2.5 Economic Growth

Question 1

What is the distinction between actual and potential growth?

Answer 1

Actual economic growth is an increase in real GDP, whereas potential economic growth is an increase in the productive capacity of an economy.

Question 2

What are the four main causes of actual economic growth?

Answer 2

These are the components of AD:

1. Increased consumption
2. Increased investment
3. Increased government spending
4. Export-led growth

Question 3

What are some causes of potential economic growth? What are these factors the same as?

Answer 3

They are the same factors that shift out the AS curve:

1. New/cheaper natural resources
2. Increased investment
3. Increases in the size of the labour force
4. Increased productivity

Question 4

What is the main thing required for countries to successfully have export-led growth? Why is this problematic?

Answer 4

International trade - countries become dependent on other coutries’ demand, meaning they are much more vulnerable.

Question 5

What is an output gap?

Answer 5

This is where there is a difference between actual growth and long-term/potential growth.

Question 6

What is happening in a positive output gap?

Answer 6

The economy is growing faster than the trend, meaning pressures will grow in the economy.

Question 7

What is happening in a negative output gap?

Answer 7

The economy is growing slower than/below trend growth, and there is spare capacity in the economy.

Question 8

Why is it hard to measure the size of an output gap?

Answer 8

Not all unemployed resources would have the same impact on the economy if they were eventually employed. Also, the non-use of resources makes them less usable in the future, showing how a negative output gap can decrease the long term growth.

Question 9

How can an output gap be illustrated on an AD/AS diagram?

Answer 9

Y₁ is not at full employment.

Question 10

What is the trade/business cycle?

Answer 10

It demonstrates recurring trends in economic growth rates - booms are followed by slowdowns, that then causes a recession. This recession is then followed by a recovery, which causes another boom.

Question 11

What are the characteristics of a boom?

Answer 11

• Higher real incomes and consumption
• Falling unemployment
• Higher tax revenues
• Often high inflation

Question 12

What are the characteristics of a recession?

Answer 12

• Falling real incomes and consumption
• Improvements in balance of trade as imports decrease
• Higher unemployment
• Less tax revenues
• Disinflation

Question 13

What are the benefits of economic growth on:

1. Consumers
2. Firms
3. Governments
4. Current and future living standards

Answer 13

1. Incomes and welfare rise, and people can save without impacting consumption. It also increases confidence and employment oppurtunities, as well as luxury holidays and early retirement.
2. More profit, investment and employment. Creates future growth.
3. More tax revenue, and less to pay in unemployment and social benefits.
4. Poverty rates likely fall. As long as costs of living do not rise, standards become better - the government can afford more healthcare, education etc. and firms can afford more technologies and cleaner systems.

Question 14

What are the costs of economic growth? [7]

Answer 14

1. Oppurtunity cost - living standards could fall if resources are diverted to produce capital and not consumer goods
2. Income inequality - unwaged and unskilled less likely to benefit, money does not necessarily trickle down. Two-speed economy, as those on higher incomes see their wealth accelerate faster than those on lower incomes.
3. Enviromental problems - depletion of natural resources, carbon emissions
4. Balance of payments - high imports and less incentive to export with high domestic demand
5. Inflation
6. Monopoly power
7. Increased stress and social dislocation