Economic growth and cycle

Question 1

What diagrams can be used to show short run economic growth?

Answer 1

AD/AS (Keynesian or Classical) and PPF (moves closer to boundary)

Question 2

Factors that cause economic growth in the short run

Answer 2

Changes in interest rates, fiscal policy changes, commodity prices, currency changes affect export and import demand, trading in other countries, business and consumer confidence

Question 3

What diagrams can be used to show long run economic growth?

Answer 3

AD/AS (Keynesian or Classical) using vertical LRAS and PPF (outward shift)

Question 4

Factors that cause long run economic growth

Answer 4

Investment, productivity, labour supply, research and development, innovation, enterprise

Question 5

Advantages of export led growth

Answer 5

• injection into the circular flow of income→ ad and output→ raises per capita incomes and reduces extreme poverty
• revenues and profits for businesses→ increased capital investment spending through the accelerator effect→ increases countries productive capacity

Question 6

Potential drawbacks from export led growth

Answer 6

• over dependence on economic cycles of trade partner countries and vulnerability to external shocks
• rapid growth could lead to demand pull inflation and higher interest rates so less competitive
• perhaps unsustainable extraction of natural resources

Question 7

Output gap

Answer 7

Difference between the actual level of GDP and its estimated potential level

Question 8

Boom

Answer 8

Rate of growth of real GDP is higher than long-term trend

Question 9

Slow down

Answer 9

Weakening of the rate of growth, real GDP is still rising

Question 10

Recession

Answer 10

At least 6 months fall in aggregate output, employment, investment, confidence

Question 11

Recovery

Answer 11

Phase after recession where real GDP starts to increase and unemployment fall

Question 12

Depression

Answer 12

Prolonged downturn where a Nation’s GDP falls by at least 10%

Question 13

Hysteresis

Answer 13

With a recession there is a big risk of a permanent loss of national output.
Loss of productive capacity due to low capital investment and business closures.
High rates of structural unemployment may cause a shrinking labour force perhaps through outward migration or discouraged workers.

Question 14

Creative destruction

Answer 14

After a recession capitalist market economies usually bounce back.
Emergence of new business models and an increase in startups.
New technologies act as a catalyst for renewed economic growth and investment.

Question 15

Attractive policies for inward fdi

Answer 15

Low corporation tax, trade agreements, flexible labour markets, high quality infrastructure, availability of low cost labour