Chapter 30: Economic growth

Question 1

Difficulty of measuring real GDP

Answer 1

• Tend to understate the level of output
• Activity is on a small scale and there are relatively hgih costs of registering a business
• Activity is ilelgal and work undertaken by immigrants who had not been given permission to work in the country

Question 2

Recession

Answer 2

When real GDP declines over a period of six months or more

Question 3

Causes of a recession

Answer 3

• Decrease in demand or decrease in supply

Reasons for demand fall:
- Negative demand side shocks
- Consumer expenditure and investment could decline due to a fall in business and consumer confidence, arising from a financial crisis or falling house prices
- Government may cut back its spending too much and net exports could fall as a result of a rise in the exchange rate

Reasons for supply fall:
- Negative supply side shock
- Rise in fuel or raw material costs
- Increase firms’ costs of production causing them to produce less

Question 4

Consequences of a recession

Answer 4

• Unemployment likley to rise
• Lower living standards from lower output and incomes
• Investment is likley to be discouraged which will endanger future economic growth
• Tax revenue will decline while government spending on benefits may be increased
• Increase any budget deficit
• If caused by a decrease in demand, price would fall
• If caused by a decrease in supply, it would be accompanied by inflation

Question 5

Causes of economic growth

Answer 5

• Increase in aggregate demand may stimulate a rise in output if the economy had unused resources
• Movement inside toward to PPC
• Quantity or quality of resources increases
• Quantity of resources may rise as a result of an increase in net investment or the size of the labour force
• Quality may increase due to an improvement in dedication and training and advances in technology

Question 6

Consequences of economic growth

Answer 6

• An increase in output can improve living standards
• Increases government tax revenue making it easier for governments to finance measures
• Political and economic standing and influence usually increaes
• If the economy is working at full capacity, it may be necessary to shift resources from making consumer goods to capital goods in order for it to grow
• Will reduce living standards as fewer goods and services will be available for households in the short term
• Long term, the capital goods will enable manufacture of more consumer goods
• Higher output can increase pollution
• May lead to greater stress on workers - longer hours, new skills, new jobs
• Very high rate may not be sustainable
• IF productive capacity can be increased in line with demand, more goods ands services can be enjoyed without an increase in prices
• Can lead to improved education and information, pressurise the government and society to care for the environment
• Potential to raise living standards but the extent to which it does is influenced by the type of products and teh distribution of income

Question 7

Policies to promote economic growth

Answer 7

• Expansionary fiscal and/or monetary policy to promote growth if an economy is operating with spare capacity
• Households and firms may not spend more despite a lower rate of interest and lower taxes if they lack confidence
• If the rate of interest is already low, there may not be much room to cut it further
• Economy can continue to increase the output it produces only if it gets more resources orhigher quality resources
• To increase productive potential, gvernment may seek to improve education and training