4.6-Economic Growth

Question 1

What is Economic Growth

Answer 1

Economic growth is in the short run an increase in the output of the economy and in the long run an increase in the productive potential of the economy.

Question 2

What is GDP

Answer 2

GDP is the total value for all goods/services produced in an economy in a year

Question 3

What are the components of GDP

Answer 3

GDP can be calculated using the value of the expenditure in an economy
GDP = Consumption (C) + Investment (I) + Government spending (G) + Exports (X) - Imports (M)
GDP = C + I + G + (X-M)

Question 4

What is Real GDP (GDP)

Answer 4

Real GDP, GDP at constant market prices and adjust for inflation

Question 5

What is Nominal GDP

Answer 5

Nominal GDP, GDP at current market prices and so not adjusted for inflation

Question 6

How do you calculate GDP per capita

Answer 6

GDP per capita = GDP / the population
It shows the mean wealth of each citizen in a country
This makes it easier to compare standards of living between countries

Definition: the total value of all goods and services produced by a country in a particular year, divided by the number of people living there

Question 7

What is national output

Answer 7

Add up the value of all goods and services produced across the whole economy.

Question 8

What is national expenditure

Answer 8

Adding together the final spending of consumers firms government and net exports

Question 9

What is national income

Answer 9

Adding together income earned by firms and individuals from productive activities

Question 10

What are the causes of economic growth

Answer 10

1. Growth Caused by a Change in Total Demand

Actual economic growth occurs when there is an increase in the quantity of goods/services produced in an economy in a given period of time
This is often measured by the percentage change in real gross domestic product (GDP)
If any component of real GDP increases (consumption, investment, government spending, net exports), there will be an increase in total demand

2. Growth Caused by a Change in the Quantity/Quality of Factors of Production

Potential growth is the increase in the productive potential of an economy
This occurs when there is an increase in the quantity or quality of the factors of production available in an economy
One example of how the quality of a factor of production can be improved is through the impact of training and education on labour. An educated workforce is a more productive workforce and the production possibilities increase
One example of how the quantity of a factor of production can be increased is through a change in migration policies. If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase
Investing in new capital machinery increases the quality of capital
Investing in new technology results in an improvement to productivity

Question 11

What would a diagram look like for growth caused by a change in the quantity/ quality of factors of production

Answer 11

Economic growth occurs when there is an increase in the productive potential of an economy
This is demonstrated by an outward shift of the entire curve represented
More consumer goods & more capital goods can now be produced using all of the available resources

Question 12

What would a diagram look like for Growth Caused by a Change in Total Demand

Answer 12

Previously unused factors of production are now being employed
This is demonstrated by a shift from inside the production possibilities curve (PPC) such as Point E, towards the boundary of the PPC
At any given point in time, the actual economic growth may be less than the potential growth available to the economy

Question 13

What are some of the consequences of economic growth

Answer 13

Economic growth is considered to be the main contributor to an improvement in the standards of living
National income increases to spend on luxuries and necessities
economic growth increases and national output increases. Increased derived demand for labour, firms produce more output. Unemployment falls.
Higher national expenditure there is an increase in taxation more government budget increased taxes and redistribution of goods and services

Question 14

What are the benefits of economic growth

Answer 14

Increased incomes lead to better standards of living

Decreased levels of absolute poverty

Improvement in the quality/quantity of environmentally friendly technologies

Higher sales revenue for firms & greater profits

Increased investment by firms increases the potential output of the economy

Reduced expenditure by governments on benefits

Higher government tax revenue due to rising incomes and surging corporate profits

Increased employment resolves some of the negative social impacts of unemployment

Question 15

What are some of the cost of economic growth

Answer 15

Rising total demand causes demand pull inflation & the purchasing power of people on fixed incomes may fall

Lack of equity in the distribution of income - the rich may get richer & the poor poorer

Environmental damage caused by negative externalities of production & consumption increases

Increased inflation can harm export sales

The level of imports usually increases negatively impacting the current account

Increased income usually leads to greater consumption of demerit goods

Greater output often requires more time from workers and can decrease leisure time & well-being

Resources are depleted more rapidly

Question 16

What are the conflictions between Economic Growth and inflation

Answer 16

Aggregate Demand increases firms will respond by increasing their prices. Higher rate of economic growth causes higher levels of consumer spending. Economic growth causes inflationary pressures

Question 17

What are the conflictions between Economic Growth and Environmental Sustainability

Answer 17

Economic growth often increases pollution, negative externalities & the depletion of non-renewable resources
The higher the growth, the faster the depletion

Question 18

What are the conflictions between Economic Growth and inequality

Answer 18

If those with high incomes have high tendancy to import, more money will be leaving the country to be spent on imports worsen the balance of payments position

Increasesthe wealthys share of income. Without government intervention rate of return from wealty will lead to widening income inequality economic growth does solve this

Question 19

What are the conflictions between Economic Growth and balancing the current account

Answer 19

Economic growth usually leads to higher incomes which leads to an increase in imports by households thereby worsening the current account balance

Question 20

What are the conflictions between Low unemployment and Low inflation

Answer 20

The closer an economy moves to full employment the less workers will be available for hire & wage inflation will help increase overall inflation

Question 21

What are the conflictions between Low unemployment and economic growth

Answer 21

Firms have difficulty employing sufficiently skilled labour when economic growth occours, growing quickly this leads to wage inflation and higher prices.

Question 22

What is a recession

Answer 22

A recession is a period of at least six months (2 quarters) of economic decline which causes a decrease in the real gross domestic product (rGDP)

Question 23

What can cause a recession

Answer 23

It can be caused by a fall in any of the factors that influence total demand (consumption, investment, government spending, net exports

It can also be caused by supply-side shocks that create challenges for firms & consumers

Question 23

What are the some of the demand- side factors that can cause a recession

Answer 23

A fall in consumer confidence reduces consumption
A fall in business confidence reduces investment
Increasing levels of unemployment reduce consumption
Decreasing levels of government spending
Increased interest rates require borrowers to repay higher amounts on their loans - this reduces discretionary income which reduces consumption
Shocks to other economies can reduce demand for a country’s exports thus reducing total demand

Question 24

What are some of the consequences of a recession

Answer 24

National output (rGDP) falls
More firms go bankrupt
Both unemployment & underemployment increase
Both exports & imports fall
Domestic & foreign investment by firms decreases/stops
Deflation may become an issue leading to even lower wage levels
Government spending on unemployment benefits increase
Opportunities for entrants to the workforce decrease (youth unemployment increases)
Governments may have to spend significant amounts of money to support the economy which carries several major opportunity costs

Question 25

What are Demand side policies

Answer 25

Demand-side policies aim to influence the total demand in an economy

The two demand-side policies are fiscal policy & monetary policy

Any policy that increases consumption, investment, government spending or net exports is likely to cause an increase in real GDP

Question 26

What are some examples of Fiscal policy used to boost economic growth

Answer 26

When the government increase spending for example on supporting key industries, providing subsidies or providing public goods they can also use expansionary fiscal policy to lower taxes and increase disposable income which ill increase economic growth cutting income tax means a larger disposable income

Question 27

What are some examples of monetary policy used to boost economic growth

Answer 27

When the central bank want to introduce new money into the economy they buy open market assets such as bonds when they introduce these into the economy and by them back quickly a new injection of money is introduced into the money supply which causes economic growth, reward for saving decreases.

Question 28

Howdo supply side policies promote economic growth

Answer 28

Lowering direct taxes consumers have higher level of disposable income firms have more income to invest in capital investment, which is increased prices go down aggregate demand goes up

Question 29

What occours during a economic boom

Answer 29

When a boom happenes there is an increase in economic growth meaning income increases and so does a firms after tax profit. Their output will increase . This becomes unsustainable which then creates inflationary pressure. In a boom there is no need for government intervention

Question 30

What occours during a economic recession

Answer 30

When an economic boom overheats. When this happenes demand revenue and profit go down so there is cut backs on production. This leads to a decrease in living standers consumption investment and GPL go down more inequality.

Question 31

What happenes in a recovering economy

Answer 31

Government intervention, expansionary and fiscal policy can be used this creates rises in confidence, prices levels dependant on fiscal policy