CIE AS SAMPLE ESSAYS

b) Assess whether increases in aggregate demand are the best way of reducing unemployment in a high-income country. [12]

Unemployment refers to the situation where individuals capable and willing to work cannot find jobs. In high-income countries, which the World Bank classifies as those with a Gross National Income (GNI) per capita above $13,845. The main types of unemployment include cyclical which is caused by economic downturns, structural due to mismatch of skills most likely due to technological change and frictional unemployment which is short-term as people are in between jobs.

Aggregate demand represents the total demand for an economy’s goods and services, influenced by consumption, investment, government spending, and net exports. High-income countries often use expansionary fiscal (e.g., reducing taxes or increasing government spending) or monetary policy (e.g., reducing interest rates) to boost AD.

Rising AD can be particularly effective in reducing cyclical unemployment in high-income economies. For example, during a recession, increased government spending on infrastructure can create jobs directly, while lower interest rates can spur investment in sectors like housing and manufacturing, leading to job growth. As demand for goods increases, businesses hire more workers, reducing the overall unemployment rate.

However, increased AD is less effective in addressing structural unemployment, which can be prevalent in high-income countries where technology and automation rapidly change job requirements. For example, an increase in demand may not help workers in traditional manufacturing if they lack the skills needed for new, tech-driven industries. Addressing this type of unemployment requires different solutions.

Supply-side policies aim to improve the productive capacity and flexibility of the labor force, making them a crucial tool for high-income countries with structural unemployment. Examples include investment in education, retraining programs, and improving digital skills. These initiatives help workers transition to growing sectors like technology and renewable energy.

For instance, in high-income countries like the United States or Germany, retraining programs for workers displaced by automation can help reduce structural unemployment. However, these policies take time to yield results and are often costly, making them less effective during periods of immediate economic downturns when the problem is a drop in demand.

The effectiveness of increasing AD in reducing unemployment in high-income countries depends on the nature of the unemployment. For cyclical unemployment, boosting AD can be a quick and effective method, helping the economy recover from downturns. However, it does little to address structural unemployment, which is common in high-income countries undergoing technological advancements.

For long-term solutions, supply-side policies are essential, as they address skill mismatches and enhance the adaptability of the labor force. In countries with advanced economies, a combination of policies is often needed. Short-term boosts in AD can address immediate job losses, while supply-side improvements ensure that workers can transition to new, high-demand sectors. Thus, the most effective approach in high-income countries is a balanced mix of policies that adapts to the evolving needs of the economy.