Economic policies and growth
in the UK economy
A2 Macro Revision
February 2009
Question
• Evaluate the extent to which government
economic policy may have influenced the
rate of growth of the UK economy in
recent years (30 marks)
• 25-27 mins to write an answer to this one
• Probably room for 2-3 sides (inc diagrams)
Stem Words
• Evaluate the extent to which government
economic policy may have influenced the
rate of growth of the UK economy in
recent years (30 marks)
Stem Words
• Evaluate the extent to which
government economic policy may have
influenced the rate of growth of the UK
economy in recent years (30 marks)
Stem Words
• Evaluate the extent to which
government economic policy may have
influenced the rate of growth of the UK
economy in recent years (30 marks)
Stem Words
• Evaluate the extent to which
government economic policy may have
influenced the rate of growth of the UK
economy in recent years (30 marks)
A Good Answer
• Will show a clear grasp of concepts
• Will understand what economic growth is
• Will show awareness of recent trends
• Will identify a range of policies
• Will appreciate the limitations of policies
• Will show an understanding of the external
context … i.e. the UK in the global economy
A Plan
Short
Opening paragraph
Define growth
Some
supporting
evidence will
always score
well
2nd paragraph
Growth
comes from….
3rd and 4th paragraphs
Identify some
policies
Keep the early
paragraphs short and
clear
5th paragraph
Flag up some
“successes”
Final paragraph
Criticise
Govt policies
“The rate of growth”
• Short term growth - % change in real GDP
• Trend growth - % change in potential GDP
• Sustainable growth
• Balanced growth
– E.g. between consumption and investment
– Between exports and imports
Where does ‘growth’ come from
• Expanding capital stock
• Technological change
• Growing ‘active’ labour force
• Improvements in human capital
• Product and process innovation
• Higher productivity
• Competitive advantage in markets
• Most A2 answers make no reference to these!
• They only discuss changes in aggregate demand!
The Cycle - Growth in UK National Output
The growth cycle
Annual percentage change in GDP at constant prices
Percent
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Source: UK Statistics Commission
UK - Potential GDP and Trend Growth
Trend growth estimates
Source: OECD World Economic Outlook
3.00
3.00
2.75
2.50
2.50
2.25
2.25
2.00
2.00
1.75
1.75
1.50
1.50
Real GDP (thousand billions)
1.4
1.3
1.4
Potential GDP
1.3
1.2
1.2
1.1
1.1
1.0
1.0
0.9
0.9
0.8
0.8
0.7
0.7
thousand billions
Percent
Trend Growth Rate
2.75
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: OECD World Economic Outlook
UK Labour Productivity and the Economic Cycle
Importance of Productivity
Annual % change in output per worker for the whole economy
5
4
5
4
Percent
Real GDP
3
3
2
2
1
1
Labour productivity
0
0
-1
-1
-2
-2
-3
-3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Reuters EcoWin
Government economic policies
• Fiscal policies
– Taxation / tax reforms
– Government spending / borrowing
• Supply-side policies
– Labour market
– Product markets
– Trade policies
• Monetary policy
– Bank of England
• Base rates
• Floating exchange rate
• No controls on credit supply
“Growth policies”
• Openness to foreign trade and investment
• Openness to net inward migration
• Tax reforms and work incentives
• Fiscal rules on borrowing and public sector investment
• Public spending on education and health
• Funding for business start-ups
• Tax credits for research and development
• Out-sourcing of monetary policy to the ‘independent’
Bank of England
Evaluate to accumulate!
• Economic growth does not happen in isolation!
– Impact of globalisation
– Favourable/unfavourable external shocks
China's Economic Growth Compared
How has China affected UK?
Annual percentage change in real national output
15.0
15.0
12.5
12.5
Percent
10.0
10.0
China
7.5
7.5
India
USA
5.0
5.0
UK
2.5
2.5
0.0
0.0
-2.5
-2.5
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
The Economist Commodity Price Index
Favourable prices until 06?
Index of Prices 2000=100
325
300
300
Industrial Metals
275
275
250
250
All Commodities
225
Index
325
225
200
200
175
175
150
150
Food
125
125
100
100
75
75
50
50
00
01
02
03
04
05
06
07
08
09
Source: Economist Commodity Price Index
Evaluate to accumulate!
• Economic growth does not happen in isolation!
– Impact of globalisation
– Favourable/unfavourable external shocks
Evaluate to accumulate!
• Economic growth does not happen in isolation!
– Impact of globalisation
– Favourable/unfavourable external shocks
• Most growth comes from the private sector not Govt
–
–
–
–
The aggregation of marginal gains!
Collaboration between businesses
Technology spill-over
Impact of FDI on labour productivity
Evaluate to accumulate!
• Economic growth does not happen in isolation!
– Impact of globalisation
– Favourable/unfavourable external shocks
• Most growth comes from the private sector not Govt
–
–
–
–
The aggregation of marginal gains!
Collaboration between businesses
Technology spill-over
Impact of FDI on labour productivity
• What has caused the growth in recent years?
– Over-consumption - falling savings ratio?
– Widening current account deficit
Evaluate to accumulate!
• Economic growth does not happen in isolation!
– Impact of globalisation
– Favourable/unfavourable external shocks
• Most growth comes from the private sector not Govt
–
–
–
–
The aggregation of marginal gains!
Collaboration between businesses
Technology spill-over
Impact of FDI on labour productivity
• What has caused the growth in recent years?
– Over-consumption - falling savings ratio?
– Widening current account deficit
• Go back to the question “evaluate the extent”
• What is happening in the economy now? !!!!!!