2.5 - Causes of growth

Question 1

Economic growth

Answer 1

Economic growth refers to an increase in the output of goods and services in an economy over time.

Question 2

Factors contributing to economic growth:

Answer 2

1) Capital Investment:
> Increased investment in physical capital (machinery, infrastructure) enhances productivity and output.

2) Human Capital
> Development: Education and training improve workers’ skills and productivity.

3) Natural Resources:
> Discovery and exploitation of natural resources can fuel growth.

4) Government Policies:
> Supportive fiscal and monetary policies, such as tax incentives and low interest rates, encourage investment and spending.

5) Institutional Factors:
> Strong legal and regulatory frameworks, property rights, and political stability promote growth.

6) Population Growth:
> A growing population increases the labour force and consumer base.

Question 3

What causes short-run economic growth?

Answer 3

• Changes to any of the components of aggregate demand (AD) will cause short-run economic growth to occur
  > This is illustrated on an AD/AS diagram by a rightward shift in AD

Question 4

What causes long-run economic growth?

Answer 4

• Long-run economic growth is caused by any improvements to the quality or quantity of the factors of production
  > A change to the quantity/quality of the factors of production has increased potential output of the economy from YFE→YFE1 (LRAS shifts right)

Question 5

Actual Growth

Answer 5

• Refers to the increase in real GDP over time, representing the economy’s current performance.
• It is measured by observing changes in output and is influenced by demand-side factors.

Question 6

Potential Growth

Answer 6

• Refers to the increase in an economy’s capacity to produce goods and services, reflecting the long-term productive potential.
• It is influenced by supply-side factors like improvements in technology, labour, and capital.

Question 7

Differences between actual and potential growth (measurement and influences)

Answer 7

• Measurement: Actual growth is observed in real-time changes in GDP, while potential growth is an estimate of the economy’s capacity.
• Influences: Actual growth is influenced by short-term factors (demand), whereas potential growth is driven by long-term factors (supply).

Question 8

The Importance of International Trade for (Export-Led) Economic Growth

Answer 8

• International trade, particularly exports, can significantly drive economic growth.

Question 9

How might international trade lead to (export-led) economic growth? (all improve productivity/efficiency)

Answer 9

• Increased Market Size:
  > Access to larger international markets allows firms to achieve economies of scale.
• Foreign Exchange Earnings:
  > Exports bring in foreign currency, enabling countries to import goods and services they cannot produce efficiently.
• Technology Transfer:
  > Exposure to international markets and competition can lead to the adoption of new technologies and practices.
• Job Creation:
  > Export industries create jobs, reducing unemployment and boosting incomes.

Question 10

Net exports (X-M) are a …

Answer 10

component of aggregate demand