(2019) 8823 H1 Econs Paper CSQ 2 Suggested Answers by Mr Eugene Toh (A Level Economics Tutor)

(2019) A Level H1 Econs Paper 1 CSQ Q2

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Suggested Answers Outline to 2019 A Level 8823 H1 Paper CSQ2

a.         Real GDP growth rate, average over previous 5 years – GDP, after accounting for inflation, has increased by 2.6% annually over the last 5 years, which would likely mean that individuals in United States would have seen an increase in incomes, allowing them to purchase more goods & services, improving their material standard of living.

 However, on its own, this indicator does not account for population growth, thus we should look also look at population growth rate and deduct the population growth rate from real GDP growth rate to get an accurate depiction of living standards. 

GDP per capita – at US$54,400 in 2015, this is higher than the OECD average of US$39,200, which suggests that individuals in United States were able to buy more goods & services giving rise to a higher material standard of living than the average OECD country. 

However, such a figure does not take into account the difference in purchasing power & cost of living in United States compared to the average OECD country.

Unemployment rate – at 5.3%, this is considered to be near full employment for a large country such as United States. Extract suggests that the lowest unemployment rate was at 4% in 2000 which could be the ‘natural rate of unemployment’ for the United States. A low unemployment rate could suggest better living standards as individuals are able to buy goods & services with income earned while employed compared to being unemployed. Low unemployment rate is also correlated with greater social stability and lower crime rates which improves non-material standard of living.

However, unemployment rate needs to be reflecting a fall for an improvement of living standards to be considered to be occurring, which such data is not available in Table 1.

b.         

1.     From Table 1 - Income inequality is rising as GINI coefficient increases from 1979 to 2013 (extract 6 – 0.397 in 1967 to 0.476 in 2013)

2.     Very high wealth inequality – in 2013, average wealth of top 5% is 24 times greater than wealth of median household.

3.     Wealth inequality is greater than income inequality – stated in Extract 6

ci.        

Demand pull inflation

1.     As economy is operating at near full employment level (lower rates of unemployment)

2.     Any increase in AD will likely bring about an increase in general price levels from P0 to P1, bringing about demand pull inflation as seen in the figure 1 below.

3.     This is because labour resources get increasingly scarce as the economy approaches full employment level, prices of resources will get bidded up as employers / firms compete for the increasingly scarce resources, causing an increase in prices.

Cost push inflation

1.     As the economy approaches full employment level, an increase in wages of workers is expected.

2.     Such as increase in wages without corresponding rise in productivity will cause a leftward shift of the SRAS curve as reflected in figure 2 below

3.     As firms pass on the higher cost of production to consumers in terms of higher prices, general price levels increase from P0 to P1

cii.       Table 2 does appear to support the findings, given that

1.     From 2010 to 2016, a fall unemployment from 9.3% to 4.7% which could be explained by an increase in AD leading to economic growth of between 1.5% to 2.9%. In the same time period, we see inflation present throughout, of between 0.7% to 3%

Table 2 also does not appear to support the findings given that,

2.     An unemployment rate of 9.9% in 2009 is considered high, which we should expect to see no inflation, but, inflation was present at 2.7% and was the highest in years

3.     The same was repeated in 2010 with an unemployment rate of 9.3% and an inflation rate of 1.5%

What could likely explain the above would be that the inflation present in 2009 and 2010 were caused by other reasons such as

1.     Imported inflation caused by a weaker USD

2.     Cost push inflation caused by higher cost of oil

d.         

1.     Unemployment rate in mid 2017 was at a 16-year low – which means that the economy was likely already operating at full employment level – exposing the risk of demand-pull inflation

2.     U.S. government likely to carry out discretionary expansionary fiscal policy via personal income tax cuts and increase infrastructure investment which will increase Consumption spending & Government expenditure (C) & (G) which will increase AD

3.     Under such circumstances above, there is an expectation of demand-pull inflation.

4.     The US Federal Reserve thus proposed a rise in interest rates to pre-emptively address the possible & likely demand pull inflation since increasing interest rates will as part of contractionary monetary policy will discourage consumption spending & investment spending due to higher interest rates making loans more expensive to maintain à Fall in AD à reduce demand pull inflation

e.         Why accelerating changes in technology might be expected to result In worsening unemployment

1.     Accelerating changes in technology might result in structural unemployment

2.     Structural unemployment refers to a situation where there is a mismatch between jobs available in the economy and the skills of umemployed workers

3.     With accelerating changes in technology, certain jobs become obsolete as repetitive tasks can be more efficiently performed by machines and at a lower cost at times. For example, cashiers at supermarkets and fast-food restaurants are replaced by self-help machines

4.     At the same time, there will be demand for programming jobs associated with the programming of such machines.

5.     While there are jobs vacancies available, the workers who are displaced by machines do not have the necessary skills to take up such jobs, resulting in structural unemployment

Why accelerating changes in technology might be expected to result in re-distributional consequences

1.     As an extension of the above explanation, we expect that there will be an increase in demand for high-skilled jobs such as computer programmers à increase in wages for high-skilled workers

2.     Correspondingly there will be an increase in supply of displaced, low-skilled workers and yet simultaneously a decrease in demand for such low-skilled workers à decrease in wages for low-skilled workers

3.     This causes a widening income disparity between high skilled and low skilled workers

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