2.5 Economic growth

Question 1

Define economic growth

Answer 1

Increase in real GDP
OR
The expansion of the productive potential of an economy

Question 2

Factors which cause economic growth

Answer 2

o Improving the labour force, with a better quality due to higher education.
o A larger labour force. This may be due to migration, birth rates or improved participation rates.
o Improved technology, which is more productive. This means resources are used more efficiently.
o More investment, to fuel economic growth. More machinery can be bought, which will increase production.
o Discovering new resources, such as oil.
o Incentives for enterprise, such as tax breaks or subsidies

Question 3

Define potential growth

Answer 3

Long run expansion of the productive potential of an economy
(caused by increases in AS)

Question 4

Define actual growth

Answer 4

% change in a country’s real GDP and it’s usually measured annually.
(caused by increases in AD)

Question 5

What is potential output

Answer 5

The potential output of an economy is what the economy could produce if resources were fully employed.

Question 6

Define recession

Answer 6

Negative economic growth for 2 consecutive quarters

Question 7

Define output gap

Answer 7

The difference between actual output of an economy and potential output
N.O.G= actual ouput below potential output
P.O.G= actual output above potential output

Question 8

Chains of reasoning

Accelerator effect and economic growth

Answer 8

• ↑in rate of growth of consumer demand= ↑in planned capital investment by firms
• Businesses ↑capital spending- need extra supply capacity + want to make ↑profits in LR
• ↑in net investment = size of country capital stock↑
• Amount of capital per worker employed will also ↑
• Expansion of nations productive potential= improvement in labour productivity effiency
• Increase LR economic growth- outward shifts for LRAS

Question 9

Describe the Piketty graph

Answer 9

• Rate of return exceed rate of economic growth
• Wealth inequality ↑ as rich accumulate wealth faster than the overall economy expand
• =inequality as capital owner will benefit more
• Decreasing the richer than average population where growth can occur

Question 10

Explain trickle down effect

Answer 10

• Rich accumulate more wealth
• Tax breaks and benefits for corporations will trickle down to everyone else
• As rich pay more tax= more tax revenue for govt= more spent on welfare benefits
• Or rich employ more to meet spare capacity in economy= people earn more disposable income

Question 11

Kuznet curve on income inequality

Answer 11

Increasing inequality occurs after rural labour migrate to urban areas and becomes socially mobile
Rich might invest and employ more
Rich own capital and land= income = ↑capital and land
Rich taxed more (progressive tax)
Government revenue increases
Spent on benefits to the poor

Question 12

Costs of economic growth

Answer 12

Reduces protection of the environment
* Until viable renewable resources are available growth depletes finte resources, worsens tadgedy of the commons and pollutes the environment, which negatively impacts our living standards, health and happiness
Income inequality
* As capital and land owners benfit from higher demand and prices during growth, earning more income to buy more capital= rich get richer

Question 13

One reason why international trade is important for economic growth.

Answer 13

The rising incomes in the overseas markets that are targeted will mean that even if the domestic markets suffer a downturn or recession, the export markets can remain a sustainable source of continued economic growth