Connect education, infrastructure, labour reform, lower direct taxes, deregulation and privatisation to incentives and productivity before judging macroeconomic effects and time…
Which statement about supply-side policy is correct?
It aims to increase the productive potential of the economy.
It aims to increase total demand in the economy.
It involves changes in the equilibrium foreign exchange rate.
It involves changes in the rate of interest.
Read the source material carefully before answering Question 1.
Source material: some problems affecting the Greek economy
Greece is the country that was worst affected by the European financial crisis that began in 2008. From the start of the crisis, no other European economy had such a large percentage fall in GDP. Greece's GDP fell by in 2011 . One reason for this was a very strong foreign exchange rate.
Since 2014, other European economies have recorded positive economic growth rates. Among the reasons for this were successful supply-side policy measures and an improving global economy. The Greek government introduced market-friendly measures, including privatisation and labour market reforms. These measures brought back some investors and moved the Greek economy closer to a market economic system. However, Greece's output still fell. This may be due to the fact that none of the government policies have managed to change population trends.
The Greek population has been falling since 2010 . Greece has the third most rapidly ageing population in the world, behind Japan and Italy. The economy has not made good use of its older population because a significant percentage of workers retire earlier than the national retirement age of 67. For example, of employees in the public sector retire before 61 years old. In addition, the crisis also led to high levels of emigration.
However, those living on some Greek islands have escaped the effects of the crisis. Income from tourism has continued to flow into the islands. An island called Ikaria has also managed to gain international attention as one of the healthiest places in the world. Approximately of the people who live on this island, live until they are over 90 . Health problems are also much less frequent than those living elsewhere. Overall, however, Greece has managed to improve its Human Development Index (HDI) value as shown in Fig. 1.
Fig. 1 Greece's GDP per head (\$) and HDI value from 2010-2015
Explain the two supply-side policy measures being used by the Greek government.
Read the source material carefully before answering Question 1.
Source material: Changes in Ecuador's economy
Oil makes up one third of Ecuador's exports. Ecuador has, however, decided to produce less oil and more of other goods and services. This decision has affected how products are made in Ecuador. For example luxury textile production, such as luxury scarves and jumpers, uses fewer capital goods than oil production. Tourism relies on natural resources including sunshine and beaches.
One reason Ecuador's government has encouraged less reliance on oil, is the large changes that often occur in the oil market. Between 2014 and 2016, demand for Ecuador's exports fell which caused a significant reduction in export revenue. This reduction, combined with a decrease in government spending, caused the country's output to decline.
Between 2016 and 2019, there was some improvement in Ecuador's economy. Incomes and household spending increased and more cars were purchased. Table 1.1 shows the GDP per head ($) and car ownership (per 1000 people) in selected countries in 2019.
Table 1.1 GDP per head (\$) and car ownership (per 1000 people) in selected countries 2019
Ecuador's government borrowed from China to spend on building more roads. The construction of these roads increased employment and was expected to influence transport costs in the long run.
Between 2016 and 2019, Ecuador's textile industry benefited from the improvement in the road network. Despite strong competition from foreign textile firms, Ecuador's textile firms increased the scale of their production. Wages paid in the textile industry did not rise significantly. A very small wage increase can affect trade union activity and emigration.
Some of Ecuador's workers emigrate to find jobs in other countries, particularly Italy, Spain and the US. These workers have a range of skills and they work in a variety of jobs abroad, some of which provide training. Many, but not all, workers send money home to their families.
Analyse how building more roads can increase a country's economic growth rate.