IB Economics HL Portfolio

May 2013 Examinations

IB Economics HL Commentary Portfolio

Name: Meghan Kadam Candidate Number: 003563 003 School: D Y Patil International School School Code: 003563 Supervisor: Mr. Swami Prabhuling

Candidate Number: 003563 003 Examination Session: May 2013

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Portfolio Summary

DATE OF COMMENTARY

TITLE SOURCE OF EXTRACT

DATE OF EXTRACT

SECTION OF SYLLABUS

LINKED TO THE ARTICLE

WORD COUNT

9/09/2012 Chinese Protesters Accuse Solar Panel Plant of Pollution

The New York Times 18/09/2011 MICROECONOMICS 732

15/09/2012 Russia raises interest rates by 0.25%

Russia Today 14/09/2012 MACROECONOMICS 728

11/10/2012 Ukraine plans to raise import tariffs alarms US

The Guardian 26/09/2012 INTERNATIONAL ECONOMICS 658


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D Y PATIL INTERNATIONAL SCHOOL, NAGPUR

IB ECONOMICS - INTERNAL ASSESSMENT PORTFOLIO WORKSHEET MAY 2013 EXAMINATIONS

Name

Meghan Kadam

Candidate Number 003563 003

Supervisor Mr. Swami Prabhuling

Source of Extract New York Times

Title of Extract

Chinese Protesters Accuse Solar Panel Plant of Pollution

Date of Extract 18th September 2011

Date Written 9th September 2012

Word Count (650 – 750 Words)

732 words

Commentary

Number

1

Area of the syllabus your commentary

relates to

MICROECONOMICS(1)


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Extract

Chinese Protesters Accuse Solar Panel Plant of Pollution

Reuters

Protesters and police officers faced off on Saturday at a plant in the Chinese province of Zhejiang. The unrest began Thursday.

By SHARON LaFRANIERE Published: September 18, 2011

BEIJING — In a fresh indication of growing public anger over pollution, hundreds of demonstrators in the eastern Chinese province of Zhejiang on Sunday were camped outside a solar panel manufacturing plant that stands accused of contaminating a nearby river.

The New York Times The factory in Haining is owned by a Chinese company, JinkoSolar Holding Company.


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The demonstration was the latest move in a four-day protest that has sometimes turned violent.

The unrest began Thursday, when about 500 residents gathered outside the plant, in Haining, roughly 80 miles southwest of Shanghai. Some protesters stormed the five-year-old factory compound, overturning eight company vehicles, smashing windows and destroying offices. The next day, four police cars were damaged.

The factory is owned by JinkoSolar Holding Company, a Chinese firm with more than 10,000 employees that is listed on the New York Stock Exchange and reported total revenue in the second quarter of 2.3 billion renminbi, or about $360 million. Some investment analysts described the company last year as a promising upstart in the solar-energy products business.

“Return our lives to us, stay away from Jinko,” read one protest banner that was photographed by a news agency. Company officials could not be reached for comment on the unrest.

According to Chinese news reports, residents claimed runoff from solid waste laced with fluoride and improperly stored at the plant had been swept into the nearby river after heavy rainfall on Aug. 26. They said that a sea of dead fish rose to the surface, covering hundreds of square yards of water. Pigs whose sties had been washed with river water also were reported to have died. The state-run China News Agency reported that government inspectors later found that the water contained 10 times the acceptable amount of fluoride.

The Haining demonstrations follow a mass demonstration last month in Dalian, in northeast China, in which 12,000 people protested a new chemical plant that produces paraxylene, a toxic chemical used to make polyester products. Government officials promised to relocate the plant after the protest, one of China’s largest in nearly three years.

Ma Jun, the director of the nonprofit Institute of Public and Environmental Affairs in Beijing, said in an interview last month that protests over pollution are on the rise.

“People have a growing awareness of the damage caused by environmental pollution and a growing sense of rights,” he said. “There are an increasing number of cases that can be characterized as ‘not in my backyard.’ ”


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According to Chinese news reports, the Zhejiang solar-panel plant had been faulted for improper waste disposal in April, and the government had ordered the company to suspend production until it constructed a facility to store solid waste safely.

The factory sits just more than 100 yards from an elementary school, and about 300 yards from a kindergarten, reported National Business Daily, a newspaper based in Beijing. A few protesters were reported to have been arrested on charges of theft or vandalism.

In one sign of the government’s growing concern over the potential of Twitter-like microblogs in China to stir unrest, a 33-year-old resident was arrested on charges of posting false rumors that 31 people had developed cancer and that six were stricken with leukemia in the nearby village of Hongxiao, which is close to the plant and has a population of 3,300.

The authorities said only six villagers had been given a diagnosis of cancer since the start of last year.


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Commentary

This extract focuses on the concept of negative externalities of pollution from

a Chinese Photovoltaic (PV) company, Jinkosolar Holding Co. and the growing anger

demonstrated by the public against it. Externality is a consequence of an

economic activity that is experienced by unrelated third parties. An

externality can be either positive or negative1. It occurs when there is a

divergence between social and private costs and benefits. The private cost2 is the price

of an activity to the individual producer – in this case the cost of running this Solar

Panel plant in Haining, that JinkoSolar owns. In the diagram below we can see that free

market allocation (considering only the private costs to JinkoSolar) would settle at q0.

The social cost however is the total cost of an activity to both the

individual consumer/firm and rest of society as well3. Social cost is equal to the

private cost plus the externality. Negative externalities are spill-over effects that

arise from the production or consumption of goods and services that have

had no specific compensation4. With negative externalities, like pollution, the

social cost is greater than the private cost. The contamination of the nearby river(x10

Acceptable Flouride count); resulting in many Fish and Pig deaths (due to Factory’s

Solid Waste runoffs) is the negative externality in this article and its costs are borne by

society as a whole. The socially optimum allocation is at q1 where the social marginal

cost = social marginal benefit. In the diagram below, we can see that firms such as

JinkoSolar will not consider social costs and will overproduce. JinkoSolar produces too

much compared to the socially optimal level. In the diagram we can see that on units

q0q1 the social marginal cost is greater than the social marginal benefit, therefore there

is allocative inefficiency (market failure). Allocative efficiency5 is where no resources

are wasted – when no one can be made better off without making someone else worse

off.(Market Failure itself occurs due to Allocative Inefficiency)

1 Investopedia.com 2Bannock, Graham and Baxter, R.E. 2011.The Penguin Dictionary of Economics. New Delhi, IND: Penguin Books India Pvt. Ltd. 3 Federal Reserve Bank of San Fransisco Website(frbsf.org) 4 Wikipedia 5Welker, Jason and Maley, Sean.2009.Economics for the IB Diploma. England, UK: Heinmann Publishers UK


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P0

Marginal social/private benefit (MSB = MPB)

Quantity

Marginal Costs and benefits (P)

Actual equilibrium in an unfettered market)

q0

Marginal private cost (MPC) to JinkoSolar

Marginal social cost (MSC) to JinkoSolar

q1

Amount of pollution (amount of tax)

Socially optimum level

P1

Pr.cost+ other costs(Contamination of the river)

The Government’s attempt to drag the company (although by intervening and

through compulsion) to a socially optimum level of production, is clear in the article as

it asks the firm to make the solid waste disposal safer. As demonstrated in the diagram

above, if JinkoSolar reduces its pollution level from q0 to q1 (by controlling its fluoride

wastes) it moves its marginal private level of production closer to the social optimum

level of production (where MSC = MSB). The aim is to reduce the negative externality,

and regulation is one way.

However, the article suggests that JinkoSolar is least concerned with these

growing environmental problems.

Furthermore, the Government may also reduce the death burden by the means of

taxation. The indirect tax imposed, as shown in the figure below, would then lower

the supply (due to increase in its private costs) and hence, raise the price to p2 and lower

the quantity supplied to q2.This would take it closer to the Marginal Social Cost(MSC)

and hence, reduce market failure. Indirect tax is a charge levied by the State

on consumption, expenditure, privilege, or right but not

on income or property 6. This tax can then be viewed as a pollution tax, as it would

help in the reduction of JinkoSolar’s Pollution levels (represented by the fall to q2)

6 Businessdictionary.com


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While there’s no doubt that regulating and taxing JinkoSolar will help the

environment, but one might overlook the fact that the problem with these solutions is

assessing the actual value of the negative externality, more specifically how much

damage has already been done by the outflow of Flouride waste. The problem with

taxing Jinko maybe that the ones already affected by this Pollution might never be

compensated. However that being said, the tax revenue could be used to clean up some

of the pollution already produced. Furthermore, Jinkosolar can purchase tradable

permits to pollute from firms who find it easier to reduce pollution and help maintain

its reputation as a ‘promising upstart in the solar-energy products business’. Tradable

Permits is an economic policy instrument under which rights to discharge

pollution or exploit resources can be exchanged through either a free or a

controlled -permit- market7. Although, some would argue that this would only lead

to ‘marketisation’ of pollution; putting it ‘up for sale’. Thus concluding, the article

introduces good ideas, but one must realize the difficulties in assessing the value of the

negative externality.

7 http://zoology.science-dictionary.org/Fishery-Dictionary/tradable_permits


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Bibliography

1. Dorton, Ian, and Jocelyn Blink. Oxford IB Diploma Course Companion. 2nd ed. Oxford, United Kingdom: Oxford UP, 2011. Print

2. Welker, Jason, and Sean Maley. Economics for the IB Diploma. Harlow, Essex: Pearson Education Limited, 2011. Print.


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Name

Meghan Kadam

Candidate Number


Source of Extract Russia Today

Title of Extract

Russia raises interest rates by 0.25%


Date Written 15th September 2012


728 words

Commentary

Number

2


relates to

MACROECONOMICS(2)


order

Yes



Yes


Yes


count

Yes


referenced.

Yes




12

Extract

Russia raises interest rates by 0.25% Published: 14 September, 2012, 12:27

Image from Wikipedia.org

The Russian Central Bank raised all of its key interest rates by a quarter point on Thursday, in a surprise move that is hoped will tame inflation which stands at 6%, in close proximity to the Economy Ministry's annual forecast of 7%. This is the first hike since December 2011. Last week the bank said inflation had reached 6.3% year-to-year, the upper limit of the central bank's target for year-end inflation; caused by higher food prices due to a poor harvest this year, and a planned rise in utility rates. In other countries slowing growth is putting pressure on central banks to keep rates low, or cut them – as has been done recently in Brazil, India and China. Russia’s GDP growth has slowed following a fall in European demand for oil and gas. The Economy Ministry now predicts 3.5% growth for the full year, with second-half growth below 3%. Despite an economic slowdown, the Russian government is more concerned about rising prices, leading to the central bank’s failure to meet its inflation target of 5-6 percent for 2012. "The decision was made in view of prices and expected inflation growth, which increases the risks of exceeding the medium-term inflation targets of the Bank of Russia," the bank said after its monthly policy meeting.


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Earlier in September Economy Minister Andrey Belousov warned against raising interest rates to tame inflation, because non-food inflation remains within earlier targets. Some economists had been saying before the decision that a failure to raise rates could be seen as a concession to business lobbies who benefit from cheaper lending and a weaker rouble. The currency market reacted almost immediately to the rate increase with the dollar depreciating against the rouble within a range of 0.5%. “For the economic situation it is not a very positive factor, as an increase in interest rates raises the cost of borrowing for businesses”, says Oleg Podymnikov, Head of Investor Operations at Lanta-Bank.


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Commentary This extract deals with several macroeconomic concepts, notably Inflation. Inflation is

an increase in the average price level of goods and services in a nation over

time8. In Russia (and almost all the countries), these changes in price levels are

monitored(monthly or quarterly) using the Consumer Price Index(CPI). The CPI is a

tool, which measures the prices of consumer goods and services and is used

by governments(here, the Russian Government) to measure changes in the price

level of the products that people in an economy(Russian Economy in this case)

may buy in a particular time period. As the article says, the inflation stood at 6%,

in close proximity to Government’s annual forecast of 7%.It also mentions that just a

week earlier, it stood around 6.3% year to year, exactly equalling the Upper limit of the

Central Bank’s target for year end inflation. This was due to high increase in food prices;

experienced because of poor harvest and a planned rise in Utility rates(= Houshold

good’s prices). Thus, the Russian economy has miserably failed to achieve one of the five

major macroeconomic goals –Price Stability (as Inflation is underway)

All this has led to a decrease in money’s ‘real’ value or a fall in the purchasing power

of Russians. Purchasing Power is the amount of money by which good(s) can

be bought.9This is highly undesirable as this will widen the gap between the rich and

the poor and make the Russian economy fall.(This is because the country’s poor will

either have to spend more on necessities, like food or clothing; making them poorer, or

would have to consume the lesser of it, like medicines ; leading to a fall in their

productivity and efficiency levels)

It may also lead to Labour unrest(and eventually to Political instability) as their pay

might not keep up with the ‘ever rising’ rate of inflation. Furthermore, the international

competitiveness of Domestically produced goods may hamper, as exports may become

expensive and imported cheaper substitutes ( Eg. Chinese goods and toys) may flood in

the domestic market. This will worsen Russia’s trade balance(= the difference between

the imports and exports of a country in a given time period) and could also lead to

Unemployment(=existence of a section of the labour force able and willing to work but

8 Welker, Jason and Maley, Sean.2009.Economics for the IB Diploma. England, UK: Heinmann Publishers UK 9 Bannock, Graham and Baxter, R.E. 2011.The Penguin Dictionary of Economics. New Delhi, IND: Penguin Books India Pvt. Ltd.


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unable to find gainful employment) in the Domestic market, including the Export

industries.

Additionally, Supply Shocks(= Events which lead to a sudden price change of a

commodity or a service) such as deficient supply due to Natural calamities or various

Government imposed restrictions, would lead to a Cost-Push Inflation(defined as an

Inflation induced by a rise in the costs of production of goods and services10)

As shown in the diagram, this would lead to an average level increase(in the short run)

from P1 to P2, following a leftward shift of Short Run Aggregate Supply(SRAS) curve

from SRAS1 to SRAS2.

Taking all of these (and many more!) aspects into consideration, the Russian Central

Bank must have increased the interest rates so as reduce this ‘ever climbing’ rate of

inflation(about 6%) in spite of slow GDP growth(3.5%, with about less than 3% in the

second quarter), which has supposedly taken place due to a fall in demand for Oil and

Gas across the Europe.

10 Bannock, Graham and Baxter, R.E. 2011.The Penguin Dictionary of Economics. New Delhi, IND: Penguin Books India Pvt. Ltd.


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This can be seen in the diagram below.

Oil - consumption (bbl/day)

http://www.indexmundi.com/g/g.aspx?v=91&c=rs&l=en

The above diagram indicates that there is a sharp decrease in Oil’s consumption across

Russia since the year 2010. This may be due to increasing awareness about Oil’s

depletion as a resource and its hazards. Sustainable , alternative technologies also play a

key role in this.

However, the inflation is Russia(as per the article) was specifically a food inflation, with

non food inflation being under control. Thus, such a situation could have been

controlled using better alternatives like undertaking various Supply-side measures like

importing food grains or supplying these at subsidized rates through the Public

Distribution System(PDS).

The Russian Government seems unaware of such measures, and this lack of knowledge,

implementation and the ineffectiveness of the decision taken; reflects the Russian

Government’s state, which is reputed to be heavily corrupt and one which often

transcends its political boundaries to safeguard ‘greater’ interests.11 This has led to its

11 Refer to Russian Economist’s warnings in the article


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failure of not meeting its annual inflationary target(5- 6% for 2012) and hence, is a

subject of argument and dispute amongst its fraternity.

Bibliography

1. Dorton, Ian, and Jocelyn Blink. IB Diploma Course Companion: Economics. 2nd ed. Oxford, United Kingdom: Oxford UP, 2011. Print


3. Lewis, Antony. 2010. World Web 6.3. San Francisco, CA: Princeton USA


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Name

Meghan Kadam

Candidate Number 003563 003


Source of Extract The Guardian

Title of Extract

Ukraine plan to raise import tariffs on range of goods alarms US


Date Written 15th November 2012


658 words

Commentary

Number

3


relates to

INTERNATIONAL ECONOMICS(3)


order

Yes



Yes


Yes


count

Yes


referenced.

Yes


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Extract

Ukraine plan to raise import tariffs on range of goods alarms US Protectionist measures cause concern at World Trade Organisation over effect on global trading system

Larry Elliott, economics editor The Guardian, Wednesday 26 September 2012 19.48 BST

Grain harvest in Chernigov, Ukraine. Imported agricultural machinery is on the list of goods facing higher tariffs imposed by the eastern European country. Photograph: Genia Savilov/AFP/Getty Images

The US on Wednesday reacted with alarm to Ukraine's plan to introduce sweeping protectionist measures and warned that the actions by the eastern European country could have damaging consequences for the entire global trading system. Amid growing concerns that a synchronised slowdown in the global economy could prompt countries to erect trade barriers, the government in Kiev announced this week that it was raising tariffs on more than 350 goods affecting imports worth $4.6bn (£2.9bn).

Trade diplomats in Geneva fear that the changes sought by Ukraine to products including cars, trucks, agricultural machinery, meat, flowers, fruit, vegetables, washing machines and syringes, will be seen as an attempt to renegotiate the terms of its membership of the World Trade Organisation, with knock-on effects in other countries.

"We are very concerned about the systemic implications of what Ukraine is contemplating, and I would say that there's a broad diversity of WTO members that are concerned about what Ukraine is contemplating," said Michael Punke, the US ambassador to the WTO, in Geneva. "To give you an example of how broad that diversity is, this is an issue where I anticipate we'll be working very closely with countries like Brazil to address our concerns."


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Officials in Geneva said Ukraine was entitled to seek increases in tariffs under an obscure part of the WTO rule book, Article 28 of the General Agreement on Tariffs and Trade, which in the past has been used rarely and usually for fewer than 10 tariffs at a time.

Ukraine will now have to enter into negotiations with other WTO members, which will seek compensation for the proposed changes. But given Ukraine's relatively small range of exported products, the EU fears that talks may fail and that Kiev may raise tariffs unilaterally, prompting retaliatory measures.

Russia, Ukraine's neighbour, has only just joined the WTO after long and difficult negotiations on its terms of entry and will be one of the countries looking for a swift resolution to the current problem.

Pascal Lamy, director-general of the WTO, has repeatedly warned of the risks of a drift into tit-for-tat protectionism since the financial crisis first erupted five years ago, and Ukraine's move comes at a time when growing tensions have been illustrated by a trade spat between the US and China.


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Commentary

This extract deals with the international economic concept of Protectionism.

Protectionism is the theory or practice of shielding a country’s domestic

industries from foreign competition by taxing imports.12 The article says that

Ukraine, an eastern European country has raised its import tariffs on more than 350

goods, worth about $4.6 billion, to which the US has opposed strongly. A Tariff is an

import tax placed on a good produced abroad13. This is largely due to the fact

that Ukraine is the 61st largest export market for the USA, with a trade surplus of $645

million in 2011. Trade Surplus is the amount by which the value of a country's

exports exceeds the cost of its imports.14 An increase in tariffs would drastically

reduce profits; thus leading to a sharp fall in USA’s Trade Surplus. This would have a

damaging effect on its economy. This can be seen in the diagram below.

12 http://oxforddictionaries.com/definition/english/protectionism 13 Pearson 14 Google


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As shown in the diagram, imposition of tariffs on imported goods would lead its price

hike (from PW to PWT) even though the supply would rise (from SW to SWT) This would

naturally lead a fall in Ukrainian imports. Thus, constricting the US export market.

On the other hand, the worldwide recession (= a period of reduced economic

activity15) is prompting countries to erect trade barriers to protect its domestic

industries. So, such actions are bound to have far reaching implications that are

damaging to Free Trade.16 Free trade is the unrestricted purchase and sale of

goods and services between countries without the imposition of constraints

such as tariffs, duties and quotas17. Thus, the Ukrainian government’s decision of

introducing protectionist measures might very well be its consequence, as it would not

only be an increased source of revenue for the government, but would also keep its

domestic goods competitively priced.

Governments and bureaucrats worldwide fear that its negotiations with other WTO

member countries might fail, since Ukraine has a very small indigenous market for

exports. This would result in a unilateral tariff rise, which may give rise to a Trade War.

Trade war is a situation in which countries try to damage each other's

trade, typically by the imposition of tariffs or quota restrictions. Head of

Research at Oxfam GB, Duncan Green, in his book ‘ From Poverty to Power’ says, “All

countries must eschew protectionism or risk a disastrous return to the trade wars that

triggered the Great Depression.”18 This highlights the graveness of the issue.

Furthermore, the fact that Ukraine’s neighbour, Russia (both formerly part of the USSR)

has just joined the WTO and that US is already in a trade spat with China would only

fuel the cause.19 It might as well be the case that Ukraine sees American imports as a

form of dumping by USA to possibly destroy Ukrainian domestic competition to

continue its dominance over the world market. Dumping is the selling of goods to

another country at a price below the original domestic production costs.20

15 http://www.merriam-webster.com/dictionary/recession 16 Refer to Punke’s lines in the Article 17 Investopedia 18 http://www.voxeu.org/debates/commentaries/protectionism-good-or-bad-it-depends 19 Refer to Lamy’s lines in the Article 20 (Pearson)


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Although much hyped and deemed illegal by other member countries, WTO officials

claim that Ukraine has the right to seek such increases in tariffs under an ‘obscure’ part

of the WTO rule book, which has been rarely used in the past.21

In my view, it is highly unprofessional on Ukraine’s part to do such a thing; given the

fact that even its neighbor Russia, a traditional US rival, has come to terms with the

WTO. I personally believe that being an import dependent nation all these years, it has

an obligation towards its partner countries, especially USA. Therefore, it should be

courteous enough not to drastically increase the import tariffs and bring an abrupt to its

long term goodwill as well as trade relationships. Further, this might develop tensions

between itself and the WTO, leading to worldwide repercussions. This can even

culminate into a Trade War as mentioned above; which would be potentially damaging

to the Ukrainian economy in the long run.

Bibliography

1. Dorton, Ian, and Jocelyn Blink. Oxford IB Diploma Course Companion. 2nd ed. Oxford, United Kingdom: Oxford UP, 2011. Print


21 Refer to Article 28, General Agreements on Tariffs and Trade

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