Evaluate whether a persistent current account deficit is a serious problem for a developed economy.
2.1.4 · 4.1.7
It is a problem- Deficit every year since the 1980s; 2.8% of GDP in Q2 2026.
- Goods deficit of 7.6% of GDP shows weak manufacturing competitiveness.
- Depends on foreign investors; the 2022 mini-budget showed how fast confidence can go.
Less serious- Services surplus of 6.6% of GDP shows real strength.
- Floating pound can fall to correct the deficit.
- Inflows often fund investment, and debts are mostly in sterling.
ChainImports of goods > exports → current account deficit → must be financed by a financial account surplus (selling gilts, shares, firms) → if inflows stop, pound falls → imported inflation ↑ and interest rates may need to rise.
JudgmentSize, cause and financing matter. A deficit of 2–3% funded by long-term investment is manageable. The risk is the combination with a budget deficit ("twin deficits") and low productivity.
Evaluate the effectiveness of raising interest rates to reduce inflation.
2.1.2 · 2.6.2 · 4.4.3
It worked- Bank Rate 0.1% (2021) to 5.25% (2023); CPI fell from 11.1% (Oct 2022) to about 2% by mid-2024.
- Mortgage costs rose sharply, cutting spending.
- Kept inflation expectations anchored.
Limits- Most of the 2022 spike was cost-push from energy; it fell as gas prices fell.
- Long lags: many mortgages are fixed for 2–5 years.
- Rates cannot stop an oil shock, as in 2026.
ChainBank Rate ↑ → mortgage and loan rates ↑ → disposable income and borrowing ↓, saving more attractive → C and I ↓ → AD ↓ → demand-pull inflation and wage pressure ease.
JudgmentRates work on demand and expectations, not on world energy prices. In 2022–23 they mainly stopped a cost-push shock becoming a wage–price spiral. That is why the Bank held, rather than cut, in 2026.
Assess the main causes of slow productivity growth in a developed economy.
2.3 · 2.5 · 2.6.3
Main causes- Low business investment, worsened by Brexit uncertainty after 2016.
- Productivity gaps between London and other regions.
- Skills gaps and long-term sickness.
Other views- Measurement: ONS's new method (2026) halves the slowdown.
- Every rich economy slowed after 2008; the UK fell most because finance and oil had been big drivers.
- Cheap labour from migration may have reduced the need to invest.
ChainUncertainty and weak demand → firms delay investment → less capital and technology per worker → output per hour grows slowly → LRAS and real wages grow slowly.
JudgmentNo single cause. Investment is the strongest explanation because it links to skills, technology and infrastructure. Measurement problems mean the puzzle is real but smaller than once thought.
Evaluate the economic effects on a country of leaving a trading bloc.
4.1.5 · 4.1.6
Costs- OBR: trade ~15% and productivity 4% lower in the long run than if the UK had stayed.
- Rules of origin and customs checks; small exporters stopped selling to the EU.
- Business investment weak since 2016.
Benefits / offsets- Own trade policy: CPTPP, India and US deals.
- Control of migration and regulation.
- Services exports have grown strongly since 2021.
ChainLeave single market → non-tariff barriers ↑ → cost of trading with EU ↑ → trade with largest partner ↓ → less specialisation and competition → productivity and LRAS ↓.
JudgmentEffects depend on time scale and sector. Goods traders lost most; services less. New deals are with distant, smaller partners, so gravity suggests they cannot replace EU trade.
Discuss whether a government should prioritise reducing its national debt.
4.5.3 · 4.5.4
Yes- Net debt 93.8% of GDP; interest above £100 bn a year.
- About a quarter of gilts are index-linked, so inflation raises interest costs at once.
- The 2022 gilt crisis shows markets can punish weak plans.
Not now- Austerity after 2010 coincided with weak growth and public investment.
- Debt in own currency with long maturity (about 14 years).
- Growth lowers the debt ratio more than cuts.
ChainHigh debt + higher interest rates → debt interest ↑ → less room for public services and investment → taxes ↑ or spending ↓ → AD ↓ in the short run; but credibility ↓ if ignored.
JudgmentDepends on the gap between interest rates (r) and growth (g). When r > g, debt rises on its own, so some consolidation is needed. Cutting investment to meet fiscal rules can harm long-run growth.
Evaluate policies to reduce regional inequality within a country.
4.2.2 · 2.6.3
Policies that help- Transport investment in northern cities.
- Devolution to mayors with control of skills and transport.
- Moving public bodies out of London.
Limits- Agglomeration: finance and tech gain from clustering in London.
- HS2's northern leg was cancelled in 2023.
- Gaps have barely changed over decades of policy.
ChainBetter transport and skills in a region → firms more productive and willing to locate there → jobs and wages ↑ → regional GDP per head ↑ → gap narrows.
JudgmentPolicies work slowly and need to be sustained. Without them, market forces such as agglomeration tend to widen gaps, not close them.
Assess the economic impact of high net inward migration.
2.1.3 · 2.3
Positive- Net migration over 900,000 at the 2023 peak filled gaps in care and the NHS.
- Migrants of working age raise LRAS and the tax base.
- Helps offset ageing; UK births barely exceed deaths.
Concerns- GDP rises but GDP per head may not.
- Pressure on housing and public services in some areas.
- May reduce firms' incentive to train or invest.
ChainMigration ↑ → labour force ↑ → LRAS shifts right → potential output ↑ and labour shortages ease → tax receipts ↑; but demand for housing ↑ too.
JudgmentEffect depends on migrants' skills and on how fast housing and services expand. The fall to 171,000 in 2025 will slow GDP growth but may not hurt GDP per head.
Evaluate the effects of a sharp rise in world energy prices on a developed economy.
2.1.2 · 2.3 · 2.6.4
Big impact- CPI 11.1% in 2022; motor fuel +23% a year in Aug 2026.
- Real wages fell in 2022–23, cutting consumption.
- Government energy support in 2022 raised borrowing.
Can be limited- Shock fades if prices fall back, as in 2023.
- Renewables (offshore wind) reduce gas dependence over time.
- Services-heavy economy uses less energy per £ of output.
ChainOil and gas prices ↑ → firms' costs ↑ → SRAS shifts left → price level ↑ and real output ↓ → conflict between inflation and growth objectives.
JudgmentSize and duration of the shock matter, plus whether wages chase prices. The UK is more exposed than most because gas sets the electricity price.
Discuss the role of the central bank in maintaining financial stability.
4.4.2 · 4.4.3
Effective- Lender of last resort in 2008; bank capital rules tightened after.
- Sep 2022: bought gilts to stop pension fund (LDI) fire sales.
- Stress tests by the Financial Policy Committee.
Problems- Moral hazard: banks expect rescues.
- Risk moves to less-regulated non-banks.
- QE raised asset prices and helped the wealthy most.
ChainPanic selling of gilts → yields spike → pension funds forced to sell more → Bank buys gilts as buyer of last resort → yields fall, spiral stops.
JudgmentThe Bank has been effective at stopping crises, but each rescue adds to moral hazard. A large financial sector (about 8% of output) makes regulation more important for the UK than most countries.
Evaluate measures to make housing more affordable.
1.2 · 1.4 · 2.6.3
Supply-side- Planning reform and the 1.5 m homes target.
- Social housing building.
- New towns and release of "grey belt" land.
Difficulties- PES is low: builders face land, labour and material shortages.
- Demand-side help (Help to Buy) mostly raised prices.
- Higher interest rates cut building in 2023–24.
ChainPlanning rules relaxed → supply of housing ↑ and becomes more price elastic → price rises smaller when demand grows → price-to-earnings ratio falls → labour mobility ↑.
JudgmentOnly supply-side measures tackle the cause, but they take years. Subsidies to buyers raise demand against inelastic supply and push up prices.