Question

In 2016, the Indonesian government increased its spending on healthcare and education and considered raising the school leaving age. The government also planned to increase taxation. Such a move might conflict with its aim of reducing unemployment at a time when a number of countries were at risk of entering a recession

Analyse, using a production possibility curve (PPC) diagram, the effects of high unemployment in a country. [6]

Unemployment

[CIE O level November 2018]

Answer

Step ➊ : Define production possibility curve and unemployment.

The production possibility curve represents the maximum amount of goods and services which can be produced in an economy if all resources are used efficiently. A production possibility curve can also be used to illustrate unemployment. Unemployment occurs when people are able, available and willing to work at the going wage but cannot find a job despite an active search for work.

Step ➋ : Illustrate high unemployment using a production possibility curve.

The impact of high unemployment on the production possibility curve is shown in the figure below.

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Step ➌ : Explain the diagram.
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
High unemployment means that the available resources are not fully and efficiently used. Consequently, the economy will not be able to produce at its maximum level on the PPC, for example at point Y. Output of the economy is smaller than the maximum and lower than potential living standards when there is high unemployment. With unemployment, the economy will be producing at point X. At this point, there may be lower economic growth or a recession.

━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
♕ Marking scheme
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Diagram up to 3 marks:

✦ axes labelled Capital Goods & Consumer Goods (also accept any other combination as long as it is clear that it is two separate products, and not Price and Quantity)
✦ a curve bowed outwards or a downward sloping straight line drawn to the axes
✦ point inside the curve identified as point of unemployment e.g. X

Written analysis up to 3 marks:

high unemployment means that the available resources are not fully (1)
and efficiently used (1)
the economy will not be able to produce at its maximum level (1)
i.e. on the PPC (1) output of the economy is smaller than the maximum (1)
lower than potential living standards (1)
May be negative or lower economic growth / recession (1)