2.5 Economic Growth

Question 1

Cause of economic growth

Answer 1

Increase in quality or quantity of one of the four factors of production

Question 2

Land

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

Labour

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. Raising the retirement age will
increase the population of working age. The government can take action such
as providing free childcare to encourage mothers to go back to work, which
will increase participation rates.

Question 4

Quality of the workforce

Answer 4

In the long run, improving the quality of labour is
perhaps 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.

Question 5

Capital

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.

Question 6

Enterprise

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.

Question 7

Technological progress

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.

Question 8

Efficiency

Answer 8

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

Question 9

Actual growth

Answer 9

Percentage change in GDP

Question 10

Potential growth

Answer 10

Change in the productive potential of the economy overtime

Question 11

International trade

Answer 11

Many economists argue that AD can affect economic growth, through export-led
growth: a rise in AD through increased exportsAlthough 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

Question 12

Long run trend rate of growth

Answer 12

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 13

Output gap

Answer 13

difference between the actual level of GDP and the
estimated long-term value for GD

Question 14

Positive output gap

Answer 14

GDP is higher than estimated

Question 15

Negative output gap

Answer 15

GDP is lower than estimated

Question 16

Trade cycle

Answer 16

the periodic but irregular up and down movements in economic activit y,
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 17

Two main types of trade cycle

Answer 17

A mild trade cycle (GDP does not fall during recessions) and a ore extreme one

Question 18

Characteristics of boom

Answer 18

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 19

Characteristics of boom

Answer 19

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 20

Impact of economic growth (consumers)

Answer 20

Positive wealth effect
Lower prices
Higher quality goods
Increased happiness
Increased inequalities

Question 21

Impact on firms

Answer 21

Increased investment
Improved business confidence
Lower costs
Higher profits

Question 22

Impact on gov

Answer 22

Increased tax revenue
More money
Improved living standards
Reduce budget deficit