4.1. Economic growth, economic development and sustainability

Question 1

Economic Growth

Answer 1

An increase in a country’s output (actual/short-run) or an increase in a country’s productive capacity (potential/long-run)

Question 2

Short-term / actual Growth

Answer 2

The annual % change in real national output

• demonstrated by movement inside PPC curve
• AD shifting right

Question 3

Long-term Growth

Answer 3

an increase in the productive capacity of the economy

• PPC shifting outwards
• LRAS shifting outwards

Question 4

Economic Development

Answer 4

An increase in the welfare and the quality of life

Question 5

Sustainable Development

Answer 5

the needs of the present generation being met without compromising the well-being of future generations

Question 6

Output Gaps

Answer 6

the difference between actual growth rate and and potential growth rate

Question 7

Positive Output Gaps

Answer 7

When actual growth rate is above trend growth rate.
- AD is higher than LRAS

Impact: lower unemployment but higher inflation.

Question 8

Negative Output Gaps

Answer 8

when actual growth rate is below trend growth rate.
- AD is lower than LRAS

Impact: lower inflation but higher unemployment.

Question 9

Economic (trade, business) cycle

Answer 9

Fluctuations in economic activity over a longer time period (years)

• actual GDP growth rate goes through booms, peaks, recessions, slumps, recovery (fluctuation)
• long-term GDP is the average / medium (straight line)

Question 10

Causes of actual growth

Answer 10

increase in aggregate demand

- increase in consumption, investment, govt spending

Question 11

Cause of potential growth

Answer 11

improvements in quality and quantity of factors of production

Question 12

Land - Causes of potential growth

Answer 12

Quantity

• discovery of new resources
• better weather
• invade and conquer

Quality

• irrigation
• selective breeding
• genetic modification
• fertilisers / pesticides

Question 13

Labour - Causes of potential growth

Answer 13

Quantity

• Net immigration
• Natural increase
• Increase in retirement age
• Decrease in working age

Quality

• education and training
• healthcare
• skilled immigrants

Question 14

Capital - Causes of potential growth

Answer 14

Quantity

• Net investment
• Finance for investment e.g. loans, subsidies

Quality

• R&D and innovation (technological progress)
• Import better technology

Question 15

Enterprise - Causes of potential growth

Answer 15

Quantity

• Deregulation
• Privatisation
• Finance for business start-ups / expansion
• Lower corporate taxes

Quality

• Education and training
• information
• healthcare

Question 16

Most important factors - Causes of potential growth

Answer 16

• infrastructure (e.g. roads and utilities)
• investment in capital
• productivity increases
• technological change

Question 17

Benefits of economic growth

Answer 17

• more goods and services
• increased living standards
• job creation
• higher incomes
• more tax revenue to fund government spending
• business and consumer confidence
• reduced poverty

Question 18

Costs of economic growth

Answer 18

• demand-pull inflation (AD>AS)
• cost push inflation (resource depletion)
• structural unemployment
• trade deficit
• inequality
• resource depletion
• environmental damage
• “problems of affluence” e.g. obesity, materialism

Question 19

Using resources today benefits

Answer 19

• increases output
• creates jobs
• increases exports
• higher tax revenue for increased government spending
• opportunity costs for the future

Question 20

Conserving resources for the future benefits

Answer 20

• encourages sustainable growth
• protects the environment
• benefits future generations
• encourages eco-tourism

Question 21

Using vs Conserving resources evaluation

Answer 21

• Are resources renewable or non-renewable?
• How is tax revenue spent
• Future demand - more or less in future?
• Future prices - higher or lower in future?
• Comparative advantage - will this change in future?

Question 22

Peak

Answer 22

Highest level of economic activity, unemployment is low, consumer and business confidence is high.

Question 23

Recession

Answer 23

Fall in GDP, decline in C, I and (X-M), employment falls.

Question 24

Slump

Answer 24

High unemployment, many business closures, low levels of C, I and (X-M), need Govt help

Question 25

Recovery

Answer 25

Level of GDP starts to rise, C, I and (X-M) gradually rise, employment begins to increase

Question 26

Boom

Answer 26

Level of GDP rises quickly, C, I and (X-M) increase fast, employment rises quickly

Question 27

Harrod-Domar Growth Model

Answer 27

Stresses the importance of savings and investment as key determinants of growth
increased savings –> increased investment –> large capital stock –> increased output –> increased income..

Question 28

Endogenous Growth Theory

Answer 28

Main contributors to economic growth:

• Human capital
• innovation
• knowledge

Question 29

Endogenous Growth Theory can be achieved by policies that focus on:

Answer 29

• Promoting competition
• Increased investment
• investment in capital
• Encourage entrepreneurship
• Research & development
• Investment in human capital (education, training)
• Protection of private property rights

Question 30

Solow Model

Answer 30

Growth comes from adding more capital and labour inputs and also from ideas and new technology.