Discuss two macroeconomic policies, apart from protectionism, that a government could use to reduce the negative effects of globalisation.

Edexcel A-Level Economics Paper 2 June 2018 Extract

With reference to Extract A, discuss two macroeconomic policies, apart from protectionism, that a government could use to reduce the negative effects of globalisation. (12 marks)

Extract A mentions that globalisation has contributed to “low wages, insecure employment, stateless corporations and striking inequalities”.

Expansionary fiscal policy can be used to reduce unemployment rates. This involves the government increasing spending or reducing taxes. For example, the government could reduce income taxes. This allows people to keep more of their income. As disposable income and consumer confidence increases, consumer spending is likely to increase. This is a component of aggregate demand (AD) so AD would then increase. This causes an increase in real gdp as more goods and services are produced to meet greater spending. This means that firms would increase their derived demand for labour, which should then reduce unemployment rates.

However, this particular policy would cause the budget defict to increase, which can cause further problems. This is when government spending exceeds tax revenue in the fiscal year. Consistently high budget deficits lead to an accumulation of national debt, which leads to higher interest repayments, which carry an opportunity cost against future spending in other areas.

'More progressive taxes' can be used to reduce inequality. This is mentioned in extract a line 16. Taxes are progressive if the tax rate increases as income increases. For example, earnings above roughly £50,000 are taxed at 40% compared to a tax rate of 20% on earnings between roughly £12,000 and £50,000 in the UK. If the government were to make taxes more progressive, this would involve reducing tax rates for low and middle earnings and increasing taxes for high earners, such as those earning above £125,000. More progressive income taxes would reduce levels of relative poverty, as shown on the Lorenz curve below. This means that there would be fewer people earning less than, say, 60% of median income.

However, reducing income inequality can often disincentivise people from working harder, which can cause productivity to fall in the economy. This happens because people are rewarded less when they earn promotions or change career paths. This can reduce the productive potential of the economy. Extract C mentions that 'some level of inequality is desirable' for this very reason.

A-Level Economics Tutoring

I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.