Evaluation Points

Question 1

Evaluate ‘government spending increases real GDP’

Answer 1

• time lag of spending e.g. infrastructure time to be built
• ricardian equivalence theory - consumers save in anticipation of a future tax increase to fund the government spending

Question 2

Gravity Trade Theory

Answer 2

• countries in close proximity will continue to trade with each other out of habit regardless of new tariffs or trading blocs
• evaluation to trading blocs -> trade creation

Question 3

No Wealth Effect

Answer 3

• ricardo sousa has shown that the wealth effect on consumption in the UK is virtually 0 because almost 50% of the UK population rents rather owns their own home
• this means that as house prices increase, people will pay more rent and therefore consume less

Question 4

Strong evaluation to the volatility of markets for primary products

Answer 4

• forward markets may be utilised - producers in advance agree to sell their commodities for a fixed price - may lead to increased investment

Question 5

Good evaluation for most policies e.g. tariffs or taxes

Answer 5

• they may be considered myopic - they fail to address the underlying issue of the problem and only provide a short term fix
• better alternatives may be SSPs

Question 6

Evaluation to raising tax rates increases government revenue

Answer 6

• depends on where the economy is on the Laffer curve
• if the economy is on the right side of the curve, increasing tax rates decreases tax revenue as labour is elastic at that section - an increase in taxes leads to a more than proportionate decrease in the supply of labour
• higher taxes disincentivise work and incentivises illegal tax evasion
• ‘brain drain’ may occur