Economic growth

Question 1

What factors cause economic growth?

Answer 1

an increase in one of the components of AD

C+I+G+(X-M)

Question 2

What is export-led economic growth?

Answer 2

Economic growth as a result of rises in net exports.

Question 3

What are the constraints on growth?

Answer 3

• absence of efficient capital markets (asymmetric info)
• Government instability
• labour market problems
• external constraints

Question 4

What is an output gap?

Answer 4

the difference between actual and potential GDP

Question 5

What is a positive output gap?

Answer 5

The economy is growing faster than the trend, resulting in pressures growing in the economy such as tight labour markets, wage pressures and shortages of raw materials.

Question 6

What is a negative output gap?

Answer 6

When the economy grows below trend, likely resulting in spare capacity in the economy. This is generally where there is scope to cut interest rates, which is likely to cause inflationary pressures.

Question 7

What are the benefits of economic growth to;

• consumers
• firms
• governments
• standards of living

Answer 7

• consumers have increased incomes and wealth. They can afford to save money for future consumption. They feel confident about their jobs and are willing to spend on durables.
• firms have more profit. they sell more due to increased MPC. They are more likely to invest and employ.
• governments will gain more tax revenue. theres less unemployment
• standards of living are likely to improve as poverty rates fall due to wages rising and employment. Governments may spend more into increasing living standards with the tax revenue they have generated.

Question 8

What are the costs of economic growth?

Answer 8

• income inequality
• environmental problems
• balance of payment problems on the current account.
• problems of rapid growth
• stress