Welcome to the 32nd edition of Wednesday Wisdoms by EdGenie!

Hey Genies,

Mastering the art of seamlessly integrating diagrams into your essays can elevate your answers from a B to an A*.

Let's demystify how to effectively include diagrams in your economics answers, specifically focusing on the impact of an increase in Corporation Tax on firms. 📊

Common Pitfalls to Avoid 🚫
Imagine you're tasked with discussing the effects of a hike in Corporation Tax.
A common mistake is to separately discuss the theory and then, almost as an afterthought, include a diagram of the AD/AS model showing a leftward shift in the SRAS (due to higher production costs) and a downward shift in AD (reflecting reduced investment).

Something like this below:
This can be seen in the leftward shift of the SRAS curve from SRAS1 to SRAS2, reflecting higher prices from PL1 to PL2 and initially reducing output from Y3 to Y2. Simultaneously, there is a leftward shift of the AD curve from AD1 to AD2, illustrating a further decrease in output from Y2 to Y3.

Why this doesn't work:

• Disconnection: The diagram feels tacked on, disconnected from the narrative of your answer.
• Missed Opportunity: Fails to use the diagram to visually reinforce your argument.
• Lack of Clarity: Readers have to piece together how the diagram relates to your discussion.

The Effective Approach

✅

Now, let's transform that approach into something more compelling.
Incorporate the diagram into the very fabric of your explanation about the impact of an increase in Corporation Tax on firms.

A rise in Corporation Tax increases their tax liabilities on profits earned. Initially, an increase in Corporation Tax diminishes a firm's net profits, as a larger proportion of their earnings is redirected towards tax payments. This elevation in operational costs squeezes profit margins, making it more challenging for firms to allocate funds for expansion or innovation . This increase in tax they have to pay, may result in passing on those extra costs onto consumers in the form of higher prices across industries, causing the Short-Run Aggregate Supply (SRAS) curve to shift leftward from SRAS1 to SRAS2 causing a rise in the price level from PL1 to PL2 originally reducing output from Y3 to Y2.
Moreover, the prospect of reduced profitability dampens firms' incentives to invest due to lower disposable profits, thus lower investment levels shifting AD to the left from AD1 to AD2, meaning lower levels of investment into research and new product development, resulting in lower dynamic efficiency, which signifies a contraction in a firm's future growth potential, hence a negative accelerator effect and can have a ripple effect on economic demand resulting in real gdp to fall from Y2 to Y3 eventually.

Incorporating diagrams into your answers should not be an afterthought but an integral part of your economic analysis.

When done effectively, diagrams can powerfully illustrate complex economic relationships, making your arguments more persuasive and your essays more impactful.
Elevate your economic essays with thoughtfully integrated diagrams, and let your economic acumen shine on paper. You've got this!

Cheers,​
Emre

Q: Explain how a mild recession can impact the labour market in terms of employment and unemployment rates.
A: A mild recession, like the one Britain is currently experiencing, can lead to a slight increase in unemployment rates as businesses may cut back on hiring due to reduced demand for goods and services. However, the unemployment rate remains relatively low (below 4% in this case) indicating that the labour market is resilient. Employment numbers might fall slightly, and job vacancies decrease, yet the total number of job openings remains above pre-pandemic levels, suggesting a mild impact on the labour market.

Q: Discuss the relationship between inflation, wage growth, and living standards during the current economic situation in Britain.
A: As the annual inflation rate falls, wage growth also moderates. However, for the time being, workers’ living standards are improving because wages are rising more rapidly than prices. This situation is temporary and depends on the balance between wage increases and inflation rates. If wages continue to rise faster than inflation, it can lead to an improvement in living standards.

Q: Analyse the significance of the private sector regular pay increase as reported by the Office for National Statistics.
A: The reported 6.1% increase in private sector regular pay in the three months ending January 2024, compared to the same period a year earlier, indicates a decrease from the previous summer’s peak of 8.2% but is slightly higher than what the Bank of England had forecasted. This suggests that while wage growth is slowing, it remains robust, reflecting a tight labour market where employers are willing to increase wages to attract or retain talent, despite economic uncertainties.

Q: Evaluate the potential impact of the expected fall in inflation on the labour market and earnings growth.
A: With inflation expected to fall from 4% to about 2% in the coming months, earnings growth is likely to moderate further. This could potentially ease the pressure on employers to raise wages at a high rate to keep up with inflation, thereby slowing wage growth. However, this moderation in earnings growth, alongside falling inflation, could help maintain or even improve living standards if wage increases continue to outpace price rises, albeit at a slower rate.

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