IBDP ECONOMICS SL PORTFOLIO

EXAMINATION SESSION: MAY 2024

COMMENTARY 1:- MICROECONOMICS

COMMENTARY 2:- MACROECONOMICS

COMMENTARY 3: GLOBAL ECONOMY

 COMMENTARY 1
Title of the article-
Is climate-friendly flying possible? Biden administration places a big wager.
Source of the article-
https://www.tbsnews.net/economy/aviation/pvt-airlines-seek-government
-support-prevent-bankruptcy-731406
Date of the article published - 1rst November 2023
Date the commentary was written- 15th November 2023
Word count of the commentary- 800 words
Unit of Syllabus to which the article relates to Microeconomics
The key concept used- Subsidies, Negative externality
 ARTICLE

The Biden administration on Friday unveiled the framework of its plan for achieving
one of the most elusive goals in the fight against global warming: making jet travel
more climate-friendly.

The proposal calls for giving subsidies to support the development of “sustainable
aviation fuels,” capable of powering jet engines from agricultural products. Examples
of such fuels include biofuels engineered out of soybeans, diesel made with animal
fat and conventional types of ethanol.

Senior White House officials said the program would make the airline industry
cleaner while bringing prosperity to rural America.
But environmental groups and some scientists expressed reservations about the
plan, which would award subsidies based on a scientific model that has previously
been used to justify incentives for corn-based ethanol. Studies have found the
gasoline additive is exacerbating climate change.

The new tax credits, created through President Biden’s signature climate law, are
meant to spur production of jet fuels that create no more than half the emissions of
the petroleum-based product. Each gallon of such fuel qualifies for a tax credit up to
$1.75 per gallon.

“The concern is they will end up subsidizing fuels that take an enormous amount of
land to produce,” said Tim Searchinger, a senior research scholar at Princeton
University. In addition to corn-based ethanol, he said, the new subsidy could spur
massive new production of biofuels made from vegetable oil, with farmland currently
being used to grow food replaced with crops harvested for jet fuel production.
That, in turn, could unleash more deforestation around the world as land is cleared to
backfill food production displaced in the United States, Searchinger said.

Administration officials said on a call with reporters Thursday that they are carefully
weighing such concerns. Agencies are in the process of updating the scientific model
for gauging climate friendliness of jet fuels, they said, and it will be revised to factor
in the emissions impact of cropland converted from food to fuel production. Federal
agencies plan to complete their revisions by March 1.
“The sustainable aviation fuel industry is a potential 36 billion gallon industry that for
all intents and purposes is just getting started,” Agriculture Secretary Tom Vilsack
said on the call. “This is a big, big deal.”

The announcement thrusts the complicated politics of ethanol and biofuels into an
election year. Subsidies for such products are hugely popular in some Midwestern
swing states, and industry players are lobbying for maximum flexibility in what
products could qualify for the new jet fuel subsidies.

Vilsack said the administration is eager to make eligible as many fuels derived from
agricultural products as possible, including those made using nascent technologies
such as “climate smart” agriculture and machinery to capture and store emissions.
The effectiveness of such technologies is in dispute among scientists and climate
economists.

“There are some who argue that when discerning the climate benefits of your fuel
you should be allowed to take credit for carbon a crop absorbs and deposits into the
soil,” said Mark Brownstein, a senior vice president overseeing energy transition
work at the Environmental Defense Fund. “In theory, that make sense. But it turns
out it is very hard in practice to document whether that is happening and the degree
to which the carbon stays permanently stored in the ground.”
Jet travel is one of the most vexing climate problems. While it accounts for only 2
percent of U.S. greenhouse gas emissions, it is among the most stubborn of any
sector. Those emissions are on the rise as the travel industry recovers from the
impacts of the covid-19 pandemic.

Unlike automobiles, jumbo jets cannot run on batteries. The immense amount of
energy they consume makes electrification possible only for small planes making
short trips. So the industry has turned to jet fuels that can run existing engines but
release fewer emissions when burned. These products, which are typically mixed
with traditional jet fuel, are marketed as “sustainable aviation fuel.

Last month, Virgin Atlantic made the first transatlantic flight powered entirely by
sustainable aviation fuel. A company news release claimed the flight’s lifecycle
carbon emissions were 70 percent lower than a flight powered by petroleum-based
jet fuel.
But sustainable aviation fuel accounts for less than 1 percent of the jet fuel burned in
the world. At the moment, much of it is made with waste products such as animal
fats or french fry grease. But the supply of such feedstocks will be exhausted quickly
as airlines shift away from petroleum to meet their climate targets.
The United States and other countries are scrambling to ramp up production of
low-carbon jet fuels that can be produced on a larger scale, aiming not just to meet
climate goals, but also to become dominant players in a fledgling industry with huge
growth potential. Vilsack said there is a need for 36 billion gallons of the fuel, which
is more than twice the amount of corn-based ethanol the United States produces
annually. This new industry, he said, will support 400,000 jobs.
“You can do the math,” Vilsack said. “This is a tremendous opportunity.”
 COMMENTARY
According to the article, President Biden decided to provide subsidies to the airline
industry to move to a more greener approach by reducing the amount of carbon print
airlines use. Subsidies refer to a form of payment done by the government to firms
to lower the costs and prices and increase the total supply.1 Intervention is when the
government indirectly intervenes in the market by providing subsidies to the airline
industry which affects the demand and supply.2

This has a direct impacts all market forces since the government's subsidy directly
affects the supply, but this effect can only happen in the long run.

The diagram shown from above is taken into perspective of how normally a market
would respond if the producers would have received a subsidy from the government
the Supply curve moves outwards and the price now reduced due to the subsidy.
However, in short, the effect of a subsidy would be the opposite. Since there is a
technological improvement would mean a supply shift, but in this case, the curve

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would move towards the left. “Due to the renewal energy switch, the airline which
uses the renewal energy would become more costly as there would be very few of
those in number.”

Thus an improvement in airline development would only mean that the price of travel
in such airlines would be much more expensive in the short run. However, as more
and more airlines start to adapt these developments or improve the quality of airline
travel the price would gradually fall. Another reason the price would be higher than
P1 in the short run is the cost of production being much higher in terms of producing
these airlines. Since all airlines are using carbon-based fuels for air travel, renewable
energy would only mean that due to the scarcity and being extremely hard to
produce, the prices would be higher.

However, it is important to note that this subsidy would help reduce global carbon
emissions, which removes negative externality when the production or
consumption of a product results in the cost to the third party3. Carbon emissions are
considered a negative externality as it causes harm to the environment. But this
government's plan of action providing subsidies to airline industries has a high risk
with little to no reward. Much time would have been spent on R&D.

The subsidy is to correct the market failure in the airline industry. Market failure is
defined as the failure of the market to allocate resources efficiently, resulting in
overallocation, underallocation or no allocation of resources to the production of a
good or service relative to what is socially most desirable.4

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From the diagram shown above the usage of air travel causes the deadweight loss
as told from the (a+b) due to the usage of non-renewable energy sources creating
pollution. A deadweight loss also exists when there is a positive externality because
the marginal social benefit is greater at the market quantity than the marginal social
cost. However due to Biden’s policy of renewable energy the the deadweight loss
now reduces to only (b) at (P3*QD3).

Several other policies could be used to restrict the usage of fossil fuel as a fuel
source for aeroplanes; one alternate method they can use is initially removing fossil
fuel from cars and other land vehicles; “land vehicles have a much larger contribution
as compared to Air travel If the government first can remove a large contributor to
stop the negative externality”. Normally this is the only form of policy that would work
to create a positive externality.

Thus, in my opinion, the US government’s intervention by subsidising the R&D of

renewable energy is a good plan to stop negative externality; however, they should
make sure that until the majority of airlines can fly by burning no fossil fuel, they
should not implement the travel of airlines using renewable energy in the short run
since this has never been done before.Thus, this policy is useful in the long run, and
the effects of the subsidy failing are very low.
 COMMENTARY 2

Name of article- China to continue consumption leading to economic

growth.

Source of the article-

https://www.chinadaily.com.cn/a/202303/23/WS641bffe0a31057c47ebb6
29d.html
Date of the article published – 23-03-2023
Date the commentary was written- 22nd May 2023
Word count of the commentary- 800 words
Unit of Syllabus to which the article relates to Macroeconomics
The key concept used- Economic growth
 ARTICLE
China is expected to make greater efforts to boost consumption, in order to add
more momentum to its economic growth, according to a senior expert.

Chen Wenling, chief economist at the China Center for International Economic
Exchanges, said in the recently concluded Asia-Pacific Financial Forum in Beijing
that boosting consumption has become the most urgent task to drive the Chinese
economy.

The country's retail sales of consumer goods, a main gauge of consumer spending,
declined 0.2 percent year-on-year last year and, although consumption has been
taking an increasing role in gross domestic product, the growth rate of
consumption has been slowing down, she said, adding that boosting consumption
has become a priority in this year's economic work.

Data from the National Bureau of Statistics also showed that the retail sales of
consumer goods climbed 3.5 percent year-on-year in the January-February period,
or 5.3 percentage points higher from the level in December 2022.

Chen suggested the country strive to stimulate offline consumption, which she said
is key to revitalize the market to the pre-pandemic level. The country should
promote the integration of offline and online consumption to further tap the
potential of related new business models and formats, according to her.

Consumption of high-value commodities, including housing, automobiles and

home appliances, are also expected to be enhanced, she said.

"I believe China's policies for the real estate industry will be consistent and stable
with an overarching design, to meet diversified demand for housing," she said,
adding that supplies of high-end housing will be enhanced with a market-oriented
pricing system while there will also be affordable public and rental housing.

The country is advised to further tap the consumption potential of special

consumer groups including seniors, young people and women, and, at the same
time, stimulate the development of consumption in industries like health, culture,
education, travelling and transportation, and housekeeping services, she said.
She also expects China to improve digital infrastructure to expand digital
consumption, and advance the cultivation of international and regional
consumption center cities to vitalize the allocation of resources and production
factors across regions.

The country should also energise market entities to expand the middle-income
group and encourage entrepreneurship and employment to boost consumption
upgrades, she added.
 COMMENTARY
According to the article given, China is aiming to increase consumption rates will
help boost economic growth.”The Chinese government has accordingly implemented
various policies to help achieve economic growth by heavily subsiding on health,
education, culture, travelling and transportation.” GDP is the final total value of all
goods and services(output) produced in the economy in a year, regardless of who
owns the factors of production.5

Economic Well-Being refers to the level of prosperity and economic satisfaction

and standards of living among members of society.6 The article doesn’t show a
specific policy about how the Chinese government can increase consumer
expenditure. The government is trying to use the expenditure approach by following
the formula AD= C+I+G+(X-M). The C in the formulae refers to consumer
expenditure.

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The diagram above indicates how the AD shifted from Y2 to Y3 during the . The
consumer expenditure increases from Y2 to Y3, showing the increase in the
consumer's willingness to buy more goods and services. This is indirectly affected by
the Chinese government's increasing employment levels. The government is
increasing expenditure on merit goods such as hospitals and schools; this means
more people in the economy are more educated and can run more revenue than
before, increasing the average Real GDP/per capita.

If the real GDP/per capita increases, households are willing to buy more goods and
services, pushing the AD curve outwards in the economy. The output approach is
designed so that the Chinese people will buy more goods and services from their
economy rather than importing them. So initially, their total output during recession
was at (Y2*PL2). After the increase in consumer expenditure, it has changed to
(Y3*PL3), thus its ability to make more money at the same price by increasing the
number of consumers.

As a result only in the Long run does the LRAS expand.

China also tries to implement a supply-side policy by subsiding in the digital
infrastructure.” Digital infrastructure refers to the sum of entertainment and
information media an individual consumes.” Increasing this service can increase
workers' productivity, such as investing in broadband connections. It enables
Chinese workers to connect locally/globally. Digital infrastructure can also create
more jobs and increase the employment of workers. As businesses adopt a
digitalised workforce, production and efficiency rates increase, boosting economic
growth.

However, due to China heavily relying on Consumer expenditure and investment

from business, the Chinese government may need to be more vulnerable to
Unsustainable Consumption. More reliance on consumer expenditure can lead to
sustainable patterns of consumption. If consumers consistently spend beyond their
means, they accumulate a higher debt, forcing demand-pull inflation. Demand-pull
inflation is when there is an increase in aggregate demand, and the supply remains
the same or decreases.7 Due to the imbalance between the demand and supply of
goods, the price levels increase. As a result, this would increase the inflation levels
in the economy. The Chinese government should also consider another variable
when trying to increase economic consumption: social inequality. As of 2022, China’s
Gini Index is around 0.466, meaning the rich will get richer, and the poorer will be
poorer. Thus the income inequality in the economy will increase as a result.

So instead of the government prioritising on the demand side policies they can focus
on the supply side policy of retraining the workers. This supply side policy will have
its effects on the consumption rate only in the long term. Retraining workers to
acquire new skills and competencies often translates into higher earning potentials,
thereby fostering increased consumption in the economy. As workers earn more
income, they are likely to allocate a portion of their earnings towards discretionary
spending on goods and services, stimulating demand and economic activity.

In conclusion,even though the Chinese consumption will boost in the short run,
there will be many consequences of focusing primarily on the boost in consumption
patterns in the chinese economy and its adverse effects on the Income Inequality as
well as the inflationary rates in the economy. A safer way to increase the
consumption pattern is to also allow the government to intervene in the markets by

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retraining structurally unemployed workers, this way the economic growth moves at
a steady rate rather than exponential rate.
 COMMENTARY 3

Name of article- Laos records trade surplus of US$943mil in 9 months

Source of the article-

https://www.thestar.com.my/aseanplus/aseanplus-news/2023/11/22/laos-
records-trade-surplus-of-us943mil-in-9-months
Date of the article published – 22nd November 2023
Date the commentary was written-25th November 2023
Word count of the commentary- 800 words
Unit of Syllabus to which the article relates to Global Economy
The key concept used- Trade surplus
 ARTICLE
VIENTIANE: Laos registered a trade surplus of more than US$943 million over the past
nine months of this year, according to a senior government official.

The Minister of Planning and Investment, Khamjane Vongphosy, told the National
Assembly recently that exports during this period were worth more than US$5.95
billion, equal to 72.94 per cent of the annual plan.

The government frames a number of policies to promote domestic productivity to

boost exports.

“We are expecting that the value of the exports for the whole of 2023 will touch
US$8.03 billion, equal to 97.71 per cent of the yearly plan,” the minister said.

The value of imports over the past nine months of 2023 stood at US$5.01 billion, equal
to 70.58 per cent of the annual plan.

The minister said the value of imports for the whole year will be around US$6.93
billion, equal to 97.71 per cent of the annual target.

The trade surplus for the whole of 2023 is expected to be around US$1.12 billion.
However, as of September, only 41.32 per cent of export payments were made through
the banking system of Laos.

The government has vowed to ensure that at least 50 per cent of export payments
are made through the banking system by the end of 2023, in line with a resolution
passed by the National Assembly in the middle of this year.

The two-way trade between Laos and other countries reported by the Lao Trade
Portal (LTP) every month does not include the value of electricity imports and
exports.

Conversely the report made by the Ministry of Planning and Investment includes the
value of all products including electricity import and export which reflect the overall
trade between Laos and other countries.
The main exports by value are mining and agricultural products, and many of them
were sent to China through the Laos-China Railway.

The country’s main imports are usually fuel, mechanical equipment, land vehicles,
wood pulp and paper scraps, beverages, plastic utensils, food products, steel and
iron, and steel products.

Recently, the Lao Prime Minister, Dr Sonexay Siphandone, issued an order directing
the concerned sectors to restrict the import of luxury items and to limit the import of
products that can be produced in Laos.

The government also framed a number of policies to promote domestic productivity

to boost exports and bring more foreign currency into Laos.

The move is part of the government’s efforts to tackle inflation, currency exchange
rates, the soaring price of goods, and minimise the pressure of sourcing foreign
currency to import goods.

In recent months, the government has allocated 4,500 billion kip to boost domestic
production and stimulate economic growth under a new credit policy to distribute
more funds to local areas. - Vientiane Times/ANN
 COMMENTARY

Laos has recorded a trade surplus of over US$943 Million in the first 9 months of the
current year. Laos hopes to boost domestic productivity which can be measured
using the output per unit, such as capital and labour or any other form of resources.
This may be achieved via increasing consumption of foreign currencies.Trade
surplus is an economic measure of a positive balance of trade, where the country's
total exports exceed its imports8.

A Trade surplus usually indicates that a country is trying to increase its economic
well-being.” The minister of Planning and investments Khamjane Vongphosy,
attributed this surplus to the robust performance of exports, totaling over US$5.95
billion during this period, constituting 72.94% of the annual plan. “

From the diagram above it shows how a trade surplus will affect the market for Laos.
I have plotted the Keynseian curve to show how much of a shift there will be in the
curve. Before Laos’s trade surplus of $943 million, the economy was at AD1 being
described that the Potential GDP is greater than the real GDP. A shift in the curve
from AD1 to AD2 can be changed from any of these factors- Consumer expenditure,
investments, government spending and balance of payments. Due to more revenue

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being generated in the economy as a result of this trade surplus allowing Laos's
Economic well-being to expand as a result.

This surplus plays a pivotal role in strengthening the nation's foreign exchange
reserves, fortifying financial stability, and creating opportunities for strategic
investments in key sectors like infrastructure, technology, and education. As Laos
aims to further develop its economy, a sustained trade surplus contributes not only to
increased creditworthiness but also reduces reliance on external financing.
Additionally, the surplus underscores Laos' competitiveness in the global market,
facilitating job creation and supporting overall economic growth. Importantly, the
positive trade balance signifies Laos' ability to produce goods and services in
demand internationally, positioning the country for sustained economic well-being in
the long term.

In this scenario the government’s policy is used to help the out the public in
achieving macroeconomic policies.Balance of payments refers to the all the
transactions between the residents of a country and the residents of all other
countries, showing all payments received from other countries, called credits, and all
payments made to other countries, called debits.9 The commentary states that
Laos’s main source of exports comes from mining and agricultural products,
highlighting how Laos still relies on the primary sector as its main source of income
in regards to generating revenue from exports. Describing how Laos's economy is
interdependent on primarily these two goods for its trade surplus. Interdependence
is the idea that economic decision makers interact with and depend on each other,
arising from the fact that no-one is self sufficient10.

Since Laos it's mostly relying on the primary goods for its export revenue it will be
able to diversify.As shown from the Article it states that ” Laos mostly exports primary
goods and imports manufactured goods. If the Laos government starts exporting
these manufactured products it will have a higher chance of their economy benefiting
as a result from relying on exporting manufactured goods rather than selling raw
resources and buying manufactured goods. The Laos government has stated that
“The move is part of the government’s efforts to tackle inflation, currency exchange
rates, the soaring price of goods, and minimise the pressure of sourcing foreign
currency to import goods.” If the Laos government continues to export primary
sources.If a dip in the commodity prices happens for the mining and agricultural
goods, it will slash the export prices, supring challenges such as reduced public
investment, currency devaluation, increased debt and a higher risk of default. In the
short run, a government's continued export of primary goods may lead to currency

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appreciation, driven by increased demand for its exports. However, this appreciation
may pose challenges for other sectors reliant on exports, potentially impacting
overall economic stability.

One of the other method’s that the government can do can raise the exports revenue
is to slowly transition from exporting Primary goods and natural resources to Capital
goods and manufactured goods.Instead of importing manufactured goods.By
exporting instead of importing these goods it will provide a higher value addition to
increase profit margins. economic growth.

In conclusion, while Laos's efforts to achieve a trade surplus and promote domestic
productivity are commendable, there is room for improvement in diversifying exports,
enhancing financial mechanisms, and supporting local industries in the secondary
sector and by slowly moving its economy towards a safer way to achieve higher
profit margins through price exports. By addressing these challenges, Laos can
strengthen its economy, reduce vulnerabilities, and foster inclusive growth for the
benefit of its citizens.