AQA A2 Economics Unit 4 - June 20th

Wow, you're so awesome at this!

I'm attempting the following essay question:
To what extent do you regard a public sector expansion as beneficial to the UK economy?

I initially thought that by public sector expansion, they meant an increase in G. But that may not be true. I'm thinking an expansion in public sector services, such as provision of public goods? But I'm really struggling to make a point out of that. Help?

Hey guys are the benefits of globlisations the same as free trade?
Such as increased exports, lower prices, Economies of scale, competition etc.

Globalisation and free trade seem very similar and interlinked to me

Hmmm.. Well what springs to mind for me is:

Expansion not beneficial - public sector jobs e.g. NHS nurse. Link to current situation austerity measures - public sector jobs being cut, wages frozen. This counts as public sector contraction as the gvt uses public sector to reduce budget deficit (forecast £163bn/11.1% GDP in 2012). These contractionary measures are good as they help the economy reduce the debt - debt is bad as we could go down in credit rating, interest payments are higher, causing more debt - and also reducing the deficit - deficit is bad because we are spending money we don't have. Also reducing budget deficit means gvt has more money to spend on benefits, supply side policies etc.



Public sector expansion is beneficial -
If the gvt were to expand public sector (i.e. create more jobs there such as nurses, teachers), they would have to be spending more. Good from a Keynesian perspective - G part of AD so AD increases. LRAS curve shows that because we are at such low capacity/spare capacity an increase in AD will achieve all 3 objectives of growth, employment with only negligible inflation. Further because our inflation is largely cost push (commodity prices - and these have been decreasing in the past 6 months) gvt may as well increase AD in the hopes of a positive multiplier effect.
Expansion would fit better with MPCs low interest rates (UK in liquidity trap - monetary policy ineffective - so we need an upwards pressure on growth). Otherwise we have exp. monetary policy with 0.5% i/r and QE, expansionary fiscal with cutting 50% tax rate (even though this is mainly political), BUT contractionary fiscal with cutting public sector. Logically we should expand then, otherwise things cancel each other out.

So overall, good from a Keynesian perspective, bad from a Classical. evaluation would be:
: which objective most important? if you think growth and employment, then YES to the question, if inflation, then possibly NO
: it depends where we are in the economy (and since we are nowhere near full employment objectives can all be achieved, meaning no tradeoff)
: depends on confidence, situation in other countries, what other inflationary/growth pressures are - where would we be WITHOUT what gvt has already done?


I can't think of anything else. That answer doesn't have many graphs in except LRAS and SR AD/AS unfortunately x

p.s. so yes, I interpreted the question as public sector jobs and services

When an economy is at the natural rate of unemployment is that unemployment purely frictional or is it also structural? I don't think the book is that clear about this.

Production possibility boundary

Crowding out would be a major point for a question like that.

Hmmm.. Well what springs to mind for me is:

Expansion not beneficial - public sector jobs e.g. NHS nurse. Link to current situation austerity measures - public sector jobs being cut, wages frozen. This counts as public sector contraction as the gvt uses public sector to reduce budget deficit (forecast £163bn/11.1% GDP in 2012). These contractionary measures are good as they help the economy reduce the debt - debt is bad as we could go down in credit rating, interest payments are higher, causing more debt - and also reducing the deficit - deficit is bad because we are spending money we don't have. Also reducing budget deficit means gvt has more money to spend on benefits, supply side policies etc.

Public sector expansion is beneficial -
If the gvt were to expand public sector (i.e. create more jobs there such as nurses, teachers), they would have to be spending more. Good from a Keynesian perspective - G part of AD so AD increases. LRAS curve shows that because we are at such low capacity/spare capacity an increase in AD will achieve all 3 objectives of growth, employment with only negligible inflation. Further because our inflation is largely cost push (commodity prices - and these have been decreasing in the past 6 months) gvt may as well increase AD in the hopes of a positive multiplier effect.
Expansion would fit better with MPCs low interest rates (UK in liquidity trap - monetary policy ineffective - so we need an upwards pressure on growth). Otherwise we have exp. monetary policy with 0.5% i/r and QE, expansionary fiscal with cutting 50% tax rate (even though this is mainly political), BUT contractionary fiscal with cutting public sector. Logically we should expand then, otherwise things cancel each other out.

So overall, good from a Keynesian perspective, bad from a Classical. evaluation would be:
: which objective most important? if you think growth and employment, then YES to the question, if inflation, then possibly NO
: it depends where we are in the economy (and since we are nowhere near full employment objectives can all be achieved, meaning no tradeoff)
: depends on confidence, situation in other countries, what other inflationary/growth pressures are - where would we be WITHOUT what gvt has already done?


I can't think of anything else. That answer doesn't have many graphs in except LRAS and SR AD/AS unfortunately x

p.s. so yes, I interpreted the question as public sector jobs and services

That's to do with consumers' propensity to spend/save, and speculation right? So if taxes decreased they would expect a later increase so don't respond in the theoretical way of spending their now-higher disposable income. And then something to do with bonds.. I never got the bonds bit??

Is this the PPF (production possibility frontier)

Wow, thank you so much for such a detailed response.

I am a bit confused with the bolded part and the link between public sector expansion and interest rates.
And yes, crowding out would perfectly fit in against the increased spending argument. Thanks a lot.

How are you revising btw?

Huh? Crowding out is where government spending leads to high interest rates (due to more bonds needing to be issued) which stops the private sector from investing...

Crowding out can also happen when the government competes for resources (labour and capital resources) and pushes the price higher.

Is this the PPF (production possibility frontier)

So globalisation happens when economic integration between countries increases free trade and reduces protectionist measures...is this right??