Eco2 Context2

Extract D- Productivity (real GDP per worker), index numbers, 2007=100

Year	UK	US
2003	93	95
2004	94	97
2005	95	98
2006	97	99
2007	100	100
2008	98	100
2009	96	101
2010	97	104
2011	97	105

[Source: official statistics, September 2012]

Extract E

Data published this week indicate that, in 2011, British workers were 20% less productive than the average for the G7 countries and almost 40% less productive than the average worker in the US. This is the biggest gap since such statistics were first published in 1990.

In the US, between 2007 and 2011, real GDP rose by 1% but the number of people in work fell by 4%. By contrast, over the same period of time, real GDP in the UK fell by 2.4% while employment rose by 0.3%. The UK economy has been creating jobs despite the slowest economic recovery in living memory. Many people would argue that is better to have more people working less productively than having rising productivity and rising unemployment.

However, in the long run, productivity growth is the key to prosperity. Rising living standards, generated by economic growth, are most likely to be achieved if the amount produced per worker rises. Productivity growth reduces costs and allows us to compete more effectively with other countries. Rising exports, required to reduce the UK’s large deficit on the current account of the balance of payments, depend upon us achieving an increase in productivity, particularly in the manufacturing sector.
[source: news reports, September 2012]

Extract F

The output of the UK economy is still 3% below what it was in 2007 and output is 15% smaller than it would have been if the UK economy had grown at its previous post-war trend rate. The failure of the UK economy to grow over this period has meant that many UK residents have seen their standard of living fall. Furthermore, low productivity growth is one reason why inflation has remained above the Government’s 2% target.

One explanation for the fall in labour productivity is that, because it is costly to train and to hire and fire staff, firms may have retained workers in the expectation that demand will pick up. Therefore, government action to stimulate aggregate demand, leading to an increase in output, should also be accompanied by a rise in labour productivity.

Investment in both physical and human capital affects productivity. Both the shortage of credit and the high cost of borrowing have reduced investment and the capital stock. As well as making it easier and cheaper for firms to borrow, appropriate supply-side policies may be required to give a boost to productivity.

The US, unlike the UK, has not experiences a fall in labour productivity during the past five years. The fall in labour productivity has helped employment in the UK in the short run but the long-run consequences of low productivity growth are likely to be less favourable.
[Source: news reports, September 2012]

5 mark: Define the term ‘capital stock’

8 mark: Using Extract D, identify two significant points of comparison between the change in real GDP per worker in the UK and the change in real GDP per worker in the US over the period shown.

12 mark: Explain two policies that the government could adopt to try to increase labour productivity in the UK.

25 mark: Using the data and your economic knowledge, assess the likely impact of a sustained period of low productivity growth on the performance of the UK economy.