Fig. 1 shows a simplified circular flow for a coastal region that has recently attracted a new private wind-turbine manufacturer. The manufacturer employs l...
Question 1 Report
Fig. 1 shows a simplified circular flow for a coastal region that has recently attracted a new private wind-turbine manufacturer. The manufacturer employs local labour, buys components from other firms and sells electricity equipment to customers. The regional government taxes wages and company profits, then uses some revenue to fund a public technical college. The college trains workers for both public-sector employers and private firms. Local residents are debating whether the government should expand the college or instead reduce the tax rate paid by firms.
(a) Identify two flows into government shown in Fig. 1. [2]
(b) Describe the role of households in the labour market shown in Fig. 1. [3]
(c) Explain how government spending on the technical college could increase the productive capacity of the region. [5]
(d) Which policy is more likely to increase long-run economic growth: expanding the college or cutting the tax rate on firms? Explain both possible benefits and reach a conclusion. [10]
Answer Details
(a) The two flows into government are taxes paid by households and taxes paid by firms. [2]
(b) Households supply labour to firms. [3] In return they receive wages or income, which they use to demand goods and services from firms.
(c) Spending on the technical college provides education and training. [5] Workers gain skills and human capital, increasing their productivity. Firms can then produce more from available resources or at lower unit costs. This increases productive capacity and potential long-run output.
(d) Expanding the college can address skill shortages, raise productivity and attract investment. [10] This can create a sustained outward increase in productive capacity. Cutting the tax rate may increase retained profit, encouraging firms to invest, employ workers and expand, and may attract new firms.
However, a tax cut reduces government revenue and could reduce funding for education and infrastructure. Training also takes time and may not match the skills firms need. Where skill shortages are significant, expanding the college is more likely to create durable long-run growth, although a targeted tax reduction could complement it.
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