Economic Growth

Question 1

What is economic growth?

What is national income?

Answer 1

Economic growth- the increase in level of output by a nation

National income (value of all incomes in economy added together- wages, profits, dividends etc) will rise as economies grow.

Question 2

How does the economy grow?

Answer 2

As economy produces more, businesses are more profitable, share prices rise and so more capital is raised and workers employed. More jobs leads to more income, leading to more spending on goods and services.

Economic growth is the result of businesses generating more output. As businesses produce more, they need more workers. Consequently, economic growth raises employment levels, and thus reduces unemployment. Governments also tend to spend more during periods of economic growth. This will also help to create more jobs – in education, health care and infrastructure development, for example.

Question 3

What are the impacts of economic growth?

Answer 3

INCREASED STANDARDS OF LIVING- Purchase more goods and services with disposable income and more income from jobs

EMPLOYMENT- Derived demand, economic growth occurs when more output produced.

REDUCED POVERTY

PRODUCTIVE POTENTIAL- Can produce more goods and services.

DEMAND PULL/COST PUSH INFLATION- If growth too fast economy may overheat

NEGATIVE EXTERNALITIES- Pollution and waste, cars/transport

INEQUALITY

DEPLETION OF NATURAL RESOURCES- increased output of goods and services, non-renewable resources used, unsustainable growth.

Question 4

What is GDP and what is it used for?

Answer 4

GDP is the market value of all final goods and services produced in a year

Includes goods sold domestically and overseas

Used to measure economic growth all over world.

Good for comparisons.

A good indicator of standard of living

Question 5

In the economic cycle what is Boom?

Answer 5

Boom- Peak of economic cycle, where GDP is growing at its fastest.

Question 6

In the economic cycle what is Downturn?

Answer 6

Downturn- A period where GDP is still growing, but more slowly.

Question 7

In the economic cycle what is Recession?

Answer 7

Recession- A fall in GDP for two successive quarters

Question 8

In the economic cycle what is Recovery?

Answer 8

Recovery- A phase in economic cycle when GDP starts to rise and economic activity increases.

Question 9

In the economic cycle what is Depression / Slump?

Answer 9

Depression/Slump- A more severe version of a recession. Widespread poverty and falling demand for many goods/services.

Question 10

What are the limitations of GDP?

Answer 10

Increases in inflation could distort true rate of growth- real GDP a true measure of growth

Population changes-
Increase in population will offset growth in GDP

Does not include figures for hidden or informal economy

Does not take into account external costs such as environmental costs and therefore does not measure how these impact on wellbeing of society

Does not represent how additional income is distributed between population- many still remain in poverty

Statistical errors- Millions of documents from firms and individuals. Admin errors

Home produced goods- Some goods/services not traded and therefore economic activity not recorded. Eg growing own produce, DIY. Particularly common in undeveloped countries.