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(a) (1) With reference to Figure 1, explain how the growth rate in the third quarter of 2012 can be "the strongest in five years" (Extract 1, line 2) while the economy is "smaller than it was before the financial crisis hit in 2008" (Extract 1, line 3). (6) (i1) With reference to Extract 1 and your own knowledge, explain two likely benefits of economic growth. (8) (iii) Using the concept of the multiplier, assess the contribution of "one-off factors such as the Queen's Diamond Jubilee and the London Olympics" (Extract 1, lines 3 and 4) to economic growth. (12) (b) (1) Explain how 'UK ILO unemployment' (Extract 2, line 1) is measured. (4) (ii) Explain two possible problems for the UK economy of 35% of the unemployed being "out of work for more than 12 months" (Extract 2, lines 5 - 6). (8) "(ii) According to Extract 2 (lines 11 - 12) the UK has a "poorer productivity performance than the average for developed countries." Assess the likely impact of the UK's relatively poor productivity performance on its economy. (12) "(c) With reference to the information provided and your own knowledge, evaluate the policies that the UK government could adopt to improve productivity. (30)Question 6 Growth, Productivity and Unemployment Figure 1 UK Growth, percentage change in real GDP from previous quarter 10 05 -05 -1.0 -15 -2.0 -25 2006 07 08 09 10 11 12 Extract 1 Exceptional effects on growth The 1% growth rate in real GDP in the third quarter of 2012 from the previous quarter was the strongest in five years. However, the economy is still no bigger than it was a year ago, and is 3% smaller than it was before the financial crisis hit in 2008. One-off factors such as the Queen's Diamond Jubilee and the London Olympics also improved the third quarter figure, which was better than the 0.6% economists predicted. But few believed the better data signalled the start of a strong economic recovery. Employment is rising, real disposable incomes are recovering and retail sales are picking up. However, the global economy is slowing, the government plans to reduce its budget deficit further next year and confidence among businesses and households remains fragile 10 (Source for Figure 1 and Extract 1: 0 The Financial Times Led 2013) Extract 2 UK unemployment and employment UK ILO unemployment is at 2.51 million, up 55% since 2007, a similar increase to the US and the eurozone, according to the OECD. That eurozone average disguises huge variations, however, from rises of well over 100% in Greece and Spain to a fall of 33% in Germany. In past recessions, the proportion of the unemployed out of work for more than 12 months in the UK has typically increased to 40-50%. This time it has reached only 35%. This has been partly attributed to the welfare-to-work policies of current and previous governments which try to push people quickly back into whatever jobs are available. The UK's strength in creating jobs, taking the number employed back above the pre- crisis level, has been balanced by concern about the quality of those jobs - a lot of 10 them self-employed, part-time or temporary - and a poorer productivity performance than the average for developed countries. (Source for Figure 1 and Extract 2: 0 stats.need.org)(a) With reference to Figure 1, (1) explain what is meant by the term economic growth. (4) (ii) outline how the Consumer Price Index is calculated. (4) (iii) discuss two reasons why economic growth is inadequate as a measure of changes in living standards over time. (12) (b) (i) Does Spain's current account balance as shown in Figure 1 represent a net injection or withdrawal? Explain your answer. (4) (ii) Outline two possible reasons for Spain's current account balance, with reference to the data in Figure 1. (6) (c) With reference to Figures 1 and 2, (i) explain what is meant by the term Human Development Index. (4) "(ii) evaluate the advantages of the HDI in making comparisons between countries. (16) "(d) Evaluate the use of supply side policies to achieve economic growth. (30)Question 5 Question 1 Measures of economic performance Figure 1 Measures of economic performance, selected developed countries Inflation Current account Economic Human growth % (% increase in of the Balance of Payments Development (2006) CPI) Index (HDI) value (2006) (% of GDP) (2006) (2005) France 2.0 1.8 1.8 0.952 Germany 2.0 1.8 5.1 0.935 Spain 2.7 2.8 -10.2 0.949 United Kingdom 2.3 2.0 -3.6 0.946 Source: www.imf.org (2007 report) and www.undp.org (2007 report of HDI based on 2005 values) Figure 2 School enrolment figures and HDI ranks, selected developed and developing economies (2005) Economy Combined HDI Rank enrolment ratio for primary and secondary education (%) France 99 10 Spain 98.5 13 United Kingdom 97 16 Pakistan 44.5 136 Kenya 60.5 148 Ethiopia 44.5 169 Niger 24 174 Source: http://hdrundp.org/en/statistics (2007 report based on 2005 figures)(a) (i) Explain the difference between income and wealth, as referred to in Extract 1. (4) (ii) With reference to Extract 1 and using the circular flow of income model, explain the likely impact on aggregate demand of a fall in investment. (8) (iii) With reference to Extract 2, assess the likely impact on the UK economy of the fall in house prices since 2007. (12) (b) (i) Explain one reason why a rate of inflation consistently above the 2% target (Extract 3, lines 6-7) might be a cause for concern. (6) (il) With reference to Extract 3, explain why the UK's inflation rate was "expected to increase in 2013" (Extract 3, line 1). (8) *(ill) Assess the likely impact on the UK economy of the further expansionary monetary policy referred to in Extract 3, lines 14-17. Use an aggregate demand and aggregate supply diagram in your answer. (12) "(c) With reference to paragraph 1 of Extract 3 and your own knowledge, evaluate the use of supply side policies as a means of controlling UK inflation. (30)Question 4 UK Income, House Prices and Government Policy Extract 1 Falling wealth, income and investment After the financial crisis of 2008 household wealth fell. In addition, by the first quarter of 2012 real household income per head had reached its lowest level since the second quarter of 2005. Real household expenditure per head fell by 0.2 % in the first quarter of 2012 compared with the fourth quarter of 2011, to its second lowest level since the third quarter of 2003. Furthermore UK private sector investment in the second quarter of 2012 fell by 2.7% on the previous quarter. (Source: @ IFS Living Standards and Inequality, June 2012 and O Bank of England Inflation Report November 2012) Extract 2 UK house prices continue to slide Robert Gardner, Chief Economist at Nationwide Building Society, said: "UK house prices declined for the fourth time in five months in July 2012, with prices falling by 0.7%." This pushed the annual pace of price change down to -2.6% - the largest fall since August 2009. House prices are currently 13% below their 2007 peak. (Source: @ adapted from the Nationwide Housing Index Report of July 2012) Extract 3 Bank of England cuts UK growth forecast again Inflation is expected to increase in 2013. Graeme Leach, Chief Economist at the Institute of Directors, warned that the fall in global commodity prices would not continue at the same pace all year. "Brent crude oil prices have edged back up above $100 per barrel and America's scorching summer has pushed up global corn and wheat prices sharply." In addition to external cost pressures, some economists remain concerned that domestically generated inflation remains consistently above the 2.0% target. They point to service sector inflation, which held steady at 3.3% in June 2012. The service sector accounts for 77% of UK GDP. Some of the possible reasons for the persistently high level of inflation in this sector are that many services are not internationally tradable, face limited competition and have few opportunities to 10 increase productivity. For the fourth year in a row the Bank of England's forecasts of output's recovery to pre-recession levels have been put back another year. The Bank's governor said that the Monetary Policy Committee "will do all it can" to bring about recovery. He did not rule out either additional purchases of gilts - known as quantitative easing - beyond 15 the current f375bn programme, or the possibility of a further cut in the Bank's 0.5% base rate. However, he questioned whether the latter would make much economic difference, and said it might even be counter-productive. He identified the big issue as stagnating output. Growth prospects are uncertain because the future of the Eurozone remains in doubt and UK incomes are being squeezed by falling real wages. 20 (Source: @ The Financial Times Led, July 17 2012 and August 8 2012)