2.1 Economic Growth

Question 1

What is economic growth?

Answer 1

Change in national output over time as measured by GDP or GNP

Question 2

What is short run economic growth?

Answer 2

Increase in actual GDP

Question 3

What is long run economic growth?

Answer 3

Increase in the productive potential of an economy.

Question 4

What is the policy objective of economic growth?

Answer 4

Governments seek economic stability and a reduction in the fluctuations of actual economic growth around the trend rate of growth. In the Uk, the govt policy objective of economic growth is a steady rate of economic growth.

Economic growth often primary policy objective as it is an indicator of how the economy is doing and of the performance of other key indicators e.g inflation, employment rates and efficiency of policy measures.

Govt policy objectives for economic growth depend on stage of economic development.

Question 5

What are the different stages of the economic cycle?

Answer 5

Boom: rate of actual economic growth exceeds trend rate and the output gap is narrowed

Slowdown/downturn: economic growth rates begin to fall and approach zero

Recession: two consecutive periods of negative economic growth

Recovery/upturn: economic growth becomes positive after a recession

Question 6

What is real and nominal gross domestic product?

Answer 6

Real GDP= takes inflation rates into account
Nominal GDP= at current prices doesn’t take inflation into account

If we know GDP at current prices and we know the relevant price index, we can calculate the real value of GDP

Question 7

How can you calculate real GDP?

Answer 7

(1.613/105.2) x 100

Question 8

What changes in GDP occur over time?

Answer 8

Changes are caused by changes in the demand and/or supply sides of the economy
Rates of change in GDP over time relates to the stage of economic development. E.g less developed countries are likely to grow at a faster rate than those that are economically developed

Question 9

How do you calculate economic growth rates?

Answer 9

Economic growth rates= (change in GDP/ original GDP) x 100

Question 10

What is GDP per capita?

Answer 10

Gross domestic product per head eg it measures the average level of national income per person in a population

Question 11

How do we calculate GDP per capita?

Answer 11

GDP per capita= GDP/ population

Question 12

Explain short run economic growth due to a demand in aggregate

Answer 12

Diagram page 133

A change in the demand side of the economy is caused by an increased component of aggregate demand (consumption, investment, government expenditure and net exports)
This in turn leads to a rise in real GDP= positive economic growth

Question 13

Explain long run economic growth

Answer 13

Diagram page 134

Growth caused by supply-side policies that increase the productive capacity of the economy

The expansion of productive potential is illustrated by the shift in long run aggregate supply, resulting in an increase to real GDP and the full employment level shifting

The shift causes a fall in price level and there is an extension in aggregate demand

Question 14

Explain short run economic growth caused by a rise in short run aggregate supply.

Answer 14

Diagram page 133

A change in factor input costs (labour costs) affects the supply side of the economy, resulting in an increase in short run aggregate supply from SRAS 0 to SRAS 1

Question 15

What are the causes and consequences of economic growth in the short and long run?

Answer 15

Shifts in aggregate demand and/ or aggregate supply

Changes on demand side are caused by changes in the components of aggregate demand e.g consumption, investment, govt expenditure and net exports

Changes on the demand side are caused by an injection into, or leakage from, the circular flow of income

An alteration in macroeconomic policy measures, monetary and fiscal policy will cause a change in aggregate demand

Question 16

What are the consequences of short and long run economic growth?

Answer 16

This depends on what has caused it. You need to highlight that policy measures on the demand side need to be balanced e with supply-side policies in order to have a sustainable economic growth

Question 17

What are the benefits of economic growth?

Answer 17

Rise in average household income as indicated by GDP per capita

Reduced unemployment through job opportunities being created in order to produce a higher level of output thus creating a higher derived demand for labour

Rise in material standards of living as households are able to purchase products with a higher income elasticity of demand

Reduction in absolute poverty levels

Improvements in public services, an increase in govt taxation receipts that could increase govt expenditure on merit goods such as education and healthcare

Question 18

What are the costs of economic growth?

Answer 18

Demand- pull inflationary pressure as spare capacity is used up

Rising income inequality as measured by the Gini coefficient and Lorenz curve

Relative poverty could rise

Environment degradation through the divergence between MSC and MPC, which hinders sustainable economic development

Wealth concentration resulting in greater division between geographical areas of the economy