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P3

Paper 3: the policy paper

Assessment · Higher level only

Paper 3 is higher level only. It gives you two cases, each with data about a country, and asks two compulsory questions. Part (a) of each is a set of short calculations, definitions and explanations (20 marks); part (b) asks you to recommend a policy (10 marks). It rewards accuracy with numbers and the ability to turn theory into practical, evidence-based advice. This page shows how it works and gives a complete practice question with answers.

🎯What this page covers

  • The structure, timing and marking of Paper 3.
  • The calculations that come up again and again, with links to where each is taught.
  • How to write the 10-mark recommendation.
  • A full practice question on a fictional economy, with a markscheme.

📚The paper

Format
1 hour 45 minutes plus 5 minutes’ reading. Two compulsory questions, 30 marks each: 60 marks. Calculator allowed.
Weighting
30% of the HL grade.
Structure of each question
(a) several sub-parts totalling 20 marks: calculations, definitions, diagrams, short explanations. (b) “Using the data provided and your knowledge of economics, recommend a policy…”: 10 marks.

Timing: about 50 minutes per question: 30 for part (a) and 20 for part (b). Do not overspend on a 1-mark calculation.

Calculations that recur

Micro
PED, YED, PES (2.5, 2.6); consumer and producer surplus (2.3); tax incidence, revenue, subsidy cost, welfare loss (2.7, 2.8); revenue, cost and profit (2.11).
Macro
GDP, GNI, real values, per capita, growth (3.1); unemployment rate, weighted price index, inflation (3.3); Gini, tax paid and average rates (3.4); real interest rate (3.5); multiplier (3.6).
Global
exports, imports and trade revenue from diagrams (4.1); tariff, quota and subsidy effects (4.2); exchange rate conversions (4.5); balance of payments (4.6); opportunity cost and comparative advantage (4.1).

Writing the 10-mark recommendation

The command term is recommend: “present an advisable course of action with appropriate supporting evidence/reason”. The markband rewards, in rising order: identifying an appropriate policy; explaining it with relevant theory; supporting it with the data provided; and synthesis and evaluation that weighs its likely consequences and constraints. A reliable structure:

  1. The problem: state the issue using figures from the data (“inflation of 7.55% is well above the 3% target…”).
  2. The recommendation: one clear, specific policy (“the central bank should raise its policy rate by 1–1.5 percentage points over six months”), not a list.
  3. How it works: the theory and a diagram.
  4. Evidence: why the data suggest it will work here.
  5. Evaluation: side effects, stakeholders, time lags, constraints in the data, and possibly a complementary policy.
  6. Conclusion: restate the recommendation and the conditions for success.

✏️Practice question: Sembara

Sembara is a fictional middle-income country; its currency is the sembar (SMB). The data are invented for practice, in the style of recent Paper 3 questions. Allow 50 minutes.

Text. Sembara exports coffee, textiles and tourism services, and imports fuel, machinery and sugar. In 2025 inflation rose above the central bank’s 3% target, partly because the sembar depreciated from SMB 14 000 to SMB 15 400 per US dollar. Unemployment is 6.5%, much of it among former textile workers whose factories closed after automation. The government protects domestic sugar growers with a tariff of $100 per tonne and plans to raise spending on roads by $6 billion.

Table 1: Balance of payments, 2025 ($ bn)
Exports of goods 48; imports of goods 55
Exports of services 12; imports of services 9
Primary income −6; secondary income +4
Table 2: CPI, 2025 (2024 = 100)
Food: weight 35, index 109
Housing: 25, 104
Transport: 20, 115
Other: 20, 102
Table 3: GDP
2024: real GDP $300 bn (deflator 100)
2025: nominal GDP $327.6 bn, deflator 105
Table 4: Sugar market
World price $400 per tonne. At $400: domestic demand 900 000 t, domestic supply 300 000 t. With the tariff (price $500): demand 800 000 t, supply 450 000 t.
Table 5: Marginal propensities
MPS 0.15, MPT 0.20, MPM 0.25

(a) (i) Calculate Sembara’s current account balance in 2025. [2]
    (ii) Calculate the weighted price index for 2025 and the inflation rate. [3]
    (iii) Calculate real GDP in 2025 and the rate of economic growth. [2]
    (iv) Draw a diagram of the sugar market with the tariff, and calculate the government’s tariff revenue. [3]
    (v) Calculate the welfare loss caused by the tariff. [2]
    (vi) Calculate the multiplier and the eventual change in GDP from the extra road spending. [2]
    (vii) Calculate the percentage depreciation of the sembar against the US dollar, and the change in the SMB price of an imported spare part priced at US$4.20. [2]
    (viii) Define structural unemployment. [2]
    (ix) Explain how the depreciation is likely to have affected Sembara’s inflation rate. [2]
(b) Using the data provided and your knowledge of economics, recommend a policy the government could use to reduce unemployment in Sembara. [10]

Markscheme

(a)(i) (48 − 55) + (12 − 9) + (−6) + 4 = −7 + 3 − 6 + 4 [1] = −$6 bn (a deficit) [1].

(a)(ii) (35 × 109 + 25 × 104 + 20 × 115 + 20 × 102) ÷ 100 [1] = (3815 + 2600 + 2300 + 2040) ÷ 100 = 107.55 [1]; inflation = 7.55% [1].

(a)(iii) Real GDP = 327.6 ÷ 105 × 100 = $312 bn [1]; growth = (312 − 300) ÷ 300 × 100 = 4.0% [1].

(a)(iv) Diagram [1]: domestic D and S, Pw = $400, Pw + tariff = $500, quantities 300k, 450k, 800k, 900k shown, revenue rectangle. Imports with the tariff = 800 000 − 450 000 = 350 000 t [1]; revenue = $100 × 350 000 = $35 million [1]. (The diagram is the one on 4.2.)

(a)(v) Production loss ½ × (450 000 − 300 000) × 100 = $7.5 m; consumption loss ½ × (900 000 − 800 000) × 100 = $5 m [1]; total $12.5 million [1].

(a)(vi) k = 1 ÷ (0.15 + 0.20 + 0.25) = 1 ÷ 0.60 = 1.67 [1]; ΔGDP = 1.67 × 6 = $10 bn [1] (exactly 6 ÷ 0.6).

(a)(vii) Value of SMB 1 in US$: 1/14 000 → 1/15 400, a fall of 9.1% [1]. Price of the US$4.20 item: 4.20 × 14 000 = SMB 58 800 → 4.20 × 15 400 = SMB 64 680: up SMB 5880 (10%) [1].

(a)(viii) Unemployment caused by a mismatch between the skills or location of workers and the jobs available, arising from changes in the structure of the economy (for example technology or declining industries) [1 + 1].

(a)(ix) Imported goods and inputs such as fuel and machinery become more expensive in sembar [1], raising firms’ costs (SRAS shifts left: cost-push) and consumer prices; exports become cheaper abroad, raising AD (demand-pull); so inflation rose towards the 7.55% measured [1].

(b) Marked with the Paper 3 part (b) markband. A strong answer might:

  • Identify the problem with data: 6.5% unemployment, largely structural (former textile workers after automation), while inflation is 7.55%, above target, so demand-side stimulus is risky.
  • Recommend: an interventionist supply-side policy: a targeted retraining and job-matching programme for displaced textile workers (for example, subsidized courses in tourism services and machine maintenance, linked to employers), possibly funded partly by the $35 m of tariff revenue.
  • Theory and diagram: retraining reduces the skills mismatch, lowering the natural rate of unemployment and shifting LRAS right (diagram), which raises output without adding to inflation, unlike a pure demand stimulus.
  • Use of data: growth of 4.0% shows demand is not the main problem; the $6 bn road programme already adds $10 bn to GDP via the multiplier (and raises inflation risk), so further demand stimulus is not needed; a current account deficit of $6 bn argues against policies that raise imports.
  • Evaluation: time lags (months to years); cost and opportunity cost; must match courses to real vacancies (tourism is an export sector); older workers may find retraining hard; complement with job search support and regional mobility; the road spending could be timed to employ displaced workers now.
  • Conclusion: a well-targeted training programme is the most appropriate policy because the unemployment is structural and inflation is high, provided it is linked to employers and funded sustainably.
Check the numbers. Current account −6; CPI 107.55; real GDP 312 (4.0%); tariff revenue $35 m; welfare loss $12.5 m; k = 1.67 and ΔGDP $10 bn; depreciation 9.1% and a 10% rise in dollar-priced goods. Each follows directly from the tables.
Recommending a demand-side stimulus for structural unemployment. The data say the problem is a skills mismatch and inflation is already high: extra AD would mainly raise prices. Always diagnose the type of problem from the data first.

📝More Paper 3-style calculations

Each has a fuller treatment on the linked topic page.

1. At a price of $8 a firm sells 5000 units; after a price rise to $10 it sells 4600. Calculate PED and the change in total revenue.
%ΔQ = −8%; %ΔP = +25%; PED = −0.32. TR: 40 000 → 46 000: +$6000 (inelastic demand).
2. A per-unit subsidy of $2 raises output from 10 000 to 12 000 units; the price paid by consumers falls from $15 to $14. Calculate the cost of the subsidy and the price received by producers.
Cost = 2 × 12 000 = $24 000. Producers receive 14 + 2 = $16 per unit.
3. Nominal interest rate 6.5%, inflation 7.55%. Calculate the real interest rate and comment.
6.5 − 7.55 = −1.05%. Real rates are negative, so savers lose purchasing power and borrowing is effectively cheap: monetary policy is still loose despite the high nominal rate.
4. A household earns $30 000 of taxable income. Tax is 0% on the first $10 000, 10% on the next $15 000 and 20% above $25 000. Calculate tax paid and the average and marginal tax rates.
0 + 1500 + 0.20 × 5000 = $2500. Average rate = 2500 ÷ 30 000 = 8.3%; marginal rate 20%.
5. The labour force is 12.4 million and 0.93 million are unemployed. Calculate the unemployment rate.
0.93 ÷ 12.4 × 100 = 7.5%.
6. Country A can produce 40 tonnes of coffee or 20 machines; Country B 30 tonnes of coffee or 30 machines. Calculate opportunity costs and identify comparative advantage.
A: 1 machine = 2 coffee (1 coffee = 0.5 machine). B: 1 machine = 1 coffee. A has the comparative advantage in coffee (0.5 < 1 machine), B in machines (1 < 2 coffee).

🔗Go deeper — other people’s work

These are external resources, not mine. If one stops working, tell me and everything above it on this page still stands.

  • Your school’s IB coordinator — official Paper 3 past papers and markschemes.
  • Paul Hoang, Economics for the IB Diploma Paper 3 Workbook (Hodder) — many calculation drills.
  • IMF Article IV country reports — real policy recommendations built on data, the model for part (b).