Economic Growth 2.5

Question 1

What is needed for economic growth to occur?

Answer 1

For economic growth to occur, there needs to be an increase in the quality or quantity of one of the four factors of production: land, labour, capital or enterprise.

Question 2

Using an example, describe how land is a more valuable FOP for developing countries compared to developing countries?

Answer 2

Developing countries tend to grow the most from exploiting new resources, whilst they do that have a significant effect in developed countries. Saudi Arabia has experienced large growth rates almost purely because of their discovery of oil and without this it is likely they would still be developing.

Question 3

How is land an FOP?

Answer 3

The discovery of new resources, e.g. oil will increase economic growth.

Question 4

How is labour a FOP?

Answer 4

a increase quality or quantity of labour will improve economic growth.

Question 5

How may the size of the workforce increase?

Answer 5

-Positive net migration can increase the size of the workforce IF it provides potential workers with the skills, knowledge and desire to work within the country.

-Less young or elderly dependents, the more people who are economically active the more growth there will be.

-The government can raise the retirement age increases the population of the working age.

-The government can provide free childcare to encourages mother to go back to work, which will increase participation rates.

Question 6

A large workforce means that…

Answer 6

more goods and services can be produced.

Question 7

How does improved education increase the quality of labour?

Answer 7

Improved education will improve labour quality as it will mean that workers have all the skills they need and are more efficient, so output per worker increase. In addition, more skilled workers (due to improved education) will have a greater occupational mobility and so this will increase the output of the economy as there are less unused resources. Furthermore, more skilled workers will be able to contribute to change i.e. new technology, business ideas, innovation etc. and this will help improve economic growth.

Question 8

Explain how more capital investment can increase economic growth?

Answer 8

If a country receives sustained capital investment, they will be able to access or develop new technology which will enable a country to improve productivity. It will also mean that more machines can be bought and used, even if these are not a technological advancement, so more goods can produced.

Question 9

Why does not all investment lead to increased GDP?

Answer 9

Not all investment will lead to increased GDP because some investment is unsuccessful. Also, it is argued that investment may not be able to increase GDP because of its nature (e.g. building houses).

Question 10

How may the government encourage the development of business (enterprise)?

Answer 10

The government can offer tax benefits and grants, this will encourage the development of businesses as costs of production are lowered. This will lead to more jobs being created so this means that more good and services are produced, which will increase economic growth.

Question 11

What happens when there is too much wealth distribution (i.e. too high taxes and benefits)?

(Enterprise)

Answer 11

-There will be little incentive for the wealthier people to increase their productivity as a lot of income is lost through taxes.

-If benefits are too high, poorer people will know that there is no need to work as the benefits they receive are likely to be similar to that of a minimum wage job.

Therefore, a lack of incentives in an economy means that businesses won’t invest and so there will be little to no economy growth.

Question 12

What are the economic benefits of technological advancements/improvements?

Answer 12

-Improved technologies mean that the average cost of production is lower, whether this is because it is quicker to produce or less labour is required.

-Technological advancements will create new products for the market and this helps to increase consumption and also keeps the MPC high as there are new things to buy. Without increased consumption, there will be little economic growth.

Question 13

Why is efficiency important in bringing about economic growth?

Answer 13

Efficiency is important about bringing economic growth as it means less resources are needed to produce each good, so more goods are produced.

Question 14

What is one the government can ensure efficiency?

Answer 14

One way the government can ensure efficiency is to keep up competition (e.g. through subsidies, tax cuts, price maximums) as it will mean that producers are forced to lower prices or increase quality. In order for this to take place, efficiency must increase.

Question 15

What is actual growth?

Answer 15

The actual growth is the percentage change in GDP. It is when the economy has actually produced goods and services.

Question 16

What is potential growth?

Answer 16

Potential growth is the change in productive potential of an economy over time, so the LRAS or PPF curve shifts.

Question 17

What does the PPF show?

Answer 17

The PPF shows the potential output of the economy.

Question 18

What is export led growth?

Answer 18

A rise in AD through increased prices.

Question 19

How does export-led growth leads to economic growth?

Answer 19

Increase exports initially increase AD rather than LRAS. However, sustained high exports will encourage firms to invest an increase demand for labour, which will lead to economic growth.

Question 20

What is an output gap?

Answer 20

An output gap is the difference between the actual level of GDP and the estimated long-term value of GDP.

Question 21

What is a positive output gap?
What is a negative output gap?

Answer 21

A positive output is when GDP is higher than the estimated long-term value for GDP whilst a negative output gap is when GDP is lower than the estimated long-term value for GDP.

Question 22

What does it mean for an economy if there is a negative output gap?

Answer 22

With a negative output gap, there is spare capacity in the economy with factories, offices and workers not being utilised to produce goods and services.

Question 23

Why is the output gap very difficult to measure?

What does this cause some economists to believe?

Answer 23

The output gap is very difficult to measure, firstly because the exact position of the LRAS is unknown and also because the initial estimates of real GDP are often inaccurate.

This means that for some economists, that output gaps are not a valid concept to use from the purpose of economic policy.

Question 24

What is the trade cycle?

Answer 24

The trade cycle is the periodic but irregular up and down movements of economic activity, measured by fluctuations in real GDP and other macroeconomic variables.

The trade cycle has four main phases: boom, downturn, recessions and recovery.

Question 25

What are the characteristics of a boom?

Answer 25

-When an economy is at its peak (the boom), the national income is high and the economy is likely to working above the PPF where there is a positive output gap.

-Consumption and investment tend to be high as tax revenues, and wages will be increasing.

-Usually, the country will increase imports to meet the demand of high-income consumers that cannot be met by the goods produced within a country.

-There will also be inflationary pressure.

Question 26

What are the characteristics of a recession?

Answer 26

-In the UK, the government defines recession as where real GDP falls in at least to successive quarters.

-When the economy is at the bottom of the trade cycle it is in a recession. There tends to be high unemployment causing low consumption, investment and imports.

-Inflationary pressure will be low and there may even be deflation.

Question 27

What is Hysteresis?

Answer 27

The idea that economies do not bounce back to their previous trend level of growth (after a recession).

Question 28

Explain the impact of economic growth on housing and shares?

(Impact of economic growth on consumer)/

Answer 28

-There will be an increase in demand for housing as national income will be higher so more people are able to afford to buy properties, which will increase house prices.
In parallel, shares are likely to increase in value as businesses are making greater profits and future prospects are good. The rising prices of shares and housing will increase wealth and lead to the positive wealth effect

Question 29

How can economic growth lead to lower prices or higher quality goods?

(Impact of economic growth on consumers)

Answer 29

-There is improved productive efficiency due to better technology. This could lead to lower prices or higher quality of goods.

Question 30

Explain the effect economic growth on investment and business confidence?

(Impact of economy growth on firms)

Answer 30

-Business confidence will improve as there is a greater potential increase in demand for business’ products. This confidence will also lead to increase investment as businesses know that it is economically viable to invest.

-As a result, increased investment from both businesses and government will lead to an improvement and an advancment in technology. This is because there will be more investment into research and development so more firms will have access to better technology. This is likely to increase productive efficiency and lead to lower costs, thereby allowing firms to have greater profit margins.

Question 31

Explain the negative impact economic growth may have on firms?

Answer 31

Firms who sell inferior goods may lose out. This is because economic growth is associated with higher incomes, as incomes rise the demand for inferior goods will decrease.

Question 32

What is the positive impact of economic growth on the government?

Answer 32

-Tax revenues will rise as more goods and services are being bought, more income is being earnt and more profits are being made. This means the government has more money to invest into the NHS, education and benefits. This will lead to the quality of these systems being improved, thereby improving the standard of living.

-It can help reduce the budget deficit, perhaps bringing about a budget surplus which would allow money saved to alleviate the impacts of future recessions.

Question 33

How does economic growth lead lower poverty levels?

Answer 33

Economic growth will result in lower poverty levels. An increase in the production of goods and services will increase jobs as labour is derived demand from the demand of goods and services. This will lead to less unemployment and less people on benefits.

Question 34

How can economic growth have a negative impact on the environment and living standards?

Answer 34

There could be decrease in future living standards due to exploitation of the environment. This is because a rise in income means more people have more have access to electricity etc. and use it more freely.. This causes depletion of non-renewable resources and increased levels of pollution.