2.5.1 Causes of Economic Growth

Question 1

What is short run economic growth?

Answer 1

Increase in rGDP.

Question 2

How does short run economic growth look like on AD/AS and PPF diagram?

Answer 2

Question 3

What are factors that could cause economic growth in the short run?

Answer 3

Question 4

What is long run economic growth?

Answer 4

Long run economic growth, or potential growth, is a sustained rise in a country’s productive potential. The main drivers of long run economic growth are higher productivity and gains from innovation and rising real incomes for households.

Question 5

What does long run economic growth look like?

Answer 5

Question 6

What are factors that could cause economic growth in the long run?

Answer 6

Question 7

What is export led growth?

Answer 7

Export led growth is where a significant part of the expansion of real GDP, jobs and per capita incomes flows from the successful exporting of goods and services from one country to another.

Question 8

What does export led growth lead to?

Answer 8

Question 9

What are advantages of export led growth?

Answer 9

1. Injection into circular flow
2. Provides revenues and profits
3. Increased investment and employment

Question 10

How is an injection into the circular flow an advantage of export led growth?

Answer 10

Exports of goods and services are an injection into the circular flow of income leading to a rise in aggregate
demand and an expansion of output. This helps to raise per capita incomes and reduce extreme poverty
especially in developing/emerging economies

Question 11

How are more revenues and profits an advantage of export led growth?

Answer 11

Growing export sales provide revenues and profits for businesses which can then feed through to an increase
in capital investment spending through the accelerator effect. Higher investment increases a country’s
productive capacity which then increases the potential for exports.

Question 12

How is increased investment and employment an advantage of export led growth and give an example?

Answer 12

Many industries help facilitate trade such as trade insurance, logistics and port facilities. Countries with fast-growingexport sectors are likely to see increased investment and employment in these related industries. A good example is the importance of trade to countries such as the Netherlands (including the port of
Rotterdam), and Singapore and Hong Kong both of which have developed in globally-scaled hubs for trade

Question 13

Explain the potential risks and drawbacks from export led growth.

Answer 13

1. Focusing on exporting might lead to over-dependence on the economic cycles of trade partner countries
   and vulnerability to external economic and political shocks
2. Running persistent trade surpluses might incite a protectionist response from other nations who feel that the benefits of trade have been unequally skewed in favour of exporting countries. Huge trade imbalances remain a big concern in the global economic system
3. Production capacity allocated to supply goods and services for export cannot be put to use meeting domestic needs and wants. There might be a consequent dip in domestic living standards unless the country is also prepared to import goods and services using the revenue generated from exporting
4. Rapid export-led growth might lead to demand pull inflation and higher interest rates. High relative inflation
   might then have the effect of making export industries less competitive in overseas markets and domestic
   producers less price competitive against imports
5. Export-led growth might be unsustainable if it contributes extraction of natural resources beyond what is required for long term balanced growth to be maintained. Consider for example the impact of deforestation and over-fishing and degradation of land by industrial-scale farming.