economic growth

Question 1

what are the trends in growth rate?

Answer 1

During a boom, real GDP rises fast and rises above the trend.
During a recession, real GDP falls for two consecutive quarters.
During a slowdown, the level of GDP may be rising, but rising below the trend (disinflation), or the level of GDP might be falling (deflation).

Question 2

what is the output gap?

Answer 2

The output gap is the difference between actual output and potential output (the output when the economy is working at maximum efficiency).

Question 3

what is a positive output gap?

Answer 3

A positive output gap occurs when actual output is greater than potential output.
This occurs when the economy is growing faster than the trend-­‐ it is trying to operate above its potential.
This leads to shortages of raw materials and labour, leading to a rise in production and labour costs, and therefore high inflation rates.

Question 4

what is negative output gap?

Answer 4

A negative output gap occurs when actual output is less than potential output. This occurs when the economy is growing below the trend, and there is likely to be spare capacity in the economy. A negative output gap is characterised by low inflation rates and unemployment.

Question 5

what does an output gap mean?

Answer 5

When the economy is running an output gap, either positive or negative, it is thought to be running at an inefficient rate as the economy is either overworking or underutilising its resources.

Question 6

what are the causes of potential growth?

Answer 6

Potential growth can only occur when the AS curve shifts to the right (or the PPF curve shifts outwards), increasing the productive capacity of the economy.

Question 7

what factors can influence the AS curve?

Answer 7

See the AS notes

Question 8

what is a constraint of growth?

Answer 8

Government Instability -
In areas where the government are incompetent, corrupt or lack political backing, economic growth is limited. This is because the economy finds it hard to attract investment from abroad, whilst domestic firms are likely to invest abroad instead of within the economy. Also, the currency might be unstable. In some countries, war or political tension add to problems because they damage resources and also use up government money.

Question 9

what is another constraint of growth?

Answer 9

Shortage of Skilled Labour -
Skilled workers are required for the economy to produce high-­‐quality goods that can be sold on the world market. A lack of skilled workers or a lack of workers in general limits the productive capacity of the economy, and hence constraints economic growth.

Question 10

what is a constraint of growth?

Answer 10

Many small undeveloped countries do not have efficient capital markets. For example, financial capital is not easily available because credit markets are ‘missing’. This is because there is high corruption in many developing countries (especially in Africa), so borrowers do not trust lenders, and therefore charge very high interest rates. This is an example of

asymmetric information-­‐ the lender does not know how reliable the borrower is (i.e. there is no credit rating system like there is in developed countries).

Question 11

what are the benefits of growth to workers?

Answer 11

Increase in real income (🡪 increase in wealth)
Increase in general standard of living
Decreases absolute poverty (‘trickle down’ effect)
Lower unemployment / greater employment opportunities
Attracts foreign investment, which increases employment opportunities further
Increase in goods available for consumption
Increased government funds (via increased tax revenues), so greater investment in public goods (e.g. healthcare, education)

Question 12

what is an evaluation point of benefits of growth to workers?

Answer 12

However, an increase in income only results in improved living standards if costs of living do not increase at the same rate.

Arguably, the increase in average income might be just a large increase for wealthy people, whilst poorer people are ‘left behind’. Therefore, living standards do not improve for everyone.

Question 13

what are the benefits of growth for firms?

Answer 13

Increased consumer confidence 🡪 increased profits
Increased business confidence = more investment = improved future growth prospects
Higher profits which may be used to improve quality of products or produce new products.

Question 14

what are the benefits of growth for the government?

Answer 14

Increase in income and spending = increased tax revenue = healthier fiscal position , better public services, redistribution of income
Potential economics growth increases LRAS, which could help lower inflation.

Question 15

costs of economic growth? (environment)

Answer 15

Economic growth leads to a depletion of natural resources and negative externalities such as pollution.

However, economic growth can lead to greater investment in cleaner technologies, such as solar power. Also, growth indicates better efficiency in the economy.

Question 16

costs of economic growth? (BOP)

Answer 16

With higher incomes, consumers purchase more imports, whilst there is less incentive for firms to export, so a trade deficit will develop.

However, if the growth is export-­‐led growth, then the current account will improve.

Question 17

costs of economic growth (income dist.)

Answer 17

Poorer, unskilled workers are less likely to benefit from economic growth. It is likely that the increased incomes go to the wealthier people in society, whilst unskilled workers are left behind.

Economics growth can also lead to transitional change in the economy, which can lead to structural unemployment. Unskilled workers are more likely to be unemployed because they lack adequate skills to adapt to different jobs.

Question 18

income dist.

Answer 18

Therefore, growth can lead to increased income inequality.

However, absolute poverty will decrease due to the ‘trickle down’ (wealthier people are earning more, so spend more, leading to more money passing to poor people, e.g. through government benefits).

Question 19

costs of economic growth (spare capacity)

Answer 19

Economic growth will shift the economy closer to full capacity, and hence factors of production such as skilled labour and raw materials rise in price.

Question 20

costs of economic growth (social stress)

Answer 20

Higher incomes are likely to mean that people are working harder. Workers might have to travel abroad as firms grow. This can arguably put stress on workers in the economy.

However, the higher incomes mean people can afford to work fewer hours, go on more holidays, pay for their children’s education or retire early.

Question 21

opportunity costs of growth

Answer 21

Opportunity costs of growth include low inflation. Growth has inflationary pressures, so the opportunity cost is the lower inflation rates that could have been achieved.

Another opportunity cost is environmental welfare, as discussed above.

Question 22

Unsustainable Growth

Answer 22

If growth is too fast it is likely to be unsustainable. Unsustainable growth can mean that high inflation can be followed by a recession due to the boom and bust cycle.

Depletion of the environment will also make growth sustainable, because the over-­‐use of scarce resources and land will mean that these resources cannot be used in the future-­‐ the growth will not be sustained.

Question 23

Investment

Answer 23

Firms might not invest the money they receive, but instead distribute profits amongst shareholders.

Question 24

Evaluation points for economic growth?

Answer 24

When evaluating effects of growth, be sure to consider:

Both costs and benefits
Difficulties of measurement-­‐ is economic growth measured accurately?
Short Run and Long Run-­‐ does the economy need some time to settle down before we see the true effect? For example, incomes might seem undistributed at first, but as effects such as the ‘trickle down’ effect begin to take place, the inequality will decrease.