2.5 Economic Growth

Question 1

How is short run economic growth caused?

Answer 1

by changes to any components of aggregate demand

Question 2

How is short run economic growth shown diagrammatically?2

Answer 2

• by a rightward shift in AD
• or by moving a point inside the PPF closer to the curve

Question 3

How is long run economic growth caused?

Answer 3

by any improvements to the quality or quantity of the factors of production
- including the determinants of long - run aggregate supply

Question 4

What is actual economic growth?

Answer 4

when there is an increase in the quantity of goods/services produced in an economy in a given period of time

Question 5

How is actual economic growth measured?

Answer 5

by the percentage change in real GDP

Question 6

What is potential economic growth?

Answer 6

the increase in the productive potential of an economy as demonstrated by a shift outward of the PPF or the LRAS

Question 7

What is international trade?

Answer 7

an important source of income for many countries

Question 8

What is export-led economic growth?

Answer 8

refers to growth that occurs as a result of an increase in the sale of goods/service to foreign countries

Question 9

What is a long-term growth trend?

Answer 9

underlying trend rate of economic growth over a longer period of time

Question 10

How is long term economic growth determined?

Answer 10

by the constant increases in the productive capacity of an economy (AS)
- increase in productive capacity is illustrated by a rightward shift of the LRAS

Question 11

What is an output gap?

Answer 11

the difference between the actual level of output (realGDP) and the maximum potential level of output

Question 12

When does a positive output gap occur?

Answer 12

when realGDP is greater than the potential realGDP

Question 13

When does a negative output gap occur?

Answer 13

when the realGDP is less than the potential real GDP

Question 14

Why is it difficult to measure output gaps accurately?3

Answer 14

• hard to know the exact maximum productive potential of an economy
• rapidly rising prices can indicate a positive gap is developing
• rising unemployment and slowdown in economic growth can indicate that a negative gap is increasing

Question 15

What is a trade cycle?

Answer 15

changes in realGDP that occur in an economy over time.
- the actual growth

Question 16

What are 4 recognisable points in the cycle?

Answer 16

• peak/boom
• slowdown/downturn
• recession
• recovery

Question 17

What are the 6 characteristics of a recession?

Answer 17

• 2 consecutive quarters or more of negative economic growth
• increasing/high unemployment
• increasing negative output gap and spare production capacity
• low confidence for firms/households
• low inflation
• increased government expenditure, leading to a great budget deficit

Question 18

What are the 6 characteristics of a Boom?

Answer 18

• increasing/high rates of economic growth
• decreasing unemployment and increasing job vacancies
• reduction of negative output gap or creation of a positive gap. Spare capacity reduced or eliminated
• high confidence and more risky decisions taken
• increasing rate of inflation (usually demand pull)
• an improvement in the government budget as tax revenue rise and expenditure falls

Question 19

Benefits of economic growth? (8)

Answer 19

• increased incomes lead to better standards of living
• decreased absolute poverty
• improvement in the quantity/quality of environmentally friendly technologies
• higher sales revenue for firms and greater profits
• increased investment by firms increases the potential output of the economy
• reduced expenditure by governments benefit
• higher government tax revenue due to rising incomes and surging corporate profits
• increased employment, resolving some of the negative social impacts of unemployment

Question 20

Costs of economic growth (7)

Answer 20

• rising AD causing demand pull inflation; purchasing power of people on fixed incomes may fall
• lack of equity in the distribution of income, rich get richer poor get poorer
• environmental damage caused by negative externalities
• increased inflation can harm export sales
• decreased export sales may lead to a delay in investment by firms
• increased income usually leads to greater consumption of demerit goods
• greater output requires more time from workers, decreasing leisure time and in tern general well-being