4.1 Growth

Question 1

What are the two main factors affecting short run economic growth?

Answer 1

The two main factors affecting short run economic growth are demand-side factors (e.g. consumer spending) and supply-side factors (e.g. productive capacity).

Question 2

What are the demand-side factors that can lead to higher economic growth?

Answer 2

The demand-side factors that can lead to higher economic growth include: rise in Consumption, Investment, Government spending or exports, lower interest rates, higher consumer confidence, rising house prices, higher real wages, depreciation of the exchange rate, and a stable banking sector.

Question 3

What are the supply-side factors that can affect SRAS?

Answer 3

The supply-side factors that can affect SRAS include: labour costs (particularly real wages), land costs, taxes and subsidies, exchange rates, commodity prices, political instability, and weather.

Question 4

What caused the negative economic growth in 1981?

Answer 4

The negative economic growth in 1981 was caused by higher interest rates (reducing borrowing), lower government spending (tight fiscal policy), and appreciation in the value of the pound which made exports uncompetitive.

Question 5

What are the two ways to increase potential output?

Answer 5

• Increase your input
• Increase your productivity (output per unit of input)
• Doing either will shit the economy’s PPF out

Question 6

Economic Growth using PPF Diagram

Answer 6

Question 7

What is the difference betweeen SRAS and LRAS

Answer 7

• The SRAS does vary with the price level. Clearly producers’ ability and willingness to supply more in the SR if the price level rises (e.g. even inefficient factories can make a profit).
• The LRAS does not vary with the price level. In the LR, potential supply is determined by availability and condition of land, labour, capital and enterprise.

Question 8

What is the QOQ of the FoP

Answer 8

Question 9

What is the difference between SR Growth and LR Growth?

Answer 9

• SR Growth is achieved when actual Real GDP increases whereas LR Growth is achieved when potential Real GDP increases.
• SR growth is when economic activity increases whereas LR growth is the capacity of the economy increasing
• SR Growth is the annual % change in RNO whereas LR Growth is very hard to measure

Question 10

Draw and describe a SR Growth Diagram

Answer 10

• The economy is initially in a SR equilibrium (P1,Y1).
• This is well below the Full Employment Level of Output (YFE). This is called a negative output gap and shows spare capacity.
• Following a reduction in the costs of production (e.g. oil prices fall), the SRAS curve shifts out.
• A new SR equilibrium is formed at (P2,Y2). This is closer to YFE, There is less spare capacity in the economy.
• An alternative source of SR growth is if the AD curve shifts right

Question 11

North Sea Example

Draw and describe a LR Growth diagram

Answer 11

• The economy is in a SR equilibrium (P1,Y1).
• This is well below the Full Employment Level of Output (YFE). This is called a negative output gap and shows spare capacity.
• Following an amazing new discovery of natural gas in the North Sea, the LRAS shifts right (the nation’s productive potential has increased).
• The negative output gap has now grown even bigger.
• In practice, LRAS shifts are usually accompanied by either a shift in AD or SRAS or both.

Question 12

What is productivity?

Answer 12

a measure of the efficiency with which a country combines capital and labour to produce more with the same level of factor inputs.

Question 13

What is Labour Productivity?

Answer 13

output per worker per hour

Question 14

What is Capital Producitvity?

Answer 14

output per capital good per hour

Question 15

Labour Productivity is determined by…

Answer 15

• Access to Technology
• Skills of Workforce
• Quality of Management
• Degree of Competition
• Cultural Factors
• Effort

Question 16

Labour Productivity is determined by…

Answer 16

• Access to Technology
• Skills of Workforce
• Quality of Management
• Degree of Competition
• Cultural Factors
• Effort

Question 17

Improved Labour Producitivity leads to…

Answer 17

• Lower unit Labour Costs
• Improved Competitiveness in trade
• Higher Profits
• Higer Wages
• Economic Growth

Question 18

What is creative destruction?

Answer 18

Creative destruction refers to the dismantling of established processes in order to make way for improved methods of production. The term was coined by economist Joseph Schumpeter

Question 19

Application of Creative Destruction

Answer 19

• Recessions and shocks change the structure of the economy, accelerating the adoption of technology and new ways of working.
• In the wake of the Great Depression, for instance, came acute distress in heavy manufacturing, shipbuilding and coal mining – along with rapid growth

Question 20

Higher Living Standards, Employment Effects

What are the main benefits of Economic Growth?

Answer 20

• Higher living standards - i.e. Real GNI per capita - helps to lift people out of extreme poverty and improve development outcomes (e.g. rising HDI)
• Employment effects - sustained growth stimulates jobs and contributes to lower unemployment rates which is turn helps to reduce income inequality.

Question 21

Fiscal dividend, Accelerator effect

What are the main benefits of Economic Growth? PT2

Answer 21

• Fiscal dividend - higher economic growth will raise tax revenues and reduce government spending on unemployment & poverty related welfare benefits
• Accelerator effect - rising growth stimulates new investment e.g. in low-carbon technologies. Better growth may attract foreign direct investment projects

Question 22

Starting with Higher real national output (GDP)

Draw the Virtouos Circle of Economic Growth

Answer 22

Question 23

A rise in productivity

Benefits from Growth driven by Technological Change

Answer 23

A rise in productivity:
* Higher GDP per worker
* Lower unit costs
* Higher wages
* Higher profits

Question 24

Benefits from Growth driven by Technological Change

Answer 24

New Goods and Service:
* Lower real prices
* Consumer welfare gains (lower prices)
* Improved living standards

Question 25

Benefits from Growth driven by Technological Change

Answer 25

Improved Health:
* Healthy life expectancy
* Labour force expands
* Increased productivity

Question 26

Risks of higher inflation and higher interst rates

What are the economic and social costs of growth?

Answer 26

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 obiectives
* The central bank may decide to raise interest rates to control inflation

Question 27

Environmental effects

What are the economic and social costs of growth?

Answer 27

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

Question 28

Inequalities of income and wealth

What are the economic and social costs of growth?

Answer 28

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 29

Formula for Labour producitivity (output per hour)

Answer 29