Causes of Economic Growth

Question 1

What are the 2 types of economic growth?

Answer 1

1) Actual economic growth

2) Potential economic growth

Question 2

What is actual economic growth?

Answer 2

Actual economic growth- an increase ⬆️ in real GDP

Question 3

What is potential economic growth?

Answer 3

Potential economic growth- an increase ⬆️ in capacity of economy

Question 4

What leads to actual economic growth?

Answer 4

• ⬆️ in any component of AD-> actual economic growth- because ➡️ward shift of AD curve
• ⬆️ in AS-> actual economic growth- because ➡️ward shift of AS curve

Question 5

What leads to potential economic growth?

Answer 5

• Vertical part of AS curve shifts ➡️-> potential economic growth
• PPF curve outward shift-> potential economic growth

Question 6

What is export led growth?

Answer 6

Export-led growth- growth driven 🚙 by ⬆️ in net exports (X-M)-> ➡️ward AD shift

Question 7

What is an issue with export led growth and what is a real life example of where this has happened?

Answer 7

Problem- exporters vulnerable to changes in demand/exchange rates in other countries
- E.g. 🇨🇳’s growth slowed after 2008

Question 8

What are constraints on growth?

Answer 8

1) Absence of efficient capital markets
2) Labour market problems
3) Government instability
4) External constraints

Question 9

How are labour market problems a constraint in growth and how can this issue be solved?

Answer 9

Labour market problems- shortage of skilled labour 👎- as countries get ⬆️ 💰, birth rates ⬇️-> ⬇️ labour supply
- Solved by ⬆️ immigration BUT skilled workers leaving low-income countries 👎- ‘🧠 drain’

Question 10

How are the absence of efficient capital markets a constraint on growth?

Answer 10

Absence of efficient capital markets- e.g. ⬆️ interest rates ⬇️ investment & growth where asymmetric info present (lender knows ⬇️ about borrower & … charges ⬆️ rate to cover risk)-> only corrupt borrowers can afford-> even ⬇️ lending- ✖️ equilibrium rate established

Question 11

How is government instability a constraint on growth?

Answer 11

Government instability- when governments incompetent, lack transparency/💪 political backing-> ✖️ attract investment-> fiscal deficit-> inability to spend to encourage growth

Question 12

How do external constraints contribute to lower growth?

Answer 12

External constraints- uneven access to 🌎 markets due to tariffs, subsidies (protectionism)-> ⬇️ country growth ALSO global recession slows trade
3% ⬆️ in 🌎 trade = 1% ⬆️ in world GDP … constraints on 🌎 trade = constraint on growth

Question 13

What is an output gap?

Answer 13

Output gap- difference between actual & potential GDP

Question 14

What does an output gap look on a diagram?

Answer 14

See bottom of page 12 on economics theme 2 notes

Question 15

What is a positive output gap?

Answer 15

Positive ➕ output gap- economy ⬆️ faster than trend growth (boom 💥)

Question 16

What does a positive output gap lead to?

Answer 16

• > inflation-> ⬆️ interest rates
• > tight labour market (economy close to full employment-> wage pressures)
• > shortages of raw materials

Question 17

What is a negative output gap?

Answer 17

Negative ➖ output gap- economy ⬆️ slower than trend growth (recession)

Question 18

What does a negative output gap lead to?

Answer 18

-> low demand … ⬇️ interest rates
-> lose labour market (spare capacity)

Question 19

What is measuring an output gap like?

Answer 19

Difficult to measure- ✖️ all unemployed resources would have same impact on economy if employed

Question 20

What does a positive output gap look like on a diagram?

Answer 20

See page 13 of economics theme 2 notes

Question 21

What does a negative output gap look like on a diagram?

Answer 21

See page 13 of economics theme 2 notes

Question 22

What is the pattern of the trade business cycle?

Answer 22

Boom 💥 -> slowdown-> recession-> recovery-> boom 💥

Question 23

What are the benefits of economic growth?

Answer 23

👍- consumers- ⬆️ incomes & wealth 💰, ⬆️ job confidence-> ⬆️ spending e.g. 🚙 📱 etc, ⬆️ employment opportunities-> close to full employment-> ⬆️ wages so firms keep workers

👍- firms- ⬆️ profit, ⬆️ consumer spending-> ⬆️ firm sales & profit-> ⬆️ more workers employed (⬇️ unemployment) & ⬆️ investment-> ⬆️ future growth prospects

👍- governments- ⬆️ incomes, asset prices & profits-> ⬆️ income tax, VAT, capital gains tax (tax payed on profit when asset sold that has ⬆️ in value) & corporation tax ALSO ⬇️ demand for unemployment benefits & income support

👍- current & future livings standards- ⬆️ incomes, asset value & employment-> ⬆️ wealthy 💰 people & ⬇️ poverty ALSO ⬆️ government revenue spent on improving town centres, libraries 📚, cleaner technology (improve living standards)

Question 24

What are the negatives of economic growth?

Answer 24

👎- income inequality- unwaged (out of work or doing unpaid work) & unskilled ⬇️ likely to benefit from ⬆️ incomes-> 2 speed economy (some ppl income ⬆️ but can’t get out of low skill slow lane) ALSO short-term unemployment for those without labour market flexibility as ⬇️ skill production ⬇️ during growth

👎- environmental problems- natural resource depletion, carbon emissions & other pollution ⬆️ with growth BUT ⬆️ tax revenue could be used by governments to clean up 🧼 environment

👎- balance of payments problem- ⬆️ incomes-> ⬆️ demand for imports BUT if export-led growth then current account improves

👎- bottlenecks in economy- ⬇️ spare capacity in economy-> factors of production ⬆️ in price e.g. labour wages