Economics (AS & A Level) · May / June 2022 · Paper 41 · Question 1

Productivity in the G7 countries The G7 is a group of countries that have some of the world’s major advanced economies. Productivity in the G7 countries varies, as shown in Fig. 1.1 below, with United Kingdom (UK) performance as the base index of 100. 90 100 110 120 130 2015 2016 140 Index (UK = 100) Japan Canada UK Italy US France Germany Source: The Sunday Times, 24 June 2018 Fig. 1.1: Gross domestic product per hour worked, G7 countries, for 2015 and 2016 Productivity in the UK was one of the worst in the G7. Poor management practices and lower levels of skills in the workforce were the main reasons for the UK’s position. In low wage, high employment sectors of the UK economy, the performance compared unfavourably with five of the G7 countries. In retailing, the UK was 40% lower than the performance in the United States (US). In hospitality industries the UK had a 45% lower rate than France. Tackling poor productivity is about innovation, investment and improving infrastructure as well as labour skills. The Federal Reserve Bank of the US suggested that innovation is one of the keys to productivity differences among the G7 countries. Innovation can occur using different factor inputs such as IT hardware and software, investment in staff training, research and development (R&D) and marketing. In 2015, the US had the most advanced software and IT services industries in the world accounting for a third of the global IT market. In 2018, the industry accounted for 12% of private sector employment and contributed 7.1% of GNP. Three of the top ten IT companies in the world were based in the US. In 2014, in the UK, businesses spent US$26 billion on R&D, notably on digital technology and biomedical research projects that are world-renowned. However over the past 25 years R&D in the UK has only averaged between 1% and 1.3% of GNP and falls behind Japan with 3.4%, Germany 2.9%, the US 2.7% and France 2.2%. 3 There were concerns about the UK government reducing spending but in 2018 it made a commitment to a large investment programme in transport and communications to provide a boost to productivity. At that time one threat to the UK economy was its decision to leave the European Union’s single market. The decision created uncertainties for investors and the balance of foreign direct investment (FDI) showed that there were more investments abroad than there were foreign investments in the UK. This made some UK industries, such as car production, vulnerable. The central bank in the UK has stated that foreign owned car manufacturers in the UK invest heavily in R&D and their presence boosts the productivity of labour. It was thought this may change in the future. Sources: The Sunday Times 24 June 2018, David Smith (Economic Outlook). ‘We don’t need a new target but we must raise our game’. The Times 27 June 2018, David Smith. ‘Inward Investment so important to Britain is now at risk’. Office for National Statistics, Britain, 2016

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