Explain the role of improved productivity in achieving economic growth.

Discuss the view that economic growth can only be achieved at the expense of other macroeconomic objectives such as a low and stable rate of inflation and equity in the distribution of income.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of productivity, improved productivity, economic growth
• diagram to show a shift of short-run aggregate supply (SRAS) to the right and/or long-run aggregate supply (LRAS) to the right or use of a production possibility diagram
• explanation that improved productivity will reduce unit costs of production in the SR and shift the SRAS to the right, leading to an increase in gross domestic product (GDP) and short-run economic growth; and/or an explanation that improved productivity will increase the productive capacity of the economy in the LR, thus shifting LRAS to the right and causing long-run economic growth
• examples of improved productivity in relation to a particular economy.

NB if no explicit and precise understanding of productivity is demonstrated, a maximum of Level 2 should be awarded.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definition of economic growth, inflation, low and stable inflation, equity in the distribution of income
• diagram to show growth through either an increase in aggregate demand (AD) or a shift of LRAS to the right, or any other relevant diagram
• explanation of how economic growth might conflict with other macroeconomic objectives, such as low and stable prices and a more equitable distribution of income and/or low unemployment, a satisfactory balance of payments (external balance) and environmental objectives
• examples of instances where growth has improved or worsened one or more of the above macroeconomic objectives
• synthesis and evaluation (discuss).

Discussion may include: circumstances in which growth might positively impact on price stability and the distribution of income and/or unemployment and the balance of payments, the different impacts of short term and long-term growth, consideration of the word “only”.

NB At least two macroeconomic objectives need to be considered. Where only one is considered, without any evaluation, a maximum of Level 2 should be awarded. Where only one is considered, with evaluation, a maximum of Level 3 should be awarded. Thus, Level 4 requires two objectives and some evaluation.

A majority of candidates did not understand the term ‘productivity’. Some were able to explain how it is achieved through technological advances, but few were able to accurately define the term. Some were able to diagram the LRAS curve or PPC curve shifting outwards but could not accurately explain why they were shifting outwards. Examples of improved productivity in relation to a particular economy were almost never given. There was also much confusion between the terms ‘production’ and ‘productivity’.

This question was not answered well by most of the candidates who attempted it. The concept of economic growth seems to have been reasonably well understood, but few were able to relate economic growth to the other macroeconomic objectives. Often the question was answered as if it were, “What are the causes of economic growth,” but not directly answering the question posed. Some could analyse the statement and explain why the achievement of economic growth does conflict with other objectives, but most could not evaluate why economic growth can be achieved without conflicting with the other objectives.