economic growth

Question 1

what factors increase economic growth?

Answer 1

For economic growth to occur, there needs to be an increase in quality or quantity of one
of the four factors of production: land, labour, capital or enterprise, or these being used more efficiently. All economists agree that an increase in LRAS will increase the potential level of output in an economy. Any factor which increases the LRAS, will also increase
economic growth.

Question 2

how does land effect economic growth? (CELL)

Answer 2

The discovery of new resources e.g. oil will increase economic growth.
Economists argue that developing countries tend to grow the most from exploiting
new resources, whilst they do not have a significant effect in developed countries.

Question 3

how does labour affect economic growth?

Answer 3

An increase in the quality or quantity of labour will improve economic growth.

Question 4

how does the size of the work force effect economic growth?

Answer 4

Changes in the size of the workforce can come from
immigration, demography (age profile) of the country or participation rates. A change in the age profile of the population i.e. the amount of people of
working age will affect economic growth: the more people of working age there are, the more growth there will be. Raising the retirement age will
increase the population of working age. The government can take action such as providing free childcare to encourage mothers to go back to work, which will increase participation rates. Immigration can be vital in enabling economic growth if it provides potential workers with the skills, knowledge and desire to work within the country. On the whole, the larger the workforce the more goods and services that can be produced.

Question 5

how does the quality of the workforce effect economic growth?

Answer 5

In the long run, improving the quality of labour is
perhaps more important; this can be done through education. Improved education will improve labour quality as it will mean that workers have all the
skills they need and are more efficient, so output per worker increases. More skilled workers will also be less likely to suffer from structural unemployment
as they will have greater occupational mobility and so this will increase the output of the economy as there are less unused resources. Additionally, more
skilled workers will be able to contribute to change i.e. new technology, business ideas, innovation etc. and this will help to improve economic growth

Question 6

how does capital effect economic growth?

Answer 6

If a country receives sustained investment, they will be able to access or develop new technology which will enable the country to improve productivity. It will
also mean more machines can be bought and used, even if these are not a technological advancement, so more goods can be produced. Not all investment will
lead to increased GDP because some investment is unsuccessful whilst it is argued

Question 7

how does enterprise effect economic growth?

Answer 7

f the government offers tax benefits and grants, they will encourage the development of business, creating jobs and meaning more goods and services
are produced, which will increase economic growth. If there is too much wealth distribution (i.e. too high taxes and benefits), there will be little incentive to work hard
as the rich know a lot of their money will be taken away and the poor know that there is no need to work as benefits will give them just as much money as a job on minimum wage. This lack of incentive will mean that businesses won’t invest and so there will be little to no economic growth

Question 8

how does technological progress effect economic growth?

Answer 8

Improved technologies mean that the average cost of
production is lower, whether this is because it is quicker to produce or less labour or equipment is needed. Also, it creates new products for the market and this helps to increase consumption and keeps MPC high as there are new things to buy. Without increased spending, there would be little economic growth.

Question 9

how does efficiency effect economic growth?

Answer 9

Efficiency is important in bringing about economic growth as it means less resources are needed to produce each good, so more goods can be produced.
One way the government can ensure efficiency is to keep up competition as it will means producers are forced to lower prices or increase quality so will
have to improve efficiency to keep profits high.
o In order for there to be efficiency, the market mechanism must be working properly. In some countries, particularly low and middle-income countries, the mechanism doesn’t work properly due to a lack of protection of property rights. If the government doesn’t intervene to protect property rights, then people will be unwilling to save and invest which will prevent economic growth.

Question 10

what is the difference between actual and potential growth?

Answer 10

The actual growth is the percentage change in GDP. It is when the economy is actually produced more goods and services. Potential growth is the change in
productive potential of the economy over time, so the LRAS or PPF curve shifts. The productive potential is determined by the factors of production and so potential growth means there have been resources discovered or more technology developed that will allow the economy to grow more

Question 11

international trade and economic growth?

Answer 11

export-led growth: a rise in AD through increased exports. This has been effective in countries such as Germany, Japan and China and prevents the poor balance of payments that tends to occur as a result of economic growth. Although increased exports initially increases AD rather than LRAS, sustained high
export levels will encourage, or force, firms to invest and increase demand for labour, which will lead to economic growth.

Question 12

what is the difference between actual growth rates and long-term trends?

Answer 12

The long run trend rate of growth is the average sustainable rate of economic growth over a period of time. It is what tends to happen over a long period of time; the average. Actual growth is the actual change (i.e. the change in real GDP) over
time and its changes are what make up the business cycle. The difference between the two is an output gap.

Question 13

what is output gap?

Answer 13

occur where the actual level of output is different from the potential level of output so not equal to the full level of output- this is shown on the trade cycle diagram which demonstrates how the actual GDP is not always on the trend.

Question 14

what is the difference between positive output gap and a negative output gap?

Answer 14

A positive output gap is when GDP is higher than estimated whilst a negative output gap is when GDP is lower than estimated. With a negative output gap, there is spare capacity in the economy with factories, offices and workers not being utilised to produce goods and services.

Question 15

why is the output gap so hard to measure?

Answer 15

firstly because the exact position of the
LRAS is unknown and also because initial estimates of the real GDP are often inaccurate. Some economists believe they are so difficult to measure that they are
not a valid concept to use from the purpose of economic policy. It is not possible to measure the productive potential of an economy as there is no single monetary value for the level of variables such as machinery, workers and technology.

Question 16

what is the trade (business) cycle?

Answer 16

This is the periodic but irregular up and down movements in economic activity,
measured by fluctuations in real GDP and other macroeconomic variables. Each business cycle is different, but they tend to have four main phases: boom, downturn, recession (slump) and recovery

Question 17

what are characteristics of a boom?

Answer 17

When economy is at its peak (the boom), national income is high and the economy
is likely to be working above PPF where there is a positive output gap . Consumption and investment tend to be high as are tax revenues, and wages will be
increasing. Usually, the country will increase imports to meet the demand of high-income consumers that cannot be met by the goods produced within the country. There will also be inflationary pressure.

Question 18

what are characteristics of a recession?

Answer 18

When the economy is at the bottom of the cycle, it is in a slump, trough, depression or recession. There tends to be high unemployment causing low consumption, investment and imports. Inflationary pressure will be low and there may even be deflation. In the UK, the government defines recession as where real GDP falls in at least two successive quarters.

Question 19

what are effects of economic growth of consumers?

Answer 19

● There will be an increase in demand for housing as people have more money and so are able to afford to buy properties, which will increase house prices. Shares are likely to increase in value as businesses are making more money and future prospects are good. The rising prices of shares and housing will increase wealth and lead to positive wealth effect.
● Improved productive efficiency due to better technology could lead to lower prices or higher quality goods.
● Some argue that increased economic growth will lead to increased happiness, but this is not necessarily the case.
● On the other hand, economic growth could lead to increased inequalities and so may not have any effect on the average consumer and may lead to inflation, which has negative effects for consumers.

Question 20

what are effects of economic growth of firms?

Answer 20

● Investment will increase since businesses are more successful. They will have more money to invest and more incentive to invest as they will know they can make money from their investments.
● Business confidence will improve as there are potential demand increases for businesses’ products and this confidence will also lead to increased investment.
● As a result of increased investment from both businesses and governments, technology will improve. There will be more research and development done to invent more technology and more firms will be able to have the best technology, which is likely to increase productive efficiency and lead to lower costs.
● The combination of higher demand and lower costs is likely to lead to higher profits.
● Economic growth also provides the opportunity for new firms to establish themselves and allows existing ones to make more profit.

Question 21

negative effects of economic growth of firms?

Answer 21

firms who sell inferior goods (with negative income elasticities) may lose out. Changing technologies and globalisation also mean that some firms find their markets disappearing e.g. DVD rental stores

Question 22

effects of economic growth on gov?

Answer 22

● Tax revenues will rise as more goods and services are being bought, more income is being earnt and more profits being made. This means the government has more money to put into the NHS, education, benefits etc.; the quality of these systems will be improved, and this will help to improve living standards.
● It can help to reduce the budget deficit, perhaps even bringing about a budget surplus which would allow money to be saved for future recessions.
● However, economic growth tends to mean people expect more from the government i.e. better education, better roads etc.

Question 23

positive effects of economic growth on current and future living standards?

Answer 23

● Economic growth will result in lower poverty levels . An increase in the production of goods and services will increase jobs so there will be less unemployment and less people on benefits. Wages are also likely to increase.
● There will be more goods and services for people to enjoy , so the poor will be able to get the goods and services they need instead of only the rich getting what
they want.
● Housing standards and the quality of food increases due to economic growth. Health also tends to increase: not only does life expectancy rise but people have a
higher quality of life in their old age.
● Increased government spending will lead to improved living standards both now and in the future, as better educated people usually have higher living standards.
● Economic growth is likely to have the highest benefits in developing countries.

Question 24

negative effects of economic growth on current and future living standards?

Answer 24

there could be decreased future living standards due to exploitation of the environment. A rise in income means more people have access to electricity etc.
and use it more freely. This causes depletion of non-renewable resources, concern about sustainability of growth for future generations and increased levels of
pollution/waste/congestion.
● On the other hand, it could be argued that people with higher incomes are able to buy cleaner fuels and richer countries can devote resources for research and
development of cleaner resources and ‘greener’, more efficient technology. Also, higher income households tend to have less children which lowers natural rate of
population growth, meaning less resources are needed for the future.
● Another cost may be that economic growth may result in increased inequalities between rich and poor. The rich may be the only ones that have gained from the
economic growth and they may even lower the living standards of the poor by exploiting the poor.