definitions: trade protection, examples such as tariffs, quotas, etc.
•• Explanation: that the use of trade protection has different levels of merit depending on the policies
and reasons for choosing those policies
•• Diagram: depends on the selection of trade protection in the real-world examples used
•• Synthesis (discuss): the validity of trade protection policies used by countries with a balanced
consideration of the outcomes on a variety of stakeholders, including consumers, producers, the
government, foreigners, society in terms of allocative efficiency
•• Example: real-world examples of countries that use trade protection policies such as tariffs, quotas,
production subsidies, export subsidies, administrative barriers
•• Definitions: trading bloc, free trade area (agreement)
•• Explanation: that countries considering forming a trading bloc will likely start with the lowest
degree of integration: a free trade agreement that allows them to pursue their own trade policies
compared to higher forms of economic integration like customs unions; that higher forms of
trading blocs like common markets allow factors of production such as labour to move freely, and
that may be initially undesirable to countries forming a new trading bloc
•• Definitions: economic integration, trading bloc, free trade area, customs union, common market
•• Explanation: that trading blocs can bring advantages and disadvantages to participating countries
depending on each country’s individual circumstance
•• Synthesis (discuss): how the chosen examples can benefit a variety of stakeholders due to increased
competition, economies of scale, greater investment, lower prices, greater choice, etc.; how the
chosen examples may face disadvantages with economic integration due to need to adopt common
trade barriers, unequal gains and losses compared to other countries, loss of sovereignty
•• Example: real-world examples of countries that have experienced gains and losses by joining a
trading bloc
HL only
16 Exchange rates and the balance of payments

Core (SL and HL)
•• Definitions: managed exchange rate, overvaluation, undervaluation
•• Explanation: that a managed exchange rate can result in overvaluation or undervaluation because
central bank intervention does not allow free market forces to determine the equilibrium rate
of exchange
•• Diagram: showing how central bank intervention can cause excess supply for a currency and
undervaluation, while central bank intervention can cause excess demand for a currency
and overvaluation
•• Definitions: net exports, exchange rate
•• Explanation: that an increase in demand for net exports creates more credits in the current account,
putting upward pressure on the exchange rate, while a decrease in demand for net exports creates
more debits in the current account, putting downward pressure on the exchange rate; as well,
changes to net exports affects aggregate demand and possibly the price level, which can affect
exchange rates
•• Diagram: exchange rate diagram showing a change in demand for the currency; or an AD-AS
diagram showing changes to AD and the price level
•• Definitions: production possibilities, balance of payments
•• Explanation: that consumption beyond a PPC requires a trade deficit and therefore very likely a
deficit in the current account
•• Diagram: production possibilities with a point of consumption outside the PPC
•• Synthesis (discuss): a balanced discussion regarding the benefits of increased consumption for
certain stakeholders, along with the disadvantages of a current account deficit, especially should it
be persistent
•• Example: real-world examples of countries that have a current account deficit due to a higher value
of imports relative to exports in their balance of trade
•• Definitions: exchange rate, floating exchange rate system, fixed exchange rate system
•• Explanation: that a floating exchange rate system relies on market forces to determine the
exchange rate and the central bank or government does not intervene, allowing for appreciation
and depreciation of the currency; that a fixed exchange rate system relies on central bank
and government intervention to maintain a chosen exchange rate, which may change through
revaluation or devaluation of the currency
•• Diagram: showing changes in currency demand or supply along with appropriate explanations of
how this happens through market forces, or through central bank or government intervention
•• Definitions: current account, exchange rate
•• Explanation: that a depreciation (or devaluation) of a currency tends to increase net exports,
therefore creating more credits in a country’s current account, while the opposite occurs when there
is an appreciation (or revaluation)
•• Diagram: exchange rate diagram showing an increase or decrease in the value of the currency
•• Synthesis (examine): the advantages and disadvantages of changes to the balance of trade in the
current account if a country experiences a change in its exchange rate; possibly increased exports
with a depreciation or decreased exports with an appreciation; increased costs of production
with a depreciation if the country imports resources, but decreased costs of production with an
appreciation; effects on stakeholders with the change in net exports
•• Example: real-world examples of countries that have experienced a change in their exchange rate,
affecting their balance of trade in the current account
•• Definitions: appreciation, exchange rate
•• Explanation: any three correctly explained causes including: a change in demand for net exports,
changes in relative inflation rates, changes in relative growth rates, changes in foreign direct
investment (inward or outward), changes in relative interest rates, remittances, speculation
•• Diagram: any properly explained exchange rate diagrams showing changes in currency demand or
supply due to the three given factors
•• Definitions: appreciation, depreciation, unemployment, rate of inflation, economic growth
•• Explanation: that appreciation/depreciation can affect unemployment, the rate of inflation and
economic growth in a variety of ways depending on particular circumstances
•• Diagram: AD-AS diagram showing effect on the price level, real GDP and therefore unemployment
and growth
•• Synthesis (compare and contrast): consideration of countries with similar and different outcomes
on unemployment; some may see decreases in unemployment with depreciation, while others see
increases with appreciation; some may see increases in inflation with depreciation, while others see a
lower inflation rate with appreciation; some may see increased economic growth with depreciation,
while others see decreases in growth with appreciation; note that all of these effects can be the
opposite depending on other variables
•• Example: real-world examples of countries that experience changes in their rates of unemployment,
inflation and growth while experiencing depreciation or appreciation
HL only
17 Further topics on exchange rates and the

balance of payments
HL only
•• Definitions: currency account, exchange rate
•• Explanation: that imbalances mean excess credits or debits in the current account; that excess
credits can flow from a trade surplus, which causes demand for the currency to increase, resulting in
appreciation; that excess debits can flow from a trade deficit, which causes supply for the currency
to increase, resulting in depreciation
•• Diagram: exchange rate diagram showing appreciation due to an increase in demand; exchange rate
diagram showing depreciation due to an increase in supply
•• Definitions: current account deficit, depreciation
•• Explanation: policies that cause currency depreciation can result in an increase in net exports and a
correction of a current account deficit; explanation of Marshall-Lerner condition
•• Diagram: exchange rate diagram showing depreciation of a currency through either a decrease in
demand or increase in supply; diagram showing J-curve effect
•• Synthesis (discuss): advantages and disadvantages of allowing the currency to depreciate, including
increased exports but possibly more expensive imported resources; that depreciation may not have
the intended effect for some time if the Marshall-Lerner condition is not met; a discussion of
alternative approaches to correct current account deficits, such as higher interest rates and increased
trade protection
•• Example: real-world examples of countries that have experienced a current account deficit and
taken measures resulting in currency depreciation
•• Definitions: fixed exchange rate system, floating exchange rate system
•• Explanation: of how a floating exchange rate system differs from a fixed one that requires constant
intervention to maintain the fixed rates
•• Diagram: an exchange rate diagram showing determination of exchange rates in a floating system and
how this differs when the exchange rate is fixed requiring central bank or government intervention to
maintain it
•• Synthesis (evaluation): consideration of the advantages and disadvantages of the two types of
systems regarding a variety of factors, such as degree of certainty, the role of currency reserves,
correction of current account imbalances, flexibility offered to policy-makers, effects on inflation
•• Example: real-world examples of countries that have a fixed exchange rate system and countries
that have a floating exchange rate system, or that have switched from one system to another
•• Definitions: current account surplus
•• Explanation: that a current account surplus usually means the value of a country’s exports exceed
the value in imports, and therefore there is a surplus in the balance of trade
•• Diagram: an exchange rate diagram showing an increase in demand for a country’s currency and
currency appreciation; or an AD-AS diagram showing AD shifting to the left due to reduced net
exports
•• Synthesis (discuss): the various consequences of persistent current account surpluses, including low
levels of consumption and investment, upward pressure on the currency that can reduce exports
and make imports more expensive, higher levels of employment with higher rates of inflation, and
possible discord with trading partners
•• Example: real-world examples of countries that tend to have persistent surpluses in their balance of
trade and face some consequences discussed above
18 Understanding economic development

Core (SL and HL)
•• Definitions: Sustainable Development Goals, economic development
•• Explanation: that sustainable development means using resources in ways that they are not
depleted over time and future generations can continue to derive benefits; that the SDGs include
taking action on climate change, making cities and settlements sustainable, conserving the ocean,
managing forests, and other goals required to achieve sustainability
•• Definitions: economic growth, economic development
•• Explanation: that economic development is a highly complex process, and includes a variety of
factors related to well-being when compared to economic growth
•• Synthesis (to what extent): consideration of the extent to which countries can achieve economic
development without economic growth; that over long periods of time, economic growth is
necessary to achieve economic development; that economic growth without any focus on merit
goods or sustainability is unlikely to bring about economic development
•• Example: real-world examples of countries that fail or succeed to varying degrees in achieving
economic development, with a full explanation as to how and why
•• Definitions: economic development, indicators
•• Explanation: that economic development refers to the well-being of a population, which cannot
be properly assessed using only measures of income or growth or any other single indicator; that
‘multidimensional’ refers to factors such as income, health, education, opportunity, social equality,
sustainability and any other factors that influence the happiness and well-being of a population
•• Definitions: economic development, indicators
•• Explanation: that a variety of indicators can be used to measure economic development, including
single and composite indicators; that indicators of development measure aspects beyond economic
growth, including education, health, inequalities, environment and others
•• Synthesis (examine): consideration of the extent to which indicators offer insights into economic
development versus their limitations; that composite indicators tend to reflect levels of economic
development more accurately than single indicators, but still have limitations; response should
include examples of indicators, such as the HDI, economic and social inequality indicators,
environment indicators and others, with a balanced examination of the information content of each
•• Example: real-world examples of any appropriate application of indicators to particular developing
countries, with possible comparisons of levels of development of different countries as revealed by
different measures
HL only
19 Barriers to economic growth and

economic development
Core (SL and HL)
•• Definitions: poverty, poverty cycle
•• Explanation: that communities in poverty spend their entire incomes attempting to meet their
most basic needs, which leads to little to no savings and inhibits investment in physical, human
and natural capital; that this perpetuates a cycle from which it is not possible to break free without
government intervention; therefore poverty is passed on from one generation to the next as children
lack education, access to health care and other necessities
•• Diagram: poverty cycle
•• Definitions: economic growth, economic development
•• Explanation: that geography largely determines factors like climate, availability of resources
and shipping costs in international trade, all of which affect economic growth and economic
development
•• Synthesis (compare and contrast): compare and contrast countries with different geographies,
referring to similarities and differences such as tropical versus temperate climates, landlocked versus
coastal countries and how such factors impact economic growth and economic development
•• Example: real-world examples of developing countries with geographical differences between them
causing an impact on economic growth and economic development
•• Definitions: economic growth, economic development, any key term related to the three chosen
barriers such as appropriate technology, human capital or others
•• Explanation: that there are a variety of factors that prevent or slow down economic growth and
economic development, such as lack of technology that is appropriate to local conditions, limited
access to merit goods which lower human capital, overspecialisation in producing primary goods, a
large informal economy, geography and climate or other acceptable factors
•• Definitions: economic growth, economic development, human capital
•• Explanation: that human capital refers to the levels of education, skills and health embodied in
individuals of a population, and that a lack of these contribute to lower economic growth and
lower economic development; reference to the positive consumption externalities of education and
health care
•• Synthesis (examine): consideration of how countries with low levels of human capital are less
productive, therefore achieving lower rates of economic growth; how a lack of human capital
comes about through insufficient funding for education and health care, discrimination, conflict,
geographical access and other factors; that low levels of human capital can play a key role in the
poverty cycle
•• Example: real-world examples of developing countries where low levels of human capital are
associated with low levels of economic growth and economic development, in contrast to other
countries where investment in human capital has contributed to higher rates of economic growth
and development
•• Definitions: inequality, informal economy, economic growth, economic development
•• Explanation: that high income inequality can result in other inequalities such as in education,
health care, political control and access to credit; that income inequalities can lead to lower growth
as higher income populations spend small fractions of their income; that income inequality can
lead to lower demand for domestic goods and services; that informal economies lead to lower tax
revenues and greater risks for workers due to lack of protection as well as a lack of benefits such as
pensions
•• Definitions: discrimination, economic growth, economic development
•• Explanation: that discrimination can affect many groups based on ethnicity, race, gender, those with
disabilities, those of certain sexual orientations and others
•• Synthesis (examine): consideration of the role of discrimination and how it impedes economic
growth and economic development, including lower levels of economic and social opportunity;
connections to discrimination and lack of education, rights, access to credit, political power and
other factors related to economic development
•• Example: real-world examples of countries that exhibit disproportionate differences between them
in growth and development due to discrimination against certain groups
HL only
20 Strategies to promote economic growth and

economic development
Core (SL and HL)
•• Definitions: redistribution, economic growth, economic development
•• Explanation: that countries can promote economic growth and development by policies that
redistribute income and wealth, including taxes, minimum wages, provision of merit goods and
infrastructure
•• Diagram: Lorenz curve showing a movement of the curve closer to the line of perfect equality
•• Definitions: market-based supply-side policies, economic growth, economic development
•• Explanation: that market-based supply-side policies, such as policies that encourage competition,
reform the labour market, liberalise trade or others, can be used in an attempt to promote economic
growth and economic development
•• Diagram: Keynesian AS or LRAS shifting rightward or growth using a PPC
•• Synthesis (evaluate): the strengths and weaknesses of achieving growth and development through
market-based supply-side policies, including the effects of reducing or abolishing minimum
wage, reducing or abolishing unemployment benefits, reducing job security, privatisation and
deregulation, lowering taxes, liberalising trade and others
•• Example: real-world examples of developing countries that have used market-based policies to try
to achieve growth and development
•• Definitions: merit goods, infrastructure
•• Explanation: that provision of education, health care and infrastructure bring many benefits, such
as improvements in human capital and therefore increased economic and social opportunities; that
provision of infrastructure provides for services such as health care and education to be delivered, as
well as transportation within and between communities; that all of these provisions can additionally
help improve the distribution of income favouring lower income groups, therefore improving standards
of living
•• Diagram: showing a positive consumption externality
•• Definitions: trade liberalisation, economic development
•• Explanation: that trade liberalisation means ‘freer trade’, and includes the gradual removal of
trade protection policies such as tariffs, quotas, administrative barriers and others; that trade
liberalisation may include entering into trade agreements and trading blocs
•• Diagram: any international trade diagram showing the removal of a trade protection policy
•• Synthesis (evaluate): consideration of the strengths and weaknesses of adopting trade
liberalisation strategies, such as increased/decreased exports, increased specialisation and decreased
diversification, increasing income inequalities and others; that government intervention may be
necessary in combination with trade liberalisation to have success
•• Example: real-world examples of developing countries that have adopted trade liberalisation
policies that have had an impact for better or for worse
HL only

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ECONOMICS FOR THE IB DIPLOMA: MARKSCHEMES

Paper 1 (SL and HL)

2 Competitive markets: Demand and supply

2.6 a Answers may include:

4 Government intervention in microeconomics

5 Market failure and socially undesirable

6 Market failure and socially undesirable outcomes

7 Market failure and socially undesirable

8 The level of overall economic activity

8.4 a Answers may include:

9 Aggregate demand and aggregate supply

9.6 b Answers may include:

10 Macroeconomic objectives I: Low

10.6 b Answers may include:

•• Synthesis (discuss): consideration of expansionary demand-side policies (fiscal and monetary) to

11 Macroeconomic objectives II: Economic growth,

11.5 a Answers may include:

12 Economics of inequality and poverty

13 Demand-side and supply-side policies

13.6 b Answers may include:

14 International trade: Part I

15 International trade: Part II

16 Exchange rates and the balance of payments

17 Further topics on exchange rates and the

18 Understanding economic development

19 Barriers to economic growth and

20 Strategies to promote economic growth and

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