4.2.3.1_-_Economic_growth_and_the_economic_cycle

Question 1

What is economic growth?

Answer 1

An increase in the production of economic goods and services, compared from one period of time to another

Question 2

What does short-run (actual) economic growth mean?

Answer 2

The economy uses up spare capacity to increase Real GDP

Question 3

How is short-run economic growth measured?

Answer 3

By the annual percentage change in Real GDP

Question 4

What is Real GDP

Answer 4

It is an Inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year

Question 5

What can Real GDP be used to show

Answer 5

The percentage change in real national output

Question 6

What usually causes increases in actual growth?

Answer 6

Increases in AD but it can also be caused by increases in short-run AS

Question 7

What is the difference between short-term and long-term growth?

Answer 7

• Short-term growth usually results from an increase in the level of aggregate demand in the economy and is usually measured as the annual rate of increase in real GDP (GNP).
• Long-term or trend growth results from an increase in the productive potential of the economy.

Question 8

Can short-term growth be sustained without an increase in the productive potential of the economy?

Answer 8

• No, short-term growth cannot be sustained without an increase in the productive potential of the economy, i.e. an outwards movement in the production possibility frontier.

Question 9

What is economic development?

Answer 9

Economic development refers to improving people’s standards of living and well-being by expanding the range of economic and social choices available to individuals and nations.

Question 10

Creation of Jobs

What does an increase in growth imply?

Answer 10

An increase in growth implies the creation of new jobs, an increase in the quality of life as people are able to buy more goods and services, a reduction in income inequality, and a reduction in poverty.

Question 11

What could be the result of higher profits for firms due to an increase in growth?

Answer 11

• Higher profits for firms due to an increase in growth could lead to technological advancements, as firms invest more in physical capital, which could increase the productive capacity of the economy.
• This could also lead to more job opportunities as firms have the money to hire more people.
• Firms also have increased confidence due to growth so they are more likely to hire and invest in the economy

Question 12

What is a fiscal dividend, and how could an increase in growth lead to it?

Answer 12

A fiscal dividend is the additional revenue that a government collects due to an increase in economic growth. An increase in growth could lead to higher profits for firms, which could result in higher corporation tax collection and increased revenue from expenditure taxes like VAT. This creates a fiscal dividend for the government, resulting in higher revenues.

Question 13

What is the major issue that can arise from unequal distribution of growth?

Answer 13

Income inequality is a major issue that can arise from unequal distribution of growth. Even in advanced economies like the UK and USA, GDP may be increasing but this is not necessarily felt by everyone in society.

Question 14

What is the difference between growth and development?

Answer 14

Growth is often used as a measure of a country’s economic success, but it’s important to consider whether this growth is leading to development in terms of improving people’s standards of living and well-being.

Question 15

What are some negative externalities from growth?

Answer 15

Negative externalities from growth can include pollution, resource depletion, and biodiversity loss. These can have long-term consequences that can ultimately hinder development.

Question 16

What areas of development could a government spend its fiscal dividend on?

Answer 16

If the government is efficient and has pure motives, it will spend the fiscal dividend on areas that promote development, such as healthcare, education, and infrastructure. Infrastructure, such as roads, bridges, sanitation, and communication, are key pillars of development.

Question 17

What is necessary for inclusive growth that benefits everyone?

Answer 17

Inclusive growth that benefits everyone is ideal for development, but achieving this requires strong government policies and interventions to redistribute income and promote development in other sectors.

Question 18

What can happen if growth is concentrated in one dominant sector?

Answer 18

If growth is concentrated in one dominant sector, only those involved in that sector may benefit from the growth, leaving the rest of society behind. Nigeria is an example of an economy that is heavily dependent on its oil sector for growth.

Question 19

What is an economic depression?

Answer 19

Worse than a recession, it is a sustained economic downturn which lasts for a long period of time (e.g. several years)

Question 20

Does actual growth always increase?

Answer 20

Not always it tends to fluctuate up and down (economic cycle diagram)

Question 21

What is Long-run economic growth also known as?

Answer 21

Potential growth / trend growth

Question 22

How is potential growth measured?

Answer 22

By the estimated annual change in a country’s potential level of national output.

Question 23

What happens when there is an increase in LRAS

Answer 23

Long-run economic growth occurs

Question 24

What usually causes Long-Run economic growth to occur?

Answer 24

A rise in the quality, quantity or productive efficiency (reduction in long run costs for firms) of inputs (FOP) - e.g. more advanced machinery

Question 25

What is Long-Run (potential) economic growth?

Answer 25

An increase in the productive capacity of the economy.

Question 26

What is the trend rate of growth?

Answer 26

The long run average rate of economic growth over a period of both economic booms and slumps. Potential growth is a term used to refer to the trend rate of growth

Question 27

How does the trend rate of growth rise?

Answer 27

Smoothly rather than fluctuating like actual economic growth, actual growth often doesn't match the trend rate

Question 28

How can short-run economic growth be shown diagrammatically?

Answer 28

By showing a negative output gap either inside the PPF or to the left of YFE On the AD/LRAS diagram. Shows a shift in AD which causes real national output to move towards YFE / or a movement towards the PPF curve.

Question 29

What labels on a PPF curve indicate a macro diagram as opposed to a micro

Answer 29

Goods / Services or Capital goods / Consumer goods

Question 30

What is the difference between actual and potential growth?

Answer 30

Potential growth means that there is an increase in the potential for an economy to grow due to an increase in LRAS; this does not increase the actual growth rate which can only be caused by an increase in AD.

Question 31

How can Long-run economic growth be shown diagrammatically?

Answer 31

Either by a shift in the PPF curve (from PPF1 to PPF2) or by a shift in the LRAS curve from YFE1 to YFE2. This shows an increase in the maximum productive potential of an economy

Question 32

What are the main ways potential growth increases within an economy? (6)

Answer 32

- Increases in labour productivity - Increases in the size of the workforce - Investment - Infrastructure improvements - Increase in competition - New resource (Land, FOP) discoveries // All cause LRAS curve to shift outwards which represents Long-run (potential) growth

Question 33

What are the main ways actual growth increases within an economy increases? (5)

Answer 33

- Lower interest rates ( C, I, X-M) - Lower income/Corporation tax (C, I) - Higher consumer/business confidence (C, I) - Higher government spending (G) - Weaker exchange rate (X-M) // All cause outwards AD shifts, represents actual growth

Question 34

What does the economic cycle show? // draw economic cycle diagram

Answer 34

The fluctuations of actual growth within an economy over time. It refers to the stage of economic growth that the economy is currently in.

Question 35

What is meant by a boom within the economic cycle?

Answer 35

When economic growth is occurring quickly. Could be inflationary or unsustainable

Question 36

What is meant by a recession occurring within the economic cycle?

Answer 36

When there is negative economic growth for at least two consecutive quarters. Real output in the economy falls.

Question 37

What happens during the recovery stage of the economic cycle?

Answer 37

Real output increases as the economy begins to grow again, goes from negative to positive economic growth. AD will be rising, unemployment will fall and inflation levels will rise

Question 38

What are the four stages of the economic cycle?

Answer 38

- Boom / Expansion - Peak - Recession / Contraction - Trough / Recovery

Question 39

What is meant by the trough phase of the economic cycle?

Answer 39

It marks the end of a period of declining business activity and the transition to expansion

Question 40

What are alternative names for the economic cycle?

Answer 40

Business / Trade cycle

Question 41

What might governments do during recessions?

Answer 41

Increase spending to try and stimulate the economy. E.G. increase availability of welfare payments / cut taxes

Question 42

What are the characteristics of a boom? (6)

Answer 42

- High rates of economic growth - Near full capacity or positive output gaps - (Near) full employment - Demand-pull inflation - Rise in confidence levels - Government budgets improve

Question 43

What are the characteristics of a recession? (6)

Answer 43

- Negative economic growth - Lots of spare capacity and negative output gaps - Demand-deficient / Cyclical unemployment - Low inflation rates - Government budgets worsen - Reduction in confidence levels

Question 44

When does an output gap occur?

Answer 44

When there is a difference between the actual level of output and the potential level of output.

Question 45

How is an output gap measured?

Answer 45

As a percentage of national output. Can be thought of as the difference between actual output and potential output

Question 46

When does a negative output gap occur?

Answer 46

When the actual level of output is less than the potential level of output

Question 47

What does a negative output gap occurring mean?

Answer 47

There is an unemployment of resources in an economy, labour and capital are not being used to their full potential. This means there is a lot of spare capacity within an economy. Puts downward pressure on inflation

Question 48

When does a positive output gap occur?

Answer 48

When the actual level of output is greater than the potential level of output

Question 49

What might cause a positive output gap to occur?

Answer 49

Resources are being used beyond the normal capacity, such as labour working overtime. If productivity is growing, the output gap becomes positive. Puts upwards pressure on inflation

Question 50

Which countries are often associated with positive output gaps?

Answer 50

Emerging countries mainly India and China, which have high rates of inflation due to fast and increasing demand

Question 51

During which stage of the economic cycle will a negative output gap occur?

Answer 51

During a recession, when the economy is under-performing as some resources are being unused or underused

Question 52

During which stage of the economic cycle will a positive output gap occur?

Answer 52

During a boom when the economy is overheating, resources are being fully used or overused

Question 53

What happens to the output gap within an economy during the recovery stage of the economic cycle?

Answer 53

The economy will go from having a negative output gap to having a positive output gap as actual output rises above the trend output

Question 54

What are the 3 ways output gaps can be represented? // Draw and explain all 3 ways out

Answer 54

- PPF - AD/AS - Economic cycle

Question 55

What do classical economists believe relating to output gaps?

Answer 55

That markets clear in the long run, so there is full employment. They believe there are output gaps in the short run

Question 56

What are the benefits of economic growth for consumers? // 2 points

Answer 56

- Increase in the levels of derived demand for labour, high levels of disposable income, wage rates increases due to firms succeeding, rise in the standards of living as long as prices don't rise more than wages - Rise in consumer confidence, increases consumption, rise in the standards of living

Question 57

What are the benefits of economic growth for firms? // 4 points

Answer 57

- Likely to earn greater profits, increases likelihood of investment also driven by increased business confidence - As firms grow they can take advantage of economies of scale - Lower average costs in the long run, investment into new technology, increases economies productive potential - face more competition, more productive and efficient, more sales opportunities

Question 58

What are the benefits of economic growth for the government? // 2 points

Answer 58

- The government budget might improve as fewer people require welfare payments and more people will be paying taxes - Public services improve as governments receive higher tax revenues, could increase life expectancy and education levels

Question 59

What are the benefits of economic growth for the environment? // 1 point

Answer 59

- Rapid development of new technology brought about be rising levels of investment allow firms to produce more cleaner and more efficiently

Question 60

What are the costs of economic growth for consumers? // 6 points

Answer 60

- Low skilled workers on low and fixed incomes might feel worse off if there is high inflation and inequality could increase - Likely to be higher levels of demand-pull inflation due to higher levels of consumer spending (component of AD) - Cost-push inflation could also occur, economic growth increases the demand for resources, pushing up their prices - Consumers could face more shoe leather costs - Higher wages, more responsibilities, higher stress levels, less productive - The benefits of consumption might not last after the first few units, law of diminishing marginal returns

Question 61

What are shoe leather costs?

Answer 61

Consumers have to spend more time and effort finding the best deal while prices are rising

Question 62

What are the costs of economic growth for firms? // 1 point

Answer 62

- Could face more menu costs as a result of higher inflation

Question 63

What are menu costs?

Answer 63

Firms have to keep changing their prices to match the level of inflation

Question 64

What are the costs of economic growth for governments? // 2 points

Answer 64

- Governments might have to increase their spending on healthcare if the consumption of demerit goods increases - A deficit on the balance of payments can be created because people on higher incomes purchase more imports. Firms may also import more resources to increase their production to meet the higher levels of demand

Question 65

What are the costs of economic growth for the environment? // 2 points

Answer 65

- Negative externalities such as pollution and waste increase as industrial expansion rapidly occurs - Resources are overexploited, could constrain growth in the future and future living standards

Question 66

How can firms benefit during a recession? // 2 points

Answer 66

- Some firms e.g. discount retailers can often attract more customers as consumers feel less confident about economic prospects - Can force firms to face up to their inefficiencies, forced to cut costs, benefits firms in the long run as they become more efficient than before

Question 67

What negative effects does a recession have on economic agents? // 4 points

Answer 67

- Unemployment levels increase as firms close down - Stop hiring new employees, bad for young people - Government spending tends to increase on welfare payments, leads to increased borrowing and a budget deficit - Levels of investment fall, this can have consequences on the long-run productive potential of the economy

Question 68

What does the extent to which AD increases depend on?

Answer 68

- People's marginal propensity to consume, MPC - How big the multiplier effect is

Question 69

When is economic growth sustainable

Answer 69

When the rate of economic growth can be maintained in the long run, so future generations can enjoy the same rate of growth.

Question 70

Why might fast growth today cause problems for future generations?

Answer 70

Natural resources, such as Oil, might deplete which will cause environmental problems for future generations and mean the future rate of growth might be weak

Question 71

When does unsustainable economic growth occur?

Answer 71

When deviations from the trend rate of growth are particularly large or frequent these are represented by the boom and bust sections of the economic cycle.

Question 72

What could happen if growth becomes excessive?

Answer 72

- Inflation in the average price level, wages and assets - Excessive credit, which is unsustainable in the long run and savings rate might be low and falling Certain excessive instability within an economy will be beyond the control of the government

Question 73

Is growth financed by public debt sustainable?

Answer 73

No, it might be difficult to pay back in the future and it does not contribute to improvements in productivty. Improvements in productivity allow an economy more room to grow

Question 74

When does a market bubble occur?

Answer 74

When the price of an asset is speculated to rise significantly, causing it to be traded more and demand exceeds supply so the price rises beyond the intrinsic value

Question 75

When does a market bubble burst and what happens?

Answer 75

When the price of the asset steeply and suddenly falls to its ordinary value . This causes panic and investors try and sell their assets. This results in a loss of confidence and it can lead to economic decline or a period of depression

Question 76

What is meant by Keynes term animal spirits

Answer 76

The instincts and emotions of human behaviour, which drives the level of confidence in an economy.

Question 77

What does destabilising speculation mean?

Answer 77

Changes in the price level in a market occurring as a result of speculation. Assets bought and sold depending on speculation of appreciation or depreciation

Question 78

Why is future sustainability important for firms to understand?

Answer 78

If firms expect a high rate of return, they will invest more. Firms need to be certain about the future, otherwise they will postpone their investments.

Question 79

How does expectations about society and politics affect the level of investment within an economy?

Answer 79

If a change in government might happen, or if commodity prices are due to rise, businesses may postpone their investment decisions.

Question 80

What is meant by the term Herding?

Answer 80

The act of reacting to the behaviour of other economic agents rather than the market. People follow a crowd of people in the belief that 'if everyone else is doing something then it must be the right thing to do' This can cause instability in the market.

Question 81

What is an economic shock?

Answer 81

Any unexpected event that has a large-scale, unexpected impact on the economy. There can be both demand side and supply side shocks as well as domestic and global shocks

Question 82

What are some examples of demand-side shocks?

Answer 82

Domestic: Consumer confidence being boosted due to house prices rising, increasing consumer spending Global: If a country's major trading partners go into a recession, significant reductions in demand for a country's exports occur

Question 83

What are some examples of supply-side shocks?

Answer 83

- A poor harvest reduces the supply of food, increases its price and reduces the economy's capacity - The discovery of a major new source of of raw material will greatly reduce its price and increase its supply - increasing the capacity of the economy

Question 84

How do classical economists view on decision making compare to Keynes animal spirt interpretation?

Answer 84

According to classical economists, economic agents always act rationally In fact people often seem to act very irrationally leading to Keynes adopting the term animal spirits

Question 85

What is speculation?

Answer 85

When people buy assets and hope to sell them for a profit later

Question 86

What does sustainable growth rely on? // 5 Things

Answer 86

A country's ability to: - Expand output every year - Find a continuous supply of FOP, to continue production (renewable resources) - Find growing markets for the increased output so that it is always being bought - Reduce negative externalities so that they don't hamper production - Do all the things above at the same same as many other countries who are pursuing the same objective // difficult to achieve sustainable growth

Question 87

What are the benefits of a country achieving sustainable economic growth?

Answer 87

Long-term benefits to society and the ability to easily plan ahead since it can be more confident about its long term economic prospects

Question 88

When is a recession said to occur?

Answer 88

If there is negative economic growth for two consecutive quarters.

Question 89

What is a long term recession often referred to as?

Answer 89

A slump

Question 90

What is an economic depression?

Answer 90

Worse than a recession, it is a sustained economic downturn which lasts for a long period of time (e.g. several years)