A-Level Economics Model Answers
Assess the significance of household savings for UK macroeconomic performance. (25 marks)
Here is a question and answer from the national economy section of the A-level Economics syllabus.
This question is an ‘assess’ question - the type of question students need to practice their exam technique. In some exam boards, this is the ‘25 marker’.
I have seen so many capable students drop a few marks on these sorts of questions simply because they do not evaluate the scenario with enough scope.
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Assess the significance of household savings for UK macroeconomic performance.
(25 marks)
Use the data and your economic knowledge to help you.
The question asks you to assess how the level of household savings plays a significant role in the macroeconomy. You should first try and provide a foundation for the answer by explaining the role of savings in the circular flow of income. Throughout, you should aim to explain how savings have an effect on macroeconomic indicators.
FREE Model Answer Guide - Information in extracts
Possible Definitions
Definitions and background
Macroeconomic performance can be broadly determined by measuring the four macroeconomic indicators: economic growth (measured by real gdp), inflation (measured by the CPI in the UK), unemployment (measured by the Claimant Count and the Labour Force Survey) and the performance of the balance of payments (done by analysing and testing the various sub-accounts of the Balance of Payments for sustainability).
However, one could argue that there are some other measures of macroeconomic performance such as the level of development, standard of living, the management of the country by the government, and the quantity/quality of infrastructure/technological progress.
Savings can be broadly defined as a household’s income minus their consumption. Therefore, savings is simply what is retained after expenditure.
The significance of savings on macroeconomic performance
The questions below intend to guide you with this answer. We need to focus on finding out what the key role of savings is before we can determine the importance of savings on economic performance.
What determines economic growth?
How is it measured?
How do consumption and savings contribute to economic growth?
Perhaps we could draw an AD/AS diagram or PPF diagram to illustrate how growth could be achieved?
What is the link between the level of savings and the level of investment?
What would be the case if consumption was 100% of income?
What would be the case if savings were 100% of income?
In order for savings to increase, what would have to happen in the UK?
What may households do if they’re unable to save? How might consumption and borrowing be affected?
What judgments can we make from this?
Other macroeconomic indicators
Based on the above, how can the level of savings affect unemployment?
Based on the above, how can the level of savings affect inflation?
Based on the above, how can the level of savings affect the balance of payments?
Based on the above, how can the level of savings affect the standards of living?
Diagrams you could use
AD/AS - Short run economic growth
LRAS - Long run economic growth
PPF - Long run economic growth
Solow model - golden ratio of savings (bonus, but not needed for A-level)
Economic cycle
Evaluation statements
Consider the magnitude of the change in savings
Consider the role of government and how government needs to balance the need of household savings vs consumption of goods/services
Consider if the changes in savings are short-term or long-term changes: how might this change outcomes?
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