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Real-World Examples

Real-World Examples are extremely important for Part B of the Paper 1 question. To paraphrase the IB Economics guide, omitting a relevant real-world example guarantees that the student cannot score higher than the 1-3 mark band out of 15.

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Below is a list of real-world examples pertaining to macroeconomic topics that are frequently tested. This is not a comprehensive list and if you feel that we have left out any important Real-World Examples please do not hesitate to suggest it using the "Contact Us" form. It is also important to note that the points presented under the subsection "Points of Discussion" is not an exhaustive list of evaluation points and should rather be used as guiding points to spark extensive evaluation. 

HL and SL 

Expansionary Monetary Policy

Change in Central Bank Lending Rate

Overview

In March 2020 The Taiwan Central Bank cut the minimum lending rate to 1.1125% 

Links

Points of Discussion

  • Inflation due to the policy remains at a low and stable rate of 1.7%

  • The economy was growing at its fastest rate in more than a decade by August

  • Taiwan’s unemployment rate in march was at 3.72% but fell to 3.6% by the same time next year

Quantitative Easing

Overview

Bank of England (BoE) bought £150 Billion of government bonds to help fight recession

Links

Points of Discussion

  • At the time interest rate was at 0.1% so it would be impossible to adjust it to a lower rate through other measure

  • Unemployment prior to the policy was at an all time high of 5.1%

  • The overall spending of the Bank of England stands at £450 billion since the start of the pandemic in march which could have financial implications

  • The policy was also implemented in light of a possible shrink in the economy by 11%

Contractionary Monetary Policy

Change in central bank lending rate

Overview

The US federal reserve announced that it will be raising its interest rate by 0.5% in May 2022

Links

Points of Discussion

  • The policy has been implemented in an attempt to counter the rising interest rate which currently stands at around 8%

  • The rising inflation comes in light of external factors such as Russia’s invasion Ukraine and is being dealt by other countries in a similar manner

  • The policy is being implemented after a similar policy proved successful in 1994

Expansionary Fiscal Policy

Government Spending

Overview

Direct payment of upto $1,400 to US Citizens around January of 2021 as part of the Biden administrations CARES Act to boost spending

Links

Points of Discussion

  • A total of $600 billion were provided to fund the scheme

  • Initial analysis suggests that the policy will lead to an increase in GDP Growth by 4%

  • Unemployment rate is predicted to dip to below 3.2% which is greater than 1 percentage point below the estimated natural rate of inflation suggesting that it could lead to inflationary pressure

Tax cuts

Overview

In March of 2022 Iowa cut income tax to a flat rate of 3.9%

Links

Points of Discussion

  • Unemployment was at 3.3% at the time the tax cut was introduced

  • The tax cut was implemented in order to encourage businesses and consumers spending

  • The tax rate of 3.9% will be gradually implemented and is expected to be fully in use by 2027

  • Their will be a loss of approximately $1.65 billion per year in government revenue

  • The reform was heavily criticised by the opposing political party, the democrats

  • As it is a constant tax rate for each income bracket it is a regressive tax

Contractionary Fiscal Policy

Government Spending

Overview

The United States government reduced spending on the defense sector by $255 billion in 1990

Links

Points of Discussion

  • The policy was implemented namely to reduce the budget deficit that had been left by the preceding president

  • The policy may have been politically motivated as all republicans voted against it and it took vice president Al Gore’s tie-breaking vote for the bill to be passed

  • In the years following the policy the budget deficit was eventually turned into a budget surplus

Supply Side Policies

Encouraging competition

Overview

n the midst of an economic crisis in 1991 India began privatizing different sectors of the economy in a bid to encourage competition and induce growth

Links

Points of Discussion

  • From 1992-92 to 2000-2001 India’s GDP grew at an average rate of 6.1% and inflation at a rate of 7.1%

  • Political differences and priorities complicated the privatization as governments often sought to keep older policies

  • As the policy was gradually implemented it ensured that adequate support was created for privatized firms.

Research & Development

Overview

South Korea invested almost $83 billion in research and development in 2019

Links

Points of Discussion

  • The spending is up 3.9% and translates to approximately 4.64% of South Korea’s Real GDP

  • The spending has played a major role in economic growth which has been rapidly increasing in the past decade

Labour Market Reforms

Overview

In December 2015 the state of Kentucky lowered its minimum wage from $10.10 to $7.25 in order to reduce unemployment

Links

Points of Discussion

  • Worker productivity since 1979 has increased 62% but wages have only increased 18%

  • Kentucky has experienced an average real GDP growth of 0.9% in the proceeding period from 2016 to 2019 before the pandemic

  • Unemployment rate also dropped to 5.1% in that same year

Provision of Infrastructure

Overview

Indian government expenditure on public healthcare in 2021-22 increased to ₹4.72 lakh crores

Links

Points of Discussion

  • The spending has increased from ₹2.73 lakh crores to ₹4.72 lakh crores representing a 73% increase in budget allocation

  • The increased spending also comes in response to the worsening impacts of the covid-19 pandemic

  • The policy has been effective in inducing long term economic growth

Policies to reduce income inequality

Cash Transfer

Overview

In 2003 Brazil enacted the Bolsa Familia scheme which provided cash transfers of 35$ per month to families living below the poverty line

Links

Points of Discussion

  • The primary objectives were to reduce poverty, inequality and break the poverty cycle

  • Roughly 11% of the population lived below the international poverty line at the time

  • Its Gini Coefficient prior to the policy stood at 0.595 which has fallen to 0.489 in 2020

  • The scheme has reportedly reached over 46 million people and has been lauded as one of the most successful conditional cash transfer scheme

Progressive Tax

Overview

Denmark has one of the most progressive income tax systems in the world with the highest tax bracket paying up to 55% of income

Links

Points of Discussion

  • The model has led to a fall in Denmark’s gini coefficient for the last five years from 0.282 to 0.277

  • In addition to a fall in gini coefficient the tax revenue is readily reinvested through provision of free education, healthcare and extremely generous paternity leave amongst others

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