Causes of Economic Growth and Trade Cycle Part B

Question 1

What is GDP?

Answer 1

Gross domestic product is the total market value of all goods and services produced within a country over a period of time. It is the aggregate of consumer, government and investment spending and net exports

Question 2

What is not included in GDP calculations?

Answer 2

Transfer payments are not included in GDP calculations since there is no corresponding output produced.

Question 3

Why is GDP inflated?

Answer 3

It is a measure of national income which includes the value of indirect taxes like VAT. This inflates the actual value of national income as indirect taxes are not part of the actual output of a country

Question 4

What is GVA?

Answer 4

Gross Value Added is the GDP minus indirect taxes plus subsidies on goods. It is a measure of the value of goods and services produced

Question 5

What is GNI?

Answer 5

Gross National Income represents the total income earned by a nation’s residents, including income from abroad. GNI measures the final value of incomes flowing to the UK because of factors of production whether they are in the UK or overseas

Question 6

What is the formula for GNI?

Answer 6

GNI = GDP + Net Income from Abroad

Question 7

What is GNP?

Answer 7

Gross National Product is the total market value of all goods and services produced over a period of time through the labour of property supplied by citizens domestically and overseas

Question 8

What is net national income at market prices?

Answer 8

This is the gross national income minus depreciation

Question 9

What are the differences between GDP and GNI?

Answer 9

GNI includes foreign investments, GDP focuses on domestic production
GNI is often used to assess economic performance with significant foreign income flows
GNI covers earnings of citizens regardless of location, GDP captures production in the borders regardless who produces

Question 10

What are the uses of GDP statistics?

Answer 10

Comparing growth rates and economic performance between countries
Track economic growth over time
Forecast changes in the economy

Question 11

What is PPP?

Answer 11

Purchasing Power Parities is a comparison of how much a typical basket of goods in one country costs compared to that of another country

Question 12

What is the formula for PPP?

Answer 12

Cost of Basket in Country 1 /// Cost of Basket in Country 2

Question 13

Why are PPP-adjusted figures preferred?

Answer 13

Nominal exchange rates do not reflect differences in living costs or price levels. PPP figures provide a more accurate comparison of living standards and economic productivity

Question 14

What are the limits to PPP-adjusted figures?

Answer 14

Calculations depend on accurate price data and may not fully capture informal or unrecorded economic activity

Question 15

What is quality of life?

Answer 15

Quality of life is the standard of health, happiness, security, and material comfort of an individual, a group of people, or a nation

Question 16

What is the standard of living?

Answer 16

Standard of living is the level of wealth, comfort, material goods, and necessities available to a person or community

Question 17

What are the limitations of GDP?

Answer 17

The exclusion of non-market transactions
Hidden/Black Market/ Informal Economy
Excludes income inequality
Does not reflect sustainability of rate of growth
Does not account for costs on human health and environment

Question 18

What is the Easterlin Paradox?

Answer 18

Happiness increases with income at low levels, but further increases in income beyond meeting the basic needs do not lead to greater happiness

Question 19

What are the benefits of economic growth on consumers?

Answer 19

Higher incomes
Improved quality of goods and services
Enhanced economic mobility

Question 20

How does economic growth lead to higher incomes for consumers?

Answer 20

Economic growth leads to higher wages and increased employment. As productivity rises, firms can pay workers more, improving standard of living

Question 21

How does economic growth lead to improved quality of goods and services for consumers?

Answer 21

Growth drives innovations so businesses can offer better products. The technological advancements spur economic expansion to improve accessibility to public services

Question 22

How does economic growth lead to enhanced economic mobility for consumers?

Answer 22

A growing economy creates more opportunities for individuals to climb the socio-economic ladder, reducing inequality over time

Question 23

What are the costs of economic growth for consumers?

Answer 23

Potential inflation
Income inequality
Consumer overindulgence and debt

Question 24

How does economic growth lead to potential inflation for consumers?

Answer 24

Rapid growth can lead to demand-pull inflation, where demand exceeds supply. Inflation erodes the purchasing power, negating the benefits of higher wages

Question 25

How does economic growth lead to income inequality for consumers?

Answer 25

While average incomes may rise, economic growth is not always distributed evenly. The wealth gap may widen if benefits favour certain groups or industries

Question 26

How does economic growth lead to consumer overindulgence and debt for consumers?

Answer 26

Higher incomes may encourage overconsumption or reliance on credit

Question 27

What are the benefits for firms because of economic growth?

Answer 27

Larger Markets
Opportunities for Investment
Economies of Scale

Question 28

How does economic growth lead to a larger market for firms?

Answer 28

Economic growth expands consumer markets, providing firms with more customers. It also allows greater trade and globalisation

Question 29

How does economic growth lead to opportunities for investment for firms?

Answer 29

Rising demand leads to firms investing in better technology, development and infrastructure. These investment enhance productivity and competitiveness

Question 30

How does economic growth lead to economies of scale for firms?

Answer 30

Growing markets enable firms to achieve economies of scale, reducing cost per unit and increasing profitability

Question 31

What is economies of scale?

Answer 31

A proportionate saving in costs gained by an increased level of production

Question 32

What are the costs of economic growth for firms?

Answer 32

Increased competition
Inflationary Costs
Resource Constraints

Question 33

How does economic growth lead to increased competition for firms?

Answer 33

As markets grow, they attract new entrants, increasing competition. Firms that do not innovate may lose market shares

Question 34

How does economic growth lead to inflationary costs for firms?

Answer 34

Persistent inflation may increase output costs for firms (wages, raw materials)
Higher costs force firms to raise prices losing customers

Question 35

How does economic growth lead to resource constraints for firms?

Answer 35

Rapid growth can strain resources such as the factors of production, leading to bottlenecks, or inefficiencies

Question 36

What are the benefits of economic growth for the government?

Answer 36

Higher Tax Revenue
Reduction in Public Debt
Social Stability

Question 37

How does economic growth lead to higher tax revenues for the government?

Answer 37

Economic growth increases profits, wages, and consumption, raising tax revenues
These funds allow governments to invest in public services

Question 38

How does economic growth lead to reduction in public debt for the government?

Answer 38

Higher tax revenues allow the government to reduce the budget deficit or repay debt

Question 39

How does economic growth lead to social stability for the government?

Answer 39

Economic prosperity reduces unemployment and poverty

Question 40

What are the costs of economic growth for the government?

Answer 40

Managing Inflation
Risk of Overheating
Policy Challenges

Question 41

How does economic growth lead to struggles with managing inflation for the government?

Answer 41

Sustained growth leads to inflationary pressures, requiring fiscal intervention
Poorly managed inflation destabilises the economy

Question 42

How does economic growth lead to risks of overheating for the government?

Answer 42

If growth is too rapid, the economy may overheat, leading to imbalances in trade and production

Question 43

How does economic growth lead to policy challenges for the government?

Answer 43

Governments must balance the benefits of growth with environmental regulations, social equity, and sustainable development

Question 44

What are the benefits of economic growth for the current and future standard of living?

Answer 44

Improved Health and Education
Higher Living Standards
Poverty Reduction

Question 45

How does economic growth lead to improved health and education?

Answer 45

Economic growth leads to greater investment in healthcare and education system through increased tax revenue

Question 46

How does economic growth lead to higher living standards?

Answer 46

Growth facilitates access to modern conveniences
People enjoy better leisure opportunities

Question 47

How does economic growth lead to poverty reduction?

Answer 47

As GDP increases, poverty rates tend to decline due to expanded job opportunities

Question 48

What are the costs of economic growth for the current and future standard of living?

Answer 48

Environmental Degradation
Resource Depletion
Unequal Benefits

Question 49

How does economic growth cause environmental degradation?

Answer 49

Economic expansion often causes pollution, deforestation, and harms ecosystems and biodiversity
Climate change

Question 50

How does economic growth cause resource depletion?

Answer 50

Overuse of finite resources limits future economic prospects
Scarcity of resources leads to higher costs and conflict

Question 51

How does economic growth cause unequal benefits?

Answer 51

The wealth generated by growth may be concentrated among a few, causing social inequality and consequential tensions