2-5 Economic growth

Question 1

What are the factors that cause economic growth?

Answer 1

• Improving the labour force.
• A larger labour force.
• Improved technology.
• More investment.
• Discovering new resources.
• Incentives for enterprise.

Question 2

What is actual growth?

Answer 2

• The percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD.

Question 3

What is potential growth?

Answer 3

• Long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.

Question 4

What is a negative output gap?

Answer 4

• Occurs when the actual level of output is less than the potential level of output.

Question 5

What is a positive output gap?

Answer 5

• Occurs when the actual level of output is greater than the potential level of output.

Question 6

What are the characteristics of a boom?

Answer 6

• High rates of economic growth
• Near full capacity or positive output gaps
• Near full employment
• Demand-pull inflation
• Consumers and firms have a lot of confidence, which leads to high rates of investment.
• Government budgets improve, due to higher tax revenue and less spending on welfare payments.

Question 7

What is a recession?

Answer 7

• In the UK, a recession is defined as negative economic growth over two consecutive quarters.

Question 8

What are the characteristics of a recession?

Answer 8

• Negative economic growth
• Lots of spare capacity and negative output gaps
• Demand-deficient unemployment
• Low inflation rates
• Government budgets worsen due to more spending on welfare payments and lower tax revenues.
• Less confidence amongst consumers and firms, which leads to less spending and investment.

Question 9

What are the benefits of economic growth to consumers?

Answer 9

• Income increases as more people are in employment and wages increase.
• Consumers feel more confident in the economy, which increases consumption and leads to higher living standards.

Question 10

What are the costs of economic growth to consumers?

Answer 10

• Economic growth does not benefit everyone equally
• Higher demand-pull inflation
• Law of diminishing returns

Question 11

What are the benefits of economic growth to firms?

Answer 11

• Increased profit
• Increased investment, higher levels of technology
• Economies of scale
• Increased productivity and efficiency due to increased competition

Question 12

What are the costs of economic growth to firms?

Answer 12

• Increased menu costs, have to keep changing prices to match inflation

Question 13

What are the benefits of economic growth to the government?

Answer 13

• The government budget will improve, since fewer people require welfare payments and more will be paying tax.

Question 14

What are the costs of economic growth to the government?

Answer 14

• Increased spending on healthcare if the consumption of demerit goods increases.

Question 15

What are the benefits of economic growth to current and future living standards?

Answer 15

• As incomes increase, increased awareness about the environment.
• Could lead to improved environmental efficiency
• Higher average wages mean increased quality of goods and services.
• Public services improve

Question 16

What are the costs of economic growth to current and future living standards?

Answer 16

• High levels of growth could lead to damage to the environment.