Economic Growth

Question 1

Define actual growth

Answer 1

Actual growth is measured by the annual percentage change in a country’s real national output (GDP).

Question 2

Define potential growth

Answer 2

Potential economic growth (Trend Growth) is measured by the estimated annual change in a country’s potential level of national output.

Question 3

What macro-economic goal has to do with growth

Answer 3

The government’s economic growth macroeconomic objective is to have sustained and sustainable economic growth.

Question 4

How is short and long term growth calculated

Answer 4

Short term growth is calculated annually by the percentage change in real national output. Long term growth is a trend, which is a potential.

Question 5

How is short-term growth achieved

Answer 5

Short-term economic growth is achieved by – Using up existing spare capacity, an increase in the rate of factor utilisation (land, labour, capital)

Question 6

Define Real GDP, Nominal GDP and GDP per capita

Answer 6

Real GDP is the value of GDP adjusted for inflation.

Nominal GDP is the value of GDP without being adjusted for inflation

GDP per capita is the value of total GDP divided by the population of the country.

Question 7

How is short-term growth shown in the PPF

Answer 7

A movement in the Dot in the PPF

Question 8

How is long-term growth shown in the PPF

Answer 8

An expansion in the lines of the PPF

Question 9

How is short-term growth shown in a Keynesian Diagram

Answer 9

a shift in AD

Question 10

How is long-term growth shown in a Keynesian Diagram

Answer 10

A shift in the LRAS line

Question 11

How is short-term growth shown in a Classical Diagram

Answer 11

A shift in AD or SRAS

Question 12

How is long-term growth shown in a Classical Diagram

Answer 12

A shit in the LRAS line

Question 13

What does the LRAS curve show

Answer 13

The LRAS curve is the level of output shown by the trend rate of growth in an economy.

Question 14

What are the benefits of growth

Answer 14

Boosts living standards through a higher real GDP per head

Increased output creates new jobs & reduces unemployment

Increased tax revenues for government

Improved business confidence

Question 15

What are the drawbacks of growth

Answer 15

Increased inequalities of income

Unbalanced growth risk of demand-pull inflation

Increased demand for imports

Environmental impact

Question 16

What are the demand side causes of growth

Answer 16

Higher consumer spending

Increased capital investment

Rise in gov spending on G&S

Increased export

Reduction in import spending

Question 17

What are the supply-side causes of growth

Answer 17

Higher productivity

Increased supply of factor inputs

Expansion of employable labour supply

Exploitation of new finds of natural resources

Technological advancements

Question 18

Define recession

Answer 18

A recession is a significant, widespread, and prolonged downturn in economic activity. Or In the UK, a recession is defined as two consecutive quarters of negative economic growth.

Question 19

Define Factor market flexibility

Answer 19

Factor market flexibility refers to the ease with which factors of production—namely labour, capital, land, and entrepreneurship—can be adjusted in response to changes in economic conditions and market demands.

Question 20

Why is flexibility in factor markets important

Answer 20

Flexibility in factor markets is crucial for maintaining competitiveness, especially in a globalised economy.

It helps economies adjust to technological advances

Additionally, flexible factor markets can better withstand and recover from economic shocks

Question 21

Define factor markets

Answer 21

In economics, a factor market is a market where factors of production are bought and sold. Factor markets allocate factors of production, including land, labour and capital

Question 22

Define output gap

Answer 22

An output gap is the difference between potential GDP and actual GDP. In the real world, the rate of economic growth is rarely constant. We can have positive and negative output gaps.

Question 23

Define positive output gap

Answer 23

A positive output gap will occur when the actual economic growth is above the sustainable potential, e.g., if the long-run trend rate is 2.5%, but we have growth of 4%

A positive output gap occurs when AD increases faster than AS.

Question 24

What does a positive output gap lead to

Answer 24

A positive output gap leads to:

• Inflation, because the demand is growing faster than the supply.
• Lower unemployment due to greater demand for workers.
• A deterioration in the current account balance of payments.
• The Central Bank may deal with the inflation by putting up interest rates.
• The ‘boom’ will be unsustainable and may lead to an economic downturn.

Question 25

Define negative output gap

Answer 25

A negative output gap occurs when the economic growth is below the sustainable potential, e.g. it could be due to very low economic growth at 0.5%, or a recession with negative economic growth (-1.2%).

With a negative output gap, the real GDP will be less than potential.

The output would be within the PPF curve.

This will be due to low aggregate demand.

Question 26

What can cause a negative output gap

Answer 26

negative output gap could be caused by:

• Cutting government expenditure
• Falling house prices causing a fall in wealth and consumer spending

Rise in interest rates