LS10 - Economic Growth

Question 1

Economic growth

Answer 1

Sustained growth in GDP, AD, improvements in productive potential of an economy
An increase in LRAS will increase the productive potential of an economy, increasing it output - this is achieved by improving the quality and quantity of FaoPr

Question 2

Land

Answer 2

A more efficient and increased use of land and the natural resources in it can lead to increase in LRAS, and hence, Econ growth

Question 3

Labour

Answer 3

Increase in quantity and quality of labour force can increase Econ growth - can be caused by rise in birth rates, increase in immigration, better training and education, participation rates

Question 4

Capital and technological processes

Answer 4

The stock of capital needs to be increased to improve productivity and output, meaning there needs to be sustained investment into capital
But investment doesn’t always mean more growth
Improvements in technology - cuts cost of production and time taken for production; produces new products for the market

Question 5

Efficiency

Answer 5

Increased efficiency leads to better productivity and hence more growth
Competition can lead to better efficiency - firms compete against each other, due to the profit motive, trying to meet consumer demands, and trying to lower costs - increases productivity

Question 6

Economic cycles

Answer 6

Fluctuation in the economy’s growth over time - measured in GDP
Boom -> Downturn -> Recession -> Recovery -> Boom …

Question 7

Boom

Answer 7

• Economic growth - GDP/GNI is high
• Economy working beyond full employment
• Consumption (more imports) , investment, expenditure is high
• Wages will be rising
• Inflation rate increasing
• Tax revenues high
• Can lead to overheating - no spare capacity, LEADS TO DOWNTURN

Question 8

Downturn

Answer 8

• Unemployment begins to increase
• Output and income start to fall - net exports fall
• Consumption and investment drops
• Tax revenue falls - govt expenditure on benefits rises - budget deficit increases
• Inflation falls
• Economic growth starts to fall

Question 9

Recession

Answer 9

• Bottom of the cycle - economic activity is at a low, economic decline
• High unemployment - disposable income is low
• Consumption and investment falls
• Deflation possible

Question 10

Recovery

Answer 10

• Output/income starts to increase
• Unemployment begins to fall
• Consumption, investment, imports starts to rise
• Inflationary pressures start to rise
• Rate of growth starts to increase

Question 11

Output gaps

Answer 11

Gap between actual and potential output
Positive OG - GDP is above productive potential - BOOM
Negative OG - GDP is below productive potential - lot of spare capacity - RECESSION

Question 12

Benefits of economic growth

Answer 12

• Life expectancy, healthcare improves
• More employment, more income
• Housing standards increase
• Quality of education rises

Question 13

Drawbacks of economic growth

Answer 13

• Growth is not sustainable - if the economy keeps growing forever, our finite resources will not have enough time to replenish, as they will always be in use - they will run out as they will be used unsustainably
• Increases in production and output can lead to more pollution, from factories, etc. - contributes to climate change/global warming

Question 14

Evaluation of drawbacks of EG

Answer 14

• As demand for resources rises, price also increases - rationing function kicks in - makes it so that only the people that can afford the higher prices can purchase the goods - decreases demand, lowering the rate of use
• This means that the exploration of alternative resources rises - demand drawn away from traditional resources, more substitutes - better for environment
• Govt regulations and incentives can be used ot reduce impacts of pollution, and stop overuse of finite resources

Question 15

Impact of EG - Consumers

Answer 15

• Rising household income - more consumption
• But, most households may not see any gain, as most of the rewards of EG go to the wealthiest

Question 16

Impact of EG - Government

Answer 16

• Rising tax revenue
• Increased spending in public sector - govt improves facilities such as education, roads, hospitals
• Possible reductions in tax rates

Question 17

Impact of EG - Firms

Answer 17

• Increased revenue - more sales as consumers have more disposable income
• More competition and new technology can lead to some firms falling behind

Question 18

Impact of EG - the Environment

Answer 18

• Rich countries - EG can lead to cleaner environment, less pollution - govts more likely to spend more money on technologies, more exploration of alternative energy sources
• Developing countries - EG can lead to more pollution, degrading the environment

Question 19

Evaluating GDP/GNI

Answer 19

If GDP grows at a constant rate and is higher than of other countries, we assume that it is a good country with a strong economy - but this may not always be true due to factors such as
* GNI/GDP statistics may not always be true
* Doesn’t accurately reflect living standards in countries
* Many other factors to observe to determine if a country has a strong economy

Question 20

Inaccuracies in GDP stats

Answer 20

• Doesn’t include non marketed output
• Doesnt include output in parallel/undergound markets
• Differing price levels in different countries - varying purchasing power in different countries

Question 21

GDP/GNI and standards of living

Answer 21

• No distinction between composition of the output - capital goods, consumer goods, military goods, merit goods all recorded as output, no specifics - cant see how output can improve standards of living
• Cant observe standards of education, healthcare, and life expectancy
• No indicator in how income is distributed - even if GDP is high, income inequality being high suggests a weak country
• Doesnt take into account increased leisure
• Doesnt measure quality of life factors
• Doesn take into account the impact of negative externalities
• Doesnt measure delpletion of non renewable resources
• Doesnt show improvements in quality of goods and services