Question 21M.2.HL.TZ0.4b
| Date | May 2021 | Marks available | [Maximum mark: 4] | Reference code | 21M.2.HL.TZ0.4b |
| Level | HL | Paper | 2 | Time zone | TZ0 |
| Command term | Explain | Question number | b | Adapted from | N/A |
Economic development in Honduras and Guatemala
Honduras
- Honduras is a developing country in Central America. While historically dependent on the export of primary products, Honduras has more recently diversified its exports to include clothing and automobile components. Honduras’ economy depends heavily on exports to the United States (US) and, to a lesser extent, on remittances (money sent by a foreign worker to their home country).
- In rural areas, approximately one out of five Hondurans lives in absolute poverty. The country is also vulnerable to external shocks and has experienced worsening terms of trade. Revenue earned by the agricultural sector has decreased by one-third over the past two decades. This is partially due to the declining prices of the country’s export crops, especially bananas and coffee beans.
- The Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) has helped attract foreign direct investment (FDI). However, a threat to future FDI inflows is Honduras’ high level of crime and violence. It has one of the highest murder rates in the world.
Guatemala
- Guatemala shares a border with Honduras. Guatemala has the largest population and the biggest economy in Central America. Guatemala is the top remittance recipient in Central America as a result of large numbers of Guatemalans living and working in the US. These inflows on the current account are equivalent to two-thirds of the country’s export revenue and about 10 % of its gross domestic product (GDP).
- The agricultural sector employs 31 % of Guatemala’s labour force. Key agricultural exports include sugar, coffee, bananas and vegetables. The CAFTA-DR has reduced the barriers to FDI, resulting in increased investment and diversification of exports, particularly in iron, steel and non-traditional agricultural exports (such as high-priced fruits and vegetables). While the free trade agreement has improved the conditions for investment, FDI continues to be limited by concerns over security, the lack of skilled workers and poor infrastructure.
- With some of the worst poverty, malnutrition and infant mortality rates in the region, Guatemala’s economic development is slowing. Those worst affected live in rural areas. Faster economic growth is crucial to achieving the country’s medium- and long-term poverty reduction objectives.
Table 2: Selected economic data for Honduras and Guatemala
[Source: Central Intelligence Agency, 2018. The World Factbook. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/gt.html [accessed 1 November 2018]. Source adapted.
United Nations Human Development Reports, Guatamala (http://hdr.undp.org/en/countries/profiles/GTM) and Honduras (http://hdr.undp.org/en/countries/profiles/HND). Licenced under Creative Commons 3.0 IGO, https://creativecommons.org/licenses/by/3.0/igo/legalcode.]
Using a perfectly competitive firm diagram, explain the effect of declining prices of coffee beans on the profits of Honduras’ coffee farmers in the short run (paragraph [2]).
[4]
For [4] the candidate must either correctly show the loss on the diagram in the form of a revenue box or have sufficient labelling to be able to correctly identify the loss in their written explanation.
For a perfectly competitive firm diagram, the vertical axis may be labelled Cost (C), Price (P) or Revenue (R). The horizontal axis may be labelled Quantity (Q) or Output. A title is not necessary.
On balance this was quite well answered. In the main, students understood the theory of perfect competition and were able to apply it to a situation of falling prices and demonstrate both diagrammatically and in terms of an explanation how the falling prices could affect profits.
Some students did not identify the correct level of output at MR=MC and/or did not clearly identify the loss in the diagram. It seems it was challenging for some students to know whether to start from a position of economic profit or loss.
