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 economy. [8] Exp. FP  increase G: giving transfers to households to increase their purchasing power=>increase C, building physical & digital infrastructure also helps to encourage I  reduce T: PIT rebate => higher disposable income => higher C, CIT rebate => higher after-tax profit => greater incentive & ability to invest Limitations:  time lags  fiscal position  poor outlook => C & I may not increase, k also may be small due to low MPC Policies to promote lending  QE: govt buys up bad debts from banks to give them more cash to lend out to new projects => increase I  Risk-sharing b/w govt and banks to reduce banks’ risk of lending => encourage them to lend => increase I  Lower i/r not accepted since qn asks for “alternative” policies Limitations:  Poor outlook may still prevent banks from lending  Fiscal position ERP  Weaken British Pound => cheaper exports in foreign currency, more expensive imports in Pound => increase NX if MLC satisfied Limitations:  May not be sufficient to offset the fall in DD for Xs  J curve effect => worsen slump in short run SSP  Invest in infrastructure & skills => encourage more I  Productivity might have really fallen => fall in LRAS => SSP to increase LRAS to enable actual growth without inflation L3 Developed discussion on at least 2 alternative policies that the UK government might consider adopting to stimulate the British economy. 7-8 L2 Undeveloped discussion. 4-6 L1 Smattering of valid points. 1-3