A-Level Edexcel Economics A Aggregate Supply (AS): The UK economy

Figure 4: UK nat

Question

The UK economy

Figure 4: UK national debt as a percentage of GDP

Figure 5: UK fiscal deficit, public sector net borrowing (PSNB)

Figure 6: Labour productivity per head, selected countries

Extract C
The National Living Wage (NLW)

The Government has announced that from 2016 it will introduce a Living Wage Premium that will apply on top of the National Minimum Wage (NMW) for employees aged 25 and over and to deliver a National Living Wage (NLW) for those people. The main NMW will continue to be set for all employees aged 21 and over, so that those aged 21 to 24 will continue to be subject to it.

The effective minimum wage for the 25+ age group will therefore be over 13% higher in 2020 than the current National Minimum Wage, and results in a 3.1% wage cost overall. Firm burdens can be real GDP are estimated to be higher productivity (+0.3%) but lower average hours worked (-0.2%) and higher unemployment. Overall real GDP is forecast to fall by 1.9% as a result of the NLW. However the government provides estimates of the likely elasticity of demand for labour.

Extract D
The productivity puzzle in the UK

Since the onset of the 2007–2008 financial crisis, labour productivity growth in the UK has remained exceptionally weak. Despite some recent signs of improvement, productivity growth has been below average over the last few years. This low growth has been accompanied by rapid employment growth. In essence, output has remained static while employment rises.

The characteristics of the UK economy illustrate a sharp increase in the demand for labour, which generates excessive inflationary pressure, which makes trends and recent movements important for the conduct of monetary policy. During the initial phases of the recession, companies appeared to have acted flexibly in reducing hours and lowering levels of capacity utilisation in response to weak demand conditions. But the productiveness weakness is also reflective of the strength in employment growth over the past two years suggesting that other factors are likely to be having more persistent effects on the level of productivity. These factors are reduced investment in both physical and human capital, which have affected skills and falling in the labour market have exacerbated under-employment of skilled workers. Therefore, explain this by using the concept of an output gap.

(a) With reference to Extract D (line 18), explain the meaning of the term 'output gap' (5)

(b) With reference to Figures 4 and 5 and your own knowledge, examine the relationship between the national debt as a proportion of GDP and the fiscal deficit. (10)

(c) Discuss the likely impact of the National Living Wage on the profitability of firms. (12)

Either

(d) With reference to the information provided and your own knowledge, evaluate the likely microeconomic and macroeconomic influences on the UK’s international competitiveness.(25)

OR

(e) With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of a government policy of cutting public expenditure rather than raising taxes as a means of reducing a fiscal deficit. (25)

With reference to Extract D (line 18), explain the meaning of the term 'output gap'

With reference to Figures 4 and 5 and your own knowledge, examine the relationship between the national debt as a proportion of GDP and the fiscal deficit.

Discuss the likely impact of the National Living Wage on the profitability of firms.

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