2.5.1 & 2.5.2 Causes Of Growth & Output Gap

Question 1

Causes of economic growth

Answer 1

• increase in AD
• increase in the quantity/quality of factors of production (AS)

Question 2

How does an increase in AD lead to economic growth?

Answer 2

• increases in the components of AD
• e.g an increase in investment.
• The size of the growth depends on the size of the multiplier & also on the shape of the AS curve

Question 3

How does increase in AS lead to economic growth?

Answer 3

• increase in quantity or improvements in the quality of any of the factors of production e.g productivity growth or immigration
• This shifts the AS curve to the right

Question 4

Difference between actual growth and potential growth

Answer 4

• actual growth is measured as an increase in real GDP
• potential growth is an increase in the capacity of the economy

Question 5

Importance of international trade for economic growth

Answer 5

• some countries (e.g China) have generated economic growth through huge increases in the value of their exports (export led growth)

Question 6

Distinction between actual growth rates and long term trends in growth rate

Answer 6

shown by changes in real GDP over time, these may be compared with changes in capacity over time or compared with trend or sustainable rate of growth

Question 7

Negative output gaps

Answer 7

• long run capacity can be different to actual/current output
• if actual real GDP > potential real GDP = negative output gap
• this meaning the economy is operating with spare capacity and unemployment is likely to be relatively high

Question 8

Positive output gaps explained

Answer 8

• in the short run, it is possible for actual real GP to be greater than potential real GDP
• the economy is operating at over-capacity and inflationary pressures are likely to be increasing

Question 9

Positive output gap graphs

Answer 9

• the equilibrium level of national income (GDP) is more than long run potential output
• it is above the trend rate of GDP (boom)
• so output is positive

Question 10

Negative output gap graphs

Answer 10

• the equilibrium level of national income (GDP) is less than long run potential output
• it is below the trend rate of GDP (slump)
• so output gap is negative

Question 11

How to measure output gap?

Answer 11

• it’s difficult to estimate the size of the output gap for an economy as it involves estimating the economy’s maximum potential output level

Question 12

AD diagram to show output gap graph

Answer 12

• can be used to show the size of the negative output gap

Question 13

AS diagram to show output gap graphs

Answer 13

can be used to show the size of the negative output gap

Question 14

Output gap

Answer 14

the difference between the actual level of GDP and its estimated potential level (level of spare capacity)
- usually expressed as a percentage of the level of potential output

Question 15

What do Keynesian economists believe about output gaps?

Answer 15

They believe that a negative output gap can exist in the long run as well as the short run

Question 16

What do classical economists believe about the output gap?

Answer 16

They believe that negative and positive output gaps can only exist in the short run