2.5 economic growth

Question 1

economic growth definition

Answer 1

-the expansion of the productive potential of the economy
-can be depicted by an outward shift in the ppf curve or a counrty’s lras curve
-measured by the annual change in real gdp

Question 2

factors which cause economic growth

Answer 2

-improving the labour force, with better quality due to higher education
-a larger labour force, from migration, birth rates or higher participation rates
-improved technology , which is more productive so resources are used efficiently
-more investment more machinery can be bought which will increase production
-discovering more resources, such as oil

Question 3

actual growth definition

Answer 3

-the percentage increase in a country’s real gdp and is measured annually
-caused by increases in ad

Question 4

potential growth definition

Answer 4

-the long run expansion of the productive potential in an economy
-caused by increases in as

Question 5

importance of international trade for export led economic growth

Answer 5

-countries can specialise and have a comparative advantage, which increases world output and lowers average costs
-a country has comparative advantage when it can produce goods and services at a lower opportunity cost than others
-increase was in short term but then firms will invest therefore bringing long term growth by improving the supply side of the economy
-leads to a surplus on the balance of payments
-but relies on economic state of other countries

Question 6

output gap definition

Answer 6

-occurs when there is a difference between the actual level of output and the potential level of output
-measured as a percentage of national output

Question 7

negative output gap definition

Answer 7

-occurs when the actual level of output is less than the potential level of output
-puts downward pressure on inflation and means there is unemployment of resources, so labour and capital aren’t used to their full potential

Question 8

positive output gap definition

Answer 8

-occurs when the actual level of output is greater then the potential level of output
-due to resources being used beyond normal capacity and puts an upward pressure on inflation
-countries like china and india have high rates of inflation due to increasing demand associated with positive output gaps

Question 9

difficulties measuring the output gap

Answer 9

-difficult to estimate the trend in a series of data
-structure of the economy often changed meaning estimates may not always be accurate
-changes in the exchange rate might offset some inflationary effects of a positive output gap
-data is not always reliable, especially from emerging markets

Question 10

characteristics of a boom

Answer 10

-high rates of economic growth
-positive output gaps
-near full employment
-demand pull inflation
-consumers and firms have high confidence leading to high investment
-government budgets improve, due to higher tax revenues and less spending on welfare payments

Question 11

recession definition

Answer 11

negative economic growth over two consecutive quarters

Question 12

characteristics of a recession

Answer 12

-negative economic growth
-lots of spare capacity and negative output gaps
-demand deficient unemployment
-low inflation rates
-government budgets worsen due to more spending on welfare payments and lower tax revenues
-less confidence so less spending and investment

Question 13

benefits of economic growth on consumer

Answer 13

-average consumer income rises as more people are in employment and wages increase
-consumers feel more confident in the economy which increases consumption and leads to higher living standards

Question 14

costs of economic growth on consumers

Answer 14

-this on low and fixed incomes may feel worse off if there is high inflation
-likely to be demand pull inflation
-consumers have to spend more time and effort finding the best deal while prices are rising

Question 15

benefits of economic growth on firms

Answer 15

-may make more profit which can increase confidence
-hugger investment levels could develop new technologies to improve productivity in long run
-as they grow they can take advantage of the benefits of economies of scale
-more competition will make them more productive and efficient

Question 16

costs of economic growth to firms

Answer 16

-have to keep changing their prices to meet inflation, menu costs

Question 17

benefits and costs of economic growth on the government

Answer 17

benefit
-government budget might improve since fewer people require welfare payments and more people will be paying tax

costs
-might increase their spending on healthcare if the consumption of demerit goods increases

Question 18

benefits of economic growth on future living standards

Answer 18

-as consumer incomes increase people may show more concern about the environment
-economic growth could lead to the development of technology to produce goods and services more greenly
-higher wages so consumers have more goods and services of better quality
-public services improve as the government have higher tax revenues

Question 19

costs of economic growth on future living standards

Answer 19

-could lead to damage to the environment in the long run due to increase of negative externalities from the consumption and production of some goods and services