Practice

Free response question

Macroeconomics · Hard · 30 marks

IEO past paper: 2019 International Economics Olympiad, open questions

The economic growth of the last 150 years has been largely driven by automation: new technologies that allowed mechanization of routine tasks previously performed by labor. The steam engine, electricity, computer chips: all these technologies both contributed significantly to economic growth and destroyed jobs. The most recent wave of automation, the rise of Artificial Intelligence (AI), seems to be able to automate not only low-skill, physical tasks but also non-routine, cognitive tasks such as driving cars and making medical recommendations. This seems to spur widespread anxiety that artificial intelligence may create mass unemployment in the decades to come. In this task, you are asked to comment on these developments from an economic standpoint.

(a)Consider the following simple model. Suppose in a certain industry (say, textiles) the quantity produced (

Q

) is equal to the degree of automation (

A

) times the number of workers (

L

Q = AL

. The industry is competitive. The wage is fixed at the level

w

. The demand for textiles is equal to

D(p)

where

p

is price, and

D

is a decreasing function. Economic equilibrium occurs at a price

p

such that demand equals supply. Suppose the degree of automation (

A

) grows so that now the industry needs fewer workers to produce a given amount of textiles. Will the equilibrium number of workers employed by the industry necessarily fall as a result? Provide a verbal explanation of the insight you get from the model.[10](b)In the following parts, do not limit your argumentation to the model above. A number of authors note that the growth of economic output due to AI and automation will lead to an increase in aggregate incomes, and thus demand, including the demand for new goods and services that are now barely imagined. All this will create new jobs and thus alleviate the problem of unemployment. Criticize this argument.[10](c)Many people think that publicly financed Universal Basic Income (UBI: a periodic cash payment delivered to all on an individual basis without means test or work requirement) is a good solution to the problem of mass joblessness. Identify and address the main problems with the UBI in terms of financing the system and motivation to work (one of each).[10]

Up to 5 AI marks a day. The mark scheme is shown after marking.

Report a mistake