“Aid is an effective means of promoting the development of poorer countries.” Evaluate this statement.

In terms of macroeconomic goals, aid should be able to overcome low savings rates, help reduce foreign exchange outflows, and reduce the dependency on private investment. Additionally, aid should also improve the living standards of the poorest people, move with times, not simple provide cheap meals, and allow choice to be exercised by the affected country.

As for the Pros and Cons of providing aid, the benefits include improving health, education, and welfare, better  technology and capital accumulation, and to stimulate the economy and foster investment.

The disadvantages of providing aid include encouraging corruption within the affected economy, encouraging dependency, and an increase in indebtedness.

In terms of stakeholders, the individuals that would greatly benefit from the aid given are the less fortunate; the people that struggle to sustain themselves on a regular basis. Since the affected economy is indebted and unable to support their less fortunate members of society, aid is able to support them. The government is affected

because it is the medium that receives the aid, and is able to decide how to allocate it effectively. Of course, depending on the corruption within the economy, the funds may be used to support the elite class’s lifestyle, but under favorable conditions the aid will be distributed evenly. Another stakeholder includes the large organizations that aim to assist developing companies such as the Red Cross or WHO. They have the responsibility, like the government, to effectively allocate the funds that are given to them. For this medium, it is

believed that corruption does not exist, as it is an organization, not a government, but nonetheless it exists.

In the short-run, the country will benefit from aid as it will alleviate pressures such as debt and a suffering community, but in the long-run, if the government is corrupt, aid will never reach the individuals that require it the most.

Explain the various types of aid, which a developing country might receive

There are two primary types of Aid that are available to developing countries, this includes Humanitarian and Developmental aid. In terms of Humanitarian aid, this describes necessities that individuals in the developing countries require in order to sustain themselves, the basic necessities. This includes food, medicine, and emergency relief.

As for developmental aid, this is towards the infrastructure of a developing economy, and its intention is to aid the economy in the long run, indirectly affecting the society in the short-run. This type of aid includes improved human resources, technology, and funding for specific projects, which aim to further develop the economy.

Additionally, in terms of developmental aid, this can be categorized within bilateral and multilateral aid. For bilateral aid, this describes aid that is given by one country to another, often times in form of loans. As for multilateral aid, this describes aid, which is given by separate countries into one central organization, for example the Red Cross, then the organization determines where to allocate the funds.


Final Reflection

In terms of the Mock exams, I believe that it assisted in preparing me for the real IB exam. The preparation before the mock exams, the weeks where we reviewed Section 2 & 3, really helped because I was able to look over the material in class, and receive feedback from you. In light of all the other exams that occurred during this period, I did not get the chance to review too much for the actual exam, but as stated before, the review in class helped.

As for the predicted grades that resulted from the mock exams, I believe that it is a good measure of my current ability to demonstrate my understanding of Economics. Further study should yield better results, as the review that I had done before the mock was not as substantial as it could have been.

The plan that I intend to follow in order to revise for the actual IB exam include improving my understanding of the definition of each concept form the IB course companion, review the graphs from the course companion, and then research real world examples that would assist in achieving the higher bands of each graded criteria. Additionally, I will look over the Triple A reading and the Power points to further develop my knowledge of economics, some of the graphs and concepts are not present in the course companion, so this I will be quite thorough with my review. I intend to spend a few days on each section, gaining the ability to confidently define each economical concept, able to represent, if possible, a graph with the concept, and then provide real world examples. The topic that I may need assistance in, in possible section 5, as we did not go over this topic as much as the previous sections.

Section 2 Review

The health and state of Eritrea

The GDP per capita of Eritrea is $700 according to the CIA fact book. This is quite unfortunate because, as compared to the world, it is ranked at #224, the first being Qatar with $145,300.

It has a population of which 50% are below the poverty line, a 2004 estimate.

Its current account balance, as of a 2010 estimate, is -212 million.

In terms of agriculture, Eritrea is able to provide sorghum, lentils, vegetables, corn, cotton, tobacco, sisal; livestock, goats; fish. For Industries that drive its economy, it has food processing, beverages, clothing and textiles, light manufacturing, salt, and cement.

Its has, according to a 2007 estimate, 1.935 million individuals that are apart of the labor force, 80% of which is devoted to agriculture.

The commodities that Eritrea exports include livestock, sorghum, textiles, food, small manufactures. Thus, any change in the price of “food” will greatly affect the exporting and agricultural industries.

According to a 2010 estimate, Eritrea spends 25 million on exports, and 738 million on imports, likely resulting in a current account deficit. 

Using the principle of comparative advantage, explain why economic theory suggests that countries should specialize and trade with each other.

Demands of the Question: Define the principles of comparative advantage, EXPLAIN and give examples of countries that have specialized. Explain the advantages of free trade in general. Do not evaluate.


Comparative advantage exists when one country is able to produce a good more cheaply, in comparison to other goods produced domestically, than another country.

Comparative advantage is a principle of economics which states that trade between two countries will be mutually beneficial as long as their domestic opportunity costs of production differ.

  • – Exists when goods produced cheaply
  • – Trade is mutually beneficial
  • – As long as domestic opportunity costs of production differ


Example given that takes into account the economies of two countries, pre and post trade agreements:

Evaluation Suggestions:

  • – Provide the limitations that befall specialization and comparative advantage.
  • – Discuss and give examples of why countries would choose to specialize.
  • – Is this effective only in the short term, or does it also apply in the long term?
  • – Explain stakeholders and who are affected by the decision to specialize.

AD/AS Diagrams



The following diagram illustrates an increase in Aggregate Demand.  The factors that influence aggregate demand include Consumption, Investments, Government spending, and exports minus imports. Consumption is a factor because by increasing it, aggregate demand increases as well since it measures the total spending within an economy over a given time period. For Investments, the more investments that an economy has, the greater the AD. Government spending is a factor because, if the government decides to contribute more towards the community, in the forms of improved transportation and roads, more spending occurs. Finally, for exports minus imports, if an increase is seen it represents the spending of the economy towards its exporting sector. A real world example of this is during Christmas time, especially in Japan, more often than not, the Consumption component of AD increases significantly due to the season’s notion of buying presents.




This diagram, on the other hand, represents a decrease in Aggregate Demand. The decrease can be brought upon by shifts in the components stated before. If there is a reduction in consumption, or a decrease in consumer spending, aggregate demand falls because there is less spending in the economy. As for Investments, if the economy receives less foreign investors, and less domestic individual investors, then there will be a shift in aggregate demand. If the government decides to spend less, the community suffers, as government owned facilities and locations are not taken cared of, resulting in a shift in AD. For exports minus imports, a fall in this component results in a shift in AD because the amount spent on the economy’s output has fallen.  A real world example that applies is the US, and the current state of its economy. Since the US has fallen on brutal times, Americans are more partial to saving instead of spending, foreign investors take less interest in US based companies, the government is attempting to spend in order to stimulate growth, and it imports more than it exports.

This diagram represents an increase in aggregate supply. The factors that influence this increase include reduction in indirect tax, wage costs, raw material and import costs, and more favorable weather conditions. By reducing indirect tax, aggregate supply increases because it measures the total amount of goods and services, which are supplied to consumers and producers. Less tax on the goods and services, more goods and services are produced and distributed.  By reducing wage costs, consumers will have more purchasing power and demand more of the good or service. For reducing raw materials and import costs, suppliers are able to focus more on their exports and learn to produce efficiently. For example, China is a supplier that has a large export cost and produces goods made of cheap raw materials. With favorable weather conditions, this affects suppliers who supply products that are associated with agriculture. For example, wheat farmers are able to supply more wheat if the weather is favorable for increased crop growth. Real world examples that describe an increase in Aggregate Supply is Nike outsourcing their production sector to third world countries such as China or Vietnam. By doing so, they are able to effectively reduce their raw materials cost, indirect taxes, and wage costs, depending on the laws of the foreign country.



The following diagram illustrates a decrease in Aggregate supply. The factors, which influence an increase in Aggregate supply, also apply to the decrease, just conversely. For example, instead of a reduction in indirect taxes, there will be an increase to reflect the pressure felt by suppliers. Higher taxes result in the demand for goods and services to decrease, thus the supply decreases as well. In this manner, an increase in wage costs, raw material and imports, and less favorable weather conditions influence the decrease in Aggregate supply. A real world example of this is Brazil, whose currency at the moment is experiencing an appreciation. As a result, the indirect taxes imposed upon the foreign companies has increased, as well as wage costs and raw materials.