2:4:1 - Economic Growth

Question 1

What is meant by the term actual economic growth?

Answer 1

Is an increase in real GDP

Question 2

What is meant by the term potential economic growth?

Answer 2

Is an increase in the capacity of the economy

Question 3

What happened to real GDP during a boom?

Answer 3

Real GDP rises fast

Question 4

What happens to real GDP during a recession?

Answer 4

It falls for at least two consecutive quarters

Question 5

What happened to real GDP during a slowdown?

Answer 5

• The level of GDP may be rising, but rising below the usual. - Or it may be falling

Question 6

How can actual economic growth occur?

Answer 6

Increase in one of the components of aggregate demand - Consumption – Investment – government spending – net trade

Question 7

What component of aggregate demand will increase consumer confidence or the availability of credit increase?

Answer 7

Consumption

Question 8

What is meant by the term export led growth?

Answer 8

Economic growth caused by rises in net exports

Question 9

Why is export led growth good?

Answer 9

– Improves current account of the balance of payments

Question 10

Can actual economic growth also occur because of increases in aggregate supply or because of government supply-side policies? Why?

Answer 10

– Yes – increase in aggregate supply (This might happen because costs of production full) – government supply-side policies (deregulation of markets)

Question 11

A shift in the AD or AS curve to the […….] should cause an increase in actual growth

Answer 11

Right However if a D increases on the vertical part of the AS curve then the only affect is inflation And the same thing happens on the horizontal parts however this isn’t inflationary but there will be no change in price levels or output

Question 12

When can potential economic growth occur?

Answer 12

– When the vertical part of the aggregate supply curve shifts to the right (increasing the amount that the economy can produce)

Question 13

What are the problems with export led growth?

Answer 13

– Makes the exporters vulnerable to changes in demand in other countries – or exchange rates Which are outside of their control

Question 14

What is the currency of China?

Answer 14

Reminbi

Question 15

What are the factors that constrain economic growth?

Answer 15

– Absence of efficient capital markets – government instability – labour market problems – external constraints

Question 16

How does the absence of efficiant capital markets constrain economic growth?

Answer 16

Lenders charge high rates of interest because there is asymmetric information

Question 17

How does government instability constrain economic growth?

Answer 17

• Cannot attract investment - currency might be unstable - Fiscal deficit (Less Power to spend and stimulate growth)

Question 18

How does labour market problems constrain economic growth?

Answer 18

– This country to get richer birthrates tend to fall, in the long run this means labour supply falls

Question 19

How does external constraints constrain economic growth?

Answer 19

– Trade is a key driver of growth – tariffs and subsidies can prevent A country from growing – global fears of a recession

Question 20

What is meant by the term output gap?

Answer 20

The difference between actual and potential GDP

Question 21

What does a negative output gap mean?

Answer 21

Country is not using its resources to the full

Question 22

What happens to the economy if there is a positive output gap?

Answer 22

– Pressures will grow Such as: tight labour markets, waste pressures and shortages of raw materials

Question 23

What does a negative output gap show about an economy?

Answer 23

Spare capacity Bank of England may cut interest rates to stimulate investment

Question 24

Who measures the size of the output gap?

Answer 24

The office for budget responsibility

Question 25

What can the trade cycle also be called?

Answer 25

– Economic cycle – business cycle

Question 26

In the economic cycle booms tend to be followed by what?

Answer 26

Slumps or slowdowns

Question 27

In the economic cycle slumps or slowdowns tend to be followed by what?

Answer 27

Recessions

Question 28

In the economic cycle recessions tend to be followed by what?

Answer 28

A recovery phase

Question 29

What are the benefits of economic growth on consumers?

Answer 29

• incomes and wealth rise - People can save money for future consumption - People feel more confident about their jobs - more willing to spend - likely to be more employment opportunities - wages might rise as firms try to keep hold of workers

Question 30

What are the benefits of economic growth on Firms?

Answer 30

• Firms tends to make more profit - Firms take on more workers and are likely to invest (increases growth and future prospects)

Question 31

What are the benefits of economic growth on Governments?

Answer 31

• People pay more tax when incomes rise and asset prices rise (cooperation tax, VAT, income tax) - Government pays less unemployment benefits - Government has a better fiscal position

Question 32

What are the benefits of economic growth on Living Standards?

Answer 32

• Incomes rise which is likely to make people better off - Poverty rates fall as wages and employment rise - Government will spend more in areas to improve living standards - Firms May use cleaner technology because they can afford to • Standards of living increase as long as the cost of living does not also increase

Question 33

What are the costs of economic growth?

Answer 33

• Income Inequality (unskilled are less likely to benefit from increased incomes) - Environmental Problems (Depletion of natural resources and external costs such as CO2 emissions) - Balance of Payments Problems on the Current Account (Higher incomes means people import more and there is less incentive for firms to export) - Bottlenecks (when there is little spare capacity, factors of production rise in price, Monopoly power could cause barrier of entry to be tightened) - Social Dislocation and Stress (Higher incomes will be earned by some but not all, could be increased household debt as people over spend, wealth effect) - Problems of rapid growth (cause short term prices to rise, growth too quickly could cause bad planning and shoddy workmanship)

Question 34

Diagram showing a NEGATIVE output gap.

Answer 34

Question 35

Diagram showing a Positive and Negative Output Gap

Answer 35

Question 36

Diagram showing the Trade Cycle.

Answer 36