2.5.1 - Causes of growth

Question 1

What is economic growth?

Answer 1

Economic growth is the increase in the real value of goods and services produced in a country or area as measured by the annual percentage change in real national output.

Question 2

What is real GDP?

Answer 2

GDP is the monetary value of the national output of goods and services. Real GDP involves taking into accout inflation - where money GDP is adjusted for changes in the price level

Question 3

What is aggregate demand?

Answer 3

The total demand for goods and services in the economy at a given time.

Question 4

What is the formula for aggregate demand?

Answer 4

AD = C + I + G (X - M)

Question 5

What graph is used to show short-run economic growth?

Answer 5

SRAS curve

Question 6

Draw a SRAS curve

Answer 6

Page 176 in your theme 2 booklet for the right answer

Question 7

What causes long-run growth in the economy?

Answer 7

A change in quantity or quality of the factors of production.

Question 8

What are the factors of production?

*remember CELL

Answer 8

Capital, land, labour and enterprise

Question 9

What’s the definition of the production possibility frontier

Answer 9

A PPF shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed;

Question 10

What does PPF stand for?

Answer 10

Production possibility frontier

Question 11

Draw a production possibility frontier

Answer 11

Page 177 in your theme 2 booklet.

Question 12

Name a cause of short-run economic growth

Answer 12

• Aggregate demand

- Aggregate supply

Question 13

What is aggregate supply?

Answer 13

Aggregate supply measures the volume of goods and services produced each year.

Question 14

What 2 graphs can be used to show long-run economic growth?

Answer 14

• Classical LRAS curve

- PPF curve

Question 15

How do you draw a classical LRAS curve?

Answer 15

Page 178

Question 16

Name 2 factors which have an effect on economic growth.

Answer 16

• Investment
• Innovation
• MIgration
• Immigration (Emigration will have the opposite effect)
• Changes in birth rates
• Increases in productivity
• Export-led growth

Question 17

How does export-led growth have an effect on economic growth?

Answer 17

Export-led growth will lead to greater investment in capital goods (in order to produce the goods and services which are demand by other countries) leading to a greater productive capacity

Question 18

How does productivity have an effect on economic growth?

Answer 18

An increase in productivity will mean that capital and labour are being used more effectively with increased output for the same input.

Question 19

Name 2 constraints on economic growth

Answer 19

• An abscence of capital markets

- Instability of government

Question 20

How does haveing an unstable governement have an effect on economic growth?

Answer 20

An unstable government will lead to short-term decision making that will have an impact of investment from the governement themselves. As regimes change change frequently so do thier policies. This does not provide businesses from within, and outside, a coutry with the confidence to invest.

Question 21

How does having an abscence of capital markets affect economic growth?

Answer 21

An abscence of capial markets in some countries means that it is harder raise finance required for investment. This is often cited (mentioned) to lack of economic development in african countries.

Question 22

How does an inccrease in the circular flow of income have an effect of aggregate demand?

Answer 22

Injections into the economy will create an increase in AD and therefore, an increase in economic growth. he size of the increase will depend on the multiplier effect. Injections will also provide the investment required for capital goods.
This will lead to an increase in productive capacity.

Question 23

How does a decrease in the circular flow of income have an effect on economic growth?

Answer 23

Withdrawals will cause a reduction in AD and therefore, a decrease in economic growth. The size of the decrease will depend on the multiplier effect. Withdrawals will also reduce the finance available for the investment required for capital goods. This will lead less growth of productive
capacity.

Question 24

Why is it important that governments find a blance between short-run and long-run economic growth policies?

Answer 24

• It is important that the government find a balance between short-run and long-run economic growth policies
• Stimulating the demand-side of the economy is vital, but if supply-side of the economy remains constrained, high levels of inflation are likely to occur.
• Equally, focusing on improving the supply-side of the economy will have limited effect if the demand-side of the economy is suppressed. There will likely be significant spare capacity and unused resources.
• However, the enhancement of the supply-side of the economy has significant time-lags attached, and not all capital investment yields the desired improvements in productive efficiency

Question 25

How do I know the difference between actual and potential growth?

Answer 25

• As long as there is positive GDP growth the economy is
  experiencing economic growth
• Therefore, if the growth rate falls from 2% to 1.5% there
  is still an increase in the level of economic growth
• If there is a contraction for two quarters of a year i.e. 6
  months the economy is officially said to be in a recession
• There is a decrease in the level of economic growth
• This is called negative economic growth
• This can be distinguished from the rate of economic
  growth
• If the growth rate falls from 2% to 1.5% there is still a
  decrease in the rate of economic growth

Question 26

Why is international trade important for export-led economic growth?

Answer 26

• International trade is a catalyst for growth
• As UK firms target global markets there will be an increase in sales abroad
• This export led strategy benefits from the liberalisation of markets
• This makes it easier to sell abroad
• UK firms will invest in productive capacity such as new factories to meet demand
• It is important that we have the skilled labour required to meet this demand so education and training is vital