Lesson 25- Economic Growth

Question 1

Define Economic Growth

Answer 1

An increase in the total output of goods and services produced in a country.

Question 2

Define GDP per head

Answer 2

Refers to the total output of goods and services produced by each and every individual in a country.

Question 3

Define Real GDP

Answer 3

GDP after adjusted for inflation.

Question 4

State 5 ways to achieve economic growth?

Answer 4

1. Discovery of natural resources will lead to the production of more goods and services and also generate revenue in the form of exports.
2. Increase in investments- Higher levels of investments by a business in the form of equipment and machinery will mean that output can be increased
3. HCI will mean that employees will be more educated and skilled which means they can find jobs easily leading to firm employing more people causing the GDP to rise.
4. Reallocation of resources from the primary sector to the secondary sector or from the secondary sector to the tertiary sector will mean that the country’s GDP will rise as the secondary and tertiary bares a higher output than the primary sector.
5. Improvements in technology enable a country to produce a higher output.

Question 4

Four benefits of economic growth

Answer 4

1.Higher Incomes- A higher GDP will mean that the people will be earning a higher income which will lead to a rise in the standard of living.
2. Better infrastructure- Economic growth would mean that the gvt of a country would earn a higher tax revenue through increased GDP which can be used to improve infrastructure.
3. Higher life expectancy- Better medical facilities and the development of new medicines would mean that people will be able to live longer.
4. Reduced unemployment as aggregate demand would increase encouraging firms to employ more.

Question 5

State 6 costs of economic growth

Answer 5

1, During growth it can be seen that the scarce resources of a country will be exploited leaving an opportunity cost for future generations.
2. Growth may lead to the unemployment of some workers due to the introduction of modern production techniques and equipment.
3. The level of pollution in a country may increase due to firms constantly focusing on increasing production levels.
4. During economic growth rising incomes may lead to an increase in AD of a country causing demand pull inflation
5. Growth may lead to a deficit on the BOP since high incomes will encourage people to import more from abroad
6. Growth is said to have an opportunity cost since during economic growth firms tend to produce more capital goods rather than consumer goods which are need for day to day use of consumers.

Question 6

State and explain 5 limitations of GDP as a measure of economic growth and living standards

Answer 6

1. Inflation is not taken into account therefore it may be misleading if the increase in output were merely an increase in the price level meaning inflation therefore real GDP should be calculated
2. It will be misleading if the rise in GDP is only because population had increased this GDP per head should be calculated.
3. It may be misleading as there might have been mistakes during the compilation of GDP figures from different groups of consumers, firms and organizations.
4. Some transactions are not taken into account account such a goods produced by consumers and exchanges of goods between others.
5. Rising GDP can be an indicator of economic growth but externalities generated at the same time can lead to a fall in living standards such as rise in pollution.

Question 7

Define the economic cycle

Answer 7

This refers to the various stages of Real GDP that a country passes through a period of time.

Question 8

What are the 4 stages of the economic cycle

Answer 8

Recovery
Peak/Boom
Recession
Trough/ Depression /Slump