impact of large infrastructure projects (3)

Question 1

macroeconomic impacts of spending on large infrastructure projects

Answer 1

1. potential economic growth + improved trade balance -> better infrastrucutre -> more transport links -> reduces geographical immobility of labour AND easier to transport exports -> incr productivity of labour force -> LRAS up -> real GDP up -> UK exports more attractive globally -> incr international competitiveness -> incr export revenue -> improved trade balance/improved CAD

Question 2

evaluate the macro impact of spending on large infrastructure projects

Answer 2

• environmental degradation -> -ve externalities e.g. pollution, displacement of communities
• high opportunity cost
• trade balance not improved if industries are reliant on imports -> net exports fall
• crowding out effect as gov. borrows more -> interest rates may rise -> reduced private sector investment

Question 3

microeconomic impact of spending on large infrastructure projects

Answer 3

1. job creation in construction + related industries -> large-scale projects = higher demand for skilled workers in construction, engineering + maintenance -> incr dervied demand for suppliers e.g. steel, concrete, machinery -> higher wages (LD shift right) -> incr consumer spending -> more sales revenue -> incr profits
2. reduced costs for firms -> invesment = lower transport times + congestion -> lower transport costs -> benefit from external economies of scale -> lower LRAC -> incr profits + productive efficiency -> can pass on lower costs to consumers -> incr consumer surplus -> improved consumer welfare

Question 4

evaluate the micro impact of spending on large infrastructure projects

Answer 4

• time lag -> major projects like HS2 takes ages
• not all firms benefit equally e.g. industries dependent on digital infrastructure gain little from transport improvements
• job creation = temporary; once projects are done, construction workers may face frictional unemployment/structural if skills don’t transfer to other industries
• geographical immobility -> hard for workers to move for the project