Question 21M.2.HL.TZ0.1b
| Date | May 2021 | Marks available | [Maximum mark: 4] | Reference code | 21M.2.HL.TZ0.1b |
| Level | HL | Paper | 2 | Time zone | TZ0 |
| Command term | Explain | Question number | b | Adapted from | N/A |
Filipino rice farmers prepare for trade liberalization
- To meet its obligations under World Trade Organization (WTO) rules, the president of the Philippines has asked the government to eliminate the current quota system for rice imports. As an important part of food security measures, the government wants to achieve self-sufficiency in the production of rice. To support this goal, the WTO allowed the Philippines to extend its rice quota until June 2017 to allow more time for local farmers to prepare for free trade.
- The current quota system for rice imports makes domestic prices rise dramatically during periods of low domestic supply.
- Eliminating the quota on rice aims to make the rice market more competitive, which could reduce the price of rice by as much as 7 Philippine pesos (PH₱) per kilogram (kg). The National Economic and Development Authority has estimated that lower rice prices could save Filipino households as much as PH₱2362 per year. However, if the rice quota is eliminated, economists have warned that the government must prepare local rice producers so that they can either compete with rice imports or move to producing other crops. “Currently Filipino farmers cannot compete with Vietnamese farmers who may enjoy economies of scale” declared one economist. “The solution is to bring down the cost of production of rice.”
- To help Filipino farmers to adjust to competition from lower-priced rice imports, the government has allocated funds to the Rice Competitiveness Enhancement Fund. This fund will provide support to farmers in order to increase productivity by supplying high-yield seeds and fertilizer. It will also provide subsidies to encourage the use of agricultural machinery and will offer support services and training to farmers.
- Apart from being an essential food for many Filipinos, rice is also an important input for the food industry. The plan to remove the import quota will reduce the inflation rate in the Philippines by up to 0.4 %. In July 2018, the central bank governor reported that inflation had reached 5.7 %, well above the government’s target range of 2 % to 4 %. He stated that “supply-side factors are the main drivers of the present inflation. These factors include rising international oil prices, higher indirect taxes and poor weather conditions that have affected food supply”. The president stated that the removal of the rice quota was one solution to ease the rising inflation.
Table 1: Average economic costs and prices of rice in the Philippines and Vietnam
[Source: Rappler, 2018. Gov’t to support farmers amid moves to lift rice import quotas. Available at: https://www.rappler.com/business/203837-government-support-philippine-farmers-lifting-rice-import-quotas [accessed 1 June 2018]. Source adapted.
Philippine News Agency, 2018. Tariff on imported rice to rake in P20-B yearly. Available at: http://www.pna.gov.ph/articles/1043516 [accessed 2 August 2018]. Source adapted.
Ernesto M. Ordoñez / Inquirer.net, 2018. Averting the 35% rice tariff crisis. Available at: https://business.inquirer.net/258373/averting-35-rice-tariff-crisis#ixzz5VJ32ugph.
Ben O. de Vera, Inquirer.net, 2018. Tariff on rice to curb inflation by 0.4 percentage point. Available at: https://business.inquirer.net/256313/tariff-rice-curb-inflation-0-4-percentage-point#ixzz5VGfm0xUp [accessed 29 August 2018]. Source adapted.]
Using an AD/AS diagram, explain how removing “the import quota will reduce the inflation rate in the Philippines” (paragraph [5]).
[4]
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For AD/AS the vertical axis may be average (general) price level, APL or price level. For the horizontal axis, real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary.
While the question specifically asked for an an AD/AS diagram, a significant minority of students offered up a quota diagram.
Two different approaches (decrease of AS or decrease in AD) were offered by candidates with a variety of reasons for each shift.
Some lower-achieving responses lost one mark for not relating the decrease in AS with the increase in the cost of production. Good responses had little difficulty in explaining, using the diagram, that removing the import quota would likely increase the supply of rice, reducing its price thus lowering input costs, a significant component in calculating the CPI/inflation rate.
Some candidates took the alternative route and explained the impact on inflation in terms of an increase in the value of imports resulting from the removal of the quota on rice and how this would decrease X-M, resulting in a fall in AD with a consequent impact on inflation.
