2.5.1 Causes of economic growth

Question 1

Economic growth

Answer 1

For economic growth to occur, there needs to be an increase in the quality, or quantity of one of factors of production, or an increase in the efficiency in the the way they are used.

Question 2

Factors causing economic growth: Land

Answer 2

The discovery of new resources.
-> Developing countries (e.g. Uganda) tend to grow the most from exploiting new resources they have discovered, this is not the case for developed countries.
E.g. Oil in Saudi Arabia accounts for 40% of GDP

Question 3

Factors causing economic growth: Labour

Answer 3

Increase the size or quality of the workforce.
Size of the workforce:
Immigration - Provides potential workers with skills, knowledge and a desire to work within a country.
Demographics (age profile) - the more people of working age the more economic growth there will be (e.g. raising the retirement age).
Participation rates - provide free childcare, to encourage mother to go back to work.

Quality of the workforce:
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.
It also increases their occupational mobility, making workers less likely to succumb structural unemployment.

Question 4

Factors causing economic growth: Capital

Answer 4

A country’s ability to access or to develop new technology will enable it to improve productivity.
-Sustained investment means more machines can be bought and used, so more goods can be produced. Not all investment contributes to an increase in GDP, because some is unsuccessful, or because of its nature (e.g. building houses).

Question 5

Factors causing economic growth: Enterprise

Answer 5

Tax benefits and grants will encourage the development of business.

High taxes and benefits kills incentive to work hard (i.e. the poor know that there is no need to work as benefits will give them just as much money as a job on minimum wage.) businesses won’t invest so there will be little economic growth.

Question 6

Factors causing economic growth: Efficiency

Answer 6

Higher efficiency means less resources are used to produced each good, so more goods can be produced.
Improved technologies means less labour or equipment is needed.
However…
- Capital markets (i.e. banks) - farmers may not have access to loans to expand their businesses
- Civil wars or natural disasters - may lead to human and physical assets being destroyed

Question 7

Actual growth

Answer 7

A percentage change in GDP
-> When the economy produce more goods and services

Question 8

Potential growth

Answer 8

A shift in LRAS or PPF
-> A change in the productive potential of the economy overtime

Question 9

Importance of international trade

Answer 9

Export led growth - A rise in AD through increased exports (e.g. China)
->In order to be competitive in the international market, British firms will have to become more efficient.
-> Although increased export initially increases AD rather than LRAS, sustained high exports will encourage firms to invest.