Economics 9708/41 — May/June 2020
Cambridge A-Level · A Level Data Response and Essays · worked solutions for every part, with the mark scheme
Topics Economic Growth and Sustainability · Effectiveness of Macroeconomic Policies · Government Policies to Correct Market Failure · Economic Development and Living Standards · Efficiency and Market Failure · Indifference Curves and Budget Lines · +9 more
In pursuit of well-being
It has been said that the mark of success of a government is raising the quality of life or the well-being of the people in the country. This is sometimes measured by the Human Development Index (HDI). Table 1.1 shows the rank order of selected countries by the HDI and compares it with the rank by Gross Domestic Product (GDP) of that country.
In order to understand how people make decisions, governments in the United States (US), the United Kingdom (UK) and Australia established Behavioural Insights Teams. They came to be known as the Nudge Units as they used nudge theories from behavioural economics.
It was hoped that this approach would help to achieve an increase in well-being as well as in economic growth and GDP. Nudge policies were used, with some success, to get people back to work, encourage them to pay their taxes on time and give them good reasons to save for future pensions or to study for improved qualifications.
They were not, however, sufficient to eliminate government budget deficits which remained at a high level. There was an ever-rising demand for public services but this was not matched by an equal rise in tax revenues so the deficit increased.
Eliminating the government budget deficit continued to be a problem. One method of dealing with the problem was to increase taxation. However, tax rates were already high and even higher tax rates would not result in the increase in revenue that was needed. An alternative option was to increase government borrowing. There might be a strong case to support economic growth, but increasing the deficit in order to achieve this could risk causing another financial crisis.
A third option was to reduce government expenditure on public services. This could be achieved without causing a reduction in the quality of the service and a reduction in well-being if increases in productivity took place. Without continued increases in productivity, however, further cuts in spending could have serious long-term detrimental effects, especially in health provision and education.
Table 1.1 Rank of selected countries by HDI and GDP in 2017
| Rank | HDI | Rank | GDP (millions US$) | |
|---|---|---|---|---|
| Norway | 1 | 0.89 | 29 | 391 959 |
| Australia | 3 | 0.86 | 13 | 1 359 723 |
| Germany | 5 | 0.85 | 4 | 3 423 287 |
| UK | 13 | 0.83 | 5 | 2 496 757 |
| Thailand | 70 | 0.58 | 26 | 432 898 |
| Botswana | 103 | 0.43 | 115 | 15 564 |
| Pakistan | 117 | 0.38 | 43 | 251 487 |
| Eswatini | 121 | 0.36 | 157 | 3 938 |
Sources: RSA Issue 1, 2017
What is meant by nudge theory?
Consider whether the information provides any evidence that nudge theory could increase an economy’s GDP.
Distinguish between demand-side and supply-side policies and identify and explain one demand-side policy and one supply-side policy from the information.
The information is entitled ‘In pursuit of well-being’. Discuss whether the information supports the idea that GDP is a good measure of well-being.
The rest of this paper
6 more questions- Q2Efficiency and Market Failure25M
- Q3Indifference Curves and Budget Lines · Utility Theory25M
- Q4Market Structures · Performance of Firms in Different Market Structures · Objectives and Pricing Policies of Firms25M
- Q5Wage Determination and Labour Market Intervention · Demand for and Supply of Labour25M
- Q6The Multiplier and National Income Determination · Effectiveness of Macroeconomic Policies25M
- Q7Characteristics of Countries at Different Levels of Development · Relationships Between Countries at Different Levels of Development · Economic Growth and Sustainability25M