Economic Growth

Question 1

explain the causes of economic growth

Answer 1

investment - this is spending on capital goods such as machinery. More investment means that the economy has the ability to produce more goods and services.

changes in technology - technological process means that the quality of capital goods improves, and a given quantity of capital can now produce more output than before.

education and training - affects the quality and quantity of work done. The more literate, educated, trained and skilled the workers, the higher the output is likely to be.

Question 2

explain the benefits of economic growth

Answer 2

a reduction in poverty - as output and incomes rise, the government will receive a greater tax revenue. The government is able to then use the extra revenue from these taxes to raise the living standard of those will lower incomes.

a rise in employment - more workers will be required to produce the extra output brought by the economic growth. Therefore, there will be a rise in employment and the unemployment rate will fall.

Question 3

explain the costs of economic growth

Answer 3

environmental costs - the production and consumption of goods and services can lead to more pollution of the land, air and fresh water. Eg. oil spills can damage the marine environment.

congestion - economic growth is often concentrated in certain areas or regions of a country. These are usually urban areas, which can become very overcrowded. There may be pressures on services such as hospitals and schools.

inequalities of income and wealth - not everyone benefits to the same extent from economic growth. This means that the gap between rich and poor may become wider with economic growth.

Question 4

explain how fiscal policy can help achieve economic growth.

Answer 4

the government can lower taxation:

• this will give consumers more disposable income, increasing aggregate demand
• it can lead to higher profits for firms, increasing investments.

increase the budget deficit:

• this can be spent of a variety of products nationally
• however, this adds to the national debt and must be repaid with interest

Question 5

explain how monetary policy can help achieve economic growth.

Answer 5

consumption:

• low interest rates will lead to less incentive to save. more incentive to borrow and therefore higher consumption
• this will affect general spending

investment:

• low interest rates lead to investment projects becoming less costly thus more attractive
• therefore, investments should rise.

Question 6

explain how supply-side policy can help achieve economic growth.

Answer 6

immigration:

• improves the quality of the workforce as skilled workers can be used to improve the skill base of an economy.
• improves the quantity of the workforce as increased numbers can be used to help fill vacancies in the economy.

training and education:
- improves productivity, mobility and flexibility of the workforce.