Paper 3 predicitions Flashcards
Outline the Types of Market structures
- Perfect competition – Many firms, freedom of entry, homogeneous product, normal profit.
- Monopoly – One firm dominates the market, barriers to entry, possibly supernormal profit- Monopoly diagram
- Oligopoly – An industry dominated by a few firms, e.g. 5 firm concentration ratio of > 50%. Interdependence of firms- Oligopoly diagram
- Collusive behaviour – firms seek to form an agreement to increase prices. (Kinked demand curve model – when prices are stable and firms compete on non-price competition.)
- Monopolistic competition – Freedom of entry and exit, but firms have differentiated products. Likelihood of normal profits in the long term.
- Contestable markets – An industry with freedom of entry and exit, low sunk costs. The theory of contestability suggests the number of firms is not so important, but the threat of competition.
- Duopoly – where two firms dominate the market. For example, Pepsi and Coca Cola. Android vs Apple. A duopoly falls between a monopoly and oligopoly.
Outline the main macroeconomic objectives
- Economic growth – positive and sustainable growth (The UK, long-run trend rate is around 2.5%)
- Low inflation (UK target 2% +/-1) –
- Low unemployment / Full employment (e.g. around 3%)
- Current account – balance of payments. Satisfactory position (i.e. avoid unsustainable current account deficit)
- Low government borrowing/public sector debt.
- Exchange rate stability
Outline the confliction of Economic growth vs Inflation
One macro-economic conflict can come between economic growth and inflation (which leads to a similar conflict between unemployment and inflation). If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS.
When the economy is growing very quickly, firms have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices. Also, if demand grows faster than supply, firms will respond to shortages by putting up prices.
Inflationary growth- In this diagram, there is an increase in AD, when the economy is close to full capacity. We get an increase in real GDP but also an increase in the inflation rate.
Example of conflict between economic growth and inflation- In the late 1980s during the Lawson boom, the UK experienced a high rate of economic growth (4-5% a year). This growth rate was above the long run trend rate of growth but caused inflationary pressures to increase. Also if growth is very quick, there may be supply constraints pushing up commodity price increases. This economic boom of the 1980s proved unsustainable and ultimately led to the recession in 1991 (as the government increased interest rates to try and control inflation. The rapid economic growth of 1986-1989 led to inflation increasing to nearly 1%. It required interest rates of 12% and the recession of 1991/92 to bring inflation under control.
Low inflationary growth- However, it is possible to have economic growth without causing inflation. If growth is sustainable – if it is close to the long run trend rate, then LRAS will increase at the same rate as AD, and therefore, we will not see inflation.
Graph- (Long-run-economic-growth-LRAS-AD)
Economic growth without inflation. AD and LRAS increasing at the same rate. The UK between 1993-2007, had a long period of economic expansion. But, this prolonged economic growth did not cause inflation. This is sometimes known as the great moderation.
Outline the conflicts of economic growth and balance of payments
When economic growth is led by consumer spending, it tends to cause a deficit in the current account. This is because as consumer spending rises, there will be a rise in import spending. This is especially true in the UK, where traditionally we have a high marginal propensity to import (MPM). Also, high economic growth may increase inflation and make exports less competitive.
The late 1980s saw an economic boom and a growing current account deficit. The recession of 1992, saw a fall in import spending and a decline in the current account deficit. However, if economic growth is export-led, then there can be an increase in economic growth without causing a current account deficit. For example, Germany has seen strong economic growth, but it often runs a current account surplus.
Outline the conflicts economic growth vs budget deficit
A government may feel it needs to reduce the budget deficit. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.
Similarly, if the government wants to boost the rate of economic growth it could pursue expansionary fiscal policy (tax cuts/spending rises). This should increase aggregate demand and help economic growth – but there will be a side effect, the budget deficit will rise.
Evaluation- If policies to reduce a budget deficit lead to unemployment and lower growth, the government will need to pay more on benefits and will get lower tax receipts. Therefore the deficit may experience only a small reduction. This has been a dilemma for European governments since the austerity measures of post-2010. However, it depends on how you reduce a budget deficit. For example, if you raised the retirement age and made it more difficult to get welfare benefits, then you can reduce government spending, but there is little negative impact on economic growth (in fact, people have to work longer, increasing LRAS). Though there may be side effects on issues of equality and fairness.
Outline the conflicts of Economic growth vs environment as a macroeconomic objectives
There can be a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non-renewable resources.
However, it is possible to have economic growth without harming the environment. For example, the development of solar panels has helped increase energy productivity, but it is also better for the environment than burning coal.
Outline the conflicts of unemployment and inflation as a macroeconomic objectives
There is often a trade off (at least in the short run) between unemployment and inflation. In a period of high growth – jobs are created, causing unemployment to fall. But, as unemployment falls, it can put upward pressure on wages, leading to inflation.
The Phillips curve suggests there is a trade off between these two objectives. For example, a cut in interest rates leads to higher Aggregate Demand (AD). Higher AD leads to higher growth (Lower unemployment) but also higher inflation. Therefore the Phillips curve trade-off moves from A to B. But, it is possible to reduce both inflation and unemployment. If successful supply-side policies are used, you can reduce structural unemployment without causing wage inflation. Also, if the growth is sustainable, inflation will remain low.
Outline Inequality in the global economy
- The world Inequality Report estimated that in 2021, total global income was $122 trillion, and the global adult population was 5.1 billion
- If this income was shared equally between all adults around the world, this would equate to PPP $23,380
- People in the poorest 50% of the global population share just 8% of global income between them. They earn on average PPP $3,920 per person, per year
- The richest 10% of people in the world are estimated to receive more than half of the global income (52%), earning over average PPP $122,100 PER PERSON, PER YEAR
(good graph to use would be lorenz curve)
(good graph to use would be the Kunetz curve)
Difference between pre-distribution and redistribution in terms of income and wealth
- Pre-distribution refers to factors that affect the partial distribution of income and wealth before taxes and welfare transfers (Such as deep inequalities in wages)
- Redistribution involves the reallocation of income and wealth through government policies after it has been generated by the market
Outline the Microeconomic policies that might be used to achieve a more equitable distribution of income - SUBSIDIES
- Subsidies to support the child-care industry (such as per capita funding for the very young)- designed to increase affordability and encourage a rise in the female labour market participation ratio. (Evaluation: Supply-side capacity of Uk childcare sector hit by rising costs/ falling profits)
A subsidy is any form of government support—financial or otherwise—offered to producers and occasionally to consumers. Subsidies to producers reduce the marginal cost of supply, usually leading to an increase in the output sold of a good or service at a lower market price. In the context of the child-care sector, the objective of subsidies is to increase the affordability of child-care services, encourage higher female labour market participation, and support the income of low and middle-income families.
The mechanism for achieving these objectives involves the government providing per capita funding for child-care services, especially targeting very young children. Direct subsidies are given to child-care providers to lower operational costs and maintain affordability. Additionally, vouchers or direct financial assistance are offered to families to help cover child-care expenses.
Subsidies aimed at child-care can directly support low-income families by reducing their expenditure on essential services and freeing up income for other needs. By lowering the financial barrier to child-care, these subsidies can help lift families out of poverty and contribute to a more equitable income distribution. Furthermore, increased labor market participation, particularly among women, boosts overall economic productivity, which can lead to higher wages and improved living standards across the board. This higher productivity and economic growth can create a virtuous cycle of increasing employment opportunities and income levels.
However, there are potential drawbacks and considerations. Subsidizing the child-care sector requires substantial government expenditure. Policymakers must ensure that the funding is sustainable and does not lead to long-term fiscal imbalances. The effectiveness of subsidies depends on accurate targeting and efficient delivery mechanisms to avoid waste and ensure that benefits reach the intended recipients. Additionally, there is a risk that increased demand due to subsidies might lead to overcrowding and a decline in the quality of child-care services. The government must implement robust regulatory frameworks to maintain high standards of care and ensure that increased capacity does not come at the expense of quality.
Outline Microeconomic policies that might be used to achieve a more equitable distribution of income - Minimum Wages
- Minimum wage for low- wage jobs + measures to protect trade union recognition in occupations where trade union density is low (Evaluation: Minimum wage rise can help to reduce working poverty - but many Uk households and poverty had no one in paid work)
Raising the minimum wage for low-wage jobs and implementing measures to protect trade union recognition, particularly in occupations where union density is low, can significantly impact income distribution and working conditions. These policies aim to reduce working poverty, enhance labor rights, and promote fairer economic practices.
The objective of raising the minimum wage is to directly increase the earnings of low-wage workers, thereby helping to lift them out of poverty. This policy can improve living standards, reduce reliance on social benefits, and promote economic self-sufficiency. Additionally, higher minimum wages can stimulate the economy by increasing consumer spending, which boosts demand for goods and services and potentially creates more jobs. This can contribute to economic growth and a more equitable distribution of income by narrowing the wage gap between low-wage and higher-wage workers. However, the effectiveness of minimum wage increases must be carefully balanced against potential negative impacts. Critics argue that significant minimum wage hikes might lead to job losses or reduced hours as employers manage higher labour costs. Policymakers need to ensure that wage increases are sustainable and do not adversely affect employment levels. Regular adjustments to the minimum wage based on inflation and cost of living can help maintain its positive impact over time.
Protecting and promoting trade union recognition is another crucial aspect. Trade unions play a vital role in negotiating fair wages and working conditions, enhancing workers’ bargaining power. In occupations with low union density, measures such as simplified union recognition procedures, protection against anti-union practices, and public awareness campaigns can encourage union membership. Stronger unions can help ensure fair treatment and representation for workers who might otherwise lack a voice in the workplace. Legal protections for trade union activities are essential to ensure that workers can join unions without fear of retaliation. Policies that safeguard union recognition and membership can lead to a more balanced power dynamic between employers and employees, contributing to reduced wage inequality and improved worker well-being. However, raising the minimum wage and supporting trade unions alone may not address poverty in households with no employed members. Complementary policies, such as improved access to education, training, and job placement services, are necessary to support these households.
Macroeconomic effects of an increase in the National Minimum Wage - AGGREGATE DEMAND
- Impact on aggregate demand: Higher minimum wages directly increase earingin of low-income workers, who are likely to spend a large portion of additional income (high MPC). (Evaluation: Minimum wage rise boosts 2.7 million lowest-paid. A Full-time adult worker paid the minimum wage will see pay rise worth £1,800 a year. Some will be lost in higher direct taxes)
An increase in the national minimum wage can significantly impact aggregate demand, primarily by increasing the earnings of low-income workers. These workers tend to have a high marginal propensity to consume (MPC), meaning they are likely to spend a large portion of any additional income they receive. This increased spending can boost aggregate demand, stimulating economic activity. For instance, a rise in the minimum wage is estimated to benefit 2.7 million of the lowest-paid workers. A full-time adult worker earning the minimum wage could see an annual pay increase of approximately £1,800. This additional income can lead to higher consumer spending on goods and services, thereby driving up aggregate demand. However, it is important to note that some of this increased income will be offset by higher direct taxes, which can slightly temper the overall boost to consumption.
Higher aggregate demand resulting from increased consumer spending can lead to inflationary pressures. Businesses may raise prices to keep up with the increased demand for their products and services. Additionally, higher labor costs can prompt businesses to pass on these costs to consumers in the form of higher prices, further contributing to inflation. The impact of a higher minimum wage on employment levels is a subject of debate. On one hand, increased labor costs could lead some businesses to reduce their workforce, cut hours, or slow down hiring to manage the higher wage bill. This potential reduction in employment could dampen the positive effects on aggregate demand. On the other hand, the increase in aggregate demand due to higher consumer spending can stimulate business activity and potentially create new job opportunities. The net effect on employment largely depends on the balance between these opposing forces and the overall health of the economy.
Raising the minimum wage can have positive effects on worker productivity and efficiency. Better-paid workers tend to be more motivated and less likely to leave their jobs, reducing turnover and the costs associated with hiring and training new employees. This can lead to higher productivity and efficiency, benefiting businesses and the economy as a whole. Higher wages lead to increased tax revenues from both income taxes and consumption taxes (due to higher spending). This additional revenue can improve government finances and potentially be used for public investments or to reduce the fiscal deficit. However, there may also be higher costs associated with public sector wages if they are linked to minimum wage levels, as well as increased spending on social benefits for those who still require support.
An increase in the national minimum wage helps to reduce income inequality by raising the earnings of the lowest-paid workers. This redistribution of income can lead to a more equitable society and can enhance social cohesion. It also helps reduce poverty levels, providing more people with the financial means to participate in the economy fully. Increasing the national minimum wage has several macroeconomic effects. It can boost aggregate demand through higher consumer spending by low-income workers, who have a high marginal propensity to consume. This can stimulate economic growth but may also lead to inflationary pressures. The impact on employment is mixed, with potential job losses offset by increased demand-driven job creation. Higher wages can improve productivity and efficiency, increase tax revenues, and contribute to a more equitable distribution of income. However, careful consideration of potential inflation and employment effects is essential to maximise the benefits of a minimum wage increase.
Outline Macroeconomic effects of an increase in the National Minimum Wage- HIGHER WAGES
- Higher wages lead to increased income tax revenues and reduced reliance on means-tested welfare programmes such as Universal Credit ( Evaluation: Many public sector workers are below paid- higher NMW might cause a rise in government spending in areas such as social care
An increase in the national minimum wage has several macroeconomic effects, including a rise in income tax revenues and a reduction in reliance on means-tested welfare programs such as Universal Credit. As wages increase, more workers move into higher tax brackets, resulting in increased income tax collections. This additional revenue can strengthen government finances, providing more funds for public investments or reducing the fiscal deficit. Moreover, as low-income workers earn higher wages, their need for welfare support decreases, leading to potential savings for the government on programs designed to assist those with lower incomes.
However, the impact on public sector workers and government spending must be carefully evaluated. Many public sector workers are currently underpaid, and a higher national minimum wage could necessitate wage increases across this sector. This could lead to increased government spending, particularly in areas such as social care, where wages are typically lower. The government may face higher costs to ensure that public sector wages keep pace with the new minimum wage standards. This dynamic creates a complex fiscal environment where the benefits of increased tax revenues and reduced welfare spending must be weighed against the additional costs of higher wages for public sector employees. Additionally, the need to maintain the quality of public services, especially in crucial sectors like social care, underscores the importance of managing these wage adjustments carefully to avoid service disruptions and ensure continued support for vulnerable populations.
Microeconomic effects of a rise in extreme poverty in a country- Reduction in real capita income
- Reduction in real capita income causes a fall in consumption on essentials reading to rising malnutrition, child stunting and other health outcomes. Families in extreme poverty often cannot afford school fees, uniform, leading to lower enrollment and higher dropout rates
A rise in extreme poverty within a country has profound microeconomic effects, impacting individuals and households at a very fundamental level. One of the most immediate consequences is a reduction in real per capita income, which directly leads to a fall in consumption of essential goods and services. As families struggle to meet basic needs, spending on food, healthcare, and education decreases significantly. This reduction in consumption can lead to severe malnutrition, child stunting, and other adverse health outcomes, as families are unable to afford nutritious food and necessary medical care.
Malnutrition and poor health further perpetuate the cycle of poverty, as individuals suffering from these conditions are less able to work and be productive, thereby earning even less income. Health issues related to extreme poverty also impose additional costs on families, who may have to spend their limited resources on medical treatments instead of other essentials. This diversion of resources exacerbates their financial situation, making it even more difficult to escape poverty.
Education is another critical area affected by rising extreme poverty. Families in extreme poverty often cannot afford school fees, uniforms, and other associated costs, leading to lower enrollment rates and higher dropout rates among children. This lack of access to education deprives children of the opportunity to acquire the skills and knowledge necessary for better-paying jobs in the future, thereby perpetuating the cycle of poverty across generations. The inability to afford education also leads to an increase in child labour, as children are forced to work to contribute to the household income, further hindering their development and future prospects.
The reduction in real per capita income and the subsequent decline in consumption have broader economic implications as well. Lower consumption levels reduce overall demand for goods and services, which can lead to a slowdown in economic activity. Businesses may experience decreased sales, leading to lower revenues and potential job cuts, further exacerbating unemployment and poverty levels. This negative feedback loop creates a challenging environment for economic growth and development.
Microeconomic effects of a rise in extreme poverty in a country - Economic Hardship
- People in extreme poverty are often forced into informal or precarious employment without job security, benefits, or adequate wages. Economic hardship may compel; families to rely on child labour to supplement household income, depriving children of education
A rise in extreme poverty forces individuals and families into informal or precarious employment, characterised by a lack of job security, benefits, and adequate wages. These informal jobs often offer no legal protection or safety nets, leaving workers vulnerable to exploitation and abuse. Without the stability and benefits that come with formal employment, individuals in extreme poverty struggle to escape the cycle of poverty, as their earnings are typically insufficient to meet their basic needs or to save for the future.
Economic hardship often compels families to rely on child labour to supplement household income. This practice is particularly prevalent in regions where extreme poverty is widespread. Children who are forced into labour miss out on education, which is critical for breaking the cycle of poverty. Without education, these children are less likely to acquire the skills and knowledge necessary for better-paying jobs in the future, thereby perpetuating the cycle of poverty across generations.
The reliance on child labour not only deprives children of their right to education but also exposes them to hazardous working conditions. Child labourers often work in dangerous environments, which can lead to serious health issues, injuries, and even fatalities. The physical and psychological toll of such work further impedes their development and future prospects. Moreover, the widespread prevalence of informal and precarious employment undermines the overall economic stability of a country. Workers in informal sectors typically do not contribute to social security systems, leading to a lack of funds for public services and social welfare programs. This exacerbates the strain on already limited public resources, making it even more challenging for governments to provide support to those in need.
The informal economy also tends to operate outside of regulatory frameworks, leading to a lack of compliance with labour laws, safety standards, and tax regulations. This not only perpetuates poor working conditions but also reduces government revenues, which are crucial for funding public services and infrastructure. Addressing the issue of extreme poverty and its associated microeconomic effects requires a multifaceted approach. Policies aimed at increasing access to formal employment opportunities, enhancing labour protections, and improving wages are essential. Additionally, providing social safety nets and support for education can help reduce the reliance on child labour and ensure that children have the opportunity to acquire the skills needed for better-paying jobs in the future.
Macroeconomic effects of a rise in extreme poverty in a country - AGGREGATE DEMAND
- Aggregate Demand: Rising extreme poverty limits household consumption (often the main component of AD). Lower demand can also discourage private sector capital investment, as businesses may see reduced profitability and growth potential. Very low income limits the ability to save- link here to the harrod-Domar Growth Model
A rise in extreme poverty within a country has profound macroeconomic effects, particularly on aggregate demand, investment, and economic growth. One of the most immediate consequences of increasing poverty is a significant reduction in household consumption, which is often the main component of aggregate demand (AD). As more households fall into extreme poverty, their ability to purchase goods and services diminishes, leading to a contraction in overall demand. This reduced consumption negatively impacts businesses, which face lower sales and profitability, discouraging them from investing in expansion and innovation.
The decrease in aggregate demand can lead to a negative feedback loop. With lower consumer spending, businesses may experience reduced revenues, prompting them to cut costs by laying off workers or reducing wages. This further exacerbates poverty and decreases consumption, creating a vicious cycle that hampers economic growth. The lack of demand can also lead to underutilization of productive capacity, resulting in higher unemployment rates and idle resources within the economy.
Lower demand also discourages private sector capital investment. Businesses are less likely to invest in new projects, technology, or infrastructure when they anticipate weak demand and reduced profitability. This reluctance to invest stifles economic growth and limits improvements in productivity. In the long term, reduced investment can lead to slower technological advancement and a decline in the overall competitiveness of the economy.
Additionally, very low incomes limit households’ ability to save, which is crucial for capital accumulation and investment. The Harrod-Domar Growth Model highlights the importance of savings and investment for economic growth. According to this model, the growth rate of an economy is directly related to the level of savings and the efficiency with which these savings are transformed into investment. When extreme poverty rises, the savings rate declines because impoverished households prioritise immediate consumption over savings. This reduction in savings leads to lower levels of investment, further constraining economic growth.
The decrease in savings also affects the financial sector. With fewer savings, banks and financial institutions have less capital available to lend to businesses and individuals. This can lead to higher interest rates and reduced access to credit, making it even more challenging for businesses to finance new investments and for households to borrow for major expenses, such as education or housing.
Furthermore, the fiscal health of the government can be adversely affected by rising extreme poverty. Governments may need to increase spending on social safety nets, healthcare, and other support programs to assist those in poverty. At the same time, lower incomes lead to reduced tax revenues, as impoverished individuals and struggling businesses contribute less in taxes. This combination of higher public expenditure and lower tax revenue can lead to larger budget deficits and increased public debt, constraining the government’s ability to invest in infrastructure, education, and other critical areas that support long-term economic growth.
Macroeconomic effects of a rise in extreme poverty in a country - HUMAN CAPITAL AND LRAS
- Human Capital and LRAS- Education: Lower educational attainment, reduces the future skilled workforce and hinder long-term economic potential. Poor health outcomes associated with extreme poverty reduce labour productivity and increase healthcare costs, further straining public resources and LRAS.
Human capital, encompassing education and health, plays a critical role in determining a country’s long-run aggregate supply (LRAS) and economic potential. Extreme poverty can severely hinder human capital development, leading to negative implications for both education and health outcomes. Lower educational attainment resulting from extreme poverty significantly reduces the future skilled workforce, which is essential for long-term economic growth. Individuals trapped in poverty often face barriers to accessing quality education due to financial constraints, lack of infrastructure, and other socio-economic factors. As a result, they may not acquire the necessary skills and knowledge to participate effectively in the workforce or contribute to innovation and productivity improvements. The underinvestment in education perpetuates the cycle of poverty, as individuals are less equipped to secure higher-paying jobs or pursue opportunities for upward mobility. Moreover, a lack of skilled workers can deter investment in industries that require a knowledgeable workforce, limiting economic diversification and technological progress.
Poor health outcomes associated with extreme poverty also have detrimental effects on LRAS. Individuals living in poverty are more likely to experience malnutrition, inadequate healthcare access, and higher prevalence of diseases. These health challenges diminish labour productivity, as workers may suffer from chronic illnesses, physical disabilities, or mental health issues that impair their ability to work effectively. The impact of poor health extends beyond the individual level to affect the broader economy. Decreased labour productivity translates into lower output per worker, reducing overall economic output and potential GDP. Moreover, the burden of healthcare costs associated with treating preventable illnesses further strains public resources, diverting funds away from investments in infrastructure, education, and other areas critical for long-term economic development.
Explain the basics of the Kuznets Income Inequality- Growth curve
The Kuznets Curve hypothesis that as an economy develops and per capita incomes grow, income inequality first increases and eventually decreases, forming an inverted curve when plotted on a graph
Reasons why a period of economic growth might lead to an increase in inequality - Unskilled returns to skilled labour
- Unequal returns to skilled labour - rising wage premium for skilled occupations. Economic growth often increases the demand for skilled labour, leading to higher wages for those with advanced education and specialised skills
Economic growth, while generally positive for a country’s overall wealth, can sometimes lead to an increase in inequality due to several factors. One significant reason is the unequal returns to skilled labour. As the economy grows, the demand for skilled labour often increases more rapidly than for unskilled labour. This rising demand for skilled workers leads to higher wages for those with advanced education and specialised skills, creating a wage premium that benefits skilled workers disproportionately compared to their unskilled counterparts.
During periods of economic expansion, industries that require higher levels of education and specialised skills, such as technology, finance, and engineering, tend to grow more rapidly. This growth generates substantial income gains for professionals in these fields, widening the income gap between them and workers in lower-skilled, lower-paying jobs. The benefits of economic growth are thus concentrated among those who possess the skills and qualifications in demand, while those without such skills see relatively stagnant wages and fewer opportunities for advancement. Additionally, economic growth can also lead to increased inequality through capital income. Those who own capital—such as stocks, real estate, and businesses—tend to see their wealth grow faster than those who rely solely on labour income. As businesses expand and profits increase during periods of growth, the returns on investments and ownership stakes also rise, disproportionately benefiting the wealthy who are more likely to own significant assets. This exacerbates the wealth divide, as the rich get richer through capital gains and dividends, while the income of the average worker grows more slowly, if at all.
Furthermore, technological advancements that often accompany economic growth can also contribute to inequality. Automation and digitalization tend to replace routine, low-skill jobs, leading to job losses or wage reductions for workers in these positions. While new technology can create high-skill jobs, these typically require advanced training and education, which not everyone can access. This shift can leave low-skill workers behind, further widening the income gap.
Globalisation, which often accelerates during periods of economic growth, can also play a role in increasing inequality. While globalisation can drive overall economic expansion by opening up new markets and increasing efficiency, it tends to benefit highly skilled workers and those with capital more than low-skilled workers. Jobs that can be outsourced to countries with lower labour costs may disappear, putting downward pressure on wages and employment opportunities for less skilled domestic workers, while increasing profits and opportunities for those engaged in international trade and investment.
Reasons why a period of economic growth might lead to an increase in inequality - (Economic growth can lead to higher return on investments and capita)
- Economic growth can lead to higher return on investments and capital (such as stocks, real estate, and businesses). Individuals and groups who already own significant capital assets beets disproportionately . Extension: Piketty’s view about return on capital > rate of growth
Economic growth can lead to higher returns on investments and capital, such as stocks, real estate, and businesses. During periods of economic expansion, the value of these assets typically increases, generating substantial gains for those who already own significant capital. This disproportionate benefit for capital owners exacerbates wealth inequality, as individuals and groups with considerable investments see their wealth grow much faster than those who rely primarily on labor income.
Thomas Piketty’s analysis in “Capital in the Twenty-First Century” provides a crucial extension to this understanding. Piketty argues that when the rate of return on capital (r) exceeds the rate of economic growth (g), wealth inequality tends to increase. This occurs because those who own capital can reinvest their returns, compounding their wealth over time at a rate faster than the overall growth of the economy. In contrast, those who depend on wages and salaries for their income do not benefit from this compounding effect and therefore experience slower wealth accumulation. Piketty’s thesis highlights a fundamental dynamic in capitalist economies: the tendency for wealth to concentrate in the hands of a few, leading to increasing inequality. As the economy grows, the returns on investments and capital assets often outpace the growth in wages and salaries. This dynamic is particularly evident in periods of robust economic growth, where asset prices soar, benefiting capital owners significantly more than wage earners. Moreover, Piketty’s insights suggest that without intervention, the natural outcome of capitalist growth is a widening gap between the wealthy and the rest of society. This is because capital ownership is typically concentrated among the wealthy, who can leverage their existing assets to generate even more wealth. As a result, the wealth distribution becomes increasingly skewed, with a larger share of economic gains accruing to those at the top of the wealth ladder.
Reasons why a sustained period of increased living standards might cause an decrease in inequality - Social safety nets
- A sustained period of increased living standards can lead to a decrease in inequality for several reasons. One significant factor is that sustained economic growth often enables governments to expand social safety nets and welfare programs, providing crucial support to the most vulnerable populations. When governments have more fiscal resources due to increased economic activity, they can invest in various initiatives aimed at reducing poverty and inequality, such as public healthcare, education, housing, and direct financial assistance to low-income families.
These expanded social programs can help level the playing field by ensuring that all citizens have access to basic needs and opportunities, regardless of their economic status. For instance, improved access to quality education and healthcare can enable individuals from disadvantaged backgrounds to enhance their skills and health, leading to better job opportunities and higher earnings in the future. Additionally, direct financial assistance and subsidised services can immediately alleviate the financial burden on low-income families, improving their standard of living and reducing income inequality.
However, the effectiveness of these measures in reducing inequality is contingent on the government’s ability to implement them efficiently and equitably. In many countries, high levels of corruption and tax avoidance can severely limit the potential fiscal dividend that economic growth might bring. Corruption can lead to the misallocation of resources, where funds intended for social programs are diverted for personal gain or squandered on ineffective projects. This reduces the overall impact of government spending on inequality reduction.
Tax avoidance, particularly by wealthy individuals and corporations, can also undermine the government’s revenue base. When significant portions of potential tax revenue are lost due to avoidance schemes, the government has fewer resources to invest in social safety nets and public services. This not only limits the scope of welfare programs but also places a disproportionate tax burden on lower-income individuals, exacerbating inequality. Furthermore, the structure of welfare programs and social safety nets themselves must be designed to effectively target and reach those in need. In some cases, poorly designed or inadequately funded programs may fail to make a significant impact on reducing inequality. It is essential for governments to ensure that social programs are well-targeted, efficiently managed, and adequately funded to achieve their intended goals.
Reasons why a sustained period of increased living standards might cause an decrease in inequality- CREATION OF WEALTH
- As living standards rise, opportunities or upward economic mobility increase. Better living standards can encourage entrepreneurship and innovation, providing opportunities for wealth creation across a broader segment of the population. (Evaluation: there are often persistent structural barriers to economic and social mobility
As living standards rise, opportunities for upward economic mobility tend to increase. Improved living standards can foster an environment that encourages entrepreneurship and innovation, thereby providing opportunities for wealth creation across a broader segment of the population. When people experience better living conditions, they often have greater access to education, healthcare, and financial resources, all of which are crucial for developing new ideas and starting businesses.
Higher living standards typically mean that more individuals can afford to invest in their education and skills, which are essential for entrepreneurial activities. With better education and training, people are better equipped to identify market opportunities, develop innovative products or services, and efficiently manage their businesses. Additionally, improved health outcomes associated with higher living standards ensure that individuals are more productive and capable of working towards their economic goals.
Access to financial resources is another critical factor. When living standards improve, more people can save money and access credit, which are vital for starting and expanding businesses. Financial institutions are also more likely to thrive in an environment where people have higher incomes and greater financial stability, leading to an increase in the availability of loans and investment capital for aspiring entrepreneurs. This increased access to capital enables a wider range of individuals to pursue entrepreneurial ventures, contributing to wealth creation and economic mobility.
Moreover, higher living standards can create a more conducive environment for innovation. As people’s basic needs are met, they can focus more on creative and strategic thinking. This shift can lead to the development of new technologies and business models that drive economic growth and create new opportunities for wealth generation across various segments of the population. Encouraging innovation can also attract investment from both domestic and international sources, further boosting economic development and reducing inequality. However, despite these potential benefits, there are often persistent structural barriers to economic and social mobility that can limit the impact of rising living standards on reducing inequality. These barriers can include factors such as discrimination, unequal access to high-quality education and healthcare, and geographical disparities in economic opportunities. For instance, individuals from marginalised communities may continue to face discrimination in the job market or in accessing financial resources, limiting their ability to benefit fully from improved living standards.
Outline the Exam Gold Diagrams for Inequality
- Lorenz curve to show changing income wealth inequality
- Analysis diagrams for minimum wage
- Analysis diagrams for rent control
- Analysis diagrams for childcare subsidies
- Labour market diagram for monopsony employer
Outline what is meant by hidden unemployment
- Hidden unemployment indicates that the true level of unemployment is higher than the official rate suggests
- This can include discouraged workers (often long-term unemployed) and the under-employed (people who are under-employed (people who are employed part-time or in hobs that do not fully utilise their skills and education, but would like a full-time employment or more suitable jobs)
How does economic inactivity differ from unemployment
- Unemployed- people out of work, actively searching for work and available to work
- Inactive- people of working age, not looking for work- include long-term sick, students, early retirees, unpaid carers who had given up a job
Micro & Macro effects of rising unemployment
- New data shows that Uk unemployment rate rose to its highest for almost a year
- The jobless rate increased to 4.3% of the labour force between January and March 2024
- The number of vacancies also dropped meaning more unemployed people are competing for the same jobs
