Ch 7: Economic Growth

Question 1

What is economic growth?

Answer 1

the increasing capacity of the economy to satisfy the wants of its members

Question 2

What does the graph of economic growth look like?

Answer 2

Question 3

How is the rate of economic growth calculated?

Answer 3

rate of economic growth (for GDP or Index) = (Yr2 - Yr1)/Yr1 x 100

Question 4

How is economic growth achieved?

Answer 4

• increase factors of production
• improve quality of factors of production
• population growth
• capacity of an economy to change (dynamic efficiency)
• willingness of an economy to trade with overseas countries

Question 5

What does the graph of economic growth look like?

Answer 5

* demand also influences economic growth

Question 6

What is allocative efficiency?

Answer 6

minimising waste by directing resources to the usage in which they have most value (least opportunity cost)

Question 7

What are the sources of growth from the supply side?

Answer 7

Question 8

What are the effects of economic growth on jobs and employment?

Answer 8

BENEFITS

• helps to generate fuller employment

COSTS

• structural unemployment -> (esp. short term). Results from increased emphasis by firms + govt. on greater efficiency, cost cutting, lowering tariffs, increasing competition, new production methods - i.e. new equipment and technology

Question 9

What are the effects of economic growth on personal incomes?

Answer 9

BENEFIT

• raises personal income because firms need to buy extra labour resources from households to raise production levels which leads to greater purchasing power and also more revenue for govt/ from income and other taxes

COST

• extra g & s produced with not be distributed evenly (inequality of market income - income prior to welfare, tax etc.)

Question 10

What are the affects of economic growth on international trading position?

Answer 10

BENEFITS

• helps strengthen Aus.’s trading position as growing economy is able to produce more g & s for export and helps to pay for imports and make trade balance more favourable
• incentive for investors from other countries as increases country’s capacity to lift production

COST

• sometimes leads to a trade deficit by raising imports of equipment and materials used by firms, relative to exports
• households may spend more on luxury imports and overseas holidays
• if inflation rises this can aldo weaken the trade balance by making local producers and exporters less competitive in their prices

Question 11

What are the affects of economic growth on inflation?

Answer 11

BENEFITS

• inflation can be low if EG is due to better productivity/efficiency. The cost inflation should fall

COSTS

• demand inflation can occur if economy is stretched beyond its production capacity and there is a shortage (also with firm’s demand for resources)
  
  • this also leads to cost inflation if productio costs rise to maintain profit margin

Question 12

What are the affects of economic growth on material living standards (depends on g & s available for each member of society)?

Answer 12

BENEFITS

• EG leads to more g & s for each person if EG is greater than population growth

COSTS

• g & s are not divided/shared equitably between individuals. EG may disproportionately benefit the rich

Question 13

What are the effects of economic growth on non-material living standards (affected by the quality of our lives)?

Answer 13

BENEFITS

• allows most to live a healthier, longer and more interesting life
  
  • helps to finance education, health care, sport and arts
  • gives consumers greater choice, increased leisure time and the capacity as tourist to visit and enjoy the culture of other countries

COSTS

• destruction of environmental reosurces
  
  • greenhous gases
• increased stress, family disintergration when both parents are work or stressed, increasingly long hours of work, reduced leisure time and corruption of our core values due to our obsession with materialism

Question 14

What is technical efficiency?

Answer 14

combining resources more productively, so that the same amount of resources can produce greater quantity/value of g & s

Question 15

How does economic growth occur? (affects rate of growth)

Answer 15

• rate of population change
• rate of increase in capital equipment per worker
• technological progress and the application of new ideas to the productive process
• improvements in the skills and productivity of the labour force
• the size of the natural resource base
• the capacity of an economy to change
• willingness of an economy to trade with overseas countries

Question 16

What is capital deepening?

Answer 16

an increase in the stock of capital relative to the stuck of other productive resources. This causes production to become more capital intensive i.e. it increases the capital/land ratio or land/capital ratio. It leads to greater productivity, making it possible for the workforce to produce a larger total output

Question 17

What is capital widening?

Answer 17

when the stock of capital grows in proportion to other productive inputs

Question 18

What are the limitations of using GDP as a measure of economic growth?

Answer 18

• does not describe how the benefits of (greater income and wealth) are distributed throughout the community
• understates improvements in working conditions over time i.e. compared to their counterparts in 1950s, Australians have a shorter working week and better conditions such as maternity leave and compulsory superannuation benefits
• measures the value of g& s which are exchanged in the market but takes no account of the non-market production that makes up a significant part of our welfare i.e. housework, charity and voluntary work
• does not measure changes in overseas trading relationships, particularly Terms of Trade. (price received for export and price paid for import). In recent years, Aus’s Terms of Trade has risen significantly, allowing more imports for the same real dollar value (welfare must have increased)
• does not measure improvements in the quality of g&s over time