The Global Economy (SL) — IB Economics SL SL Study Guide

For: IB Economics SL candidates sitting IB Economics SL.

Covers: All core subtopics of the IB Economics SL Global Economy unit, including international trade fundamentals, exchange rate systems, standard economic development indicators, and the UN Sustainable Development Goals.

You should already know: Basic literacy in current affairs and arithmetic.

A note on the practice questions: All worked questions in the "Practice Questions" section below are original problems written by us in the IB Economics SL style for educational use. They are not reproductions of past IBO papers and may differ in wording, numerical values, or context. Use them to practise the technique; cross-check with official IBO mark schemes for grading conventions.

1. What Is The Global Economy (SL)?

The Global Economy unit for IB Economics SL explores the interconnectedness of national economic systems, cross-border flows of goods, services, capital, and labor, and the shared social and environmental outcomes of global economic activity. It is the fourth and final core unit of the IB SL Economics syllabus, worth 20% of your final assessment weight across both Paper 1 (essay) and Paper 2 (data response) questions. Common synonymous terms used in exam questions include "international economy", "global economic system", and "cross-border economic activity". Examiners regularly test both quantitative skills (calculations of comparative advantage, exchange rates, HDI) and evaluative skills (trade-offs of free trade, barriers to SDG progress) in this unit.

2. International Trade Basics

International trade is the exchange of goods and services between sovereign national economies, underpinned by the principle of comparative advantage first formalized by David Ricardo. Two core terms define trade patterns:

• Absolute advantage: When one country can produce a good using fewer factor inputs (labor, capital, land) than another country
• Comparative advantage: When a country can produce a good at a lower domestic opportunity cost than another country, even if it has no absolute advantage in any good

The formula for calculating opportunity cost for trade is: $$\text{Opportunity Cost of 1 unit of Good X}=\frac{\text{Quantity of Good Y given up}}{\text{Quantity of Good X gained}}$$

Worked Example

The table below shows output per worker per year for Thailand and Vietnam, producing rice and solar panels:

Calculate opportunity cost of 1 solar panel for both countries:

• Thailand: $\frac{18}{6}=3$ tonnes of rice per solar panel
• Vietnam: $\frac{10}{5}=2$ tonnes of rice per solar panel

Vietnam has comparative advantage in solar panels, and Thailand has comparative advantage in rice (opportunity cost of 1 tonne of rice = 1/3 solar panels in Thailand, vs 1/2 in Vietnam). If they trade at a rate of 1 solar panel for 2.5 tonnes of rice, both countries gain more of both goods than if they produced domestically.

Exam note: You will be asked to draw a simple tariff diagram for SL questions: always label the world price line, post-tariff price, import volumes before and after the tariff, and the two deadweight loss triangles to get full 4 marks for the diagram.

3. Exchange Rates Intro

An exchange rate is the price of one currency expressed in terms of another currency, determined by one of three common systems: floating (market supply and demand only), fixed (set and maintained by a central bank), or managed float (market-led with occasional central bank intervention). Key terminology to avoid mixing up:

• Appreciation: Increase in value of a currency under a floating system
• Revaluation: Deliberate increase in value of a currency under a fixed system
• Depreciation: Decrease in value of a currency under a floating system
• Devaluation: Deliberate decrease in value of a currency under a fixed system

The formula for exchange rate conversion is: $$\text{Value in Target Currency}=\text{Value in Base Currency}\times \text{Exchange Rate (1 Base = X Target)}$$

Worked Example

The exchange rate between the Canadian Dollar (CAD) and Euro (EUR) is 1 CAD = 0.68 EUR. A Canadian retailer is importing 2000 EUR worth of French cheese. What is the cost in CAD? $$\text{Cost in CAD}=\frac{2000}{0.68}\approx 2941.18\text{ CAD}$$ If the CAD depreciates to 1 CAD = 0.65 EUR, the same shipment now costs $\frac{2000}{0.65}\approx 3076.92$ CAD, so the retailer will likely pass this higher cost to Canadian consumers as higher prices.

Exam note: The Marshall-Lerner condition is not required for SL. You only need to explain that a depreciation makes exports cheaper for foreign buyers and imports more expensive for domestic buyers, so it is likely to improve a country's current account balance over time.

4. Economic Development Indicators

Economic development is a broad measure of improvements in living standards, wellbeing, and economic opportunity for a population, distinct from economic growth which only measures increases in real GDP per capita. IB SL requires you to know three categories of development indicators:

1. Single indicators: Real GDP per capita (PPP adjusted), GNI per capita (PPP adjusted), life expectancy at birth, adult literacy rate, mean years of schooling
2. Composite indicators: The Human Development Index (HDI), which combines three equally weighted dimensions: health (life expectancy), education (mean and expected years of schooling), and standard of living (GNI per capita PPP). HDI scores range from 0 (lowest development) to 1 (highest development). The simplified SL formula for HDI is: $$\text{HDI}=\frac{1}{3}\times (\text{Health Index Score}+\text{Education Index Score}+\text{Income Index Score})$$
3. Inequality-adjusted indicators: The IHDI, which reduces the HDI score based on how unequally access to health, education, and income is distributed across the population.

Worked Example

Kenya has a health index score of 0.72, education index score of 0.68, and income index score of 0.61. Its HDI is: $$\text{HDI}=\frac{0.72+0.68+0.61}{3}=0.67$$ This falls in the medium development category (0.55-0.69). If income inequality in Kenya is high, its IHDI score would be 10-15% lower than its HDI score.

Exam note: Always distinguish growth from development in exam answers. For example, growth from oil extraction that only benefits a small elite, increases pollution, and does not improve health or education for most people is an example of growth without development.

5. Sustainable Development Goals

The UN Sustainable Development Goals (SDGs) are a set of 17 interconnected global targets adopted in 2015, designed to end poverty, protect the planet, and ensure shared prosperity for all people by 2030. For IB SL, you only need to focus on the 5 SDGs most closely linked to economic outcomes:

• SDG 1: No Poverty
• SDG 8: Decent Work and Economic Growth
• SDG 10: Reduced Inequalities
• SDG 12: Responsible Consumption and Production
• SDG 13: Climate Action

SDGs have both co-benefits (progress on one goal supports progress on another) and trade-offs (progress on one goal may make another harder to achieve). For example, investing in renewable energy infrastructure (SDG 7, SDG 13) creates formal jobs (SDG 8) and reduces household energy costs for low-income families (SDG 1), a co-benefit. Conversely, prioritizing rapid industrial growth via coal power (SDG 8) increases carbon emissions and air pollution, which undermines SDG 13 and public health outcomes (SDG 3), a trade-off.

Exam note: Essay questions often ask you to evaluate how a specific policy (e.g. foreign aid, trade liberalization) supports SDG progress. Always include one co-benefit and one trade-off to get full evaluation marks.

6. Common Pitfalls (and how to avoid them)

• Wrong move: Confusing comparative and absolute advantage, claiming a country that produces more of all goods cannot benefit from trade. Why students do it: They mix up total output and opportunity cost when reading trade data tables. Correct move: Always calculate opportunity cost for each good for both countries before determining trade gains; even countries with no absolute advantage always have a comparative advantage in one good.
• Wrong move: Using "appreciation" and "revaluation" interchangeably, or "depreciation" and "devaluation". Why students do it: All terms refer to a change in currency value, so they assume they are synonyms. Correct move: Only use appreciation/depreciation for floating exchange rate systems, revaluation/devaluation for fixed systems; you will lose 1 mark per incorrect use in data response questions.
• Wrong move: Equating economic growth directly with economic development, arguing that a rise in real GDP per capita always improves living standards. Why students do it: Growth is the most commonly cited economic indicator in media, so students default to it. Correct move: Explicitly distinguish growth (narrow, quantitative) from development (broad, qualitative), and give at least one example of growth without development in relevant answers.
• Wrong move: Drawing a tariff diagram with incorrectly labelled welfare loss triangles, or forgetting to label the world price line. Why students do it: They rush the diagram in exam conditions, mixing up supply and demand shifts for trade. Correct move: Always label the pre-tariff world price (Pw), post-tariff price (Pw + t), domestic supply and demand curves, import levels before and after the tariff, and the two deadweight loss triangles clearly.
• Wrong move: Claiming that SDGs are entirely independent, with no trade-offs between different targets. Why students do it: They memorize individual SDGs without thinking about real-world policymaking constraints. Correct move: Acknowledge that SDGs are interconnected, and always give one example of a trade-off and one example of a co-benefit between two SDGs when answering related essay questions.

7. Practice Questions (IB Economics SL Style)

Question 1 (4 marks, Data Response)

The table below shows output per worker per year for Chile and Argentina producing lithium and beef:

Solution 1

a) Opportunity cost of lithium = beef given up / lithium gained. For Chile: $\frac{5}{20}=0.25$ tonnes of beef per tonne of lithium. For Argentina: $\frac{8}{12}\approx 0.67$ tonnes of beef per tonne of lithium. (2 marks, 1 per correct calculation) b) Opportunity cost of 1 tonne of beef: Chile = $\frac{20}{5}=4$ tonnes lithium, Argentina = $\frac{12}{8}=1.5$ tonnes lithium. Argentina has lower opportunity cost, so it has comparative advantage in beef. (1 mark) c) Any terms of trade between 1.5 and 4 tonnes of lithium per tonne of beef, e.g. 1 tonne of beef = 2 tonnes of lithium. (1 mark)

Question 2 (3 marks, Short Answer)

The exchange rate between the US Dollar (USD) and Indian Rupee (INR) changes from 1 USD = 80 INR to 1 USD = 76 INR. a) State whether the USD has appreciated or depreciated against the INR. (1 mark) b) Explain the impact of this change on the price of Indian exports to the US. (2 marks)

Solution 2

a) The USD has depreciated against the INR, as 1 USD now buys fewer INR than before. (1 mark) b) A depreciation of the USD means US buyers need to spend more USD to buy the same amount of INR. For an Indian export priced at 800 INR, it previously cost $\frac{800}{80}=10$ USD for US buyers, and now costs $\frac{800}{76}\approx 10.53$ USD. The price of Indian exports to the US rises, so quantity demanded of Indian exports in the US is likely to fall. (2 marks)

Question 3 (4 marks, Essay Part A)

Define the Human Development Index (HDI), and explain one limitation of using HDI alone to measure a country's level of economic development.

Solution 3

The HDI is a composite economic development indicator published annually by the UN, which scores countries from 0 to 1 based on three equally weighted dimensions: health (measured by life expectancy at birth), education (measured by mean years of schooling for adults and expected years of schooling for children), and standard of living (measured by GNI per capita adjusted for purchasing power parity). (2 marks) One key limitation of HDI is that it does not account for negative externalities from economic activity, such as pollution and carbon emissions. For example, a small oil-rich country may have a very high HDI score from high GNI per capita, but high levels of air pollution from oil extraction reduce life expectancy for low-income communities and contribute to climate change, which harms long-term development prospects not captured in the HDI score. (2 marks)

8. Quick Reference Cheatsheet

9. What's Next

This Global Economy unit ties together all prior core units of the IB Economics SL syllabus: the supply and demand models from Microeconomics explain exchange rate determination and tariff welfare effects, while the macroeconomic concepts of GDP, inflation, and unemployment from the Macroeconomics unit directly inform measures of economic development and progress on SDGs. You will see questions that combine content from this unit with prior topics on both Paper 1 and Paper 2 of your final exam: for example, a data response question may ask you to use supply-demand analysis to explain the impact of a currency depreciation on a country's inflation rate, then evaluate how inflation affects progress on SDG 1 (No Poverty) for low-income households.

If you struggle with any of the calculations, diagram drawing, or evaluation frameworks covered in this guide, you can get personalized help, additional practice questions, and custom feedback on your essay drafts from Ollie at any time by visiting the homepage. You can also access more topic-specific study guides, past paper walkthroughs, and timed practice quizzes for all IB Economics SL units to prepare for your final exams.