2.5.1 Causes of Economic Growth

Question 1

What are some factors which could cause economic growth?

Answer 1

Capital Investment: Increased investment in physical capital (machinery, infrastructure) enhances productivity and output.
Example: Building new factories and upgrading transportation networks.
Technological Advancements: Innovations and improvements in technology increase production efficiency and create new products.
Example: The rise of information technology boosting productivity in various sectors.
Human Capital Development: Education and training improve workers’ skills and productivity.
Example: Investment in higher education and vocational training programs.
Natural Resources: Discovery and exploitation of natural resources can fuel growth.
Example: Oil discoveries in Saudi Arabia leading to rapid economic growth.
Government Policies: Supportive fiscal and monetary policies, such as tax incentives and low interest rates, encourage investment and spending.
Example: Tax cuts to stimulate business investments.
Institutional Factors: Strong legal and regulatory frameworks, property rights, and political stability promote growth.
Example: Stable political environments attract foreign investment.
Population Growth: A growing population increases the labor force and consumer base.

Question 2

What is the Distinction Between Actual and Potential Growth?

Answer 2

Actual Growth:

Refers to the increase in real GDP over time, representing the economy’s current performance.
It is measured by observing changes in output and is influenced by demand-side factors.
Example: A country’s GDP grows from $1 trillion to $1.1 trillion over a year.
Potential Growth:

Refers to the increase in an economy’s capacity to produce goods and services, reflecting the long-term productive potential.
It is influenced by supply-side factors like improvements in technology, labor, and capital.
Example: An economy’s potential output increases due to technological advancements.

Question 3

What is the importance of international trade for export-led economic growth?

Answer 3

Increased Market Size: Access to larger international markets allows firms to achieve economies of scale.
Example: Germany’s automobile industry exports cars globally, benefiting from larger production scales.
Foreign Exchange Earnings: Exports bring in foreign currency, enabling countries to import goods and services they cannot produce efficiently.
Example: South Korea exports electronics, earning foreign currency to import oil.
Technology Transfer: Exposure to international markets and competition can lead to the adoption of new technologies and practices.
Example: Chinese firms adopting advanced manufacturing techniques from foreign partners.
Job Creation: Export industries create jobs, reducing unemployment and boosting incomes.
Example: Bangladesh’s textile industry employs millions due to export demand.

Question 4

Describe a real life situation to illustrate export-led economic growth.

Answer 4

A strong real-life example of export-led economic growth relevant to the Edexcel A-level Economics (A) specification is Germany’s export-driven model, but for the UK specifically, a good example would be the Scottish whisky industry:

• Significance of Exports:
  
  • The UK, particularly Scotland, is a major global exporter of whisky, with exports contributing significantly to GDP growth.
  • In 2022, Scotch whisky exports hit £6.2 billion, accounting for over 75% of Scotland’s food and drink exports and about 2% of total UK goods exports.
• How It Drives Economic Growth:
  
  • The revenue from whisky exports increases aggregate demand (AD), boosting GDP.
  • The industry supports tens of thousands of jobs in distilleries, supply chains, and tourism.
  • Export success leads to increased investment by whisky producers, expanding production capacity and improving productivity.
• Multiplier Effect:
  
  • As whisky exports rise, profits increase, leading to higher wages and spending within the UK economy, further stimulating growth.

This example aligns with export-led growth theory, where a country’s GDP grows due to strong demand for its exports, improving trade balances and stimulating investment and employment.

Would you like a comparison with another country’s export-led model as well?