Economics 9708/42 — October/November 2017

Background Concept

Economic indicators are statistics that provide information about the health of an economy. For households, key indicators include inflation (the rate at which prices rise), interest rates (the cost of borrowing), and debt levels. Lower inflation means the purchasing power of money is preserved, lower interest rates reduce the cost of mortgages and loans, and a lower debt-to-income ratio indicates households are less financially stretched.

Understanding the Question

The question asks to identify three changes in the table that show households should have benefitted from the recovery. The table compares 2008 (the crisis year) with 2014 (the recovery year). The answer must be drawn directly from the data, not from general knowledge. The command word is 'identify', so no explanation is needed, just the three changes.

Approach

Scan the table for indicators that improved for households between 2008 and 2014. Look for falling inflation, falling interest rates, and falling debt ratios. Rising house prices could also be seen as a benefit for homeowners, but the mark scheme focuses on the three listed. Select the three clearest positive changes.

Step-by-Step Reasoning

1. Inflation: The annual inflation rate fell from 5.2% in September 2008 to 1.2% in September 2014. Lower inflation means the cost of living is rising more slowly, so households' money goes further.
2. Interest rate: The interest rate fell from 4.5% in October 2008 to 0.5% in October 2014. This reduces the cost of borrowing for mortgages and loans, leaving households with more disposable income.
3. Household debt to income ratio: This fell from 162.9% in March 2008 to 136.3% in March 2014. A lower ratio means households owe less relative to their income, reducing financial vulnerability.

Rising house prices (from £209,000 to £274,000) could also be cited as a benefit for homeowners, but the mark scheme prioritises the three above.

Key Takeaways

• When asked to 'identify', simply list the required number of points from the source.
• Focus on changes that are clearly positive for the group mentioned (households).
• Use the exact data from the table, including the years and values.

Common Mistakes

• Explaining the changes instead of just identifying them. The command word 'identify' requires only listing.
• Choosing indicators that worsened, such as falling wage growth or falling real household income.
• Using general knowledge instead of the table's data.

Things to Be Careful About

• Read the table carefully and select only the indicators that improved.
• Do not mix up the years; the question asks for changes from 2008 to 2014.
• Ensure each point is a distinct indicator, not a repetition of the same idea.

Background Concept

Living standards are often measured by real household disposable income – the income households have after tax and adjusted for inflation. If nominal wages rise slower than prices, real wages fall, reducing purchasing power. Unemployment is a key determinant of living standards, but the type of employment also matters: a shift from higher-paid public sector jobs to lower-paid private sector jobs can reduce average living standards even if total employment rises.

Understanding the Question

The question asks to explain why some households faced a fall in living standards even though unemployment fell. This is a paradox: normally falling unemployment should raise living standards. The answer must use evidence from the extract and table to resolve the paradox. The command word is 'explain', so a chain of reasoning is required, not just a list.

Approach

Identify two pieces of evidence from the source that explain the paradox:

1. The table shows wage growth (0.7%) was below inflation (1.2%) in 2014, so real wages fell. This directly reduces living standards for employed households.
2. The extract mentions public sector job losses. Even if total unemployment fell, those who lost public sector jobs may have experienced a fall in income, especially if they moved to lower-paid private sector jobs or became unemployed temporarily.

Step-by-Step Reasoning

Point 1: Falling real wages

• From the table: annual wage growth in August 2014 was 0.7%, while annual inflation in September 2014 was 1.2%.
• Since prices rose faster than wages, the real value of wages fell. This means households could buy less with their income.
• This is confirmed by the data showing real household disposable income per head fell from £4320 in 2008 to £4263 in 2014.
• Therefore, even employed households experienced a fall in living standards.

Point 2: Public sector job losses

• The extract states: 'This increase outweighed the loss of jobs, such as hospital workers, in the public sector.'
• This implies that some households lost their jobs in the public sector. Even if they found new jobs in the private sector, these may have been lower-paid or less secure.
• The loss of a job, even temporarily, reduces income and living standards for those households.
• The overall unemployment figure masks these individual losses.

Key Takeaways

• A fall in unemployment does not guarantee a rise in living standards for all households.
• Real wages (adjusted for inflation) are a better measure of living standards than nominal wages.
• Always use specific data from the extract to support explanations.

Common Mistakes

• Stating that unemployment fell without linking it to the paradox.
• Ignoring the data on wage growth and inflation.
• Providing only one reason when the mark scheme expects two (2 × 1+1 explanation).
• Confusing nominal and real values.

Things to Be Careful About

• Use the exact figures from the table: wage growth 0.7%, inflation 1.2%.
• Explain the mechanism: wage growth < inflation → real wages fall → living standards fall.
• Reference the extract's mention of public sector job losses.
• Do not add evaluation; the command word is 'explain'.

Background Concept

Entrepreneurs are motivated by profit. They will create jobs when they expect the additional revenue from hiring a worker to exceed the additional cost. Factors that reduce costs or increase expected revenue encourage job creation. Key factors include the cost of borrowing (interest rates), the cost of labour (wages), and the overall business environment (government policy).

Understanding the Question

The question asks to analyse why entrepreneurs were encouraged to create more jobs during the recovery. The command word 'analyse' requires a developed chain of reasoning, not just a list. The answer must use evidence from the extract. The mark scheme allocates up to 5 marks, with 3 points each worth 1+1 for development.

Approach

Identify three factors from the extract that would encourage job creation:

1. Low interest rates (monetary policy) – reduces cost of investment.
2. Low wage growth – reduces labour costs, increasing profitability.
3. Government policy to encourage private sector activity – improves business confidence.

For each factor, explain the mechanism: how does it lead to more jobs?

Step-by-Step Reasoning

Point 1: Low interest rates

• The extract states: 'The central bank fixed interest rates at their lowest ever level of 0.5%.'
• Low interest rates reduce the cost of borrowing for firms. Entrepreneurs can take out loans at a lower cost to finance investment in new machinery, factories, or technology.
• This investment increases the firm's productive capacity, requiring more workers to operate the new capital.
• Lower interest rates also reduce the opportunity cost of investment (the return from saving is lower), encouraging firms to invest rather than hold cash.
• Therefore, low interest rates directly incentivise job creation.

Point 2: Low wage growth

• The table shows annual wage growth fell from 3.2% in 2008 to 0.7% in 2014.
• The extract notes that inflation was 1.2% in 2014, meaning real wages were falling.
• For entrepreneurs, this means the cost of hiring additional workers is low and falling in real terms.
• Lower labour costs increase profit margins, making it more attractive to expand output and hire more workers.
• The expectation of higher profits encourages entrepreneurs to take on more risk and create jobs.

Point 3: Government encouragement of private sector activity

• The extract states: 'the UK government aimed to ... increase economic growth through encouraging more private sector activity.'
• This could include policies such as deregulation, tax cuts for businesses, or subsidies for hiring.
• Such policies reduce the costs and barriers to starting and expanding a business, making it easier for entrepreneurs to create jobs.
• Improved business confidence also encourages investment and hiring.

Key Takeaways

• Analysis requires a chain of reasoning: policy → incentive → entrepreneur behaviour → job creation.
• Use specific evidence from the extract to support each point.
• Develop each point fully rather than listing many shallow points.

Common Mistakes

• Listing factors without explaining the mechanism.
• Using general knowledge not supported by the extract.
• Confusing low wage growth with low wages; the key is that wage growth is below inflation, reducing real labour costs.
• Ignoring the role of profit expectations in driving entrepreneur behaviour.

Things to Be Careful About

• Ensure each point is clearly linked to job creation.
• Use the exact figures from the extract (0.5% interest rate, 0.7% wage growth).
• Do not evaluate; the command word is 'analyse', not 'discuss'.
• The mark scheme allows up to 5 marks for 3 developed points, so aim for three distinct factors.

Background Concept

Macroeconomic policies aim to achieve objectives like growth, low unemployment, and price stability. However, policies often have distributional effects – they benefit some groups more than others. Expansionary monetary policy (low interest rates, QE) stimulates aggregate demand but can hurt savers and benefit borrowers. Contractionary fiscal policy (spending cuts) reduces debt but can cause job losses in the public sector. The question asks to evaluate the extent to which the benefits of the policies were uneven.

Understanding the Question

The question asks to identify two economic policies from the extract and consider to what extent there is evidence that while these policies may lead to a recovery, the benefits are uneven. The command word 'consider to what extent' requires evaluation: both the benefits (how they contribute to recovery) and the limitations (how benefits are uneven). The answer must use evidence from the extract. The mark scheme allocates 8 marks: 2 policies × (1 policy + 1 explanation + 1 benefit + 1 limitation), with a maximum of 6 if both policies are from the same group.

Approach

Identify two distinct policies from the extract:

1. Expansionary monetary policy: low interest rates and quantitative easing.
2. Contractionary fiscal policy: cutting government expenditure.

For each policy:

• Explain how it works (the mechanism).
• State one benefit for the recovery (using extract evidence).
• State one limitation showing uneven benefits (using extract evidence).

Finally, reach a conclusion on the extent of uneven benefits.

Step-by-Step Reasoning

Policy 1: Expansionary monetary policy

How it works: The central bank fixed interest rates at 0.5% and used quantitative easing (purchasing government bonds) to increase liquidity in the banking system. Lower interest rates reduce the cost of borrowing for firms and households, encouraging investment and consumption. QE increases the money supply and encourages banks to lend.

Benefit for recovery: The extract states that unemployment fell below two million for the first time since 2008, and GDP grew. This suggests the policy helped stimulate aggregate demand and support the recovery.

Limitation (uneven benefits): The extract notes that only the services sector output exceeded its pre-2008 peak; industrial production, construction, and agriculture did not. This suggests that the benefits of low interest rates were concentrated in the services sector. Also, low interest rates hurt savers, particularly pensioners reliant on interest income, while benefiting borrowers (e.g., homeowners with mortgages).

Policy 2: Contractionary fiscal policy

How it works: The government cut government expenditure to reduce the huge government debt. This reduces aggregate demand in the short run but aims to improve long-term confidence and reduce the crowding-out effect.

Benefit for recovery: The extract states that the government aimed to increase economic growth through encouraging more private sector activity. The fall in unemployment was driven by private sector job creation, suggesting the policy may have helped crowd in private investment.

Limitation (uneven benefits): The extract states that job losses in the public sector (e.g., hospital workers) were outweighed by private sector job gains. However, those who lost public sector jobs suffered a fall in income and living standards. The recovery was uneven across sectors, with public sector workers losing out. Also, the fall in real household disposable income per head suggests that even those in work experienced a fall in living standards.

Conclusion

The evidence clearly shows that the benefits of both policies were uneven. The recovery was sectorally unbalanced (services vs. others), and distributionally unbalanced (private sector workers vs. public sector workers, borrowers vs. savers). The fall in real household disposable income per head confirms that the average household did not benefit. Therefore, to a significant extent, the benefits were uneven. However, the policies did achieve some recovery (falling unemployment, rising GDP), so the statement is partially true but the unevenness is substantial.

Key Takeaways

• Evaluation requires both sides: benefits and limitations.
• Use specific evidence from the extract to support each point.
• A conclusion must be justified and address the 'extent' asked in the question.
• Distinguish between different policy types to avoid repetition.

Common Mistakes

• Choosing two policies from the same group (e.g., both monetary policy), which limits marks to 6.
• Describing the policies without analysing their benefits and limitations.
• Providing a one-sided answer (only benefits or only limitations).
• Failing to reach a conclusion or giving a vague conclusion.
• Not using extract evidence.

Things to Be Careful About

• Ensure the two policies are distinct: one monetary, one fiscal.
• For each policy, clearly separate the benefit (how it aids recovery) from the limitation (how benefits are uneven).
• Use the extract's data on sectoral output, public sector job losses, and real household income.
• The conclusion should state the extent (e.g., 'to a significant extent') and justify it.
• Reserve 1 mark for the conclusion as per the mark scheme structure.