Economic Growth

Question 1

Economic growth

Answer 1

An increase in a country’s productive capacity over a SPOT as measured by GDP

Question 2

Recession

Answer 2

Two or more consecutive quarters of negative economic growth

Question 3

GDP

Answer 3

Measures the total value of all G/S produced within a country over a SPOT

Question 4

CFOI: economic growth formula

Answer 4

Income=Output=Expenditure

Question 5

What affects short run EG (3)

Answer 5

Changes in AD and SRAS
Short term external shocks: D+S
Short term policies: changes in IR

Question 6

Long term EG (5)

Answer 6

• Potential output/ trend growth
• Productivity
• Tech progress and strength of enterprise
• Labour force changes
• Investment rates

Question 7

Factors affecting SREG (6)

Answer 7

• Lower IR
• Increased gov spending and lower tax
• Lower commodity prices: oil + basic food
• Depreciating exchange rate
• Trading conditions in other countries
• Confidence of business and households (animal spirits)

Question 8

Factors affecting LREG (6)

Answer 8

• Finding new enterprise
• Discovery of new recourses
• Research
• Increased investment
• Improved productivity
• Increases labour supply

Question 9

Benefits of EG (4)

Answer 9

Living standards
Employment effects
Accelerator effect
Fiscal dividend

Question 10

What is the accelerator effect?

Answer 10

When GDP rises, foreign investment rises even more

Question 11

Drawbacks of EG (4)

Answer 11

Price level
Inequality
Environmental damage
Sustainability

Question 12

Difficulties in using GDP as a measure of living standards (4)

Answer 12

• GDP incompletely measures output
• Doesn’t take account of quality improvements
• Distribution of income and wealth not accounted for
• Doesn’t account for what is being produced

Question 13

Other methods used to calculate economic welfare (2)

Answer 13

• Misery index: inflation and unemployment
• Human development index: life expectancy, education and GNP per capita

Question 14

GDP as a measure of living standards evaluation

Answer 14

It’s not a perfect measure of living standards however evidence shows that there is a positive correlation with life expectancy, happiness and the HDI index.

Question 15

Features of an economic slow down (4)

Answer 15

• Downward pressure on prices to stimulate demand
• Less income: less spending
• More business closures
• Less gov tax revenue

Question 16

Features of a recovery (3)

Answer 16

• Increase in demand and employment
• Firms able to reduce excess capacity
• More investment as business confidence rises

Question 17

Boom stage features (5)

Answer 17

• Fast growth of consumption: rise in incomes, confidence and wealth
• Business investment in capital goods
• Move towards full employment
• High demand for imports
• Improved public finances

Question 18

Economic shock

Answer 18

A large unexpected event that results in large changes to EG, inflation and UE

Question 19

Examples of external shocks (7)

Answer 19

• Global crisis: credit crunch
• Eurozone crisis: Brexit
• Changing relationships between nations
• Other nations see unexpected levels of growth or decline
• Currency volatility
• Extreme weather/ natural disasters
• Geo political issues: war and terrorism

Question 20

Features of a recession (6)

Answer 20

• Fall in consumption and business investment
• Increase in business closures
• Increase in UE and job opportunities
• Decline of animal spirits
• Depreciation of value of X+M
• Fall in gov revenue and increased deficit