2.5 Economic growth

Question 1

what is short run economic growth?

Answer 1

an increase in real GDP i.e. an increase in actual output

Question 2

what are the causes of short run economic growth?

Answer 2

• Lower interest rates
• Lower income/corporation tax
• Higher confidence
• Weaker exchange rate
• low commodity prices

Question 3

what is long run/potential economic growth?

Answer 3

a sustained rise in a country’s productive potential
- the main drivers of long run economic growth are higher productivity and gains from innovation and rising real incomes for households

Question 4

what are the causes of long run economic growth?

Answer 4

• productivity
• investment
• labour supply
• innovation
• enterprise

Question 5

advantages of export led growth?

Answer 5

• rise in AD and expansion of output
• growing export sales = more profits
• increased investment and employment

Question 6

risks of export led growth?

Answer 6

• over-dependence on the economic cycles of trade partner countries ➡️vulnerable to shocks
• incite a protectionist response from other nations who feel that the benefits of trade have been unequally skewed in favour of exporting countries
• rapid export-led growth might lead to demand pull inflation and higher interest rates
• might be unsustainable if it contributes extraction of natural resources beyond what is required for long term balanced growth to be maintained

Question 7

what is the output gap?

Answer 7

The output gap is the difference between the actual level of GDP and its estimated potential level
➡️ usually expressed as a percentage of the level of potential output

Question 8

Positive output gap?

Answer 8

where actual GDP is above potential GDP, possible excess AD

Question 9

Negative output gap?

Answer 9

growth is lower than what was expected
-where the economy has large margin of spare capacity of factor resources

Question 10

why’s it difficult to asses the output gap?

Answer 10

hard to measure
- productivity
- size of Labour market
- business output and confidence
- underemployment

Question 11

boom?🌟

Answer 11

A period when the rate of growth of real GDP is fast and higher than the long-term trend

Question 12

slowdown?

Answer 12

A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate

Question 13

recession?🌟

Answer 13

A period of at least six months when an economy suffers a fall in aggregate output, employment, investment and confidence

Question 14

recovery?

Answer 14

A phase after a recession, during which real GDP starts to increase and unemployment begins to fall

Question 15

depression?

Answer 15

A prolonged downturn in the economy and where a nation’s GDP falls by at least 10 perent

Question 16

possible causes of a recession?

Answer 16

• external events
• tightening of macro policy
• fall in assets price
• supply of credit reduced
• drop in confidence

Question 17

how can AS create a recession?

Answer 17

if it shifts inwards

Question 18

impact of recession?

Answer 18

Negative output gap
Reduced production/supply
Less profits
High unemployment
Less confidence ➡️less consumption and investment
Widening inequality
Rising national debt
Lower rate of inflation

Question 19

Hysteresis views about effect of depression?

Answer 19

• when an economy is disabled by recession there is a big risk of a permanent loss of national output
• loss of productive capacity due to low capital investment + many business closures
• high rates of structural unemployment may cause a shrinking labour force perhaps through outward
  migration

Question 20

Creative Destruction views about effect of recession?

Answer 20

• recessions can cast a dark shadow, but capitalist market economies usually bounce back eventually
• recessions see the emergence of new business models and an increase in start-ups
• new technologies can act as a catalyst for renewed economic growth and investment

Question 21

benefits of economic growth?

Answer 21

• higher living standards
• lower unemployment
• raises tax revenues and allowing the government to spend more on public and merit goods or help cut a fiscal deficit
• accelerator effect
• great business profits

Question 22

cost of economic growth?

Answer 22

• risks of higher inflation and higher interest rates
• environmental effects
• inequalities of income and wealth

Question 23

how can you use a AD diagram to see if the output gap is positive or negative?

Answer 23

negative = LRAS in front of equilibrium
positive = LRAS behind equilibrium

Question 24

what is spare capacity?

Answer 24

when a business is not making full use of its available capacity – there are spare factors of production including land, labour and capital

Question 25

when an economy has lots of spare capacity what happens?

Answer 25

short run aggregate supply (SRAS) is elastic and the output gap is negative

Question 26

what’s the difference between actual and potential growth in an economy?

Answer 26

actual growth
- real increase in the output of goods and services produced by an economy over a specific period of time
potential growth
- the maximum sustainable rate at which an economy can grow over the longer term