2.5 Economic Growth

Question 1

Define the business cycle

Answer 1

Where GDP fluctuates around its underlying trend, following a regular pattern

Question 2

Define the output gap

Answer 2

The difference between actual real GDP and potential real GDP

Question 3

Define a negative output gap (recessionary gap)

Answer 3

When an economy is producing less than their productive potential

Question 4

Define a positive output gap/inflationary gap

Answer 4

When an economy is producing more than their productive potential

Question 5

Define spare capacity

Answer 5

When an economy is not using all its factors of production fully or efficiently (not at productive potential)

Question 6

Define a recession

Answer 6

When GDP falls for two or more consecutive quarters

Question 7

Define productivity

Answer 7

A measure of the efficiency of a factor or production

Question 8

Define labour productivity

Answer 8

A measure of output per worker, or output per hour worked

Question 9

Define capital productivity

Answer 9

A measure of output per unit of capital

Question 10

Define total factor productivity

Answer 10

The average productivity of all factors, measured as the total output divided by the total amount of inputs used

Question 11

Define investment

Answer 11

Spending by firms on capital goods (goods used to make other goods)

Question 12

Define depreciation

Answer 12

The fall in the value of physical capital equipment over time as it is subject to aging and wear and tear

Question 13

How is net investment calculated?

Answer 13

Gross investment - depreciation

Question 14

Define human capital

Answer 14

The skills and expertise that contribute to a worker’s productivity

Question 15

Define export-led growth

Answer 15

A strategy for achieving rapid economy growth through the promotion of export activity

Question 16

Define sustainable development

Answer 16

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Question 17

Define actual growth

Answer 17

An increase in GDP over time

Question 18

How can actual growth be increased?

Answer 18

By increasing AD (factors) or SRAS (costs of production)

Question 19

Define potential growth

Answer 19

The trend/average rate of growth over a time period

Question 20

How can potential growth be increased?

Answer 20

By increasing LRAS (increasing productive potential)

Question 21

How is an output gap calculated?

Answer 21

Actual GDP - Potential GDP

Question 22

Name a thing seen in the economy during an inflationary gap, and whether it is short/long term

Answer 22

High wages as firms compete

Short-term

Question 23

Name 3 things seen in the economy during a recessionary gap

Answer 23

High unemployment

low profit

Firms resist wage increases/employees reluctant to seek wage rises

Question 24

Name 4 consequences of a negative output gap

Answer 24

Unemployment
Real GDP below potential (bad living standards)
Budget deficit
Low wage growth
Low business confidence (if widening)