Barriers to economic development, inflation, market failure

and exchange rates (HL and SL)

Examination style paper 2
Marksscheme

Economic growth and development in Sudan

Background

Sudan is a Sub-Saharan African country that borders Libya, Egypt, Chad, Central African Republic,
Ethiopia and Eritrea. It also has a northern border on the Red Sea, making it strategically important
in the region. The White and Blue Niles meet in Sudan’s capital, Khartoum and the surrounding area
around the Nile provide fertile land for agriculture. The north of the country is desert and less useful
for economic activity. [Paragraph 1]

Sudan’s main export are primary goods and include gold, oily seeds (peanuts and soybeans), oil and
ground nuts. The recent rise in world commodity prices has increased producers' revenues in these
industries and has also boosted Sudan’s export revenues. Sudan’s soybean producers have certainly
benefited from a rise in world demand for Soybeans. [Paragraph 2]

Inflation

Sudan has a very bad inflation problem. The country’s current rate of inflation is 149 per cent
although this is down from a high of 400 per cent two years ago. Inflation has increased to such high
levels in Sudan because of rising commodity prices, particularly food and energy cost. Inflation has
also increased because of a significant depreciation in the value of the Sudanese pound on
international currency markets. [Paragraph 3]

The high rate of inflation in Sudan has had a significant negative effect on household real incomes
which is a particular problem for people on low incomes. Economists are also concerned that high
inflation in Sudan reduces the country’s rate of investment and its international investment. Some
businesses, however, have managed to profit from inflation by over-inflation price
increases. [Paragraph 4]

Many economists have accused Sudan’s central bank of poor management of the money supply as a
reason for high inflation. The central bank reduced interest rates and increased the money supply
following the recession caused by the Covid19 pandemic. The increase in aggregate demand caused
by the increase in Sudan’s money supply caused demand-pull inflationary pressures to build in the
economy which was made worse by cost-push inflationary pressures. [Paragraph 5]

© Alex Smith
InThinking www.thinkib.net/Economics 1
Sudan macroeconomic data table

2021 2020

Economic growth 0.5% -3.6%

Unemployment 17.7% 16.8%

Inflation rate 149% 192%

Current account -$734m -$683m

Government debt percentage of GDP 259% 202%

Population 43.85m 43.91m

GNI per capita $4323 $3970

Gini coefficient 34.2 34.1

Challenges to the country

The Sudanese economy has been adversely affected by recent floods in the country. Sudan
experienced extreme flooding during its rainy season with more than 100 people killed and tens of
thousands of homes destroyed. The heavy rainfall has had a particularly bad effect on agricultural
output. [Paragraph 7]

Sudan suffers from gender inequality issues. The country’s culture follows conservative gender
norms and low labour participation rates amongst women in the country’s labour market. Sudan’s
women also suffer in the country’s education system with many girls failing to achieve their
potential in school. [Paragraph 8]

An important environmental challenge facing Sudan is industrial and household waste disposal. This
has led to severe pollution in urban areas, and it has particularly affected drinking water. Electricity
plants in Khartoum are seen as a particular problem for water pollution because polluted water used
to cool the plants drains straight into groundwater. Lack of access to clean drinking water is a
significant issue amongst Sudan’s population. The government is under pressure to improve water
quality by improving water infrastructures such as piping and water treatment plants.
Environmentalists who argue for government investment in water supply believe it will bring
significant welfare benefits. [Paragraph 9]

© Alex Smith
InThinking www.thinkib.net/Economics 2
Questions
a. (i) Define the term inflation. [2]

Inflation is the sustained increase in the general level of prices in an economy.

(ii) Define the term interest rate. [2]

An interest rate is the cost borrowers pay for borrowed funds and the reward lenders receive for
lending funds (the cost of borrowing and the reward for lending).

b. Outline why you would describe Sudan as currently experiencing disinflation. [2]

Sudan has seen its inflation rate fall from 400% to 149% which is called disinflation.

c. Using an AD/AS diagram explain how rising commodity prices leads to inflation. [4]

Rising commodity prices such as an increase in

the price of oil and gas add to business costs
which causes the SRAS curve to shift to the left
from SRAS to SRAS1. This leads to a rise in the
average price level from P to P1 and a fall in real
GDP from Y to Y1. This is cost-push inflation.

d. Using the data in the table.

(i) Calculate Sudan’s GNI in 2021 and 2020. [2]

2020: 43,910,000 x $3970 = $174,322,700,000

2021: 43,850,000 x $4323 = $189,563,550,000

(ii) State what has happened to Sudan’s GNI. [1]

It has increased.

© Alex Smith
InThinking www.thinkib.net/Economics 3
Alternative part d question (HL only)

d. The reserve asset ratio in Sudan is 0.20 and the money supply increased by $150m in 2021.

(i) Calculate the money multiplier. [1]

1/0.2 = 5

(ii) Calculate the final change in Sudan’s money supply in 2021. [2]

5 x $150m = $750m

e. Using a cost/benefit diagram explain how industrial waste that pollutes Sudan’s water supply
leads to market failure. [4]

Industrial waste is the pollution that

comes from factories and industrial
plants that are a negative externality of
production. As industrial waste pollutes
the water supply it has a negative impact
on households who use polluted water,
and this is shown in the energy market
diagram where the MSC is above MPC
and the market output Q is above the
socially efficient output Q*. The distance
Q to Q* is the overallocation of
resources in the market and the shaded
triangle shows the welfare loss.

f. Explain two reasons why the Sudan pound might have depreciated on foreign exchange
markets. [4]

The value of the Sudanese pound might have fallen because:

• There has been a fall in demand for Sudan’s exports which has reduced the demand for
Sudanese pounds.

• There has been an increase in imports into Sudan, increasing the supply of Sudanese
pounds.

© Alex Smith
InThinking www.thinkib.net/Economics 4
g. Using a demand and supply diagram, explain how a rise in world demand for Soybeans would
lead to a rise in revenue for Sudan’s soybean producers. [4]

As the demand for soybeans increases

the demand for curve shifts from D to D1
in the diagram. This means revenue will
increase from P x Q to P1 x Q1.

h. Using information from the text and your knowledge of economics, evaluate the view that
economic factors are the most significant barriers to economic development. [15]

Answers might include:

• Definition of economic development.

• An explanation is that barriers to economic development reduce the ability of the Sudanese
economy to grow and develop.

• An explanation of inflation as an economic barrier to development in Sudan in terms of

falling real incomes (‘high rate of inflation in Sudan has had a significant negative effect on
household real incomes’) which is a particular problem for people on low incomes,
redistribution of income from lenders to borrowers, reducing investment, making the
country uncompetitive on international markets (‘Economists are also concerned that high
inflation in Sudan reduces the country’s rate of investment and its international
investment’), adversely affecting productive efficiency amongst Sudan’s firms, and distorting
the country’s price mechanism. These costs of inflation mean Sudan's economy will not
operate as efficiently and achieve its potential output which will be a barrier to economic
development.

© Alex Smith
InThinking www.thinkib.net/Economics 5
 • A diagram to show how high
cost-push inflation leads to
falling real GDP which can
reduce household incomes. The
diagram could also show the
Sudanese economy operating
below full employment (YFE to
Y1) because of cost-push
inflation leading to
unemployment (16.8% to
17.7%). This would reduce
welfare and development.

• Evaluation might include discussion of the long-term (inflation reducing investment) and
short-term consequences (falling real incomes) of inflation on economic development. There
could also be a discussion of how inflation might benefit some stakeholders such as
borrowers and business profits (‘Some businesses, however, have managed to profit from
inflation by over-inflation price increases.’) This means the impact of inflation as a barrier
to development would be felt unevenly by the population in Sudan.

• There could be some discussion of geographical barriers to development such as the desert
in the north of the country (‘the north of the country is desert and less useful for economic
activity’) and recent flooding in Sudan (‘Sudanese economy has been adversely affected by
recent floods in the country’.) There could also be some discussion of political/social
barriers such as gender inequality (‘women also suffer in the country’s education system
with many girls failing to achieve their potential’).

Total [40]

© Alex Smith
InThinking www.thinkib.net/Economics 6