Economics 9708/41 — May/June 2021

Background Concept

Macroeconomic policy aims are the broad objectives that a government pursues to manage the overall performance of the economy. The standard set includes:

• Economic growth: increasing the economy's capacity to produce goods and services, raising living standards.
• Low unemployment: minimising involuntary joblessness to use labour resources fully.
• Low and stable inflation: maintaining price stability to protect the value of money.
• A satisfactory balance of payments: avoiding persistent deficits or surpluses on the current account.
• Equity and redistribution: reducing poverty and inequality.
• Sustainability: ensuring growth does not deplete resources for future generations.

Understanding the Question

The question asks you to identify and explain two macroeconomic policy aims from the article. The article mentions the government's aims to raise the quality of life and achieve efficiency. You need to pick two standard aims that are clearly relevant to the context of public services and well-being. The mark scheme awards 2 marks for identifying two aims and 2 marks for explaining them (1 mark per explanation).

Approach

1. Read the article's opening sentence: "A government usually has macroeconomic policy aims that it hopes will enable some success in raising the quality of life, or well-being, of the population."
2. Select two aims that are directly linked to improving well-being. Economic growth and low unemployment are the most straightforward and widely applicable.
3. For each aim, state it clearly and then provide a brief explanation of what it means and why it matters.

Step-by-Step Reasoning

Step 1: Identify the first aim – Economic growth

• The article talks about raising the quality of life. Economic growth, measured by rising real GDP per capita, is a primary means of increasing material living standards.
• Explanation: Growth means the economy produces more goods and services, which can lead to higher incomes, more consumption, and better funding for public services like healthcare and education.

Step 2: Identify the second aim – Low unemployment

• The article discusses public services and taxpayers' money. High unemployment wastes labour resources, reduces tax revenue, and increases welfare spending.
• Explanation: Low unemployment means more people are in work, earning incomes and contributing to tax revenues. This supports the funding of public services and reduces poverty, improving well-being.

Step 3: Write the answer concisely

• State each aim and its explanation in separate sentences. Keep it clear and direct.

Key Takeaways

• Macroeconomic aims are standard and can be applied to most contexts.
• The question asks for "identify and explain" – you must do both for each aim.
• Link the aims to the context provided (public services, well-being) to show application.

Common Mistakes

• Listing three or four aims instead of two – you only need two, and extra ones do not earn more marks.
• Naming an aim but not explaining it – this loses the explanation marks.
• Choosing aims not relevant to the article, such as "balance of payments equilibrium" when the article does not mention trade.

Things to Be Careful About

• Ensure each explanation is a full sentence, not just a phrase.
• Use precise economic terminology: "economic growth" not "making the economy bigger".
• The marks are 2 for identification + 2 for explanation, so allocate your effort equally.

Background Concept

Behavioural economics challenges the traditional assumption of rational economic agents. It recognises that people often make decisions based on cognitive biases, heuristics, and social influences. Nudge theory, popularised by Thaler and Sunstein, suggests that small changes in the 'choice architecture' can steer people towards better decisions without restricting their freedom of choice. Governments have established 'Nudge Units' to apply these insights to public policy.

Understanding the Question

The question asks whether the article contains evidence that a knowledge of behavioural economics can help public policy. This is a straightforward 'yes/no' question requiring you to cite specific examples from the text. The mark scheme awards marks for identifying the evidence (the examples) and linking them to behavioural economics concepts.

Approach

1. Scan the article for examples of behavioural interventions.
2. Identify three clear examples: tax letter, jobseeker text message, automatic pension enrolment.
3. For each example, briefly explain how it uses a behavioural insight (e.g., framing, personalisation, default bias).
4. Conclude that the evidence supports the claim.

Step-by-Step Reasoning

Step 1: Identify the first example – Tax payment

• The article states: "A small change in the wording of a letter to people who owed tax demonstrated how more behaviourally sensitive language sped up payments."
• This uses the behavioural insight of framing – how a message is presented affects the response. Changing the wording made the request more effective.

Step 2: Identify the second example – Jobseeker attendance

• The article states: "Jobseekers were nearly twice as likely to turn up for a job fair if the text message from the job centre used their names, and nearly three times as likely if the person sending the text message added 'good luck'."
• This uses personalisation (using the person's name) and social norms (a friendly gesture like 'good luck' creates a sense of reciprocity).

Step 3: Identify the third example – Pension saving

• The article states: "So enrol them instead automatically in a pensions programme as a default position, with the possibility of opting out."
• This uses the default bias – people tend to stick with the default option because it requires effort to change. Automatic enrolment dramatically increases participation rates.

Step 4: Conclude

• All three examples show that a knowledge of behavioural economics led to more effective public policy outcomes. Therefore, the answer is 'yes'.

Key Takeaways

• Behavioural economics provides practical tools for improving policy effectiveness.
• Nudge interventions are often low-cost and can have large impacts.
• The article's examples are classic illustrations of nudge theory in action.

Common Mistakes

• Answering 'no' without reading the article carefully.
• Describing the examples without linking them to behavioural economics concepts.
• Providing only one example when the article offers several.

Things to Be Careful About

• The question asks for evidence "in the article" – do not bring in external examples.
• Keep explanations concise; 4 marks means 2-3 well-explained points are sufficient.
• Use the exact figures from the article (e.g., "nearly twice as likely") to show you have read it.

Background Concept

In economics, efficiency is a multi-dimensional concept. The two most important types are:

• Productive efficiency: producing goods and services at the minimum possible cost. This occurs when a firm operates at the bottom of its average total cost curve (ATC). It is about 'doing things right' – minimising waste.
• Allocative efficiency: producing the mix of goods and services that society most desires. This occurs when price equals marginal cost (P = MC). It is about 'doing the right things' – matching supply to consumer preferences.

Pareto optimality is a state where no one can be made better off without making someone else worse off. Both productive and allocative efficiency are necessary for Pareto optimality.

Understanding the Question

The article states: "Efficiency is measured by relating inputs to outputs." The question asks whether this is how economic theory states that efficiency is determined. This is a 'partly true, partly false' question. The statement is correct for productive efficiency but misses allocative efficiency.

Approach

1. Acknowledge that the statement is partly correct.
2. Define productive efficiency and show how it matches the article's description.
3. Introduce allocative efficiency and explain why it is not captured by the input-output ratio.
4. Conclude that the article's definition is incomplete.

Step-by-Step Reasoning

Step 1: Identify the part that is correct

• The article says efficiency is measured by relating inputs to outputs. This is exactly how productive efficiency is defined.
• Productive efficiency: producing the maximum output from a given set of inputs, or producing a given output at the minimum cost.
• Example: A hospital treating 100 patients with $1 million is more productively efficient than one treating 80 patients with the same budget.

Step 2: Identify the part that is missing

• Economic theory also requires allocative efficiency. This is not about the input-output ratio but about whether the right goods and services are being produced.
• Allocative efficiency occurs when P = MC. This ensures that the marginal benefit to consumers (price) equals the marginal cost of production.
• Example: A hospital might be productively efficient (treating many patients at low cost) but allocatively inefficient if it spends too much on general hospitals and too little on mental health services, as the article itself suggests.

Step 3: Conclude

• The article's statement is only a partial description of efficiency. It captures productive efficiency but ignores allocative efficiency. Therefore, it is not a complete statement of how economic theory determines efficiency.

Key Takeaways

• Efficiency is not a single concept; it has multiple dimensions.
• Productive efficiency is about cost minimisation; allocative efficiency is about matching production to consumer preferences.
• A full analysis of efficiency must consider both.

Common Mistakes

• Agreeing completely with the article without mentioning allocative efficiency.
• Disagreeing completely without acknowledging that the article correctly describes productive efficiency.
• Confusing efficiency with equity or other concepts.

Things to Be Careful About

• The question is worth 5 marks, so a balanced answer that shows understanding of both sides is expected.
• Use precise definitions: "productive efficiency" and "allocative efficiency".
• Link back to the article's context (public services) to show application.

Background Concept

Well-being (or welfare) is a broad concept encompassing material living standards, health, education, environmental quality, social connections, and subjective happiness. Traditional economic indicators like GDP measure only the market value of goods and services produced. They fail to capture many aspects of well-being. This has led to the development of alternative indicators.

Key indicators:

• GDP per capita: Total output divided by population. Useful for comparing material prosperity but ignores distribution, non-market activities, and externalities.
• HDI: A composite index (0 to 1) based on income, health, and education. Developed by the UN to provide a more comprehensive measure of development.
• MEW: An attempt to adjust GDP for factors like leisure, unpaid work, and pollution. Not widely used due to measurement difficulties.
• MPI: Measures overlapping deprivations at the household level in health, education, and living standards.
• Subjective well-being measures: Surveys asking people about their life satisfaction. Increasingly used but not part of traditional economic indicators.

Understanding the Question

The question asks you to discuss whether there are any economic indicators that could be used to assess whether well-being has become better or worse. The article mentions that "other economic indicators could be used to assess this change in well-being." You need to evaluate the strengths and weaknesses of various indicators and reach a conclusion.

Approach

1. Introduce the concept of well-being and why GDP alone is insufficient.
2. Describe monetary indicators (GDP per capita) and their limitations.
3. Describe composite indicators (HDI, MEW, MPI) and their advantages and disadvantages.
4. Mention non-monetary indicators (life expectancy, literacy, etc.).
5. Evaluate the overall usefulness of these indicators.
6. Conclude with a justified judgement on the best approach.

Step-by-Step Reasoning

Step 1: Start with GDP per capita

• It is the most commonly used indicator of economic performance.
• Strengths: Easy to calculate, comparable across countries, correlates with many aspects of well-being (e.g., health, education).
• Weaknesses: Ignores income inequality (a country with high average income but high inequality may have low well-being for many). Ignores non-market activities (e.g., childcare, volunteering). Ignores environmental costs (e.g., pollution from production). Does not capture subjective well-being (happiness, life satisfaction). The article itself says "concentrating on a monetary calculation of GDP" may not capture well-being.

Step 2: Introduce composite indicators

• HDI: Combines income, health, and education. It is broader than GDP but still misses inequality, environmental quality, and political freedom. For example, a country could have a high HDI but high inequality or pollution.
• MEW: Adjusts GDP for leisure, unpaid work, and pollution. It is conceptually better but difficult to measure accurately. It is not widely used in practice.
• MPI: Focuses on deprivation. A reduction in MPI directly indicates improved well-being for the poorest. However, it does not capture the well-being of the non-poor.

Step 3: Mention non-monetary indicators

• Life expectancy, infant mortality, literacy rates, crime rates, pollution levels. These are direct measures of outcomes that matter for well-being. They are easy to understand and compare. However, they are partial – no single one captures overall well-being.

Step 4: Evaluate and conclude

• No single indicator is perfect. The best approach is to use a dashboard of indicators that includes GDP per capita, HDI, and key non-monetary measures. This provides a more complete picture.
• The article's suggestion that "other economic indicators could be used" is correct, but the choice depends on what aspect of well-being is being assessed.
• For policy purposes, a focus on well-being might also require subjective measures (e.g., life satisfaction surveys), which are not traditional economic indicators but are increasingly used.

Key Takeaways

• Well-being is multi-dimensional and cannot be captured by a single number.
• GDP per capita is useful but incomplete.
• Composite indicators like HDI offer a broader view but still have limitations.
• A dashboard approach is the most robust way to assess changes in well-being.

Common Mistakes

• Only discussing GDP per capita and ignoring other indicators.
• Describing indicators without evaluating their strengths and weaknesses.
• Failing to reach a conclusion – the question asks for a discussion, but a justified conclusion is expected for top marks.
• Not linking back to the article's context (e.g., the example of mental health services).

Things to Be Careful About

• The question is worth 7 marks, so a detailed and balanced answer is required.
• Use specific examples from the article (e.g., mental health, older people) to ground your discussion.
• Ensure you evaluate, not just describe. For each indicator, say why it is useful and why it is limited.
• The conclusion should be a clear judgement, not a vague statement like "it depends".