Photo AI
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 - Edexcel - A-Level Economics A - Question 2 - 2017 - Paper 3
Question 2
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... show full transcript
Worked Solution & Example Answer: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 - Edexcel - A-Level Economics A - Question 2 - 2017 - Paper 3
Step 1
With reference to Extract D (line 18), explain the meaning of the term 'output gap'.
Answer
The output gap is defined as the difference between the actual output of an economy and its potential output at full capacity. A positive output gap indicates that the economy is producing above its potential, often leading to inflationary pressures due to high demand and scarce resources. Conversely, a negative output gap signifies underperformance, where economic activity is below the potential level, suggesting unused capacity and higher unemployment. In the context of Extract D, understanding the output gap can help assess the UK's productivity levels post-crisis, which have been weak despite efforts to improve employment.
Step 2
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.
Answer
The relationship between national debt as a proportion of GDP and the fiscal deficit is critical for understanding the fiscal health of an economy. A fiscal deficit occurs when a government's expenditures exceed its revenues, leading to the need for borrowing, which in turn increases national debt.
From Figure 4, we observe that as the fiscal deficit increases (as shown in Figure 5), the national debt as a percentage of GDP also tends to rise. This is because ongoing deficits contribute directly to the accumulation of debt. Moreover, in times of economic downturn, such as after the 2007-2008 crisis, governments may engage in deficit spending to stimulate growth, further enhancing the debt-to-GDP ratio. Additionally, high levels of national debt can impact future fiscal policies, potentially leading to austerity measures.
Thus, there is a distinct, direct relationship between the two, where rising fiscal deficits tend to correlate with increasing national debt relative to GDP.
Step 3
Discuss the likely impact of the National Living Wage on the profitability of firms. Use a cost and revenue diagram in your answer.
Answer
The introduction of the National Living Wage (NLW) is likely to impact firms' profitability through increased wage costs. Firms that rely heavily on low-wage labor may face significant increases in their pay structures, which could lead to reduced profit margins unless they adjust their pricing strategies.
In a typical cost and revenue diagram, the average cost curve would shift upwards due to increased wage expenses. With the demand curve remaining constant, this results in a new equilibrium price where the quantity supplied may decrease as firms withdraw from unprofitable markets.
This rise in operating costs may force businesses to either increase prices, which could reduce demand, or find efficiencies elsewhere, such as through automation or reducing hours.
Ultimately, while the NLW may raise living standards for employees, its implications for profitability will depend on the firm's ability to adapt its business model and pass on some of these costs to consumers.