1- Economic growth

Question 1

Causes of economic growth

Answer 1

Q^2 CELL

Anything that will shift LRAS

Question 2

How does capital cause economic growth?

Answer 2

• Through investment
• More goods can be produced with better technology
  BUT: Houses, buildings may not increase GDP

Question 3

How does enterprise cause economic growth?

Answer 3

• Through gov tax incentives
• Lower corporation tax- encourages investment
• Lower income tax- more workers, more goods
• High taxes- equal wealth distribution- removes incentive.

Question 4

How does labour cause economic growth?

Answer 4

Size: Immigration, demography, participation rates (women, high retirement ages).
- Quality: Productivity through education and training.
Greater occupational mobility- more innovation.

Question 5

How does land cause economic growth?

Answer 5

• Through the discovery of new resources e.g. oil.

Question 6

Other causes of economic growth?

Answer 6

• Technological progress

- Efficiency

Question 7

How does technological progress cause economic growth?

Answer 7

• Improved technology- lowers costs- quicker to produce and less labour need.
• Creates new products, keeps MPC high, needed for growth.

Question 8

How does efficiency cause economic growth?

Answer 8

• Less resources needed to produce each good.

- Promote competition- low prices- high quality.

Question 9

Difference between actual and potential growth?

Answer 9

Actual growth- AD shifts

Potential growth- LRAS or PPF shifts

Question 10

How does international trade cause economic growth?

Answer 10

• Export led growth increases AD.
• Export led growth can encourage investment increases LRAS.
• Increase efficiency as firms forced to be efficient.

Question 11

When is a positive output gap possible?

Answer 11

Only in the short run

Question 12

Problems with output gaps?

Answer 12

• Hard to measure
• GDP inaccurate
• LRAS unknown

Question 13

4 phases of the trade (business) cycle

Answer 13

• Boom
• Downturn
• Recession (slump)
• Recovery

Question 14

Characteristics of a boom

Answer 14

• High national income
• Positive output gap
• Consumption, investment, tax revenues high
• Wages increasing
• Inflationary pressures
• Imports

Question 15

Characteristics of a recession

Answer 15

• High unemployment- low consumption, investment, imports
• Low inflationary pressures- maybe deflation
• Firms lower revenue and profits.

Question 16

Hysteresis problem with recession

Answer 16

• Permanent loss of labour

- Loss of skills discourages workers

Question 17

Problem with boom

Answer 17

• Those on fixed incomes will have a fall in their real income due to inflation.

Question 18

Impact of economic growth on consumers

Answer 18

• Positive wealth effect- higher house prices and share prices
• Lower prices from improved productive efficiency
• Increased happiness
• Increased inequality
• Inflation

Question 19

Impact of economic growth on firms

Answer 19

• Investment increases- more money, incentive and more chance of a return on investment.
• Business confidence increases- potential demand increases
• R + D from investment- lower costs
• High demand, lower costs = higher profits
• Firms who sell inferior goods may lose out.

Question 20

Impact of economic growth on governments

Answer 20

• Tax revenues increase- VAT, income tax
• Help reduce budget deficit or budget surplus to help in future recessions.
• High expectation on government

Question 21

Impact of economic growth on living standards

Answer 21

• Lower poverty levels
• More goods and services to enjoy
• Health increases
• Exploitation of environment- but R +D for cleaner fuels
• Increased inequality