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In 2016 the UK Chancellor of the Exchequer announced that the government would spend an extra £23 billion on innovation and infrastructure over the following five years - Edexcel - A-Level Economics A - Question 7 - 2018 - Paper 2
Question 7
In 2016 the UK Chancellor of the Exchequer announced that the government would spend an extra £23 billion on innovation and infrastructure over the following five ye... show full transcript
Worked Solution & Example Answer:In 2016 the UK Chancellor of the Exchequer announced that the government would spend an extra £23 billion on innovation and infrastructure over the following five years - Edexcel - A-Level Economics A - Question 7 - 2018 - Paper 2
Step 1
Likely effects of increased government expenditure
Answer
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Increase in Aggregate Demand: Government spending injects money into the economy, increasing aggregate demand (AD). This can lead to higher output and employment levels.
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Investment in Infrastructure: Improved infrastructure can boost productivity by reducing travel time and costs for businesses, enhancing efficiency and ultimately raising living standards.
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Innovation Enhancement: Increased funding for innovation can lead to the development of new technologies and services, making the UK more competitive internationally and positively affecting the current account balance.
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Long-term Growth Potential: While the immediate effects may be positive, the long-term impact on economic growth depends on how effectively the funds are allocated, particularly in areas where there have been historical underinvestments.
Step 2
Evaluation of the planned increase in expenditure
Answer
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Magnitude of the Investment: £23 billion over five years is a substantial amount, but may not significantly affect the overall size of the UK economy, which is quite large.
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Quality of Existing Infrastructure: Many regions in the UK face significant infrastructural challenges that require more funding than this initiative may provide. The government needs to prioritize effectively to achieve impactful results.
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Effectiveness of Resource Allocation: The success of this expenditure heavily depends on the government’s ability to allocate resources efficiently. Historical inefficiencies in public spending could hinder the expected benefits of this investment.
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Improvement Timeline: Significant improvements in productivity and growth may take years to realize, meaning that immediate impacts may be limited.