List of Macro Essay Questions:
Discuss the possible contribution of supply-side reforms to achieving an improvement in the UK
balance of trade in goods (25 marks)
Assess the importance of a floating exchange rate to a country trying to achieve macroeconomic
stability (25 marks)
Explain how interdependence and uncertainty affect the behaviour of firms in oligopolistic
markets? (15 marks)
‘Increased protectionism could be damaging as the UK is placing much of its hopes for export
success on the growing Chinese market’. Evaluate the view that the use of protectionism is
inevitably damaging to economies (25 marks)
Discuss the view that monetary policy has been the most important factor behind the recovery of
the UK economy in recent years (25 marks)
, Discuss the possible contribution of supply-side
reforms to achieving an improvement in the UK
balance of trade in goods (25 marks)
Supply-side reforms are macroeconomic policies that are aimed at improving the long-term productive potential of
an economy, in order to increase the long-run trend growth rate. As of 2017 Q1, the UK’s economy was running a
deficit of £17bn on the current account of the balance of payments, which means that the value of imported goods
exceeded the value of exported goods. Though this highlights the weaknesses in the UK manufacturing sector, there
are both public sector and private sector reforms that may aid the competitiveness of the UK’s export market, thus
improving their trade balance.
Investment in training and education is a supply-side policy that may improve the long-term labour productivity of
the UK’s economy. Investing in human capital provides workers with the necessary skills, mobility and flexibility
required for both an efficient labour force and better employment prospects. In addition, improving the skills of
workers makes the labour force more productively efficient, which is likely to reduce the costs of production in
export-based industries in the long-term.
This is shown by diagram A, in which increased labour productivity leads to an
outward shift of the LRAS, from LRAS1 to LRAS2, increasing the long-term
productive capacity of the economy. In addition, an outward shift of supply
leads to a fall in the price level, from PL1 to PL2, which reduces the cost of
production for firms. As a result, UK firms can pass this saving onto foreign
consumers, making exports cheaper and more price competitive. This may, in
theory, increase the demand for exports by foreign markets and lead to an
overall improvement in the balance of trade, as the value of exports will be
relatively higher. However, the issue with education and training investments
is that they are long-term policies and the trade deficit of the UK, in the short-
term, is likely to persist. In addition, it is uncertain as to how these policies will
be received, as people may be unwilling to participate in training schemes,
therefore preventing them from gaining the necessary skills to improve labour efficiency.
A fiscal supply-side policy of reducing corporation tax may improve the UK’s balance of trade, as a reduction in
corporation tax allows firms to have a greater retention of their profits. This, in turn, provides firms with the
opportunity to reinvest their profits into research and development projects, allowing the UK export industry to
produce innovative, higher quality goods. A perceived improvement in the quality and range of UK exports may lead
to an increase in export demand by foreign markets, therefore improving the UK’s balance of trade, as the value of
exports is relatively higher. Similarly, like investment and training programmes, research and development projects
are time consuming and are associated with a time lag. In addition, the extent to which innovative goods impact the
UK’s balance of trade depends on the technological progress of competing economies. For nations like South Korea,
in which the manufacture of hi-tech products, by companies like Samsung, exceed the UK, their sustained
technological progress is likely to be higher than that of the UK. Accompanied by the aid of cheap labour,
high technology goods are likely to be cheaper to produce in South Korea, and thus more price competitive than
competing UK goods. Therefore, while the quality of UK goods may increase export demand, the relative
competitiveness of the UK may not increase as other economies are advancing at faster rates than the UK.
Another supply-side policy may be the privatisation and deregulation of export-related firms by the UK government.
Due to the profit motive in the private sector, privatisation of firms may lead to increased productivity, in order to
remain competitive amongst other firms. In turn, this may lead to increased efficiency of the UK export market, in
which lower costs of production may be translated into lower export costs,
which would make them more price competitive. The lower costs of
exports are likely to increase the demand for exports and thus, improve
the UK’s position on the current account of the balance of payments.
Though supply side policies may help improve the UK’s balance of trade in
the long-term, there are other policies that may be implemented to
Discuss the possible contribution of supply-side reforms to achieving an improvement in the UK
balance of trade in goods (25 marks)
Assess the importance of a floating exchange rate to a country trying to achieve macroeconomic
stability (25 marks)
Explain how interdependence and uncertainty affect the behaviour of firms in oligopolistic
markets? (15 marks)
‘Increased protectionism could be damaging as the UK is placing much of its hopes for export
success on the growing Chinese market’. Evaluate the view that the use of protectionism is
inevitably damaging to economies (25 marks)
Discuss the view that monetary policy has been the most important factor behind the recovery of
the UK economy in recent years (25 marks)
, Discuss the possible contribution of supply-side
reforms to achieving an improvement in the UK
balance of trade in goods (25 marks)
Supply-side reforms are macroeconomic policies that are aimed at improving the long-term productive potential of
an economy, in order to increase the long-run trend growth rate. As of 2017 Q1, the UK’s economy was running a
deficit of £17bn on the current account of the balance of payments, which means that the value of imported goods
exceeded the value of exported goods. Though this highlights the weaknesses in the UK manufacturing sector, there
are both public sector and private sector reforms that may aid the competitiveness of the UK’s export market, thus
improving their trade balance.
Investment in training and education is a supply-side policy that may improve the long-term labour productivity of
the UK’s economy. Investing in human capital provides workers with the necessary skills, mobility and flexibility
required for both an efficient labour force and better employment prospects. In addition, improving the skills of
workers makes the labour force more productively efficient, which is likely to reduce the costs of production in
export-based industries in the long-term.
This is shown by diagram A, in which increased labour productivity leads to an
outward shift of the LRAS, from LRAS1 to LRAS2, increasing the long-term
productive capacity of the economy. In addition, an outward shift of supply
leads to a fall in the price level, from PL1 to PL2, which reduces the cost of
production for firms. As a result, UK firms can pass this saving onto foreign
consumers, making exports cheaper and more price competitive. This may, in
theory, increase the demand for exports by foreign markets and lead to an
overall improvement in the balance of trade, as the value of exports will be
relatively higher. However, the issue with education and training investments
is that they are long-term policies and the trade deficit of the UK, in the short-
term, is likely to persist. In addition, it is uncertain as to how these policies will
be received, as people may be unwilling to participate in training schemes,
therefore preventing them from gaining the necessary skills to improve labour efficiency.
A fiscal supply-side policy of reducing corporation tax may improve the UK’s balance of trade, as a reduction in
corporation tax allows firms to have a greater retention of their profits. This, in turn, provides firms with the
opportunity to reinvest their profits into research and development projects, allowing the UK export industry to
produce innovative, higher quality goods. A perceived improvement in the quality and range of UK exports may lead
to an increase in export demand by foreign markets, therefore improving the UK’s balance of trade, as the value of
exports is relatively higher. Similarly, like investment and training programmes, research and development projects
are time consuming and are associated with a time lag. In addition, the extent to which innovative goods impact the
UK’s balance of trade depends on the technological progress of competing economies. For nations like South Korea,
in which the manufacture of hi-tech products, by companies like Samsung, exceed the UK, their sustained
technological progress is likely to be higher than that of the UK. Accompanied by the aid of cheap labour,
high technology goods are likely to be cheaper to produce in South Korea, and thus more price competitive than
competing UK goods. Therefore, while the quality of UK goods may increase export demand, the relative
competitiveness of the UK may not increase as other economies are advancing at faster rates than the UK.
Another supply-side policy may be the privatisation and deregulation of export-related firms by the UK government.
Due to the profit motive in the private sector, privatisation of firms may lead to increased productivity, in order to
remain competitive amongst other firms. In turn, this may lead to increased efficiency of the UK export market, in
which lower costs of production may be translated into lower export costs,
which would make them more price competitive. The lower costs of
exports are likely to increase the demand for exports and thus, improve
the UK’s position on the current account of the balance of payments.
Though supply side policies may help improve the UK’s balance of trade in
the long-term, there are other policies that may be implemented to
