Essay 2_Workbook

Chinas GDP grew at an average rate of 9.5% and 12 million new jobs were created in 2011. However, officials say that China's high-speed economic growth will not solve the country's unemployment problem.(a) Explain why a government may want to increase the GDP and lower the unemployment rate in an economy.[10](b) Discuss the view that high-speed economic growth will not solve a countrys unemployment problem.[15]

(a) Suggested Answer:Introduction:Governments often pursue real economic growth (i.e. an increase in real GDP) which also brings about an increase in employment levels. These are 2 macroeconomic aims of many governments because achieving them brings about benefits to an economy.Define an increase in GDP as an increase in the total monetary value of all goods and services produced within a country in a given year. Define a lowering of unemployment rate as a fall in the number of unemployed as a percentage of the labour force. Those who are unemployed are defined to be those who are of legal working age and are willing and able to work, but are unable to find employment.

Body:1. Explain why a government may want to increase GDP (i.e. Benefits of an increase in GDP) Economic growth may be considered the primary aim of the government as it ultimately means that the standard of living of people in a country continues to improve. With a higher GDP, the amount of goods and services that are available for consumption by people living in the country continues to increase, thereby contributing to higher economic well-being. This is all the more important as the population of a country expands, since the national output will have to be distributed among a larger population. Therefore with an increase in population, GDP needs to increase more than proportionately in order for each person to enjoy more goods and services and enjoy a higher standard of living.

With higher GDP, tax revenue increases. As income rises, people automatically pay more taxes under a progressive tax structure. This allows the government to spend more on public projects and/or provide subsidies to help the poor.

An increase in GDP may also create business optimism thereby encouraging investment. An increase in FDI may also help improve the capital and financial account of the BOP. An increase in investment not only increases AD and GDP further, it also increases LRAS and productive capacity of the economy. This results in potential growth and higher possible levels of output in the future. This increases the future SOL of the country.

As GDP increases, demand for labour increases, thus reducing the unemployment rate.

2. Explain why a government may want to lower the unemployment rate in an economy (i.e. Benefits of low unemployment rate in an economy) The problem of unemployment relates directly to the core issue in economics; scarcity the use of limited resources relatively to unlimited wants. Unemployment leads to the misallocation of resources which results in welfare loss to society due to allocative inefficiency. Unemployment means that the economy is operating at a point inside the Production Possibility Curve (PPC), and hence there is productive and allocative inefficiency. The lower the unemployment rate, the closer the economy is to producing in its PPC, the greater the level of output of the economy and the higher the welfare of a society. With a lower unemployment rate, more people are working and there will be an increase in tax revenue since those who are employed pay income tax. Assuming that those who are employed also spend more, they also pay more Goods and Services Tax.

In addition, if the government reduces spending on unemployment benefits, it may improve its budget balance and may be better able to spend on public projects and merit goods which may increase the standard of living of its citizens.

Lowering unemployment rates mean that more people are able to get jobs and this could result in lower incidence of poverty and cause less social problems.

Conclusion: The pursuit of economic growth and low unemployment should also be balanced by other objectives such as price stability and external balance.

For example, high growth in nominal national income with high inflation may mean little or no improvement in the average standard of living. Alternatively, high economic growth with severe current account deficit could mean that the country is relying heavily on borrowing from abroad and would result in a huge foreign debt to be repaid in the future. Some degree of unemployment may also be inevitable due to structural and frictional factors

Mark SchemeLevelDescriptors

Level 11-23-4Answer is mostly irrelevant with no evidence of understanding of the benefits of higher GDP or lower unemployment rates.

Answer shows some knowledge about the benefits of higher GDP and/or lower unemployment rates but these are not explained OR there are basic errors in theory.

Level 25 6Answer shows good knowledge about the benefits of higher GDP and lower unemployment rates. Answer could have emphasized the negative consequences of not achieving these macroeconomic aims rather than the benefits of achieving them.Max 5m for an answer that considers only benefits of higher GDP OR lower unemployment rates.

Level 37 10Answer shows excellent knowledge about the benefits of higher GDP AND lower unemployment rates.

Examiners comments:This was a straightforward question and many candidates could score L3 marks. However, there were also many candidates who surprisingly did not understand the requirements of the question and therefore scored low L2 or even L1 marks.

This question clearly required candidates to explain WHY a government should increase GDP and lower unemployment rates. In other words, the question required candidates to explain the BENEFITS of an increase in GDP and a fall in unemployment rates. However, some students explained in detail HOW a government could increase GDP. These students made use of AD-AS analysis to explain how autonomous increases in AD would lead to an increase in GDP and a fall in unemployment. Notice that this does not answer the question. Compounding the problem were students who showed conceptual errors when they incorrectly said that an increase in GDP and/or a fall in unemployment would lead to an increase in C which would then increase AD and NY more than proportionately because of the multiplier effect. This is incorrect because if C increases DUE to an increase in national income, this is not an autonomous increase in C but an induced increase. This is illustrated by a movement not a shift of the AD. There would not be a multiplier effect.

Candidates who focused on explaining the costs of unemployment would also be capped at L2 because that would not be directly answering the question. Some candidates also did not seem to know the benefits of an increase in GDP because they would say that the benefit of an increase in GDP was that there was economic growth. That does not explain any benefit at all. WHY would a country want economic growth? Other candidates said an increase in GDP would lead to confidence in the economy and this was beneficial because it would lead to further increases in GDP. Again, the benefit of an increase in GDP was not explained.

One common error was to state that with an increase in employment levels, the productive capacity of an economy would increase. This is incorrect. While it is true that high unemployment levels may lead to discouraged workers leaving the workforce after being unable to find a job for a long time, thereby leading to a fall in LRAS because of a smaller labour force, the converse is not true. More workers being employed is illustrated by a movement of a point from inside the PPF to a point on the PPF. It does not mean a shift of the PPF outwards! LRAS does not shift to the right because of higher employment levels!

Best answers were those that explained the benefits of BOTH an increase in GDP and a fall in unemployment rates in detail.

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