Government Economic Service (GES) Assessment Centre Applied Economics and Public Policy Flashcards

24 sample cards from the Applied Economics and Public Policy deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. In labour economics, what is the difference between the substitution and income effects of a wage change on labour supply?

   A wage rise raises the opportunity cost of leisure, encouraging more work (substitution effect). It also raises income, allowing the worker to 'buy' more leisure, reducing work (income effect). When the income effect dominates at high wages, the labour supply curve bends backwards.

2. In the economics of education, what is the human capital theory explanation for the returns to education?

   Education is an investment that raises a worker's productivity and therefore their future earnings; the return is the higher lifetime wage relative to the costs (tuition plus forgone earnings). The Mincer earnings function links log wages to years of schooling and experience. (Contrast: signalling theory, where education signals pre-existing ability rather than building it.)

3. What is a 'public good' and why does the market under-provide it?

   A public good is non-rival (one person's consumption does not reduce availability to others) and non-excludable (you cannot prevent non-payers from benefiting). Non-excludability causes free-riding, so private firms cannot capture enough revenue and the market under-provides it, justifying public provision or funding (e.g. defence, clean air).

4. What is an externality, and how can it be internalised?

   An externality is a cost or benefit imposed on third parties not reflected in market prices (e.g. pollution = negative externality). It can be internalised via Pigouvian taxes/subsidies set equal to the marginal external cost/benefit, tradable permits (cap-and-trade), regulation, or assigning property rights (Coase theorem).

5. What is the Social Cost of Carbon, and how does UK appraisal value greenhouse gas emissions?

   The Social Cost of Carbon is the present value of damage from one additional tonne of CO2. For appraisal, the UK (BEIS/DESNZ) uses a target-consistent carbon value derived from the marginal abatement cost of meeting the UK's net-zero / carbon-budget targets, rather than a pure damage cost, applied as a non-traded carbon price that rises over time.

6. What is the UK's legally binding long-term climate target and the mechanism that paces it?

   A net-zero greenhouse gas target by 2050, set under the Climate Change Act 2008 (amended 2019). The path is governed by five-yearly legally binding carbon budgets advised by the independent Climate Change Committee (CCC).

7. How is the Gini coefficient defined and what do its extreme values mean?

   The Gini coefficient measures income (or wealth) inequality from the Lorenz curve: $$G = \frac{A}{A+B}$$ where $A$ is the area between the line of perfect equality and the Lorenz curve, and $B$ is the area under the Lorenz curve. $G=0$ means perfect equality; $G=1$ means one person holds all income.

8. Distinguish absolute poverty from relative poverty as measured in the UK.

   Relative poverty: household income below a threshold set relative to the contemporary median, typically below 60% of median equivalised household income. Absolute poverty: income below a fixed real threshold (60% of a base-year median, uprated only for inflation), so it captures whether living standards rise over time independent of the median.

9. What is GDP and what are the three equivalent approaches to measuring it?

   Gross Domestic Product is the total value of goods and services produced in an economy in a period. It can be measured three equivalent ways: the output (value-added) approach, the expenditure approach ($GDP = C + I + G + (X-M)$), and the income approach (wages + profits + rents + mixed income). All three should give the same total.

10. What is the difference between economic growth and economic development?

    Economic growth is an increase in real output (GDP or GDP per capita). Economic development is broader: improvements in living standards, health, education, equality and capabilities. The Human Development Index (HDI) combines income (GNI per capita), life expectancy and education to capture development beyond GDP.

11. What are Official Development Assistance (ODA) and the UN 0.7% aid target?

    ODA is government aid designed to promote the economic development and welfare of developing countries, on concessional terms. The UN target is that donor countries spend 0.7% of Gross National Income (GNI) on ODA. The UK met 0.7% from 2013, then reduced it to 0.5% of GNI from 2021.

12. Why do 'institutions and governance' matter for development, per institutional economics?

    Inclusive institutions (secure property rights, rule of law, control of corruption, enforceable contracts) provide incentives to invest, innovate and trade, driving long-run growth; extractive institutions concentrate power and deter investment. Work by North and by Acemoglu and Robinson argues institutions, not just geography or culture, explain why nations succeed or fail.

13. What is the principle of comparative advantage and why does it justify trade?

    A country has comparative advantage in a good if it can produce it at a lower opportunity cost than another country. Even if one country is absolutely more productive at everything, both gain by specialising in their comparative-advantage goods and trading, because total world output rises (Ricardo).

14. What is the Office for Budget Responsibility (OBR) and what does it produce?

    The OBR is the UK's independent fiscal watchdog, created in 2010. It produces independent five-year economic and fiscal forecasts (twice a year, alongside the Budget), judges whether the government has a better-than-even chance of meeting its fiscal targets, scrutinises the costing of tax and spending measures, and analyses fiscal sustainability/risks.

15. What is the difference between the Budget and a Spending Review?

    The Budget (an annual fiscal event) sets the overall tax and borrowing position and announces tax changes and the fiscal stance. A Spending Review is a multi-year exercise that allocates total public spending across departments, setting their resource (RDEL) and capital (CDEL) budgets (DEL) over the review period. Budgets focus on revenue/aggregate fiscal policy; Spending Reviews allocate departmental expenditure.

16. In UK public finance, what is the distinction between DEL and AME?

    Departmental Expenditure Limits (DEL) are firm multi-year budgets set in Spending Reviews that departments control (split into resource RDEL and capital CDEL). Annually Managed Expenditure (AME) is demand-led, volatile or large spending hard to plan firmly (e.g. welfare benefits, debt interest, pensions), managed annually rather than capped over the review period.

17. Distinguish demand-pull from cost-push inflation, and give a UK example of each from the 2022 cost-of-living episode.

    Demand-pull inflation arises when aggregate demand outstrips supply (too much money chasing too few goods). Cost-push inflation arises from rising input costs shifting supply. In 2022, surging wholesale gas/energy prices (cost-push, partly from the Russia-Ukraine war) drove UK CPI to a peak of around 11.1% in October 2022; reopening demand also contributed.

18. What are the main demand-side and supply-side policy responses to high energy-driven inflation?

    Demand-side: the Bank of England raises Bank Rate to curb spending and anchor inflation expectations (monetary tightening). Fiscal targeted support (e.g. the Energy Price Guarantee and cost-of-living payments) cushions households. Supply-side: improving energy security, diversifying supply, energy efficiency and boosting productive capacity to ease underlying price pressures.

19. What was the UK 'Levelling Up' agenda and what economic problem did it target?

    A government policy (2019-2024, with a 2022 White Paper and 12 'missions') aimed at reducing regional economic disparities — the UK's wide gaps in productivity, pay, health and opportunity between London/South East and other regions/towns. It targeted spatial inequality through investment in skills, infrastructure, R&D and devolution, using funds such as the Levelling Up Fund and UK Shared Prosperity Fund.

20. What is an 'agglomeration economy' and why is it central to regional and levelling-up policy?

    Agglomeration economies are the productivity gains firms and workers get from being located near each other: labour-market pooling, input sharing, and knowledge spillovers. They are central to regional policy because they explain why productivity clusters in cities and why connectivity (transport) and density can raise lagging regions' productivity.

21. How should a GES economist 'form a defensible view on a live issue' when evidence is incomplete?

    State the question and objective clearly; set out the relevant economic framework and mechanisms; marshal the best available evidence and its quality; be explicit about assumptions, uncertainties and trade-offs (including distributional effects); reach a balanced, proportionate conclusion; and signpost what further evidence would change the view. The aim is transparent, evidence-based reasoning, not false certainty.

22. What is the difference between economic efficiency and equity, and why is the trade-off central to policy advice?

    Efficiency is about maximising total welfare / allocating resources so no one can be made better off without making someone worse off (Pareto efficiency); equity is about the fairness of the distribution of welfare. Many policies improve one at the expense of the other (e.g. redistributive taxes may reduce efficiency), so economists must make the trade-off explicit rather than hide it.

23. What is the 'do-nothing' or counterfactual baseline in Green Book option appraisal, and why must every shortlist include it?

    The 'do-nothing' (or 'do-minimum') is the continuation of current arrangements without the proposed intervention. Every appraisal must measure options against it because the value of an intervention is the incremental (additional) net benefit over what would happen anyway; without the baseline, benefits would be overstated.

24. What is deadweight, displacement and additionality in evaluating an economic intervention?

    Additionality is the net effect attributable to the intervention beyond what would have happened anyway. Deadweight is outcomes that would have occurred without the intervention. Displacement is benefits gained in the target area/group at the expense of others (substitution elsewhere). Net additional impact subtracts deadweight, displacement, leakage and substitution from gross outcomes.

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