3.1 Economic Growth

Question 1

What is GDP

Answer 1

The total value of final goods and services produced within a country in a given period of time

Question 2

What is the definition of economic growth?

Answer 2

The change in a country’s level of real GDP over time

Question 3

What is real GDP?

Answer 3

nominal GDP adjusted for inflation

Question 4

what is rate of growth of GDP as a formula?

Answer 4

New GDP - Original GDP /Original GDP x 100

Question 5

What is GDP/Capita

Answer 5

Measures total GDP divided by population, which means more meaningful comparisons can be made

Question 6

What factors affect the usefulness of GDP/capita figures?

Answer 6

• statistical inaccuracies in data collection
• figures need to be converted into a common currency so values may be subject to exchange rate fluctuations
• The hidden economy, the figures do not include the informal sector or illegal activities, which will underreport income
• Distribution of income is not shown
• Quality of goods may change so comparisons can be difficult

Question 7

What is short-run economic growth?

Answer 7

Refers to growth in actual real GDP

Question 8

What is long-run economic growth?

Answer 8

Refers to growth in potential or trend real GDP

Question 9

Increases in Aggregate Spending lead to?

Answer 9

Short-Run economic growth

Question 10

What are the 4 components of Aggregate Spending?

Answer 10

• Consumption
• Investment
• Government Spending
• Net Exports (Exports - Imports)

Question 11

2 Factors that affect consumption?

Answer 11

• Amount of Disposable Income
• Rate of Interest

Question 12

2 Factors that affect investment?

Answer 12

• Rate of Interest
• Rate of Corporation Tax

Question 13

How will a fall in income tax rates lead to short run economic growth

Answer 13

1. Cut in income tax
2. Increase in Disposable Income
3. Increase in Consumption
4. Increase in Aggregate Spending
5. Short-Run Economic Growth

Question 14

How does long-run economic growth occur?

Answer 14

Means there is an increase in the productive capacity of the economy, usually happens due to an increase in the quantity and quality of factors of production

Question 15

Benefits of Economic Growth?

Answer 15

1. Lead to a rise in the standard of living, as increased output means more labour demanded (derived) so wages increase as firms make more profit leading to more disposable income
2. Can lead to lower unemployment as more workers are needed to produce additional output
3. can lead to increased tax revenue for the government
4. Higher profits for firms, circular flow in income, investment increases

Question 16

What factors can be used to evaluate economic growth

Answer 16

1. The size of the rate of economic growth
2. Duration of the economic growth
3. Causes of growth
4. mitigation of costs of growth
5. The level of development of the country (better for less developed)

Question 17

What can economic growth do to the environment?

Answer 17

It can lead to increased pollution and other environmental costs as there is more output so more raw materials are used

Question 18

How can economic growth lead to income inequality?

Answer 18

May lead to increasing income inequality as increases in income will only go to the top of income distribution, and workers will not benefit

Question 19

How can economic growth lead to a lower standard of living?

Answer 19

• may lead to a lower standard of living as workers are producing more output so they may need to work longer hours
• also due to environmental costs

Question 20

How can economic growth affect unemployment?

Answer 20

• may decrease unemployment as economic growth leads to a larger output and more workers are required to produce this output
• may also increase as growth may have been driven by substituting capital for labour

Question 21

How can economic growth affect inflation?

Answer 21

Short run economic growth can lead to inflation as aggregate demand and aggregate spending may outstrip the productive capacity of the economy leading to demand-pull inflaation