2.5 - Economic growth

Question 1

2.5.1 - causes of growth

what is economic growth?

Answer 1

Economic growth refers to an increase in the output of goods and services in an economy over time. Various factors can contribute to economic growth

Question 2

causes of economic growth?

Answer 2

-capital investment
-technological investments
-human capital investments
-institutional factors
-population growth
-natural resources [new and exploitation]
-gov policies

Question 3

explaining causes of economic growth;
capital investments and technological advancements?

Answer 3

Capital Investment: Increased investment in physical capital (machinery, infrastructure) enhances productivity and output.
Example: Building new factories and upgrading transportation networks.
Technological Advancements: Innovations and improvements in technology increase production efficiency and create new products.
Example: The rise of information technology boosting productivity in various sectors.

Question 4

explaining causes of economic growth;
human capital development and population growth?

Answer 4

Population Growth: A growing population increases the labour force and consumer base.
Example: Increased immigration leading to a larger workforce.

Human Capital Development: Education and training improve workers’ skills and productivity.
Example: Investment in higher education and vocational training programs.

Question 5

explaining causes of economic growth;
gov policies and institutional factors?

Answer 5

Government Policies: Supportive fiscal and monetary policies, such as tax incentives and low interest rates, encourage investment and spending.
Example: Tax cuts to stimulate business investments.

Institutional Factors: Strong legal and regulatory frameworks, property rights, and political stability promote growth.
Example: Stable political environments attract foreign investment.

Question 6

interest rates affecting growth?

Answer 6

Decreased IR = more borrowing = increased investment = increase MPC = more consumption = increased AD = more growth

Question 7

taxes affect on growth?

Answer 7

Decrease in taxes = increased disposable income and investment increases, more consumption = increased AD = more growth

Question 8

gov spending effect on growth?

Answer 8

Increased gov spending = more investment = direct injection into the circular flow of income = increased AD = more growth

Question 9

exports affecting growth?

Answer 9

Increased exports = more demand for goods/services = increased AD = more growth

Question 10

Explain how changes in the following will lead to an increase in aggregate supply and hence growth–AS; interest rates

Answer 10

IR – decreased IR = cost of borrowing decreases = decrease in cost of raw materials / lower production costs = increased SRAS [right shift] - (fall in SRAS- decreased IR = decreased value of £)

cut IR = increase MPC –> increase AD = multiplier

Question 11

Explain how changes in the following will lead to an increase in aggregate supply and hence growth–AS; taxes

Answer 11

Taxes – decreased taxes = more disposable income = decreased costs = can afford more labour = increase in SRAS

Question 12

Explain how changes in the following will lead to an increase in aggregate supply and hence growth–AS; competition policy

Answer 12

Competition policy – increased competition = more firms enter the market = firms act more effectively and efficiently = increase in LRAS [

Question 13

Explain how changes in the following will lead to an increase in aggregate supply and hence growth–AS; education

Answer 13

Education = increase in education – more skilled workers = increased supply of labour = increase LRAS

Question 14

Actual growth?

Answer 14

Refers to the increase in real GDP over time, representing the economy’s current performance.
This is often measured by the percentage change in real gross domestic product (GDP)
It is measured by observing changes in output and is influenced by demand-side factors.

Question 15

potential growth?

Answer 15

the increase in the productive potential of an economy as demonstrated by a shift
outward of the production possibilities frontier(PPF) or the long-run aggregate supply (LRAS) curve
It is influenced by supply-side factors like improvements in technology, labour, and capital.

Question 16

key differences ; measurement of actual and potential?

Answer 16

It is influenced by supply-side factors like improvements in technology, labour, and capital.

Question 17

key differences; influences of actual and potential growth

Answer 17

Actual growth is influenced by short-term factors (demand), whereas potential growth is driven by long-term factors (supply).

Question 18

importance of export lead growth?

Answer 18

-exports lead to increased AD hence growth

-some countries [ eg China] have generated economic growth though huge increases in the value of exports —> export-led growth

Question 19

export-led economic growth refers to what?

Answer 19

s to growth that occurs as a result of an increase in the sale of
goods/services to foreign countries
Net exports (X-M)is a component of aggregate demand (AD)
For many developing countries,the exports represent a high percentage ofthe annual AD and
gross domestic product (GDP)
When the value of the exports rise, the real GDP rises significantly

Question 20

what can export led economic growth lead to?

Answer 20

-increased market size = access to larger international markets allows firms to achieve economies of scale.
-Foreign Exchange Earnings: Exports bring in foreign currency, enabling countries to import goods and services they cannot produce efficiently.
-technology transfer = Exposure to international markets and competition can lead to the adoption of new technologies and practices.
-job creation

Question 21

2.5.2 - [output gaps]

The output gap is what?

Answer 21

is the difference between our actual level of output [measured by GDP] and our potential level of output [measured by long term growth rate]

Question 22

Measuring the output gap is difficult, because we do not have completely accurate data for both of the following;

Answer 22

Current level of GDP

Potential [full capacity] GDP

Question 23

A positive output gap?

Answer 23

occurs when actual GDP is greater than the potential real GDP

Question 24

what does a positive output gap indicate?

Answer 24

that the economy is producing above sustainable capacity, often leading to inflationary pressures

Question 25

A negative output gap?

Answer 25

occurs when the real actual GDP is less than the potential real GDP There is spare capacity in the economy to produce more goods/services than are being produced

Question 26

what does a negative output gap indicate?

Answer 26

Indicates underutilization of resources, high unemployment, and deflationary pressures.

Question 27

It is difficult to accurately measure output gaps as?

Answer 27

This is because it is hard to know exactly what the maximum productive potential of an economy is 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 28

summarised; difficulties in measurement?

Answer 28

Estimation of Potential GDP: Potential GDP is not directly observable and must be estimated, leading to potential inaccuracies. Data Revisions: Economic data is often revised, which can change the assessment of output gaps. Structural Changes: Changes in the economy’s structure, such as technological advances or demographic shifts, can affect potential GDP estimates.

Question 29

2.5.3 - [trade business cycle] -the trade or business cycle describes what?

Answer 29

how the economy tends to exhibit recurring trends in economic growth rates --> booms tend to be followed by economic slumps or slowdowns, which tend to be followed by a recession, before the economy moves into the recovery phase, and then back into a boom

Question 30

trade (business) cycle refers to [simple]

Answer 30

- refers to the changes in real GDP that occur in an economy overtime This is the actual growth The real GDP will fluctuate above and below the long term trend rate of growth

Question 31

what is a positive output gap?

Answer 31

-identified as growth of real GDP that is above the trend

Question 32

negative output gap?

Answer 32

-is identified as growth of GDP that is below trend

Question 33

this flow of real GDP can be moderated by what?

Answer 33

government intervention

Question 34

characteristics of a Recession

Answer 34

-Two consecutive quarters (6 months) or more of negative economic growth -high unemployment -low confidence -Increasing negative output gap and spare production capacity -low inflation -Increase in government expenditure perhaps leading to a great budget deficit

Question 35

characteristics of a boom?

Answer 35

-high rates of economic growth -Decreasing unemployment and increasing job vacancies -Reduction of negative output gap or creation of a positive gap. Spare capacity is reduced or eliminated -high confidence -An improvementin the government budget as tax revenues rise and expenditure falls -increasing rate of inflation - usually due to demand pull

Question 36

Economic boom: [class paragraph]

Answer 36

During a boom, we would expect economic growth to increase, this leads to the level of unemployment decreasing as the economic growth requires more labour to be used to produce more goods and services. As more labour is being used, there is less spare capacity in the economy as we are using up more labour. This causes inflation to increase as there is a a rise in the average price level from PL to PL1. More economic growth leads to an increase in business and consumer confidence. As people earn higher wages the government sees an increase in budget as they have more tax revenue. The opposite would happen in a recession.

Question 37

2.5.4 - [impact of economic growth] Benefits of economic growth?

Answer 37

-increased incomes = better standard of living -decreased levels of absolute poverty -Improvement in the quality/quantity of environmentally friendly technologies -Higher sales revenue for firms -increased investment = greater productive potential -Reduced expenditure by governments on benefits -Higher government tax revenue due to rising incomes and surging corporate profits -increased employment

Question 38

costs of economic growth?

Answer 38

-Rising aggregate demand causes demand pull inflation; purchasing power may fall -lack of equity in the distribution of income -environmental damage caused by negative externalities in production -increased inflation -Greater output often requires more time from workers and can decrease leisure time and wellbeing -greater consumption of demerit goods Decreased export sales may lead to a delay in investment by firms