Economic growth,
recession, demand and
supply, FDI (HL and SL)
Examination style paper 2
This case study focuses on economic growth, recession, demand and supply, and foreign direct
investment. The 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. The
maximum mark for this paper is 40.
Recession in Cambodia
The Cambodian economy has suffered badly from the economic downturn caused by the Covid19
pandemic. Table 1 sets out the GDP, GNI, GDP deflator, and population data for Cambodia’s
economy from 2017 to 2021. [Paragraph 1]
Year Nominal GDP Real GNI (PPP US$ GDP deflator Population
(PPP US$ billions) billions) (millions)
2017 22.18 20.37 95 16
2018 24.75 22.46 97 16.25
2019 27.09 25.34 99 16.5
2020 25.29 23.11 98 16.71
2021 27.21 25.53 100 16.89
The big drivers of economic growth in Cambodia are industries like tourism, construction, and
textiles and these were badly affected by the recession in 2020. Travel restrictions meant the
number of tourists visiting Cambodia fell dramatically and this reduced the demand for hotels, bars,
and restaurants. It is estimated that 3000 tourism-related firms have gone out of business and nearly
50,000 jobs have been lost. [Paragraph 2]
Cambodia’s construction boom over the last decade has slowed down dramatically in the last two
years. A great deal of Cambodia’s investment in construction was supported by foreign direct
investment (FDI) and this has decreased significantly. There are concerns that the fall in investment
spending in Cambodia will have a negative impact on the country’s potential output. [Paragraph 3]
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The important textile sector of the Cambodian economy has also seen a significant contraction with
110 factories stopping production in the first nine months of 2020 which led to 55,000 workers in
the sector losing their jobs. The textile sector has also been affected by a change in buying patterns
in their main export markets with consumers switching to cheaper garments away from branded
items. [Paragraph 4]
The Cambodian economy has also been hit by poor weather. Nineteen provinces and over 100,000
households in Cambodia have been adversely affected by floods. Agriculture has been particularly
hard-hit with heavy rain and flooding devastating nearly 170,000 hectares of rice fields. This has
caused a huge increase in the price of rice leading to significant hardship for households because the
demand for rice is price inelastic. [Paragraph 5]
The Cambodian government has struggled to compensate those affected by the flooding because of
lower tax revenues resulting from the recession in 2020. The government has seen a significant
increase in its budget deficit and national debt. [Paragraph 6]
The recession in Cambodia is seen to have had a negative impact on all stakeholders in the
Cambodian economy, but some economists see some positive aspects for the country. One view is
that the rapid growth over the last ten years had led to widening income inequality and slower
economic growth might put a brake on this. There is also a feeling that the recession might force
businesses to think about being more efficient to survive. Falling economic activity also comes with
some environmental benefits. [Paragraph 7]
Questions
a. Define the term GDP. [2] [Paragraph 1]
b. Using the data in table 1 for each year from 2017 to 2021 calculate:
(i) Real GDP. [3] [Table 1]
(ii) Rate of economic growth [2] [Table 1]
c. Using the nominal data from table 1 calculate the net property (factor) income for Cambodia in
2021. [2] [Table 1]
d. Using a PPC diagram, explain the impact a fall in Cambodia’s foreign direct investment might have
on the country’s potential output. [4] [Paragraph 3]
e. Using a demand and supply diagram, explain the impact the foreign travel restrictions imposed by
Cambodia have had on the revenues of the country’s tourism sector. [4] [Paragraph 2]
f. (i) Using a demand and supply diagram, explain the effect of the floods in Cambodia on the price of
rice in the country. [4] [Paragraph 5]
(ii) Explain why the demand for rice in Cambodia might be price inelastic. [4] [Paragraph 5]
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InThinking www.thinkib.net/Economics 2
g. Using your knowledge of economics and information from text, discuss the view that a recession is
always bad for an economy. [15]
Total [40]
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InThinking www.thinkib.net/Economics 3
