Monday 20 May 2024 Afternoon Time allowed: 2 hours Materials For this paper you must have: • an AQA 12-page answer book • a calculator. Instructions • Use black ink or black ball-point pen. Pencil should only be used for drawing. • Write the information required on the front cover of your answer book. The Paper Reference is 7136/2. • In Section A, answer EITHER Context 1 OR Context 2. • In Section B, answer ONE essay. Information • The marks for questions are shown in brackets. • The maximum mark for this paper is 80. • There are 40 marks for Section A and 40 marks for Section B. Advice • You are advised to spend 1 hour on Section A and 1 hour on Section B. A-level ECONOMICS Paper 2 National and International Economy 2 IB/H/Jun24/7136/2 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 (GDP per hour worked, US $) Productivity change 2010–2021 (%) Life expectancy at birth (years) Gini coefficient Expected years of schooling (years) CO2 emissions per capita (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 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 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’ 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 effective use of the tax and benefits system are also key factors in driving productivity growth. 5 10 15 20 Source: News reports, 2022 3 IB/H/Jun24/7136/2 Turn over ► 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 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 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 have argued that tackling these issues, to prevent a further fall in living standards, is more important than introducing measures to increase productivity. 5 10 15 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]