2.5 Economic Growth

Question 1

Causes of Economic Growth

Answer 1

Capital
Enterprise
Land
Labour
Technological Progress
Efficiency

Question 2

Causes of Economic Growth
Land

Answer 2

Discovery of new resources increase economic growth
Economists argue that developing countries tend to grow most from exploiting new resources, whilst they do not have a significant effect in developed countries

Question 3

Causes of Economic Growth
Labour

Answer 3

Size of the workforce:
Immigration, demography and participation rates

Quality of the workforce:
Education and skills

Question 4

Causes of Economic Growth
Capital

Answer 4

If a country receives sustained investment, they are able to access or develop new technology which will in improve productivity
This leads to more machines being bought and sold even if there are not technological advancement as they still allow for more goods to be produced
Not all investments lead to increased GDP as some can be unsuccessful

Question 5

Causes of Economic Growth
Enterprise

Answer 5

If governments offer tax benefits and grants, development of business will be encouraged which creates jobs leading to increased production increasing economic growth
If there is high wealth distribution, incentive to work falls
Lack of incentive means businesses do not invest
=> No economic growth

Question 6

Causes of Economic Growth
Technological Progress

Answer 6

Improved technology = average cost of production falls
=> Production increase / Less labour required
Creates new products for market helping increase consumption and keeps MPC high as there are new things to buy
Without increased spending, there would be little economic growth

Question 7

Causes of Economic Growth
Efficiency

Answer 7

Increase competition as quality will increase or prices fall
Market mechanism needs to work
Presence of efficient capital market

Question 8

Actual Economic Growth

Answer 8

Actual growth is percentage change in GDP
Economy has produced more goods and services

Question 9

Potential Economic Growth

Answer 9

Change in productive potential of the economy over time
LRAS or PPF shifts

Question 10

Production Potential

Answer 10

Determined by factors of production
Potential growth means there have been resources discovered or more technology developed that will allow economy to grow more
Extra goods and services have not yet been produced so GDP has not yet grown

PPF shows potential output of economy
Outward shift is economic growth
Move from inside PPF to PPF is recovery

Question 11

International Trade as Economic Growth

Answer 11

AD can affect economic growth through export-led growth (a rise in AD through increased exports)
Increased exports initially increases AD rather than LRAS, sustained high export levels will encourage firms to invest and increase demand for labour leading to economic growth
To be competitive in the international market, firms have to be more efficient

Question 12

Actual Growth Rates and LR Trends

Answer 12

LR trend rate of growth is average sustainable rate of economic growth over a period of time
Actual growth is the actual change over time and its changes are what make up the business cycle
Difference between two is an output gap

Question 13

Output Gaps

Answer 13

Difference between actual level of GDP and estimated long term value for GDP
Shown on trade cycle diagram
Positive output gap is when GDP is higher than estimated
Negative output gap is when GDP is lower than estimated => spare capacity in economy
Output gaps are difficult to measure as exact position of LRAS is unknown and initial estimates are inaccurate

Question 14

Trade Cycle Diagram

Answer 14

Question 15

Output Gaps AD and AS

Answer 15

Can be shown using AS and AD diagrams
LRAS shows full capacity output
Equilibrium to right of LRAS shows economy working over capacity in short term, left shows underutilisation

Question 16

Output Gaps AD and AS Model

Answer 16

Equilibrium = AD = SRAS = LRAS
AD3 there is negative output gap because SRAS equilibrium is less than LRAS equilibrium
AD2 there is positive output gap because SRAS equilibrium is more than LRAS equilibrium

Question 17

Classical Economists Output Gaps

Answer 17

Positive output gap would be filled by LR economic growth moving the LRAS curve, a recession which would decrease AD or a rise in costs of production which would decrease SRAS
Negative output gap would be brought back to equilibrium by rising AD or a fall in SRAS due to lower costs of production

Question 18

Trade Cycle

Answer 18

Periodic but irregular up and down movements in economic activity measure by fluctuations in real GDP and other macroeconomic variables
Four main phases

Question 19

Trade Cycle Model

Answer 19

Question 20

Trade Cycle Phases

Answer 20

Boom
Downturn
Recession
Recovery

Question 21

Trade Cycle Phases
Boom

Answer 21

When economy is at its peak, NI is high and economy is likely to be working above PPF where there is a positive output gap
C and I tend to be high as are tax revenues
Wages increase
Country increases imports to meet demand
Inflationary pressure

Question 22

Trade Cycle Phases
Downturn

Answer 22

Economy begins to move from a boom to a recession
Output and income fall
C and I fall and tax revenues also fall
Payments for benefits rise and unemployment rises
People accept jobs for lower wages due to higher levels of unemployment
Inflationary pressure to ease and a fall in imports

Question 23

Trade Cycle Phases
Recession

Answer 23

When economy is at bottom of cycle
High unemployment
Low consumption, investments and imports
Inflationary pressure low and maybe even deflation
Government defines recession as where real GDP falls in at least two successive quarters in UK

Question 24

Trade Cycle Phases
Recovery

Answer 24

Move from recession to boom
NI and output begin to increase
Unemployment falls
Consumption, investment and imports increase
Inflationary pressure begins to grow as workers start to demand higher wages

Question 25

Impact of Economic Growth
Consumers

Answer 25

Increase in demand for housing as people have more money and are able to afford properties
=> increase house prices
Shares likely to increase
Rising prices of shares and housing increases wealth and positive wealth effect
Improved productive efficiency => lower prices or higher quality
Increased happiness
Increased inequalities

Question 26

Impact of Economic Growth
Firms

Answer 26

Investment increases
Business confidence improves
Technology improves as a result from increased investments => lower costs?
Combination of higher demand and lower costs leads to higher profits
Opportunity for new firms to establish themselves
Firms who sell inferior goods might sell out and some firms might find their markets disappearing

Question 27

Impacts of Economic Growth
The Government

Answer 27

Tax revenues rise as more goods and services are being bought, more income is being earned and more profit is being made
=> Improve quality of living standards
Reduce budget defines
People expect more from government

Question 28

Impact of Economic Growth
Current and Future Living Standards

Answer 28

Lower poverty levels
More goods and services to enjoy
Housing standards and quality of food increases
Increased government spending
Highest benefits in developing countries
Exploitation of the environment
Devote resources for research and development
Increased inequalities between rich and poor