Economic growth

Question 1

Actual growth

Answer 1

This is short run growth and it is the percentage increase in a countries real GDP. It is usually measured annually and it is impacted my movements in AD.

Question 2

Potential growth

Answer 2

This is the long run expansion of the productive potential of an economy, this is caused by increases in AS, the potential output of an economy is what the economy could produce if resources were fully employed.

Question 3

Real GDP

Answer 3

This is the value of GDP adjusted for inflation. For example if the economu grew by 4% last year but inflation was 2%, economic growth would be 2%.

Question 4

GDP

Answer 4

Gross domestic product
This measures the value of goods and services produced in an economy, it also measures national income/national expenditure.

Question 5

GDP per capita

Answer 5

This is the level of GDP divided by the population, for exampe if real GDP were to increase by 3% and the population rises by 1%, the real GDP per capita has only risen by 2%.

Question 6

Economic growth usual definition

Answer 6

Economic growth is defined as a expansion of the productive potential of the economy and a long term shift in the AS curve.
- We can depict this through either a shift in the PPF curve or the LRAS curve.

Question 7

Recession

Answer 7

In the UK this is defined as two consecutive quarters of negative economic growth.

Question 8

Difficulties and issues with using GDP as a measurement of short run growth.

Answer 8

• GDP does not give any indication of income distribution and therefore does not tell us the extent of income inequality.
• Black market is not accounted for in GDP, this can make comparisons misleading and uncomparable.

Question 9

Rate of economic growth

Answer 9

Measures the annual % change in real GDP

Question 10

Buisness cycle

Answer 10

Refers to the cyclical nature of economic growth, NEED TO DRAW DIAGRAM.

Question 11

Business cycle - Peak

Answer 11

Top of the cycle, where growth rates will begin to fall.

Question 12

Buisness cycle - Economic downturn/recession

Answer 12

Where the growth rate falls and may become negative, leading to a fall in national output.

Question 13

Buisness cycle - Actual and potential Economic growth

Answer 13

• The straight line represents potential economic growth and the productive potential of the economy.
• The other curve represents actual economic growth and therefore the changes in GDP annually.

Question 14

Output gap

Answer 14

This is the measure of the difference between actual output and potential output.
- A positive output gap means that growth is above the trend rate. A negative output gap means there is spare capacity, unemployment and economic downturn.
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Question 15

Causes of economic growth in the short run

Answer 15

Economic growth in the short run is a result of a rise in AD.
- Lower interest rates, reducing the cost of borrowing and leading to higher investment and higher consumption. ALSO return on saving is lower so consumers are encouraged to spend instead of save.
- Rising house prices, leading to a positive wealth effect on consumers, encouraging them to spend and causing C to rise.
- Changes in income, higher disposable income will encourage consumers to spend more.
- Lower income tax increases dispoasable income and encourages C.
- Low exchange rate means that demand for exports will rise and therefore X-M increases.

Question 16

Policies to increase economic growth

Answer 16

Supply side
- Income tax cuts, increase the incentive to work
- Privatisation, making government owned firms private to increase profit incentives and efficiency.
- Reduce bureauracy and regulations on firms in order to promote investment and reduce costs for firms.
- Government spending on education and training to improve the labour supply and its productivity.

Question 17

Other supply side causes of economic growth

Answer 17

• Rising investment on capital.
• Migration and demographic changes, ageing population may mean that the labour supply is smaller. Increase in the supply of labour from migration would mean that productive cappacity of the economy would increase.
• Tech advances, innovation in industries, increase productivity and possibly mean new firms can enter the market.

Question 18

Benefits of economic growth - Households

Answer 18

• Higher incomes/wages for workers.
• Economic growth creates employment and helps to reduce unemployment.
• Consumers are likely to feel more confident in the economy, consumption may rise and this will lead to greater standard of living.

Question 19

Costs of economic growth - Households

Answer 19

• Those on low and fixed incomes may feel worse off if there is high inflation, economic growth will likely mean a rise in the price level in the economy.
• Likely to be increased demand-pull inflation, due to high levels of consumer spending, caused by increased confidence in the economy.
• Consumers will face more shoe leather costs, which means they have more time and effort finding the best deal while prices are rising.
• Diminishing marginal returns means that benefits from consuming a good may fall after some time.

Question 20

Benefits of economic growth - Firms

Answer 20

• Firms increase output, and therefore make more profit. This can be placed into future investment and mean future profits will rise even further.
• High levels of buisness confidence means investment will rise and increase future profits.
• Improvements in productivity and lower costs in the long-run due to investment.
  POSITIVE FEEDBACK LOOP, higher growth encourages firms to invest, increased investment results in higher growth in the furture.

Question 21

Costs of economic growth - Firms

Answer 21

• MENU costs, as a result of inflation they may have to keep changing their prices to meet inflation.
• COSTS may rise as wages are higher,

Question 22

Benefits of economic growth - Government

Answer 22

• The government budget will improve as fewer people require welfare payments and benefits and their tax revenue has increased as people and firms having higher incomes/profits.
• Increased tax revenue for the government, which they can use to invest back into healthcare, pensioners and edcuation.
• Reduced govt. dept, redcued budget deficit.
• Lower government borrowing.
• POLITICAL BENEFITS

Question 23

Costs of economic growth - government

Answer 23

• They might increase spending on healthcare if the consumption of demerit goods increases as a result of growth.
• If growth is unbalcanced we could see frowing current account deficit as people buy more imports.

Question 24

Benefits of economic growth - Current and future living standards

Answer 24

• As consumer incomes increase, some people might show more concern for the enviroment.
• Economic growth could lead to development of technology to produce goods and services more greenly.
• Higher wages means consumers can enjoy a choice of goods with higher quality.
• Public services such as health and education improves as the government has higher tax revenues.
• Higher incomes for people, reduction of absolute poverty and overall higher standards of living.

Question 25

Costs of economic growth - Current and future living standards

Answer 25

• High levels of growth will mean that there is a increase in emissions of CO2 and pollution, enviormental damage and health issues could be a result of this.
• Increase in negative externaltities from consumption of goods such as cigareets and cars.