RVHS_H1_ECONS_Question 1 The UK Productivity Puzzle Answers

Question 1 The UK Productivity Puzzle – Did productivity really fall? (a) (i) With reference to Figure 1, state the relationship between output growth and employment growth in the UK from 2000 to 2009. [1]  positive / direct relationship / move in tandem (a) (ii) Suggest possible reasons for this relationship. [2]  Higher output growth => more workers needed => higher employment growth  higher employment growth => more people have jobs => higher income => higher C => higher AD => higher output growth (b) (i) State what happened to the level of productivity observed in the UK economy during the “job-rich depression”. [1]  During a “job-rich depression”, output falls yet employment stays strong. Hence, output per worker falls, leading to a fall in productivity observed. (b) (ii) Explain why this “job-rich depression” might not currently be a concern for the British government. [6]  Rising employment despite falling output => could avoid problems such as falling SOL, loss of skills, fiscal costs, social costs, etc typically associated with recessions  Rising employment => could potentially boost C and support economic recovery (AD)  If the situation is mainly caused by labour hoarding and a flexible labour market, output can increase quickly when dd recovers => it can propel the economy forward when it recovers eventually  Fall in productivity is not alarming if it is mainly due to difficulty in winning contracts / delay in investment / labour hoarding during a slump => can be resolved on its own once the economy recovers (c) Explain what is meant by “we need strong productivity in the long term to raise living standards and to maintain our competitiveness”. [4]  ↑productivity => ↑LRAS => sustained non-inflationary growth (↑NY) => higher SOL (material or non-material elaborate)  ↑productivity => ↓COP or greater value-addedness => more competitive export or more competitive FDI destination => maintain international competitiveness (d) (i) Identify the evidence that suggests Britain’s economic slump in 2008-2009 could turn out to be a severe one. [3]  Figure 2: weak real wage growth – negative growth in Q3 2008 & Q1 2009  Figure 3: substantial fall in GDP across Eurozone, and in US  Extract 2: banks struggling to finance new projects due to financial crisis (d) (ii) Using AD/AS analysis, explain how the above evidence eventually led to a severe slump in the UK. [5]  Figure 2: weak real wage growth – negative growth in Q3 2008 & Q1 2009 => fall in purchasing power => fall in C

 Figure 3: substantial fall in GDP across Eurozone, UK and US => fall in foreign income => fall in X + worsened outlook => fall in C & I  Extract 2: banks struggling to finance new projects due to financial crisis => fall in I  Diagram: fall in AD=> fall in NY (d) (iii) In view of the reasons above, discuss alternative policies the government might consider adopting to stimulate the British