2.5 ECONOMIC GROWTH

Question 1

i. What is the difference between actual and potential growth?

Answer 1

-Actual economic growth is measured by the annual percentage change in a country’s real national output (GDP). Potential economic growth is also known as trend growth and is measured by the estimated annual change in a country’s potential level of national output

Question 2

ii. What causes actual growth but not potential growth?

Answer 2

-Short-run/actual economic growth is caused byan increase in Aggregate demand

Question 3

iii. What causes potential growth?

Answer 3

-LRAS or potential growth can increase for the following reasons:Increased capital
. e.g. investment in new factories or investment in infrastructure, such as roads and telephones. Increase in working population, e.g. through immigration, higher birth rate

Question 4

BOOM

Answer 4

-Growthfaster than the trend, high rpofits, low unemployment, high consumer and business confidence, high demand for imports,

Question 5

RECESSION/TROUGH

Answer 5

-declining AD, high unemployment, sharp falls in confidence/investment, de stocking, falling house prices and construction, lower inflation, low demand for imports

Question 6

RECOVERY

Answer 6

Rising consumer confidence, higher house prices, rising business confidence, higher investment, increase in construction, loose policies to prevent the economy going back into a recession

Question 7

why does the economic cycle occur and differentiate from the trend?

Answer 7

all happens due to shocks, things no one can predict

can happen demand side, or supply side

Question 8

how do output gaps occur

Answer 8

Output gaps occur when the actual level of output is different to the potential level of output

Question 9

when do negative output gaps occur?

Answer 9

-negative output gap occurs when actual level of output is less than the potential level of output

Question 10

when do positive output gaps occur

Answer 10

-positive output gap occurs when the actual level of output is greater than the potential level of output

Question 11

AD shifts affecting output gaps (use in essays)

Answer 11

Keynesian

when ad shifts to the right the actual level of output increases, unemployment will decrease, rise in demand pull inflation

what if economy is in recession, if there is an increase in disposable income then there will be no increase in inflation as the econommy is below full capacity.

But if the economy is at the potential level of output then there will be no increase in employment or level of income and only inflation will rise.

Question 12

points for judgement in growth

Answer 12

-sustainable growth (growth without inflation)

-inclusive growth (everyone benefits form inflation)

-balanced growth (sustained over time, not from one dominant sector but from many sectors)

-private sector/government (pay workers, make sure environment is good, tax revenues are being used correctly, investing well)

Question 13

i. Give 2 benefits of growth to consumers

Answer 13

-higher disposable income

-higher employment

Question 14

ii. Give 4 costs of growth to consumers

Answer 14

inflation

-income inequality (rural vs urban)

Question 15

iii. Give 4 benefits of growth to firms

Answer 15

-higher profits for firms

Question 16

. Give 1 benefit of growth to the government

Answer 16

-fiscal dividends (increase tax revenues, VAT revenue, corporation tax revenues, tariff revenues)

Question 17

vi. Give 1 cost of growth to the government

Answer 17

-current account deficit

Question 18

viii. Give 1 cost of growth on long run living standards

Answer 18

-environmental costs