Theme 2 Application

Evaluation of multiplier

• Difficult to know the exact size of multiplier - hard to measure

• Takes time for multiplier process to feed through - time lag

• Long run multiplier effect is likely higher for developing countries than developed ones

Explain one reason why Purchasing Power Parities are used.

To improve accruacy when comparing data between countries

PPP compares cost of living.

PPP is calculated by comparing the price of a basket of comparable goods and services in different countries

Explain the process of calculating the rate of inflation in the UK using the Consumer Prices Index. Refer to the concept of weights in your answer.

• Inflation rate measures change in average prices in an economy over a year

• A representative basket of goods and services used by average households is recorded

• An expenditure survey is carried out to decide what goes in to the basket of goods

• This is used to attach weights to products based on proportion of spending.

Interventionist supply side policies

• Investment in infrastructure

• Interventions to reduce poverty

• Provision of key public and positive externality goods

• Investment in ideas

• State ownership of key businesses: nationalisation can help economy develop

• Govt spending on education

• Subsidies to promote investment

• Govt spending on healthcare

Cons of SSPs

• Bureaucracy and inefficiney

• Crowding out private sector

• Reduced incentive

• Ineffective redistribution

• Costly and inefficient state enterprise

• Income inequality

• Time lag

• Potential for gvt fialure

Market based ssps

• Reducing taxes

• Reducing benefits

• Reducing minimum wages

• Reduction in trade union power

• Privatisation / deregulation

• Trade liberalisation - reducing trade barriers

• Encourage immigration

Examples of SSPs

• Royal Mail in 2016 was privatised

• Tax free healthcare

• Kickstart scheme for unemployed

• Reforms to UK immigration system (moving to a points based system)

Example of UK inflationary spiral

UK inflation rate was 24.24% in 1975

Example of effect of inflation on consumers

UK inflation peaked at 11.1% in 2022, leading to the highest cost of living in recent years

Example of effects of inflation on workers

UK real wages fell by 2.6% in 2022, the largest decline in over a decade

Example of effect of inflation on firms

UK food producers faced input cost increases of over 15% in 2023 due to inflation, resulting in a 0.7% decrease in UK investment in Q3 2023 due to reduced animal spirits

Example of effect of inflation on government

Fiscal Drag - UK gov expected to raise an extra £40bn in tax revenue as inflation increases people’s wages and pushes them into higher tax brackets

Example of structural unemployment

Between 1980 and 2000, UK coal mining jobs fell from 230,000 to less than 10,000 as mines were closed

Example of frictional unemployment

The average UK graduate takes 3-6months to secure a job after finishing university

Example of seasonal unemployment

Employment in U.S. agriculture drops by over 250,000 jobs every winter

Example of cyclical unemployment

US unemployment doubled from 5% to 10% between 2007-2009 due to recession

Example of national well being

According to the ONS, the average life satisfaction score in the UK is 7.45/10

Wealth effect

UK house prices are 3.9% higher in 2025 than in 2024

Example of interventionist SSP

Installation of a third runway will allow for Heathrow Airport to encompass 100mn passengers yearly

Example of market based SSP

Ireland has very low corporate tax rate of 12.5%

Example of demand side policy

UK gov has suggested reducing the limit on tax-free savings accounts from £20,000 to £4,000 to encourage consumption and investment

Technological advancement (influencers of LRAS)

Installation of 5G connectivity increased internet speeds

Changes in Productivity (Influencers of LRAS)

Installation of the Elizabeth line to the London Underground reduced journey time and has Wi-Fi

Changes in Education and Skills (Influencers of LRAS)|

Government subsidisation of apprenticeships and the provision of T-Levels for free as a qualification

Changes in Migration (Influencers of LRAS)

Rishi Sunak’s skilled Visa programme granted 88,000 visas to skilled migrants

Moral Hazard

The US spent $500bn to bail out banks in 2008

National Debt

UK gov spent £102mn on servicing(i.e. paying interest on) the national debt in 2023

Time Lag

BoE raised interest rates to 5.25% in August 2023 but inflation only fell significantly in mid-2024

Multiplier Effect

The UK gov has pledged to increase defense spending to 2.5% of GDP by 2027

Benefits of Economic Growth on Consumers

Percentage of Indians living in absolute poverty fell from 45% in 1993 to below 10% in 2021

Benefits of Economic Growth on Firms

Amazon’s revenue increased by 38% in 2020

Benefits of Economic Growth on Government

US gov tax revenue increased by 19% in 2021 due to economic recovery

Environmental Policies

In 2020 the European Commission proposed a €1tn investment plan to fund the European Green Deal

Policies to Tackle Income Inequality

In 2016 the gov taxed 1% of the highest bracket of earner’s and this generated 27% of all tax revenue

Policy Conflict - Environment X Growth|

China grew at annual rate of 9.1% between 2000-2019 but contributed to 30% of global emissions by 2021

UK Response to Great Depression

Tariffs, abandoned gold standard, depreciation of 25% -> improved international competitiveness

UK Response to 2008 Financial Crisis

£375bn QE, 2.5% cut in VAT, cut base rate to 0.5%