2.5 - Economic Growth

Question 1

Economic growth

Answer 1

An increase in the real output of goods and services in an economy over time, measured by the rise in real GDP

Question 2

Causes of economic growth

Answer 2

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

Question 3

Land as a cause of economic growth

Answer 3

The discovery of new resources e.g. oil will increase economic growth

Question 4

Labour as a cause of economic growth

Answer 4

An increase in the quality or quantity of labour will improve economic growth, such as through a larger workforce or higher skilled workers making them more efficient

Question 5

Capital as a cause of 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

Question 6

Enterprise as a cause of 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

Question 7

Technological progress as a cause of 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

Question 8

Efficiency as a cause of economic growth

Answer 8

Efficiency is important in bringing about economic growth as it means less resources are needed to produce each good, so more goods can be produced

Question 9

Actual growth

Answer 9

The percentage change in GDP, which is when the economy has actually produced more goods and services, reflecting short-term economic expansion within an economy’s current capacity

Question 10

Potential growth

Answer 10

The increase in an economy’s productive capacity over time, leading to a higher long-term sustainable output level, represented by an outward shift of the long-run aggregate supply curve or the production possibility frontier

Question 11

Actual growth rates

Answer 11

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

Question 12

Long-term trends in growth rates

Answer 12

The average sustainable rate of economic growth over a period of time

Question 13

Output gap

Answer 13

The difference between an economy’s actual output (real GDP) and its potential output (full capacity GDP)

Question 14

Positive output gap

Answer 14

When actual Gross Domestic Product is above potential Gross Domestic Product, meaning the economy is producing beyond its sustainable capacity

Question 15

Negative output gap

Answer 15

When actual Gross Domestic Product is below potential Gross Domestic Product, meaning the economy is underperforming with unused resources

Question 16

Trade cycle

Answer 16

The recurring fluctuations in economic activity over time, characterized by periods of expansion and contraction in real GDP

Question 17

Phases of the trade cycle

Answer 17

1. Boom
2. Recession
3. Slump
4. Recovery

Question 18

Characteristics of a boom

Answer 18

High economic growth, low unemployment, rising inflation, strong consumer and business confidence

Question 19

Characteristics of a recession

Answer 19

Two consecutive quarters of negative GDP growth, rising unemployment, falling demand and lower inflation

Question 20

Characteristics of a slump

Answer 20

Severe and prolonged economic decline with high unemployment and low confidence

Question 21

Characteristics of a recovery

Answer 21

Gross Domestic Product starts to rise, employment increases and confidence improves, leading back to expansion

Question 22

Benefits of economic growth on consumers

Answer 22

1. The average consumer income increases as more people are in employment and wages increase
2. Consumers feel more confident in the economy, which increases consumption and leads to higher living standards
3. Improved productive efficiency due to better technology could lead to lower prices or higher quality goods

Question 23

Drawbacks of economic growth on consumers

Answer 23

1. Economic growth does not benefit everyone equally. Those on low and fixed incomes might feel worse off if there is high inflation and inequality could increase
2. Consumers could face more shoe leather costs, which means they have to spend more time and effort finding the best deal while prices are rising
3. The benefits of more consumption might not last after the first few units, due to the law of diminishing returns

Question 24

Benefits of economic growth on firms

Answer 24

1. Investment will increase since businesses are more successful. They will have more money to invest and more incentive to invest as they will know they can make money from their investments
2. Business confidence will improve as there are potential demand increases for businesses’ products and this confidence will also lead to increased investment
3. 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

Question 25

Drawbacks of economic growth on firms

Answer 25

1. Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation 2. Firms who sell inferior goods (with negative income elasticities)may lose out 3. Changing technologies and globalisation also mean that some firms find their markets disappearing e.g. DVD rental stores

Question 26

Benefits of economic growth on the government

Answer 26

1. 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 2. Can help to reduce the budget deficit, perhaps even bringing about a budget surplus which would allow money to be saved for future recessions

Question 27

Drawbacks of economic growth on the government

Answer 27

1. Governments might have to increase their spending on healthcare if the consumption of demerit goods increases 2. Economic growth tends to mean people expect more from the government, which may cause conflict

Question 28

Benefits of economic growth on current and future living standards

Answer 28

1. Economic growth will result in lower poverty levels . An increase in the production of goods and services will increase jobs so there will be less unemployment and less people on benefits. Wages are also likely to increase 2. Housing standards and the quality of food increases due to economic growth 3. Increased government spending will lead to improved living standards both now and in the future, as better educated people usually have higher living standards

Question 29

Drawbacks of economic growth on current and future living standards

Answer 29

1. High levels of growth could lead to damage to the environment in the long run, due to increase negative externalities from the consumption and production of some goods and services 2. Economic growth may result in increased inequalities between rich and poor. The rich may be the only ones that have gained from the economic growth and they may even lower the living standards of the poor by exploiting the poor