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CIE Paper 2 (0455/0987)

Tom 's Profile Picture

University of Warwick - BSc Economics

A-level examiner. Panel judge of the Royal Economics Society essay competition. Former BBC News senior producer.

PMT Education

0455 || 0987

You can find all CAIE Economics IGCSE (0455 and 0987) Paper 2 past papers and mark schemes below.

For 0987 Cambridge says ‘this syllabus is graded from 9 to 1 but is otherwise the same as Cambridge IGCSE Economics – 0455. You can therefore use the past papers for Cambridge IGCSE Economics – 0455 to inform your teaching of the 9-1 version of the syllabus.’

  • June 2003 MS - Paper 2 CIE Economics IGCSE
  • June 2003 QP - Paper 2 CIE Economics IGCSE
  • June 2004 MS - Paper 2 CIE Economics IGCSE
  • June 2004 QP - Paper 2 CIE Economics IGCSE
  • June 2005 MS - Paper 2 CIE Economics IGCSE
  • June 2005 QP - Paper 2 CIE Economics IGCSE
  • June 2006 MS - Paper 2 CIE Economics IGCSE
  • June 2006 QP - Paper 2 CIE Economics IGCSE
  • June 2007 MS - Paper 2 CIE Economics IGCSE
  • June 2007 QP - Paper 2 CIE Economics IGCSE
  • June 2008 MS - Paper 2 CIE Economics IGCSE
  • June 2008 QP - Paper 2 CIE Economics IGCSE
  • June 2009 MS - Paper 2 CIE Economics IGCSE
  • June 2009 QP - Paper 2 CIE Economics IGCSE
  • June 2010 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2010 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2010 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2010 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2010 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2011 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2011 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2011 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2011 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2011 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2011 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2012 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2012 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2012 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2012 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2012 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2012 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2013 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2013 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2013 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2013 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2013 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2013 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2014 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2014 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2014 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2014 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2014 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2014 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2015 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2015 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2015 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2015 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2015 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2015 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2016 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2016 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2016 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2016 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2016 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2016 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2017 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2017 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2018 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2018 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2019 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2019 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2019 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2019 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2019 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2019 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2020 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2020 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2020 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2020 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2020 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2020 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2021 (v1) MS - Paper 2 CIE Economics IGCSE
  • June 2021 (v1) QP - Paper 2 CIE Economics IGCSE
  • June 2021 (v2) MS - Paper 2 CIE Economics IGCSE
  • June 2021 (v2) QP - Paper 2 CIE Economics IGCSE
  • June 2021 (v3) MS - Paper 2 CIE Economics IGCSE
  • June 2021 (v3) QP - Paper 2 CIE Economics IGCSE
  • June 2022 (v1) MS - Paper 2 CAIE Economics IGCSE
  • June 2022 (v1) QP - Paper 2 CAIE Economics IGCSE
  • June 2022 (v2) MS - Paper 2 CAIE Economics IGCSE
  • June 2022 (v2) QP - Paper 2 CAIE Economics IGCSE
  • June 2022 (v3) MS - Paper 2 CAIE Economics IGCSE
  • June 2022 (v3) QP - Paper 2 CAIE Economics IGCSE
  • March 2016 (v2) MS - Paper 2 CIE Economics IGCSE
  • March 2016 (v2) QP - Paper 2 CIE Economics IGCSE
  • March 2017 (v2) MS - Paper 2 CIE Economics IGCSE
  • March 2017 (v2) QP - Paper 2 CIE Economics IGCSE
  • March 2018 (v2) MS - Paper 2 CIE Economics IGCSE
  • March 2018 (v2) QP - Paper 2 CIE Economics IGCSE
  • March 2019 (v2) MS - Paper 2 CIE Economics IGCSE
  • March 2019 (v2) QP - Paper 2 CIE Economics IGCSE
  • March 2020 (v2) MS - Paper 2 CIE Economics IGCSE
  • March 2020 (v2) QP - Paper 2 CIE Economics IGCSE
  • March 2021 (v2) MS - Paper 2 CIE Economics IGCSE
  • March 2021 (v2) QP - Paper 2 CIE Economics IGCSE
  • March 2022 (v2) MS - Paper 2 CAIE Economics IGCSE
  • March 2022 (v2) QP - Paper 2 CAIE Economics IGCSE
  • November 2002 MS - Paper 2 CIE Economics IGCSE
  • November 2002 QP - Paper 2 CIE Economics IGCSE
  • November 2003 MS - Paper 2&4 CIE Economics IGCSE
  • November 2003 QP - Paper 2 CIE Economics IGCSE
  • November 2004 MS - Paper 2 CIE Economics IGCSE
  • November 2004 QP - Paper 2 CIE Economics IGCSE
  • November 2005 MS - Paper 2 CIE Economics IGCSE
  • November 2005 QP - Paper 2 CIE Economics IGCSE
  • November 2006 MS - Paper 2 CIE Economics IGCSE
  • November 2006 QP - Paper 2 CIE Economics IGCSE
  • November 2007 MS - Paper 2 CIE Economics IGCSE
  • November 2007 QP - Paper 2 CIE Economics IGCSE
  • November 2008 MS - Paper 2 CIE Economics IGCSE
  • November 2008 QP - Paper 2 CIE Economics IGCSE
  • November 2009 MS - Paper 2 CIE Economics IGCSE
  • November 2009 QP - Paper 2 CIE Economics IGCSE
  • November 2010 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2010 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2010 (v2) MS- Paper 2 CIE Economics IGCSE
  • November 2010 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2010 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2010 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2011 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2011 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2011 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2011 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2011 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2011 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2012 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2012 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2012 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2012 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2012 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2012 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2013 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2013 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2013 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2013 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2013 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2013 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2014 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2014 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2014 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2014 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2014 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2014 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2015 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2015 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2015 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2015 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2016 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2016 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2016 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2017 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2017 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2017 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2017 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2017 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2017 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2018 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2018 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2018 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2018 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2018 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2018 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2019 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2019 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2019 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2019 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2019 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2019 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2020 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2020 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2020 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2020 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2020 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2020 (v3) QP - Paper 2 CIE Economics IGCSE
  • November 2021 (v1) MS - Paper 2 CIE Economics IGCSE
  • November 2021 (v1) QP - Paper 2 CIE Economics IGCSE
  • November 2021 (v2) MS - Paper 2 CIE Economics IGCSE
  • November 2021 (v2) QP - Paper 2 CIE Economics IGCSE
  • November 2021 (v3) MS - Paper 2 CIE Economics IGCSE
  • November 2021 (v3) QP - Paper 2 CIE Economics IGCSE
  • Specimen 2014 MS - Paper 2 CIE Economics IGCSE
  • Specimen 2014 QP - Paper 2 CIE Economics IGCSE
  • Specimen 2020 MS - Paper 2 CIE Economics IGCSE
  • Specimen 2020 QP - Paper 2 CIE Economics IGCSE
  • November 2021 (v2) MS - Paper 2 CAIE Economics IGCSE
  • November 2021 (v2) QP - Paper 2 CAIE Economics IGCSE

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How to Nail Your IB Economics Paper 2 – Practical Tips

By TutorsPlus

IB Economics Paper 2 Student

Nailing your IB Economics Paper 2 is as important as the other components of your final assessment. It is accountable for 30%-40% of your success (depending on whether you are doing SL or HL Economics).

This complex exam poses a challenge to many students. Fear not, with some of the practical tips you’ll find in this post, you’ll ace your IB Economics assessment like a pro.

Paper 2 is very demanding since it requires you to demonstrate your understanding of economic theory, to apply your knowledge in real-life situations, as well as evaluate economical processes and their consequences.

So dive into this article along with its companion piece “How to nail paper 1.”

The Structure of IB Economics Paper 2

IB Economics Paper 2 is a combination of data response questions and an extended response question. Students have two questions but need to answer only one of them. These questions feature two snippets of news articles, which provide some data for practical application.

Each question refers to one of the four sections of the IB Economics syllabus and is broken into a-g sections. They, as a rule, contain the following questions:

  • Define two terms (4 marks);
  • Based on the information from a news article, calculate (3 marks) and draw a diagram (2 marks);
  • Using a diagram, explain how… (4 marks);
  • Using a diagram and the information from the text, explain …(4 marks);
  • Using a diagram and the information from the article, explain how…(4 marks);
  • Using a diagram, explain what…(4 marks);
  • Using the information from the article and the knowledge of economic theory, discuss … (15 Marks).

In total, IB Economics Paper 2 awards 40 marks, out of which 25 bring short-answer questions and 15 – the final essay-like question. These marks weigh 30% of the total grade for HL students and 40% from the SL. Overall, students have 1 hour and 45 minutes to complete the assignments.

IB Econ exam

How to Nail Your IB Economics Paper 2: Practical Tips

Now that the structure of the questions is clear, let’s take a closer look at each section.

Definitions (Section a)

The opening section of Paper 2 is give-a-definition questions. Typically, there are two such questions, and each brings 2 marks. Occasionally, a question may ask to specify the functions of an institution or organization, such as a central bank.

To gain two points for each definition, it is not enough to provide a simple answer. You should also give an example, provide a brief explanation, and, when appropriate, an equation.

Calculation (Section b)

In your exam, you will be asked to do some calculations. For example: ‘Using the data about national income specified in an article, calculate nominal GPD sticking to the expenditure approach’. The majority of these calculations require just the basic mathematical functions (plus, minus, multiply, divide) yet calculators are allowed during the examination.

When doing these calculations, you need to be exact – unless otherwise specified in the question, show two decimal places. If you use formulas, make sure to include them. Also, you need to show full working out.

Diagrams (Section b, c-f)

Diagrams are an essential part of Paper 2 – typically, sections from b to f have something to do with them. Naturally, you need to master how to draw and describe diagrams to nail your IB Economics assessment.

Sections c-f reward 4 marks each, 2 of which are for drawing a diagram and 2 for explaining it. This explanation shouldn’t be too detailed – one or two paragraphs will suffice. When it comes to drawing, make sure to stick to the following tips:

  • Always use a ruler to draw the axes of a diagram as well as linear lines;
  • Remember to fully label your diagram (axes, important points, intersections, etc.). Use standardized abbreviation (GDP, for instance) but don’t shorten labels in other cases (use Price instead of just ‘P’). Also, don’t forget to specify measuring units ($, kg, etc.);
  • Show your diagrams as dynamic, not static. If an indicator changed over a period of time, you need to appropriately reflect this change.
  • When it comes to the essay-like section g, a diagram is not compulsory. Nevertheless, if you feel that it can help you with a more detailed answer, you can include it.

Explain (Section c-f)

The sections from c to f feature the ‘explain’ type of questions. To be more exact, they feature command terms, which indicate the depth of your answer. The Economics guide from the IBO specifies 34 such commands, but in Paper 2, you will be likely to come across the following most frequent terms: analyse, compare, compare and contrast, describe, determine, discuss, explain, evaluate, list, show, etc.

It is vital that you understand what command terms require you to come up with an adequate answer.

For example, ‘explain’ implies that you need to give a detailed account featuring reasons and causes.

Evaluate, on the other hand, means that you need to provide your opinion on a situation, including highlighting its pros, cons, and limitations.

If your question commands ‘list’, you don’t have to go into details. It’s enough to write a few bullet points with brief commentaries for each.

Do not go into more details than required.  This will waste time and you will not be awarded additional marks for it.

Discuss (Section g)

Section g of Paper 2 is very similar to section b of Paper 1. Both intend to assess how well you are able to apply the economic theory you learned in class to real situations. In order to nail your IB Economics Paper 2, we suggest that you use the DEEDE method we described in detail in our previous IB Economics Paper 1 article .

The acronym DEEDE means the following:

  • D efinitions – give a definition of economic terms and keywords related to your question. As a rule, some of these terms are mentioned directly in the question. You may also need to define other terms essential to your answer.
  • E xplanation – you need to show that you are able to apply relevant economic concepts and theories to answer the question.
  • E xample – your question will already feature an example (news article excerpt) so you don’t need to provide it on your own. However, you need to show that you are able to interpret data, see the correlation between two or more variables, and use it for calculations and diagram drawing when applicable.
  • D iagram – depending on your specific question, providing a diagram may be beneficial, but it is not a requirement. If you already have a diagram based on the same data for one of the previous sections, you can simply refer to it but don’t draw it again.
  • E valuate – a command term in the question will give you an idea of what is required (compare, contrast, discuss, evaluate, examine, justify, etc.). In a simplistic way, evaluation means providing a judgment about the strengths and weaknesses of an action or process, its consequences, or alternatives. Your answer should be based both on data from the text and economic analysis, and all of your arguments must be fully justified.

You will have a sufficient amount of time to formulate your answer – as a rule, it takes 45 minutes to complete the task, so make sure your answer has a good flow, depth, and clarity.

How to Nail Your IB Economics Paper 2 with Tutors Plus

Preparation for IB Economics Paper 2 is not without its challenges. On one hand, Paper 1 and Paper 2 have many similarities – you need to focus on definitions, diagrams, and evaluations of certain processes, concepts, and actions. On the other hand, Paper 2 features calculations, and many students struggle with those.

One more thing that makes it difficult to nail IB Economics Paper 2 is changes in the syllabus. Up until 2021, Paper 2 focused only on the International Economics and Development Economics units of the syllabus. Now, the units of the syllabus are different, and Paper 2 utilizes not just two but all four units. It makes it hard to practice with past papers since their questions may no longer be relevant, let alone they don’t cover the entire programme.

How to properly prepare for Paper 2 then? Our solution is tutor assistance. An IB Economics tutor is able to estimate where you’re standing and where you should be going. This concerns not only your theoretical knowledge but also practical skills and your ability to analyse since all of them are equal parts important to nail your Paper 2.

Tutors Plus is your reliable source of IB tutors – knowledgeable, experienced, and committed to your success. Contact us at [email protected] or 022 731 8148 and let us help you be fully equipped for one of the most important exams in your life.

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economic paper 2

IB Economics Paper 2 Question Bank

If you’re an IB Economics student, then you know that Paper 2 can be one of the most challenging parts of the course. Luckily, there’s a Question Bank available to help you prepare for this section of the exam. The IB Economics Question Bank includes multiple questions, divided into topic areas. Each question comes with a full solution, so you can see exactly how to approach each type of question on the exam. With so many questions at your fingertips, you’re sure to find Paper 2 a breeze!

Case study reference: https://www.azernews.az/business/155766.html  

Sharp increase in subsidies in Azerbaijan to contribute to agriculture production growth

Incredible work has been done in Azerbaijan to improve the business environment and support entrepreneurship, Chairman of the Azerbaijan Pomegranate Manufacturers and Exporters Association Farhad Garashov told Trend . He made the remarks as part of the video project entitled “PREZIDENT. Musteqillik. Tehlukesizlik. Rifah”.

The geography of export of Azerbaijani non-oil products is expanding, and trading houses are opening in foreign countries, he said.As a result, the flow of currency into Azerbaijan increased, entrepreneurs made big profits, and thanks to the efforts of Azerbaijani President Ilham Aliyev, a favorable business environment has been created in the country, the state provides special benefits in this area, long-term loans are granted to farmers.

Garashov added that entrepreneurs shouldn’t depend only on state support.“We ourselves must be aware of our responsibility,” he said. “The Association supports the fulfillment of the requirements set by the president before state bodies in order to solve all problems of entrepreneurs, as well as steps taken to improve the business environment. Members of the Association present a single pavilion under the brand ‘Made in Azerbaijan’ at the biggest exhibitions of the world. Naturally, we set ourselves the goal of using all the conditions created for us.”

Garashov noted that the quality of products in Azerbaijan is growing from year to year. In his opinion, a sharp increase in the amount of subsidies for agriculture producers will contribute to the growth of agriculture production. “A ll this is related to the policy of President Ilham Aliyev,” he said. “Each of us expresses gratitude to the head of state for the conditions created for the entrepreneurs.”

a) (i) Define the term ‘Subsidy’ [2 marks]

A subsidy is a government payment to producers attempting to lower the price of produce and increase quantity produced (encourage production). In the international trade context, the subsidy is given to domestic producers to increase their international competitiveness.

(ii) Define the term ‘ Trade Protection’ [2 marks]

Trade protectionism is a policy that protects domestic industries from unfair foreign competition. Trade protectionism involves various tools such as tariffs, subsidies, quotas, embargos and currency manipulation.

b) Explain the impact of this subsidy on the various stakeholders in the economy. [4 marks]

Foreign producers are negatively affected as they receive a lower revenue from reduced imports. In retaliation, the act of dumping may occur as countries start exporting their products at a price lower than their cost of production. 

Moreover, the government incurs an opportunity cost as the money used to subsidize agricultural production could have been utilized to improve areas such as education, health care, infrastructure, perhaps even the tertiary sector. Noting that Azerbaijan is a developing country, an improvement in the tertiary sector would contribute further to economic growth and development in the form of an increase in the real Gross Domestic Production and the well-being of the citizens. Moreover, due to a reduction in the government’s budget, it may impose taxes to make future expenditures, therefore making taxpayers worse off. 

Other stakeholders like the consumers do not face a loss in consumer surplus as the price remains constant. Furthermore, as there is less entry of imports, consumers do not have access to a wide range of goods or services and are dissatisfied.

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c) Evaluate the effectiveness of trade protectionism [6 marks]

Trade protectionism is a policy that protects domestic industries from unfair foreign competition. 

The advantages to trade protectionism include:

  • Assisting emerging industries: According to the Infant Industry Argument, emerging industries need assistance in order to scale up in the face of established worldwide competition. Protectionists contend that altering the trade balance is required to promote innovation. 
  • Job creation: According to protectionists, restricting trade and favouring domestic producers lead to the creation of jobs at home and economic growth by providing domestic industries with the favourable conditions they require to thrive. 
  • Increasing competitiveness: In a free market, higher pay developed nations (such as the United States) cannot compete on price with lower wage emerging nations. This is another justification for protectionism (like China). In order to help the domestic industry compete, the government must tip the scales in its favour.

The disadvantages to trade protectionism include: 

  • Effectiveness of specialisation: Anti-protectionists contend that encouraging specialisation in a few important areas and forging beneficial trade agreements with other nations that have comparable specialisations is a more effective way to boost the economy than restricting international trade. 
  • High cost of job creation: While protectionism may help maintain or add to domestic employment, it may also hinder economic growth and cause price inflation as domestic goods become more expensive. Any jobs created will be expensive because inflation is a real possibility. 
  • Risk of retaliation: Protectionism’s detractors claim that, aside from trade wars, it has historically resulted in blatantly violent warfare, such as World War I.

d) To what extent does subsidising agricultural production impact trade? [8 marks]

The subsidies are a trade protection involving a government payment to domestic producers in Azerbaijan. They are intended to lower the price of produce and increase agricultural production. As the agricultural products are exported, this policy leads to an overall rise in Azerbaijan’s international competitiveness. This type of trade protection safeguards the Azerbaijan economy from foreign competition by minimizing imports. In addition, as developing countries depend on the primary sector, agricultural production is crucial to the health of the economy.

Prior to the introduction of subsidies to domestic agricultural producers, it is assumed that imports were initially high and that agricultural production took place at a slower rate. As seen in Fig.1, when trade takes place without protectionism, the equilibrium is at the intersection of the world price; a price for a good or service in all countries, with Sd at the quantity Q1 and price Pw. At this price, domestic supply is low (Q1) and the imports are high; Q2 minus Q1. 

economic paper 2

When the Azerbaijan government starts subsidizing its producers, they receive a higher effective price; Pe, providing them with the incentive to increase production from Q1 to Qe, even though the market price does not change. This results in a downward shift in the domestic supply curve by the size of the subsidy per unit, Sd+sub, indicating that there is higher domestic agricultural production as the cost of production is lowered. To meet with the higher production process, demand for labour increases, leading to an overall rise in domestic employment and thus revenue. This revenue can be invested in capital to improve their agricultural production. However, these subsidies may also cause domestic producers to become lethargic, leading to inefficient agriculture production. This results in a global misallocation of resources, adversely affecting economies. In the long run, domestic employment may also negatively affect the economy as it causes a rise in inflation rates due to high costs of production from providing additional wages to labour. However, there are also long term benefits of diversification in agricultural production and exports in developing countries.  

On the other hand, as the subsidy is not sufficient to change the Pw, Domestic demand (Dd) does not change either. Considering that Dd is constant and agricultural production is growing, there is a decrease in the entry of imports compared to the exports, from Q2 minus Q1 to Qe minus Q1. As there is less expenditure on imports, Azerbaijan’s current account improves. This also allows infant industries to grow in size and produce higher output and take advantage of economies of scale as it receives a lower average cost, hence enabling them to compete in the international market. 

In conclusion, trade protection such as subsidies can benefit Azerbaijan’s economy but only up to a moderate extent. This form of trade protection may be considered more effective in comparison to tariffs; which are taxes on imports, as it does not lead to possible loss of living standards or have negative effects on consumption. This indicates that as price does not increase, it does not make consumers switch to cheaper but fewer goods or services causing a deterioration in the standard of living. However, consumers may also be worse off as the government subsidizes producers rather than funding socially desirable aspects. Furthermore, the government would have to raise taxes to fund the subsidy. 

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Answering Economics Case Study Questions

economic paper 2

When it comes to Economics Paper 2, many students fumble with the idea of applying economic theories in real-life case studies. However, it’s not the regurgitation of facts, memorised real life examples, or definitions, as many students think that matters. Instead, it’s the requirement of understanding economic concepts with application to real life news headlines.

IB Economics Case Studies have become increasingly harder in today’s uncertain economic climate. As a result, questions are asked based on multiple topics, including Section 3 and 4 of the syllabus and even a blend of both Micro and Macro concepts. This implies that it’s neither how hard you work, nor is it being able to bank on International and Developmental parts of the syllabus, but rather, how you tailor your study techniques to answer the demands and complexities of said questions. 

As a guest writer who has scored 38/40 for Paper 2, I would like to share some tips with you, allowing you to tackle this paper using the NMN (‘emi-nem’ LOL) acronym easily.

#1 Never Leave Your Paper Blank

When tackling Paper 2 questions, many students tend to read only the case studies without annotating. This is a sure-fire way to miss the crux of the case study and exclude certain points that should be incorporated in your final analysis. 

The best advice I can give would be to highlight the points relevant to the case study and subsequently, find out how they can fit into the narrative of your part d) question. 

Furthermore, humans have a high tendency to forget things in exam conditions, thus not annotating your case studies increases the chances you may make mistakes. By annotating case studies consistently, it becomes easier for one to be able to identify the key points to incorporate into the answers.

You should be highlighting certain points, such as, “Poor governance has led to an issue of widespread corruption and funds diverted away from institutional reforms like education and infrastructure developments.” By doing this, the main point of poor governance being an impediment to the economic development of the country can be easily encapsulated in your answer. This creates a mental framework in your mind, demonstrating clear understanding of the context of the case study/country.

#2 Most of the Focus should be on Part d) Questions

Each case study should be approached with a time limit of 45 minutes. With the demands of each questions from part a) to d) in mind, this would be my recommendation:1. Part a) - c): 20 mins

2. Part d): 25 mins

Part a) to c) should be done in the shortest time frame, because based on the mark scheme, being awarded the highest mark is not difficult. They simply require full, detailed relevant explanations and elaborations, something that you will definitely have gotten the hang off before your IB Examinations.

When answering these questions, you may use the standard PEEL format (which I personally do not use), or write out full explanations as seen in the Economic study guides, with the context of the question in mind. Most importantly, ANSWER the question directly, keeping in mind that the examiners are mainly looking out for the correct keywords, economic theories, and relevant points.

#3 Never Study International & Developmental for Paper 2 Only

The IB syllabus is getting increasingly cross-sectional, meaning that Micro and Macro questions can be tested in Paper 2 as well. This means you cannot exclude any parts of the syllabus. Hopefully, since Paper 1 is usually the day before Paper 2, you would have less trouble recalling Micro and Macro concepts.

What I would like to stress is: Do not assume Paper 2 will test International and Developmental only, but rather, study smart such that regardless of the situation, you will have the ability to integrate concepts from the earlier syllabus into your answers. 

Especially for students that take Higher Level Economics, IB has consistently tested students on Theory of the Firm in part b) or c) questions, resulting in students being easily confused. However, in a situation that that does not occur, you should have studied the syllabus sufficiently to not be stumped by the question.

Final Words

With today’s economic volatility and a stalling global recession caused by the pandemic, there are many case studies IB are able to test on this year. The many articles being published currently about stimulus COVID-19 packages; restructuring of the economy; rampant unemployment, can be used for your IAs.

The key to answering CSQ questions well would be finding out how you are able to link your economic concepts with the real life world. For practice, you should begin by reading the news, as that will allow you to kick-start your journey to a grade 7 in IB.

When you come across headlines such as “COVID-19 has led to the Fed buying back bonds”, ask yourself “What does this entail?”, “What economic policy is the government trying to do here?” and  “Does it really work?”. With the desire to learn and understand more about the real world,  you will be able to utilise the knowledge learnt in the classroom efficiently, allowing you to better understand the concepts taught in Economics.

Thus, your responses to CSQs will become more polished and in depth, allowing you to put on the thinking cap of an economist and soar to greater heights.

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Top 3 misconceptions about subsidies.

ECONOMICS PAPER 2 GRADE 12 QUESTIONS - AMENDED SENIOR CERTIFICATE PAST PAPERS AND MEMOS MAY/JUNE 2017

ECONOMICS PAPER 2 GRADE 12 SENIOR CERTIFICATE EXAMINATIONS MAY/JUNE 2017 INSTRUCTIONS AND INFORMATION

  • Answer FOUR questions as follows in the ANSWER BOOK: SECTION A: COMPULSORY SECTION B: Answer TWO of the three questions. SECTION C: Answer ONE of the two questions.
  • Answer only the required number of questions. Answers in excess of the required number will NOT be marked.
  • Number the answers correctly according to the numbering system used in this question paper
  • Write the question number above each answer.
  • Read the questions carefully.
  • Start EACH question on a NEW page.
  • Leave 2–3 lines between subsections of questions.
  • Answer the questions in full sentences and ensure that the format, content and context of your responses comply with the cognitive requirements of the questions.
  • Use only black or blue ink.
  • You may use a non-programmable pocket calculator.
  • Write neatly and legibly.
  • selling price.
  • total cost.
  • marginal cost.
  • economic profit.

1.1.2 The supply curve for a firm in a perfectly competitive market has a … slope.

1.1.3 Differentiated products are …

  • heterogeneous.
  • homogeneous.

1.1.4 The demand curve that explains oligopolistic behaviour is described by some theorists as …

  • horizontal.

1.1.5 The market is unable to protect the environment because it is mainly driven by …

  • self-interest.
  • social interest.
  • social cost.
  • the community.

1.1.6 The implementation of inflation targets is the responsibility of the …

  • South African Revenue Services.
  • Department of Finance.
  • South African Reserve Bank.
  • Department of Trade and Industry.

1.1.7 For a trip to be classified as part of tourism, the maximum length of stay should be less than … year(s).

1.1.8 Global warming is the result of the emission of … gases into the atmosphere.

  • oxygenated (8 x 2)

(16) 1.2 Choose a description from COLUMN B that matches the item in COLUMN A. Write only the letter (A–I) next to the question number (1.2.1–1.2.8) in the ANSWER BOOK.

(8 x 1) (8) 1.3 Give ONE term for each of the following descriptions. Write only the term next to the question number (1.3.1–1.3.6) in the ANSWER BOOK. 1.3.1 A cash incentive given to a producer to lower the cost of production 1.3.2 A situation where one firm fixes a price and other firms accept it as the market price 1.3.3 The spillover effect of an economic activity that affects third parties 1.3.4 An excessive rise in the general price level, sometimes referred to runaway inflation 1.3.5 The dumping of waste matter into the environment 1.3.6 The long-term change in weather patterns which includes changes in temperature, rainfall patterns and wind (6 x 1) (6) TOTAL SECTION A: 30

SECTION B Answer any TWO of the three questions in this section in the ANSWER BOOK. QUESTION 2: MICROECONOMICS 40 MARKS – 30 MINUTES 2.1 Answer the following questions. 2.1.1 Give any TWO examples of community goods. (2 x 1) (2) 2.1.2 Why is the demand for skilled labour difficult to adjust in South Africa? (1 x 2) (2) 2.2 Study the graph below and answer the questions that follow.

2.3.1 Name the institution in the extract that investigates anticompetitive behaviour in South Africa. (1) 2.3.2 Identify ONE aspect that was influenced negatively by ArcelorMittal's anticompetitive behaviour. (1) 2.3.3 What is the role of the Competition Tribunal? (2) 2.3.4 What is meant by market dominance? (2) 2.3.5 How will ArcelorMittal's anticompetitive behaviour affect the industrial sector? (2 x 2) (4) 2.4 Distinguish, without using graphs, between productive inefficiency and allocative inefficiency. (2 x 4) (8) 2.5 Draw a fully labelled graph to illustrate the economic loss of a monopoly market structure. (8) [40] QUESTION 3: CONTEMPORARY ECONOMIC ISSUES 40 MARKS – 30 MINUTES 3.1 Answer the following questions. 3.1.1 Name any TWO World Heritage Sites in South Africa. (2 x 1) (2) 3.1.2 How can people be educated to manage the environment in such a way that sustainability is ensured? (1 x 2) (2) 3.2 Study the information below and answer the questions that follow.

3.2.1 Identify the average price of a kilowatt per hour (kW.h) electricity in 2002. (1) 3.2.2 What trend does the average price of electricity show, as represented in the graph? (1) 3.2.3 Briefly describe the term administered-price inflation. (2) 3.2.4 Why does NERSA allow Eskom to have price increases above the inflation rate? (2) 3.2.5 Why is it important that NERSA regulates electricity prices in South Africa? (2 x 2) (4) 3.3 Study the table below and answer the questions that follow.

3.3.1 Identify TWO purposes in the table above why South Africans travelled domestically. (2) 3.3.2 Briefly describe the term domestic tourism. (2) 3.3.3 What is a possible reason for the decline in holiday trips between 2015 and 2016? (2) 3.3.4 Calculate the number of people who undertook business trips in 2016. Show ALL calculations. (4) 3.4 Briefly discuss the granting of property rights as a measure to sustain the environment. (4 x 2) (8) 3.5 How can indigenous knowledge systems (IKS) be used to increase tourism in South Africa? (4 x 2) (8) [40] QUESTION 4: MICROECONOMICS AND CONTEMPORARY ECONOMIC ISSUES 40 MARKS – 30 MINUTES 4.1 Answer the following questions. 4.1.1 Name TWO environmental problems that affect environmental sustainability. (2 x 1) (2) 4.1.2 How will the producer react if the government implements a maximum price on his product? (1 x 2) (2) 4.2 Study the information below and answer the questions that follow.

4.2.1 Identify ONE of the five big banks in South Africa. (1) 4.2.2 What, according to the extract, prevents any entrepreneur from entering the banking industry in South Africa? (1) 4.2.3 Briefly describe the concept oligopoly. (2) 4.2.4 Explain the nature of the product offered by the banking industry. (2) 4.2.5 How do banks compete to increase their market share in South Africa? (2 x 2) (4) 4.3 Study the extract below and answer the questions that follow.

4.3.1 In which city was the world wildlife conference held? (1) 4.3.2 Identify the aim of CITES in the extract above. (1) 4.3.3 Briefly describe the term conservation. (2) 4.3.4 Why is elephant poaching a threat to the environment? (2) 4.3.5 How can CITES contribute to the conservation of elephants? (2 x 2) (4) 4.4 Briefly discuss the reasons for growth in the tourism industry. (2 x 4) (8) 4.5 Why is a cost-benefit analysis (CBA) necessary for public sector projects? (8) [40] TOTAL SECTION B: 80 SECTION C Answer any ONE of the two questions in this section in the ANSWER BOOK. Your answer will be assessed as follows:

QUESTION 5: MICROECONOMICS 40 MARKS – 40 MINUTES Markets are the backbone of economic activities in any country.

  • Compare the market structure of a monopolistic competitor to that of a perfect market. (26)
  • Explain, with the aid of a graph, how economic profit is achieved for a perfect competitor. (10) [40]

QUESTION 6: CONTEMPORARY ECONOMIC ISSUES 40 MARKS – 40 MINUTES The disadvantage of a market economy is often demonstrated by inflation.

  • Discuss the causes of cost-push inflation. (26)
  • Advise the Minister of Finance on how to use taxes as an instrument to combat inflation. (10) [40]

TOTAL SECTION C:40 GRAND TOTAL: 150

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This section of the site contains 24 paper two-style questions, written by the authors according to the new syllabus, starting August 2020, but revised for the May 2024 section. Each question is designed to be completed in around 85 minutes. Mark schemes for each of the questions accessed directly from this page. None of the mark schemes are available online making them ideal for homework or classwork exercises. Three...

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This section includes recent A-Level Economics and AS Economics past papers from Pearson Edexcel. You can download each of the Pearson Edexcel A-Level Economics past papers and marking schemes by clicking the links below.

Economics A (9EC0): Pearson Edexcel A-Level Past Papers June 2022

Paper 1: A-Level - Markets and Business Behaviour (9EC0/01)  Download Past Paper     -     Download Mark Scheme Paper 2: A-Level - The National and Global Economy (9EC0/02)   Download Past Paper     -     Download Mark Scheme Paper 3: A-Level - Microeconomics and Macroeconomics (9EC0/03)   Download Past Paper     -     Download Mark Scheme

Economics B (9EB0): Pearson Edexcel A-Level Past Papers June 2022

Paper 1: A-Level - Markets and how they Work (9EB0/01)  Download Past Paper     -     Download Mark Scheme Paper 2: A-Level - Competing in the Global Economy (9EB0/02)   Download Past Paper     -     Download Mark Scheme Paper 3: A-Level - The Economic Environment and Business (9EB0/03)   Download Past Paper    -     Download Mark Scheme

Economics A (9EC0): Pearson Edexcel A-Level Past Papers November 2021

Economics B (9EB0): Pearson Edexcel A-Level Past Papers November 2021

Economics A (9EC0): Pearson Edexcel A-Level Past Papers November 2020

Paper 1: A-Level - Markets and Business Behaviour (9EC0/01)  Download Past Paper    -     Download Mark Scheme Paper 2: A-Level - The National and Global Economy (9EC0/02)   Download Past Paper    -     Download Mark Scheme Paper 3: A-Level - Microeconomics and Macroeconomics (9EC0/03)   Download Past Paper    -     Download Mark Scheme

The above papers are labelled June 2020

Economics A (8EC0): Pearson Edexcel AS-Level Past Papers November 2020

Paper 1: AS - Introduction to Markets and Market Failure (8EC0/01) Download Past Paper    -     Download Mark Scheme Paper 2: AS - The UK Economy - performance and policies (8EC0/02) Download Past Paper    -     Download Mark Scheme

The above papers are labelled June 2020  

Economics B (9EB0): Pearson Edexcel A-Level Past Papers November 2020

Paper 1: A-Level - Markets and how they Work (9EB0/01)  Download Past Paper    -     Download Mark Scheme  Paper 2: A-Level - Competing in the Global Economy (9EB0/02)   Download Past Paper    -     Download Mark Scheme Paper 3: A-Level - The Economic Environment and Business (9EB0/03)   Download Past Paper    -     Download Mark Scheme

Economics B (8EB0): Pearson Edexcel AS-Level Past Papers November 2020

Paper 1: AS - Markets, Consumers and Firms (8EB0/01) Download Past Paper    -     Download Mark Scheme  Paper 2: AS - The Wider Economic Environment (8EB0/02) Download Past Paper    -     Download Mark Scheme

Economics A (9EC0): Pearson Edexcel A-Level Past Papers June 2019

Paper 1: A-Level - Markets and Business Behaviour (9EC0/01)  Download Past Paper    -     Download Mark Scheme Paper 2: A-Level - The National and Global Economy (9EC0/02)   Download Past Paper    -     Download Mark Scheme Paper 3: A-Level - Microeconomics and Macroeconomics (9EC0/03)   Download Past Paper    -     Download Mark Scheme  

Economics A (8EC0): Pearson Edexcel AS-Level Past Papers June 2019

Economics B (9EB0): Pearson Edexcel A-Level Past Papers June 2019

Paper 1: A-Level - Markets and how they Work (9EB0/01)  Download Past Paper    -     Download Mark Scheme  Paper 2: A-Level - Competing in the Global Economy (9EB0/02)   Download Past Paper    -     Download Mark Scheme Paper 3: A-Level - The Economic Environment and Business (9EB0/03)   Download Past Paper    -     Download Mark Scheme  

Economics B (8EB0): Pearson Edexcel AS-Level Past Papers June 2019

Economics A (9EC0): Pearson Edexcel A-Level Past Papers June 2018

Paper 1: A-Level - Markets and Business Behaviour (9EC0/01)  Download Past Paper  -  Download Mark Scheme Paper 2: A-Level - The National and Global Economy (9EC0/02)   Download Past Paper  -  Download Mark Scheme Paper 3: A-Level - Microeconomics and Macroeconomics (9EC0/03)   Download Past Paper  -  Download Mark Scheme  

Economics A (8EC0): Pearson Edexcel AS-Level Past Papers June 2018

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Estimates of the natural interest rate for the euro area: an update

Prepared by Claus Brand, Noëmie Lisack and Falk Mazelis

Published as part of the  ECB Economic Bulletin, Issue 1/2024 .

The natural rate of interest, r* (or “r-star”), is defined as the real rate of interest that is neither expansionary nor contractionary. [ 1 ] In the wake of the 2008 global financial crisis, real interest rates (as measured by deducting inflation expectations from a nominal rate of interest) slumped to exceptionally low levels in advanced economies, including the euro area. They have moved higher only recently as monetary policy was tightened following the post-pandemic surge in inflation.

Available estimates of r* can broadly be classified as either slow-moving equilibrium measures or cyclical inflation-stabilising measures. In its 2021 monetary policy strategy review, the ECB referred to the former as being most relevant for gauging risks of policy rates being constrained by their effective lower bound. Slow-moving measures reflect long-run equilibrium levels, determined by structural factors, towards which real interest rates are gravitating. But over the business cycle slow-moving measures are not a good indicator of the natural short-term real interest rate that eliminates both inflationary and disinflationary pressures. Gauging developments in the natural rate over the business cycle requires a model-based approach which ensures that a central bank tracking r* stabilises inflation either concomitantly (in the textbook New Keynesian Dynamic Stochastic General Equilibrium – DSGE – model, in the absence of nominal frictions) or over the medium term (in econometric models, in the absence of unforeseen shocks).

Inferences about movements in r* are subject to high uncertainty. r* is unobservable and its estimation is fraught with a host of measurement and model-specification challenges. In practice, r* estimates and their interpretation are always model and data-dependent, and thereby subject to both model uncertainty and statistical uncertainty. When assessing movements in r*, the models used and the specifics of the estimation must be taken into consideration. Such aspects include the policy instrument used to measure the monetary policy stance, the measure of economic slack included in the analysis, the level at which inflation stabilises once the slack is absorbed and the time horizon over which this occurs. Whether the lower bound on interest rates or the effects of unconventional monetary policies are factored into the estimation of r* also matters for the statistical validity of the measures.

Cyclical measures of euro area r* differ in their inflation-stabilising properties. Not all cyclical measures offer desirable inflation-stabilising properties. Among the cyclical measures discussed in this box, only a few are obtained from econometric or structural models positing a relationship between a model-specific measure of economic slack, the difference of inflation from the central bank target and the real rate gap (the distance of actual real rates from r*). [ 2 ] In addition, for these econometric model-based measures, the time horizon over which the inflation target is reached can vary greatly with the size and persistence of shocks. Other measures, be they cyclical or slow-moving, model-dependent or survey-based, have even less well-understood inflation-stabilising properties.

The post-pandemic economic environment may have raised cyclical measures of r* but it has also complicated its measurement. The impact of the pandemic, global supply chain disruptions, sharp energy price increases and more interventionist fiscal policies contributed to an exceptional surge in inflation in 2021-2022 and may, in principle, also be associated with a temporary increase in cyclical measures of r*. The inflation surge initially lowered the real short-term interest rate and thereby opened a large negative real rate gap. In principle, this gap has supported increasing economic activity and thereby fuelled inflation further. In addition, to the extent that the post-pandemic recovery in aggregate demand has outpaced productive capacities (which were constrained by further adverse supply shocks), the real rate of interest would have had to increase for this overutilisation of capacities to be corrected, pointing to a cyclically higher r*. [ 3 ] If a higher r* were material and persisted beyond the post-pandemic inflationary episode, it would undercut the effects of the normalisation and tightening of monetary policy since the end of 2021. However, the normalisation of supply in recent years – as seen, for instance, in improvements in delivery times – would work in the opposite direction, reducing the required equilibrium increase in r*.

Slow-moving measures of r* anchored to long-run economic trends are unlikely to have risen recently. While cyclical measures of r* might be edging higher, slow-moving measures of r* that only change over decades are unlikely to have risen, since their long-run economic drivers, such as productivity growth, demographics and risk aversion, have not changed fundamentally. [ 4 ] Productivity growth has remained low and the demographic transition is driving up savings at the global level in anticipation of longer retirement periods. Risk aversion and the scarcity of safe assets have been important factors behind the decline in euro area r* in the wake of the global financial crisis. But it is difficult to gauge how the impact of these factors might be waning over time.

While estimates of euro area r* vary widely across a suite of models, the median estimate has risen by about 30 basis points compared with levels prevailing in mid-2019, before the onset of the pandemic (Chart A). Euro area r* was reported to have fallen to levels around or below zero following the global financial crisis. [ 5 ] Given the uncertainty surrounding r* measures, Chart A reports evidence based on a suite of models and approaches for estimating some slow-moving r* measures and a larger number of cyclical measures of r*, including term structure models, semi-structural models, a DSGE model and survey-based estimates. [ 6 ] Recently the exceptional nature of the pandemic shock has complicated model-based inferences about cyclical measures of r*. Many models have not been amended to factor this shock into the estimation of r*. In a few instances, time averaging of r* or allowing for stochastic volatility in the output gap are used to ensure that the high macroeconomic volatility during this period does not mechanically translate into large r* fluctuations. With this caveat in mind, updated estimates suggest that euro area r* had fallen into negative territory by 2021, with the size of the range of estimates pointing to a very high degree of model uncertainty. Subsequently r* is estimated to have moved closer to pre-pandemic levels – albeit within a narrower range around zero – mainly owing to changes in cyclical measures. Since the second half of 2023 estimates obtained from term structure models and semi-structural models (i.e. excluding the more volatile DSGE model-based estimate) have ranged between about minus three-quarters of a percentage point to around half a percentage point. [ 7 ]

Real natural rates of interest in the euro area

(percentages per annum)

economic paper 2

Sources: Eurosystem estimates, ECB calculations, Federal Reserve Bank of New York and Consensus Economics. Notes: Survey-based estimates include the following: the estimate from the Survey of Monetary Analysts, which is the median of respondents’ long-run expectations regarding the ECB’s deposit facility rate, less expectations of inflation in the long run (starting in the second quarter of 2021); and the Consensus Economics estimate, which is the expected three-month interbank rate ten years ahead, less expectations of inflation in the long run. Term structure-based estimates are derived from Geiger, F. and Schupp, F., “ With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound ”, Deutsche Bundesbank Discussion Paper, No 27, 2018; Joslin, S., Singleton, K.J. and Zhu, H., “ A New Perspective on Gaussian Dynamic Term Structure Models”, Review of Financial Studies , Vol. 24, Issue 3, January 2011, pp. 926-970; Ajevskis, V., “ The natural rate of interest: information derived from a shadow rate model ”, Applied Economics , Vol. 52(47), July 2020, pp. 5129-5138; and Brand, C., Goy, G. and Lemke, W., “ Natural rate chimera and bond pricing reality ”, Working Paper Series , No 2612, ECB, Frankfurt am Main, November 2021. Semi-structural estimates are derived from Holston, K., Laubach, T. and Williams, J.C., “ Measuring the Natural Rate of Interest after COVID-19 ”, Federal Reserve Bank of New York Staff Reports, No 1063, June 2023; Brand, C. and Mazelis, F., “ Taylor-rule consistent estimates of the natural rate of interest ”, Working Paper Series , No 2257, ECB, Frankfurt am Main, March 2019 (including stochastic volatility in the output gap, a long-term interest rate, asset purchase effects and the effective lower bound); Carvalho, A., “ The euro area natural interest rate – Estimation and importance for monetary policy ”, Banco de Portugal Economic Studies, Vol. IX, No 3 (based on Holston, Laubach and Williams (2023), with and without inflation expectations); and Grosse-Steffen, C., Lhuissier, S., Marx, M. and Penalver, A., “How to weigh stars? Combining optimally estimates for the natural rate”, Banque de France working paper, forthcoming. DSGE-based estimates are derived from Gerali, A. and Neri, S., “ Natural rates across the Atlantic ”, Journal of Macroeconomics , Vol. 62(C), 2019 (displayed as a three-year moving average of the estimates). The latest observations are for the third quarter of 2023 for Holston, Laubach and Williams (2023), Ajevskis (2020), Grosse-Steffen, Lhuissier, Marx and Penalver (forthcoming), Carvalho (2023), and Geiger and Schupp (2018); and for the fourth quarter of 2023 for all other estimates.

Overall, model uncertainty complicates the measurement of r* and its use as an indicator for monetary policy. While cyclical measures of euro area r* have been edging higher, slow-moving estimates anchored to long-run economic trends are unlikely to have risen. The estimates vary widely, reflecting a high degree of model uncertainty and differences in model-specific inflation stabilisation properties. While these features greatly complicate the use of r* estimates as an indicator for monetary policy at high frequencies, trends in r* estimates still signal risks of nominal interest rates possibly becoming constrained by their effective lower bound in the future.

This box uses the terms “natural” and “neutral” real rate of interest interchangeably. By contrast, Obstfeld (2023) distinguishes between a natural rate – as the real rate of interest prevailing over a long-run equilibrium where price rigidities are absent – and a neutral rate –as the real policy rate of interest that eliminates inflationary and deflationary pressures. However, these two definitions overlap, because neutral measures defined in this way track the frictionless real rate of interest, i.e. they have natural rate characteristics, too. See Obstfeld, M, “ Natural and Neutral Real Interest Rates: Past and Future ”, NBER Working Paper, No 31949, December 2023.

The widely used r* measure from Laubach and Williams (2003) posits a backward-looking relationship between the real interest rate gap, economic slack and inflation. The resulting r* estimate stabilises inflation around a random drift, i.e. not necessarily close to the central bank’s inflation target. See Laubach, T. and Williams, J.C., “ Measuring the Natural Rate of Interest ”, Review of Economics and Statistics , Vol. 85, No 4, November 2003, pp. 1063-70.

Post-pandemic measures of slack are above zero when accounting for the impact of supply shocks on potential output – see the box entitled “Potential output in times of temporary supply shocks”, Economic Bulletin , Issue 8, ECB, 2023.

Cesa-Bianchi, Harrison and Sajedi (2023) draw the same conclusions with respect to global r* developments, for similar reasons. They estimate global r* to have been around or below zero recently. See Cesa-Bianchi, A., Harrison, R. and Sajedi, R, “ Global R* ”, Staff Working Paper No 990, Bank of England, October 2023.

See the Working Group on Econometric Modelling 2018 Report entitled “ The natural rate of interest: estimates, drivers, and challenges to monetary policy ”, Occasional Paper Series , No 217, ECB, Frankfurt am Main, December 2018.

The range of estimates obtained only accounts for model uncertainty and does not take account of much larger statistical uncertainty.

By comparison, for the United States, mixed evidence about developments in r* also highlights model uncertainty. According to the New York Federal Reserve’s DSGE model, between June 2022 and March 2023 the nominal short-term natural rate increased more than the Federal Funds rate (see Baker, K., Casey, L., del Negro, M., Gleich, A. and Nallamotu, R., “ The Post-Pandemic r* ”, Liberty Street Economics , August 2023; and Baker, K., Casey, L., del Negro, M., Gleich, A. and Nallamotu, R., “ The Evolution of Short-Run r* after the Pandemic ”, Liberty Street Economics , August 2023). However, this finding remains debatable as updated estimates of Lubik and Matthes (2015) and estimates from Holston, Laubach and Williams (2023) move in opposite directions. The latter use a semi-structural model assuming that r* is consistent with non-accelerating inflation, while the former do not impose inflation-stabilising properties and define r* as the long-horizon forecast of the real short-term rate in a Vector Autoregression model with time-varying parameters. This resulting discrepancy across recent estimates for the United States also highlights the considerable model uncertainty surrounding r* measures. See Lubik, T.A. and Matthes, C., “ Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches ”, Federal Reserve Bank of Richmond Economic Brief, No 15-10, October 2015; and Holston, K., Laubach, T. and Williams, J.C., “ Measuring the Natural Rate of Interest after COVID‑19 ”, Federal Reserve Bank of New York Staff Reports, No 1063, June 2023.

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  22. Estimates of the natural interest rate for the euro area: an update

    Prepared by Claus Brand, Noëmie Lisack and Falk Mazelis. Published as part of the ECB Economic Bulletin, Issue 1/2024.. The natural rate of interest, r* (or "r-star"), is defined as the real rate of interest that is neither expansionary nor contractionary. [] In the wake of the 2008 global financial crisis, real interest rates (as measured by deducting inflation expectations from a ...