2.1 - economic growth

Question 1

What are the seven macroeconomic objectives?

Answer 1

1. economic growth
2. low unemployment
3. price stability = inflation @ 2% CPI
4. BOP current account equilibrium
5. fiscal prudence = balanced budget
6. environmental protection
7. greater income equality

Question 2

How is economic growth measured?

Answer 2

It is measured by the change in real GDP over time. (national income/output/expenditure)

Question 3

What is GDP?

Answer 3

Gross Domestic Product is the total value of the output produced by the economy. The sum of the value of goods and services produced in the economy.

Question 4

What is real GDP?

Answer 4

GDP adjusted for inflation.

Question 5

How does change in real GDP show economic growth?

Answer 5

If the measure is up on the previous three months, the economy is growing. If its negative, the economy is shrinking or contracting.

Question 6

How do we know when a recession has occurred?

Answer 6

2 consecutive quarters (three month periods) of contraction = recession.

Question 7

What is the national income identity?

Answer 7

National output = national income = national expenditure.

Question 8

What is the output measure?

Answer 8

The total value of goods and services produced by all sectors of the economy: agriculture, manufacturing, energy, construction, service sector and the government.

Question 9

What is the expenditure measure?

Answer 9

The value of all goods and services bought by households and by government, investment in machinery and buildings. Includes the value of exports minus imports.

Question 10

What is the income measure?

Answer 10

The value of income generated mostly in terms of profits and wages.

Question 11

What is GDP per capita?

Answer 11

A measure of the country’s economic output per person.

Question 12

How can you calculate GDP per capita?

Answer 12

GDP / population

Question 13

What is the difference between volume and value?

Answer 13

Volume = quantity
Value = a variable in monetary terms, the current monetary worth of a given volume.

Question 14

How is value calculated?

Answer 14

Value = volume x price

Question 15

What is nominal data?

Answer 15

Raw data not adjusted for levels of inflation, reflects current prices

Question 16

What is real data?

Answer 16

Nominal data adjusted for inflation, reflects constant prices

Question 17

What are index numbers?

Answer 17

Economists use index numbers to analyse time series data. A base year is selected and assigned the value 100. Data for subsequent years is represented by a number that shows how the variable has changed relative to the base.

Question 18

How can you calculate an index number?

Answer 18

Index number = (current figure / figure in base year) x 100

Question 19

How can you calculate the real value of nominal data?

Answer 19

Real value = (index of comparison / index of current) x nominal value

Question 20

What are some limitations of using GDP per capita to compare living standards over time?

Answer 20

• price have increased over time
• statistics are inaccurate
• changes in population over time
• quality of goods and services may improve over time but they may fall in price
• proportion of national income devoted to defence should be considered
• national income spent on investment affects living standards
• externalities aren’t taken into account eg. pollution
• increased national income may not mean individuals have increased incomes

Question 21

What are the limitations of using GDP per capita to compare living standards between countries?

Answer 21

• they may use different accounting conventions to calculate NI
• the quality of data varies
• the size of the unrecorded economy differs between countries
• quality of goods and services differs
• countries spend different proportions of GDP on defence and other expenditures
• externalities aren’t considered
• income distributions differ between economies
• geography distorts comparisons eg. size/temperature
• market exchange rates don’t reflect purchasing power, may distort comparisons
• different countries have different purchasing power parity rates that they can survive at
• informal/black market activity not recorded
• percentage change is misleading
• population rates distort the data
• spending on investment goods will raise future living standards at the expense of current living standards

Question 22

What are purchasing power parities?

Answer 22

GDP is converted into a common currency at a PPP rate - a rate of exchange that allows a given amount of money in one country to buy the same amount of goods in another country after exchanging one currency into the other. It is an exchange rate of one currency for another comparing how much a typical basket of g/s costs compared to in another country.

Question 23

What is the Easterlin Paradox?

Answer 23

Happiness and income are positively related at low levels of income. Higher levels of income are not associated with increases in happiness.

Question 24

Why are income and happiness weakly correlated?

Answer 24

Happiness is caused by a variety of different factors.

Question 25

Why do those with above average incomes tend to have higher levels of happiness?

Answer 25

This may be because people see income as a symbol of social status and this make people happier. Also, higher incomes are correlated with other factors associated with happiness eg. better health, less likely to be unemployed.

Question 26

What is short-run economic growth?

Answer 26

A change in Y/Q or AD, closes the output gap. Shown by an increase in AD on a diagram.

Question 27

What is short-run economic growth caused by?

Answer 27

- increase in AD - export-led growth = positive net exports - utilisation of spare capacity = more efficient use of existing FOPs

Question 28

What is long-run economic growth?

Answer 28

The underlying rate of growth the economy can sustain without generating inflationary pressure. The speed at which the economy could grow, an increase in the productive capability of the economy.

Question 29

What is long-run economic growth caused by?

Answer 29

- an increase in the quality/quantity of land, labour and capital - technological improvements increase the marginal efficiency of capital

Question 30

What is the quantity of labour determined by?

Answer 30

Size of the labour force: - participation rate = the economically active labour force - size of population - net migration and demographics

Question 31

What is the quality of labour determined by?

Answer 31

- training and education - healthy workers are more productive

Question 32

How is long-run economic growth illustrated on a diagram?

Answer 32

Increase in aggregate supply.

Question 33

How is short-run economic growth illustrated on the PPF?

Answer 33

Actual growth = a movement from inside the PPF, where FOPs are underemployed, towards the boundary

Question 34

How is long-run economic growth illustrated on the PPF?

Answer 34

Potential growth = an outwards shift from the boundary

Question 35

What are the characteristics of an economic boom?

Answer 35

- positive output gap - economy operating at full capacity - low unemployment - high profits - increased business /consumer confidence - demand induced investment - firms increase stocks and production - positive multiplier - increased consumption - budget surplus - demand-pull inflation - high levels of borrowing from banks

Question 36

What are the characteristics of an economic recession?

Answer 36

- negative output gap - economy operating below trend - spare capacity - increased unemployment - falling profits - decreased business and consumer confidence - investment falls - firms reduce stocks and production - negative multiplier - consumption falls - budget deficit - disinflation or deflation - low levels of borrowing from banks

Question 37

What is a positive/inflationary output gap?

Answer 37

Economy is growing faster than trend AD, increasing faster than capacity. Temporarily operates beyond capacity

Question 38

How is a positive output gap illustrated on a diagram?

Answer 38

Short run equilibrium (SRAS = AD) at a higher level than long run equilibrium.

Question 39

What is a negative/deflationary output gap?

Answer 39

Actual GDP is below trend GDP, the economy is growing below trend reducing inflationary pressure

Question 40

How is a negative output gap illustrated on a diagram?

Answer 40

The short run equilibrium (SRAS=AD) is below the long-run equilibrium

Question 41

What determines the trend growth rate of the economy?

Answer 41

The productive potential of an economy which is determined by the FOPs available to an economy. Affected by quality/quantity of FOPs, technological advances and efficiency

Question 42

Why do economies grow at different rates?

Answer 42

Natural resources - if they have resources such as gas and oil, they can export them to increase their economic growth rate Participation rates - if a large number of the population are working age, they have an increased labour force causing economic growth. However some countries have an aging population, so growth is slowing. Investment levels - capital stock needs to be increased to sustain economic growth, so high investment means the economic growth rate can be increased.

Question 43

What is the difference between total and per capita?

Answer 43

Total = overall value Per capita = total value divided amongst population

Question 44

What is Gross National Income (GNI)?

Answer 44

The value of goods and services produced by an economy during a year plus the net overseas interest payments and dividends for the time. Essentially GDP plus income paid into the country by other countries.

Question 45

How are comparisons about growth over time made?

Answer 45

- Changing levels of national income can show if the country has grown or shrunk over a certain period of time - Data can be compared to other countries to see if the country is growing at a good rate or not - Can show changes in economic welfare as growth suggests a rise in living standards - Important to use real and per capita values. This accounts for possible population growth and inflation within the economy.

Question 46

How are comparisons about growth between countries made?

Answer 46

- Countries have different population sizes so it is important to use per capita values, as this may not reflect a difference in living standards - Real GDP figures should be used as inflation can be different within each country

Question 47

How does the UK measure national wellbeing?

Answer 47

- In 2010, the Prime Minister launched the Measuring National Wellbeing report to measure how lives in the UK are improving - People answer questions about life satisfaction, anxiety, happiness and worthwhileness. The report is updated on a quarterly basis. - From 2012-2016, life satisfaction, happiness and worthwhileness all increased whilst anxiety initially fell but then began to increase. This may be due to a fall in unemployment, rise in GDP but a concern about global security.