31 Economic growth

Question 1

Economic growth

Answer 1

Change in national output over time as measured by GDP

Question 2

Policy objective of economic growth

Answer 2

• government seek economic stability and a reduction in the fluctuations of actual economic growth around trend rate
• often primary policy objective as it is an indicator of the health of the economy and performance of other key indicators such as inflation and efficacy of policy measures
• government policy objectives from economic growth may differ depending on the stage in economic development

Question 3

Stages of economic cycle

Answer 3

Boom: rate of actual economic growth exceeds the trend rate and the output gap is narrowed
Downturn: economic growth rates begin to fall and approach zero
Recession: two consecutive periods of negative economic growth
Recovery: economic growth becomes positive after a recession

Question 4

Real GDP

Answer 4

Takes inflation into account when GDP is calculated

Question 5

Nominal GDP

Answer 5

At current prices does not take inflation into account when calculating GDP

Question 6

Short run econ growth

Answer 6

• A change in demand side is caused by an increased component of AD
• a change in factor input costs affects the supply side resulting in econ growth
• real GDP increases for both

Question 7

Long run econ growth

Answer 7

Caused by supply side policies that increase productive capacity of the economy
- the expansion of productivities potential is illustrated by the shift in long run aggregate supply and ull employment shifts to the right
- extension of aggregate demand

Question 8

Causes of econ growth

Answer 8

• short run econ growth is caused by shifts in aggregate demand or supply
• change on the demand side are caused by changes in the components of AD of an injection or leakages from the circular flow of income
• any alteration in macroeconomic policy measures, monetary and fiscal which will casue a change in aggregate demand

Question 9

Benefits of economic growth

Answer 9

• rise in average household incomes as indicated by GDP per capita
• reduced unemployment through creation of job opportunities as more workers are needed to produce s higher level of output - higher derived demand for labour
• rise in material standards of living as households are able to purchase products with higher income elasticity of demand
• reduction in absolute poverty levels
• improvements in public services, an increase in government taxation receipts that could increases government expenditure on merit goods such as healthcare

Question 10

Costs of econ growth

Answer 10

• demand-pull inflationary pressure as spare capacity is used up
• rising income inequality as measured by the gini coefficient and Lorenz curve
• relative poverty could rise
• environ meant degradation through the divergence between MSC and MPC which hinders sustainable economic development
• wealth concentration resulting in greater division between geographical areas the economy