Barriers to economic development, inflation, market failure
and exchange rates (HL and SL)
Examination style paper 2
This case study focuses on the barriers to
economic development, inflation, market
failure, and exchange rates in Sudan. This
paper can be completed as a homework
or classwork exercise and should take
around 105 minutes. It is based on a
paper two examination question using
the new syllabus. This question has an
additional HL only question on the money
multiplier. The maximum mark for this
paper is 40.
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]
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InThinking www.thinkib.net/Economics 1
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]
Sudan macroeconomic data table
2021 2020
Economic growth 0.5% -3.6%
Unemployment 17.7% 16.8%
Inflation rate 149% 192%
Current account balance of payments -$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]
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InThinking www.thinkib.net/Economics 2
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]
Questions
a. (i) Define the term inflation. [2]
(ii) Define the term interest rate. [2]
b. Outline why you would describe Sudan as currently experiencing disinflation. [2]
c. Using an AD/AS diagram explain how rising commodity prices leads to inflation. [4]
d. Using the data in the table.
(i) Calculate Sudan’s GNI in 2021 and 2020. [2]
(ii) State what has happened to Sudan’s GNI. [1]
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]
(ii) Calculate the final change in Sudan’s money supply in 2021. [2]
e. Using a cost/benefit diagram explain how industrial waste that pollutes Sudan’s water supply
leads to market failure. [4]
f. Explain two reasons why the Sudan pound might have depreciated on foreign exchange markets.
[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]
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]
Total [40]
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InThinking www.thinkib.net/Economics 3
