4.6 - Economic Growth

Question 1

GDP calculation

Answer 1

GDP = C + I + G + (X-M)

Question 2

Consumption

Answer 2

the total spending on goods/services by consumers (households) in an economy

Question 3

Investment

Answer 3

the total spending on capital goods by firms

Question 4

Government spending

Answer 4

is the total spending by the government in the economy (not including transfer payments)

Question 5

Net exports

Answer 5

the difference between the revenue gained from selling goods/services abroad & the expenditure on goods/services from abroad

Question 5

What are the two causes of economic growth?

Answer 5

1. Growth caused by a change in total demand
2. Growth caused by a change in the quantity/quality of factors of production

Question 6

Actual economic growth

Answer 6

measured by the annual percentage change in a country’s real national output (GDP)

Question 7

Potential economic growth

Answer 7

measured by the estimated annual change in a country’s potential level of national output

Question 8

How does the PPC shift given a change in total demand?

Answer 8

It is the shift of the point on the curve or into or out of the curve, the curve does not change

Question 9

How does the PPC shift given a change in the quantity or quality of FoP?

Answer 9

It will shift the whole curve outwards or inwards depending on the positive or negative change in quantity or quality

Question 10

Benefits of economic growth (name 4)

Answer 10

• Increased incomes lead to better standrads of living
• Decreased levels of absolute poverty
• Improvement in the quality/quantity of environmentally friendly technology
• Higher sales revenue for firms & greater profits
• Increased investment by firms increases the potential output of the economy
• Reduced expenditure by governments on benefits
• Higher government tax revenue due to rising incomes and surging corporate profits
• Increased employment resolves some of the negative social impacts of unemployment

Question 11

Costs of economic growth (name 4)

Answer 11

• Rising total demand causes demand pull inflation & the purchasing power of people on fixed incomes may fall
• Lack of equity in the distribution of income
• Environmental damage caused by negative externalities of production & consumption increases
• Increased inflation can harm export sales
• The level of imports usually increases negatively impacting the current account
• Increased income usually leads to greater consumption of demerit goods
• Greater output often requires more time from workers and can decrease leisure time & well-being
• Resources are depleted more rapidly

Question 12

Recession

Answer 12

a period of at least six months (2 quarters) of economic decline which causes a decrease in the real gross domestic product (rGDP)

Question 13

How is a recession caused?

Answer 13

• It can be caused by a fall in any of the factors that influence total demand
• It can also be caused by supply-side shocks that create challenges for firms & consumers

Question 14

What demand-side factors reduce total demand and total supply? (name 3)

Answer 14

• A fall in consumer confidence reduces consumption
• A fall in business confidence reduces investment
• Increasing levels of unemployment reduce consumption
• Decreasing levels of government spending
• Increased interest rates require borrowers to repay higher amounts on their loans - this reduces discretionary income which reduces consumption
• Shocks to other economies can reduce demand for a country’s exports thus reducing total demand

Question 15

What supply-side factors reduce total demand and total supply? (name 3)

Answer 15

• Unexpected supply shocks such as the war on Ukraine or the Japanese Tsunami of 2011
• A gradual decline in the productive capacity of the economy when capital (machinery) grows old & is not replaced
• A gradual decline in the level of education/training available in an economy
• On-going industrial action such as worker strikes which disrupt the supply of labour to an economy
• Weather events which destroy agricultural products or interrupt supply chains

Question 16

Consequences of recessions (name 5)

Answer 16

• National output (rGDP) falls
• More firms go bankrupt
• Both unemployment & underemployment increase
• Both exports & imports fall
• Domestic & foreign investment by firms decreases/stops
• Deflation may become an issue leading to even lower wage levels
• Government spending on unemployment benefits increase
• Opportunities for entrants to the workforce decrease (youth unemployment increases)
• Governments may have to spend significant amounts of money to support the economy which carries several major opportunity costs