3.1 - Economic Growth and the Economic cycle

Question 1

what is short run economic growth

Answer 1

the percentage increase in a countries real GDP and its usually measured annually and it is caused by increases in AD.

Question 2

what is long run economic growth

Answer 2

occurs when productive capacity of the economy is increasing and refers to the rate of growth of real national output in an economy over a period of time. it is caused by increase in AS

Question 3

what is the potential output of an economy

Answer 3

what the economy could produce if resources were fully employed

Question 4

when does an output gap occur

Answer 4

when there is a difference between the actual level of output and the potential level of output. its measured as a percentage of national output.

Question 5

what is a negative output gap

Answer 5

it occurs when he level of output is less than the potential level of output.
This puts downward pressure on inflation. It usually means there is the unemployment of resources in an economy, so labour and capital are not used to their full productive potential. This means there is a lot of spare capacity in the
economy.

Question 6

what is a positive output gap

Answer 6

it occurs when the actual level of output is greater than the potential level of output. It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation.

Question 7

what is the economic/business cycle

Answer 7

It refers to the stage of economic growth that the economy is in.

Question 8

what is the recovery stage

Answer 8

a period of economic growth following a recession where real output increases

Question 9

what is an economic boom

Answer 9

when an increase in GDP is above trend growth GDP

Question 10

what is a recession

Answer 10

a fall in GDP over two consecutive quarters and there is negative economic growth.
this could involve spending on welfare payments to help people who have lost their jobs, or cutting taxes.
it can lead to lower living standards particularly for the most vulnerable in society.

Question 11

what is a slump

Answer 11

a prolonged period of recession

Question 12

define GDP

Answer 12

the total amount of goods and services produced in an economy within a given time.

Question 13

what is economic growth

Answer 13

when real GDP is rising (output is increasing) so more goods and services are being produced, unemployment is falling, consumer confidence is rising and living standards are rising

Question 14

what is trend growth in GDP

Answer 14

the average rate of growth

Question 15

what are the characteristics of a boom

Answer 15

High rates of economic growth
Near full capacity or positive output gaps
(Near) full employment
Demand-pull inflation
Consumers and firms have a lot of confidence, which leads to high rates of
investment
Government budgets improve, due to higher tax revenues and less spending on welfare payments

Question 16

what are the characteristics of a recession

Answer 16

Negative economic growth
Lots of spare capacity and negative output gaps
Demand-deficient unemployment
Low inflation rates
Government budgets worsen due to more spending on welfare payments and lower
tax revenues
Less confidence amongst consumers and firms, which leads to less spending and
investment

Question 17

what is the impact of recession on GDP

Answer 17

less gods and services are produced because income decreases so consumers buy less so firms decrease their labour quantity
* lower consumer confidence causes less spending on nonessential and luxury
goods.

Question 18

what is the impact of recession on unemployment

Answer 18

businesses need to employ less people because demand decreases so more people lose their job and become unemployed.
+ increased business failures → more unemployment.

Question 19

what is the impact of recession on government finances

Answer 19

tax revenues decrease + increased spending
on welfare due to increased unemployment → government borrowing
increasing.
* tax revenues decrease due to less VAT and lower in come taxes.

Question 20

what is the impact of recession on equity

Answer 20

increased income inequality, unemployment rates rise as businesses try to reduce costs, which typically affects the lower income less skilled workers. so these workers find it harder to recover financilaly as they have less savings to rely on.
* many workers, income will also decrease over time due to fewer bonuses, less
sales commissions and lower profit related pay.

Question 21

what is the impact of recession on inflation

Answer 21

inflation falls due to lower demand pull inflationary pressures and lower consumer confidence as people cut back on spending, so businesses may try to lower their prices in order to attract customers.
falling prices of commodities, as demand for things such as raw materials an energy drops.

Question 22

what is the impact of recession on the current account of the balance of payments

Answer 22

the deficit would fall because less is imported as people earn les so reduce spending on nonessential and luxury goods such as holdays, cars ect. which are typically imports.

Question 23

what is the impact of growth on GDP

Answer 23

its a sign that the economy is doing well.
(unemployment is likely to be increasing)
more goods and services are being produced because income rises and firms increase labour quantity.

Question 24

what is the impact of growth on unemployment

Answer 24

as firms expand, they employ more people due to increased demand for goods and services.
* leads to increased wages and consumer spending

Question 25

what is the impact of growth on government finances

Answer 25

improved public services → collect more tax revenue + Vat. which can be invested in public services such as healthcare and education. + less spending in welfare benefits + government borrowing is likely to fall

Question 26

what is the impact of growth on equity

Answer 26

higher living standards (higher GDP per capita) => caused by increased employment + higher incomes which allows people to afford more goods and services + provides more opportunities to less skilled workers => redistributing wealth - however sometimes the capital owners benefit more than the labourers.

Question 27

what is the impact of growth on inflation

Answer 27

demand-pull inflationary pressures are likely to rise (caused by higher production costs meaning the demand exceeds supply) → higher consumer confidence encourages investment → prices rises

Question 28

what is the impact of growth on the current account of the balance of payments

Answer 28

Increased exports (growth → more production → more exports → better balance) *however as incomes rises consumers demand more imported goods → increased deficit. + exchange rate appreciation (currency appreciation could make imports cheaper and exports more expensive but it depends on interest rates and increased deficit may reduce rate)

Question 29

how can you increase AD

Answer 29

Following the equation: AD = C + I + G + (X - M) If consumption, investment, government spending or exports increase or if imports fall, AD will increase.

Question 30

what are the costs of economic growth

Answer 30

Risks of higher inflation and higher interest rates Fast-growing demand can lead to demand-pull and cost-push inflation – this leads to a conflict between macro objectives The central bank may decide to raise interest rates to control inflation Environmental effects More negative externalities such as pollution & waste Risk of unsustainable extraction of finite resources – i.e. fast growing countries may cause a long-run depletion of natural resources Inequalities of income and wealth Rapid increases in real national income can lead to a higher level of inequality and social divisions Many of the gains from growth may go to only a few people

Question 31

what are the social costs of high unemployment

Answer 31

1. Financial strain: Unemployment can lead to a reduction in income and an increase in financial insecurity, people may not have the resources to meet their basic needs or pay for necessities such as housing, food, and healthcare. 2. Mental health problems: Unemployment can have a negative impact on mental health, as individuals may experience stress, anxiety, and depression due to their financial situation and loss of purpose and social connections. 3. Social disruption: High levels of unemployment can lead to social disruption and unrest, as individuals may feel isolated from their communities. 4. rise in income inequality; individuals are unable to find work, so struggle to meet their basic needs, and have to rely on government welfares or other forms of support. This can create a cycle of poverty, as individuals may struggle to improve their financial situation or escape poverty. A reduction in real wages, employers may be able to find a larger pool of workers who are willing to accept lower pay due to the lack of job options. So gap widens between low-income workers and those who are able to secure higher-paying jobs. Certain groups, such as racial and ethnic minorities, women, and young people, may be more likely to experience unemployment and discrimination in the job market. This can lead to further disparities in income and opportunities.

Question 32

what are the economic costs of high unemployment

Answer 32

1. Lost Output: High unemployment results in a loss of potential output, as unemployed workers are not able to contribute to the economy. The economy is operating well within their production possibility frontier. 2. Decreased Consumer Spending: Unemployed workers have less real disposable income, which can result in decreased consumer spending and a reduction in aggregate demand. This in turn can cause a fall in planned investment spending by firms increasing the risk of a deeper recession. 3. Reduced Tax Revenue: High unemployment can also reduce direct and indirect tax revenue, as fewer workers are paying into the system and more are receiving unemployment benefits. 4. Increased Government Spending: High unemployment can increase government spending on social welfare programmes, which then leads to a rise in the size of a government's budget deficit and a higher level of national debt. 5. Reduced Investment: High unemployment can reduce investment, as firms may be less confident in the future prospects of the economy and may not be willing to invest in new projects or expand their operations. 6. Lower Labour Force Participation: High unemployment can lead to discouragement, where workers drop out of the labour force and may not return, reducing the size of the potential labour force and the economy's long run productive capacity. 7. Increased Relative Poverty: High unemployment can result in increased poverty, as unemployed workers are unable to meet their basic needs and may require government support. Overall, high unemployment can result in significant economic costs, including lost output, decreased consumer spending, reduced tax revenue, increased government spending, reduced investment, lower labor force participation, and increased poverty.