2.5 Economic growth

Question 1

What needs to happen for Economic growth to occur?

Answer 1

There needs to be an increase in quality or quantity of one
of the four factors of production: land, labour, capital or enterprise, or these being used more efficiently. All economists agree that an increase in LRAS will increase the potential level of output in an economy. Any factor which increases the LRAS, will also increase economic growth.

Question 2

How does Land lead to economic growth?

Answer 2

The discovery of new resources e.g. oil will increase economic growth. Economists argue that developing countries tend to grow the most from exploiting new resources, whilst they do not have a significant effect in developed countries.

Question 3

How does Labour lead to economic growth?

Answer 3

-Size of the workforce: Changes in the size of the workforce can come from immigration, demography (age profile) of the country or participation rates. A change in the age profile of the population i.e. the amount of people of working age will affect economic growth: the more people of working age there are, the more growth there will be.
-Quality of the workforce: In the long run, improving the quality of labour isperhaps more important; this can be done through education. Improved education will improve labour quality as it will mean that workers have all the
skills they need and are more efficient, so output per worker increases. More skilled workers will also be less likely to suffer from structural unemployment as they will have greater occupational mobility and so this will increase the output of the economy as there are less unused resources.

Question 4

How can the size of the workforce be increased?

Answer 4

-raisng the retirement age
-providing free childcare
-immigration

Question 5

How does Capital lead to economic growth?

Answer 5

If a country receives sustained investment, they will be able to access or develop new technology which will enable the country to improve productivity. It will also mean more machines can be bought and used, even if these are not a technological advancement, so more goods can be produced. Not all investment will
lead to increased GDP because some investment is unsuccessful whilst it is argued that other investment doesn’t increased GDP because of its nature e.g. building
houses.

Question 6

How does Enterprise lead to economic growth?

Answer 6

If the government offers tax benefits and grants, they will encourage the development of business, creating jobs and meaning more goods and services are produced, which will increase economic growth. If there is too much wealth
distribution (i.e. too high taxes and benefits), there will be little incentive to work hard as the rich know a lot of their money will be taken away and the poor know that there
is no need to work as benefits will give them just as much money as a job on minimum wage.

Question 7

How does Technological processes lead to economic growth?

Answer 7

Improved technologies mean that the average cost of
production is lower, whether this is because it is quicker to produce or less labour or equipment is needed. Also, it creates new products for the market and this helps to
increase consumption and keeps MPC high as there are new things to buy. Without increased spending, there would be little economic growth.

Question 8

How does Efficency lead to economic growth?

Answer 8

-One way the government can ensure efficiency is to keep up competition as it will means producers are forced to lower prices or increase quality so will have to improve efficiency to keep profits high.
-In order for there to be efficiency, the market mechanism must be working properly. In some countries, particularly low and middle-income countries, the mechanism doesn’t work properly due to a lack of protection of property
rights. If the government doesn’t intervene to protect property rights, then people will be unwilling to save and invest which will prevent economic growth.

Question 9

Actual growth

Answer 9

The percentage change in GDP. It is when the economy is
actually produced more goods and services.

Question 10

Potential growth

Answer 10

The change in productive potential of the economy over time, so the LRAS or PPF curve shifts

Question 11

What does the PPF show?

Answer 11

the potential output of the economy. An outward shift of the PPF is economic growth. If the economy moves from inside the PPF to on the PPF, this would be classed as economic recovery rather than economic growth.

Question 12

Importance of international trade for economic growth

Answer 12

-Although increased exports initially increases AD rather than LRAS, sustained high export levels will encourage, or force, firms to invest and increase demand for labour, which will lead to economic growth.
-Moreover, in order to be competitive in the international market, British firms will have to become more efficient as they are competing with more firms than in just the UK
market.

Question 13

long run trend rate of growth

Answer 13

The average sustainable rate of economic growth over a period of time. It is what tends to happen over a long period of time;
the average.

Question 14

Actual growth

Answer 14

the actual change (i.e. the change in real GDP) over time and its changes are what make up the business cycle.

Question 15

what is the difference between lung run trend rate of growth and actual growth?

Answer 15

Actual growth

Question 16

Output Gap

Answer 16

the difference between the actual level of GDP and the
estimated long-term value for GDP- this is shown on the trade cycle diagram which demonstrates how the actual GDP is not always on the trend.

Question 17

Positive Output gap

Answer 17

when GDP is higher than estimated

Question 18

Negative output gap

Answer 18

when GDP is lower than estimated. With a negative output gap, there is spare capacity in the economy with factories, offices and workers not being utilised to produce goods and services.

Question 19

difficulties with measuring the ouput gap

Answer 19

firstly because the exact position of the LRAS is unknown and also because initial estimates of the real GDP are often inaccurate. Some economists believe they are so difficult to measure that they are not a valid concept to use from the purpose of economic policy. It is not
possible to measure the productive potential of an economy as there is no single monetary value for the level of variables such as machinery, workers and technology.

Question 20

The trade cycle

Answer 20

This is the periodic but irregular up and down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. Each business cycle is different, but they tend to have four main phases: boom, downturn, recession (slump) and recovery.

Question 21

two main types of the trade cycle

Answer 21

a mild trade cycle where GDP does not fall during recessions but instead doesn’t grow by as much as the trend, and a more extreme one like that in the diagram.

Question 22

Characteristics of a boom

Answer 22

When economy is at its peak (the boom), national income is high and the economy is likely to be working above PPF where there is a positive output gap. Consumption and investment tend to be high as are tax revenues, and wages will be increasing. Usually, the country will increase imports to meet the demand of high-income consumers that cannot be met by the goods produced within the
country. There will also be inflationary pressure.

Question 23

Characteristics of a recession

Answer 23

When the economy is at the bottom of the cycle, it is in a slump, trough, depression or recession. There tends to be high unemployment causing low consumption, investment and imports. Inflationary pressure will be low and there may even be deflation. In the UK, the government defines recession as where real GDP falls in at least two successive quarters

Question 24

During a downturn…

Answer 24

the economy begins to move from a boom to a recession, output and income fall which leads to a fall in consumption and investment as well as tax revenues.
Payments for benefits rise as unemployment rises. People begin to accept jobs for lower wages due to higher levels of unemployment. This causes inflationary pressure to ease and a fall in the number of imports.

Question 25

During a recovery phase…

Answer 25

as national income and output begin to increase with unemployment falling and consumption, investment and imports increasing. Inflationary pressure begins to grow as workers start to demand higher wages.

Question 26

impact of economic growth on conusmers

Answer 26

-wealth effect
-lower prices and higher quality goods
-increased satisfaction
-more facing inequality due to inflation
-equality gap closes

Question 27

impact of economic growth on firms

Answer 27

-Investment will increase since businesses are more successful.
-Business confidence will improve as there are potential demand increases for businesses’ products and this confidence will also lead to increased investment.
-There will be more research and development done to invent more technology and more firms will be able to have the best technology, which is likely to increase productive efficiency and lead to lower costs.
-higher profits
-opportunity for new firms to establish themselves
-firms who sell inferior goods (with negative income elasticities) may lose out. Changing technologies and globalisation also mean that some firms find their markets disappearing

Question 28

impacts of economic growth on the government

Answer 28

-tax revenues will rise as more goods and services are being bought, more income is being earnt and more profits being made. This means the government has more
money to put into the NHS, education, benefits etc.; the quality of these systems will be improved, and this will help to improve living standards.
-reduce the budget deficit
-people expect more from the government
-

Question 29

impact of economic growth on current and future living standards

Answer 29

-lower poverty levels
-more goods and services for people to enjoy
-housing standards and the quality of food increases
-increased government spending
-higher benefit on developing countries
-exploitation of the environment
-it could be argued that people with higher incomes are able to buy cleaner fuels and richer countries can devote resources for research and development of cleaner resources and ‘greener’, more efficient technology
-increased equality gap

Question 30

Growth pessimists

Answer 30

those who question the long term sustainability of growth