Government expenditure on the physical and organisational structures that enable economic activity. Main components:
| Macro‑economic aim (syllabus) | Link with infrastructure spending |
|---|---|
| Economic growth | Reduces production costs and removes bottlenecks → LRAS shifts right, raising potential output. |
| Full employment | Construction creates short‑run jobs; higher LRAS raises long‑run employment. |
| Price stability (inflation control) | Lower transport and energy costs reduce unit‑cost pressures, easing upward price pressure. |
| Balance of payments | Improved logistics lower import‑related costs and make exports more competitive. |
| Income distribution | Targeted regional projects reduce geographic disparities; better public services raise human capital for low‑income groups. |
| Environmental sustainability | “Green” infrastructure (e.g., rail, renewable energy) cuts carbon emissions and supports sustainable growth. |
Thus infrastructure spending contributes to all five macro‑economic aims set out in sections 4.5‑4.7 of the syllabus.
| Mechanism | Effect on LRAS (long‑run) | Short‑run effect on AD |
|---|---|---|
| Lower transport costs (new highway) | Higher productive efficiency → LRAS shifts right | Higher profitability → firms increase output → AD shifts right |
| Improved energy reliability (new grid) | Fewer production interruptions → LRAS shifts right | Reduced cost‑push inflation → AD may stay stable or shift slightly right |
| Better communications (broadband rollout) | Facilitates innovation & service delivery → LRAS shifts right | Faster market response → AD shifts right |
| Enhanced public services (schools, hospitals) | Higher‑quality labour → LRAS shifts right | Increased household confidence → AD shifts right |
\$k=\frac{1}{1-\text{MPC}}\$
where MPC = marginal propensity to consume.
| Criterion | What to consider |
|---|---|
| Effectiveness | Does the project directly raise LRAS or remove a bottleneck? Evidence: reduced transport cost per kilometre, lower energy outage frequency. |
| Efficiency | Cost‑benefit analysis – pay‑back period vs. fiscal cost; value for money compared with alternative SSP measures. |
| Equity | Who benefits? Regional balance, access for low‑income groups, impact on income distribution. |
| Sustainability | Environmental impact – carbon intensity, use of renewable energy, alignment with green‑growth goals. |
| Time‑horizon | Short‑run (job creation, AD boost) vs. long‑run (LRAS shift). Consider implementation lag and financing method. |
| Financing method | Borrowing, taxation, or re‑allocation of existing budgets – implications for debt, crowding‑out, and fiscal sustainability. |
Sample evaluation paragraph (Level 2/3 answer): “The new high‑speed rail link is likely to be effective because it cuts travel times and logistics costs, directly raising LRAS. However, its efficiency is questionable: the projected pay‑back period of 12 years exceeds the typical 5‑year horizon for public projects, suggesting a high fiscal cost. In terms of equity, the link connects a deprived northern region with the capital, improving regional income distribution, but the benefits accrue mainly to businesses that can afford higher freight rates. Environmentally, the shift from road to rail reduces carbon emissions, supporting sustainability goals. The project’s long implementation lag (≈ 6 years) means short‑run AD effects are modest, while financing through a new loan raises public debt, raising the risk of crowding‑out. Overall, the rail link offers clear long‑run gains but must be weighed against its fiscal burden and timing.”
Draw an AD‑AS diagram with the following features:
Suppose the government increases infrastructure spending by £200 million and the marginal propensity to consume (MPC) is 0.75.
\$k=\frac{1}{1-\text{MPC}}=\frac{1}{1-0.75}=4\$
\$\Delta AD = k \times \Delta G = 4 \times £200\text{m}= £800\text{m}\$
Infrastructure spending is a core supply‑side policy that raises an economy’s potential output by improving production efficiency, reducing costs, and enhancing human capital. It contributes to the five macro‑economic aims (growth, employment, price stability, balance of payments, and equitable distribution) and, when designed as “green” infrastructure, supports environmental sustainability. The main challenges are fiscal cost, long implementation lag, and the risk of politically driven misallocation. Effective evaluation must weigh effectiveness, efficiency, equity, sustainability, timing, and financing to determine whether the policy delivers sustainable economic growth.
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