A-level
ECONOMICS
Paper 2 National and International Economy
Monday 20 May 2024 Afternoon Time allowed: 2 hours
7136/2
, 2
Section A
Answer EITHER Context 1 OR Context 2.
EITHER
Context 1 Total for this context: 40 marks
Productivity and living standards
Study Extracts A, B and C and then answer all parts of Context 1 which follow.
Extract A: Indicators of economic performance and living standards, selected nations, 2021
Productivity Productivity Life Gini Expected CO2
(GDP per change expectancy coefficient years of emissions
hour worked, 2010–2021 at birth schooling per capita
US $) (%) (years) (years) (tonnes)
Estonia 42.9 +28.8 77.1 0.308 15.9 7.9
Hungary 39.9 +16.7 74.5 0.300 15.0 5.0
UK 59.1 +3.5 80.7 0.351 17.3 4.9
Source: OECD & WHO, 2022
Extract B: The UK’s productivity puzzle
The economist Paul Krugman once wrote that “Productivity isn’t everything, but, in the long-run,
it is almost everything”. Productivity is a key determinant of living standards because it affects
the amount of goods and services that can be produced, and therefore consumed, from the
resources that are available. Historically, productivity has increased over time, which has
contributed to real wage rises and improved living standards. Although productivity can be 5
measured in several different ways, one common way is GDP per hour worked.
When economies move through their economic cycles, it is not unusual for productivity to fall
during downturns, as happened in 2008–2009. However, the persistently low rate of growth of
productivity that the UK has experienced since 2010 is unusual. Productivity growth in other
nations, including Estonia and Hungary, has been much higher. The UK’s low rate of 10
productivity growth is often referred to as ‘The UK’s productivity puzzle’. If the pre-2007 trend in
productivity growth had continued, UK productivity would now be over 30% higher than it is
today.
Many economists have tried to provide reasons for the productivity puzzle. Among the
suggestions are low levels of investment and the impact of the financial crisis on banks’ 15
willingness to lend to new businesses. More people working beyond normal retirement age has
led to an older workforce and may have affected productivity. These factors may be relevant but
they do not provide a complete explanation for the weakness in UK productivity growth.
So, what can be done to raise productivity? Investing in human capital to improve people’s skills
and supporting improvements in technology should help. Creating a stable economy and 20
effective use of the tax and benefits system are also key factors in driving productivity growth.
Source: News reports, 2022
, 3
Extract C: Falling living standards in the UK?
According to the Office for Budget Responsibility (OBR), in 2022, the UK faced its biggest fall
in living standards on record as the surging cost of living reduced real wages. The OBR also
forecast a significant increase in unemployment.
Energy and food bills had risen dramatically due to shocks to the economy, such as labour
shortages, a depreciation of the pound and the war in Ukraine. Inflation was at a 41-year high 5
and average real household income was expected to fall by 7%, back to the level it was in
2013. The rising cost of living led to industrial action by workers trying to achieve pay
increases that compensated for the rise in prices.
In response to the rise in inflation, the Bank of England increased Bank Rate. The rise in Bank
Rate meant that financial institutions raised the rate of interest on mortgages. As a result, it 10
has been forecast that house prices are likely to fall by around 9% over the next two years.
In his Autumn Statement of 2022, the UK Chancellor of the Exchequer, Jeremy Hunt,
announced tax rises and cuts in public spending even though the UK economy was expected
to contract in 2023. The cuts in public spending are likely to damage public services and came
at a time when poverty and inequality appeared to be rising with life expectancy falling. Some 15
have argued that tackling these issues, to prevent a further fall in living standards, is more
important than introducing measures to increase productivity.
Source: News reports, 2022
0 1 Using the data in Extract A, calculate the ratio of the UK’s GDP per hour worked to $1 of
GDP per hour worked in Hungary.
Give your answer to two decimal places.
[2 marks]
0 2 Explain how the data in Extract A show that higher productivity may result in higher
living standards.
[4 marks]
0 3 Extract C (lines 4–5) states ‘Energy and food bills had risen dramatically due to shocks to
the economy, such as labour shortages, a depreciation of the pound…’
With the help of a diagram, explain how a depreciation of the pound may cause inflation.
[9 marks]
0 4 Extract B (lines 4–5) states: ‘Historically, productivity has increased over time, which has
contributed to real wage rises and improved living standards.’
Using the data in the extracts and your knowledge of economics, assess the view that the
government should make raising productivity a priority in order to improve living standards
in the UK.
[25 marks]
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