Economic growth

Question 1

What is potential economic growth?

Answer 1

expansion in productive capacity of economy

Question 2

What is actual economic growth?

Answer 2

rate of growth of real GDP in a period

Question 3

If workforce becomes more skilled, what will be the effect on the long-run aggregate supply curve?

Answer 3

shifts right

Question 4

If workforce becomes more skilled, what will be the effect on average price and on output?

Answer 4

average price down and output up (as LRAS shifts right so extension of AD)

Question 5

Define the output gap

Answer 5

difference between actual real GDP and maximum possible real GDP

Question 6

If the economy is operating below full employment level, what can we deduce about the output gap?

Answer 6

It is negative.

Question 7

How would it be possible for the output gap to be positive?

Answer 7

Actual real GDP > full capacity - can occur in short run only, eg by workers doing overtime

Question 8

Is it possible to measure the output gap? Explain your answer.

Answer 8

Not really, as not feasible to identify exactly the full capacity of an economy

Question 9

What does productivity measure?

Answer 9

efficiency of a factor of production

Question 10

What does labour productivity measure?

Answer 10

output per worker or per hour worked

Question 11

What does capital productivity measure?

Answer 11

output per unit of capital

Question 12

What doese total factor productivity measure?

Answer 12

average productivity of all factors, measured as total output divided total amount of inputs used

Question 13

What are the two ways in which capacity output can be increased?

Answer 13

• increase in quantity of factors of production
• improvement in efficiency/productivity of factors of production

Question 14

What is investment?

Answer 14

expenditure by firms on capital goods

Question 15

Define human capital

Answer 15

stock of skills and expertise that contribute to a worker’s productivity

Question 16

How can human capital be increased?

Answer 16

through education, training and healthcare

Question 17

Why is export-led growth particularly important for small countries?

Answer 17

It makes them more able to achieve economies of scale.

Question 18

What characterises a boom period?

Answer 18

rapid growth and higher GDP than its trend value, as part of the trade cycle

Question 19

What are the stages of the economic cycle?

Answer 19

recession - (trough) - recovery - boom - (peak) - slump

Question 20

In a recession, are unemployment and inflation likely to be high or low?

Answer 20

• unemployment high
• inflation low (but not always)

Question 21

What was the average real GDP growth 1980 to 2007?

Answer 21

2.5% pa

Question 22

How is a recession defined?

Answer 22

when GDP falls for two or more consecutive quarters

Question 23

Name two years when there was negative growth in most major economies.

Answer 23

• 2009
• 2020

Question 24

What effect is economic growth likely to have on the average household?

Answer 24

• higher incomes
• more employment opportunities

Question 25

What effect is economic growth likely to have on firms?

Answer 25

higher profits

Question 26

What effect is economic growth likely to have on government finance?

Answer 26

• Higher tax revenue
• Lower need for benefits
• Higher spending or debt payments possible

Question 27

How long did the recession last in the UK in late 2000s?

Answer 27

18 months, ie six quarters

Question 28

Define sustainable development.

Answer 28

develipment that meets the needs of the present without compromising the ability of future generations to meet their own needs

Question 29

What trade-offs might there be to economic growth?

Answer 29

current consumption
environment
structural change leading to unemployment
social/health effects eg stress, lack of leisure time