A Venn diagram of exam probabilities

Both mock exams and the real thing are swiftly approaching. Time for exam strategy and the fine-honing of your economics skills. The basis of this is invariably to go through past exam papers and do the probability calculations.

Yes, I know, you are probably fed up with maths and any form of logical relationship. No worries, my intention here is simply to (mis-) use the concept of a Venn diagram to illustrate that there is considerable overlap in core syllabus areas when one ‘does the maths’ and looks at past papers. Basically there is considerable overlap over time in what is asked for in exams.

Now, don’t for a minute think that this is my teaching strategy – far from it! I put inordinate effort into education and this means I spend considerable time outside the confines of the syllabus. It bears stating, once again, that there is considerable haziness amongst both students and teachers as to the intended purpose of the IB syllabus; it does NOT ‘bind’ or ‘limit’ what teachers are allowed to teach or students are allowed to use in exams! Instead, the purpose of the syllabus is to limit what examiners are allowed to ask! Big difference.

The simple illustration above shows how I view exam strategy for my students. The four syllabus areas will be covered in Paper 1 (micro and macro) and Paper 2 (trade and development). If one takes a few minutes to go through past exam questions, there is a distinct ‘pattern’ or overlap – this is the star-shaped area in the middle (note: not to scale!) that you might focus on given the time constraints of revising for six subjects.

What I’ve basically tried to do is put together a revision list that I can get through in class in two weeks – circa 8 hours in class. Below, somewhat tiresomely iterated, are the core areas I focus on in revision. For some additional depth, I include my complete revision list here.

Section 1, micro

• Non-price variables affecting supply and demand; focus on price mechanism as a signal in allocating resources

• Consumer surplus (CS), producer surplus (PS) and societal surplus (SS); focus on linking to gross and net loss of CS + PS and thus the dead-weight loss (net loss of CS and PS)

• Price elasticities: focus on PED (total revenue, incidence of taxes and subsidies) and CPED (effects of price changes on substitutes/complements)

• Minimum and maximum prices: focus on SR outcomes (excess supply or demand), secondary effects (govt repurchasing scheme or black markets), additional govt responses (govt dumping or queue system), LR possibilities (effects of dumping on LDCs or market exit and higher black market price)

• Market failure (four diagrams): focus on linking each diagram to forms of market failure and possible govt responses and evaluation hereof

And that’s it. Yes, I know; “…but how about theory of the firm?!” Basically, I don’t revise theory of the firm (ToF). It’s 100% avoidable on your exams and if a student is competent in this area I strongly recommend he/she pick the ToF question. If not; do the other micro question which will probably be about taxes, maximum/minimum prices or market failure.

Section 2, macro

• Basic macro objectives: how they are measured (e.g. what metrics are used) and the trade-offs involved (i.e. inflation & unemployment or growth & sustainability)

• O = E = Y and basic methods of accounting for GDP, going from GDP to GNI, real vs nominal, weaknesses of GDP figures

• AD: focus on components and shifts (non-policy variables such as expectations of households and firms and foreign variables such as exchange rate and trade partners’ income)

• AS: Keynesian and monetarist versions, links to SR and LR Phillips curve

• Growth: D-side methods and S-side, consequences of growth, trade-offs

• Unemployment: definition, equilibrium (full) employment, dis-equilibrium unemployment (demand-deficient and real wage), social and economic costs of unemployment

• Price stability: terminology (i.e. inflation/deflation/disinflation/reflation), strong focus on how the CPI is compiled and used and NOT the same as the GDP deflator, three main ways inflation arises, depth for HL in the SR and LR Phillips curve

• Income distribution: Lorenz curve and Gini, methods to improve income distribution (taxes, subsidies, transfer payments, services in kind)

• Fiscal policy: links to AD and macro objectives, govt budget, discretionary and automatic spending, D-side and links to business cycle (inflationary/deflationary gaps – use the monetarist model)

• Monetary policy: interest and money supply, links to AD and macro objectives

• Supply-side policies: strong focus on differentiating between market based policies (i.e. competition/tax/labour policies) and interventionist policies (re-education and re-skilling, R&D, infrastructure)

• Keynesian-monetarist/new-classical debate – I put some real effort into four evaluative points here: I) The basic view of markets and thus the shape of the Keynesian AS curve vs. the monetarist LRAS and SRAS curves; II) the issue of whether there is a SR trade-off between inflation and unemployment; III) the possibility of multiplicative effects in D-side, and; IV) the possibility of crowding out.

Section 3, trade

• Reasons for trade: resource endowment, economies of scale and full diagrammatic illustration of comparative advantage.

• Barriers to trade: tariffs/quotas/subsidies and diagrams – these are some of the most commonly used diagrams in the syllabus (alongside simple supply and demand and AS-AD)

• Arguments for protectionism: employment argument, source of govt revenue, health and safety, infant industry argument (with diagram)

• Arguments against protectionism: allocative inefficiency, creates comfort zones for domestic firms leading to lack of innovation and productivity increases, higher prices, forward linkage effects, monopolies, danger of reciprocal barriers to trade

• Exchange rates: floating and fixed (with diagrams), main influences on S and D for a currency, Marshall-Lerner and J-curve, links to balance of payments, links to AD, links to terms of trade

• Balance of payments: current and capital/financial accounts – scenarios linked to exchange rates and AD

• Economic integration: FTA (Nafta) – customs union (within the EU) – common market (EU) – further economic integration (Euro-zone) and benefits/costs of common currency, trade creation/diversion (with diagrams)

• Terms of trade (ToT): index of ToT, links to price of exports/imports and exchange rate, links to primary goods producers (LDCs) and deteriorating ToT over past 30 years

Section 4, development

A good 60% of this section is basically revision of macro and trade. I spend little time here – the focus is mainly on defining development in terms of standard of living metrics (HDI) and linking to a ‘pro-development’ cycle in addressing the exam question.

• Pro-development cycle: ↑Y → ↑ S → ↑ I → ↑ productivity → ↑ Y…etc.. and also that ↑Y → ↑tax revenue for govt → ↑G → ↑public and merit goods → ↑productivity → ↑ Y…etc

• Import substitution (India, pre-1992) and export promotion (Asian Tigers) – successes and failures

• Globalisation issues: FDI, economies of scale, export revenue, ‘race to the bottom’, possible destruction of domestic markets by MNCs

• Aid: types, debt crisis of 1980s and ’90’s, IMF structural adjustment

• Market orientation (trade liberalisation + freely floating exchange rates + supply-side policies) vs interventionism (govt planning + ownership + allocation)