Economic Growth and GDP

Question 1

Why does the government take the standard definition of output based on a United Nations measure?

Answer 1

It allows output to be compared between countries and over time.

Question 2

What three calculations does the government use to measure the value of actual output?

Answer 2

The value of total expenditure, total income or total output.

Question 3

What does the expenditure method measure?

Answer 3

All of the expenditure within the economy in a given period.

Question 4

What are the three domestic groups that buy goods and services?

Answer 4

Consumers, firms and the government.

Question 5

What is total expenditure?

Answer 5

Total domestic expenditure added to the value of our exports.

Question 6

What does the income method do?

Answer 6

It adds together all of the incomes earned within the economy over a given period of time (before taxes have been deducted).

Question 7

What does the output method measure?

Answer 7

The value of goods and services produced by all industries over a given time period.

Question 8

What is the problem with GDP measuring market prices such as indirect taxes?

Answer 8

They are not a part of the output of the economy so this measure inflates the actual value of national income.

Question 9

What is a major problem with GDP?

Answer 9

It doesn’t include the hidden economy e.g tax evasion or the illegalities of certain economic activity.

Question 10

How is economic growth measured?

Answer 10

Using the rate of change of output or GDP.

Question 11

When does a recession exist?

Answer 11

When real GDP falls (growth is negative) for two consecutive quarters.

Question 12

What are the benefits of economic growth in terms of incomes and what does this lead to?

Answer 12

A rise in income and this leads to an rise in living standards.

Question 13

Why might economic growth damage the environment?

Answer 13

More growth means that there is more output which means that there are more factory emissions, more output may require more land to be built on which leads to a loss of carbon sinks, incomes are increased which means there are more cars and more foreign holidays which leads to a greater use of fuel and growth leads to more consumption which leads to more waste.

Question 14

What are the costs of economic growth?

Answer 14

Increased inequality, greater current account deficit as higher incomes lead to more imports and it leads to demand-pull inflation which means there is a lower purchasing power.

Question 15

What are the benefits of economic growth?

Answer 15

Higher health, higher tax revenues which could reduce the budget deficit, lower spending on welfare, higher GDP means that there is more investment as there is a higher level of business confidence and lower poverty.

Question 16

What is a cost of economic growth in terms of non-renewable resources?

Answer 16

In order to achieve economic growth, more of these resources will have to be used which are limited in supply, this means that economic growth is unsustainable and it will prevent economic growth in the future.

Question 17

Why is it unlikely that economic growth will be prevented in the future?

Answer 17

The market mechanism ensures that the growing scarcity of a resource results in a price rise.

Question 18

Why is it unlikely that economic growth will be prevented in the future?

Answer 18

The market mechanism ensures that the growing scarcity of a resource results in a price rise.

Question 19

What is the effect of a price rise in non-renewable resources?

Answer 19

Demand and consumption fall, as there is now a financial incentive to conserve these resources, it becomes profitable for firms to explore new supplies for these resources and consumers will switch to substitute products while producers are encouraged to find new replacement products.

Question 20

What is sustainable economic growth?

Answer 20

A rise in the economy’s productive potential today which does not lead to a fall in the economy’s productive potential for future generations.

Question 21

What is the effect of economic growth increasing the levels of pollution in the atmosphere on workers?

Answer 21

It may lead to workers having illnesses which in the long-run would have negative consequences on the productivity of the workforce as life expectancies may fall and more people may end up in hospital.

Question 22

What has happened in order to reduce the impact of economic growth on the environment?

Answer 22

High-income governments often use their increased tax revenues from economic growth to clean up the environment and there has been some international effort to safeguard the environment.

Question 23

How does economic growth lead to a rise in inequality?

Answer 23

Those who own the means to production will try to keep more of the higher income to themselves in the form of higher profits and as land is a scarce resource, rents also rise in a economic boom which benefits landowners.

Question 24

What types of unemployment may economic growth lead to and why?

Answer 24

Structural unemployment as those with non-transferable skills may find that their industries have moved out of the UK leaving them without a source of income and technological unemployment as production may become more automated.

Question 25

What types of unemployment may economic growth lead to and why?

Answer 25

Structural unemployment as those with non-transferable skills may find that their industries have moved out of the UK leaving them without a source of income and technological unemployment as production may become more automated.

Question 26

How does economic growth cause the current account to worsen?

Answer 26

If consumption increases then the UK will suck in more imports and there is less incentive for firms to export their goods as they can sell more easily in the domestic market.

Question 27

How can economic growth cause the current account deficit to improve?

Answer 27

If economic growth is export-led and if economic growth is driven by a rise in the productive capacity as more services and goods can be made for export and there is a downward pressure on the price level so exports remain price-competitive in foreign markets.

Question 28

What is the problem with actual economic growth happening too fast and being mainly driven by shifts in the AS curve?

Answer 28

The economy will soon get near its full employment level of output and the closer we get to this point, the more demand-driven growth will be inflationary.

Question 29

What needs to happen for economic growth to be sustainable and why?

Answer 29

AS and AD need to shift right together which ensures that real output rises but with controlled increases in the price level.

Question 30

What happens to GDP if AS shifts with a large negative output gap?

Answer 30

There will be no increase in GDP.

Question 31

What happens to GDP if AD shifts with no output gap?

Answer 31

There will be no increase in GDP.

Question 32

What is actual growth?

Answer 32

An increase in real GDP - caused by a shift in AD to the right.

Question 33

What is potential growth?

Answer 33

An increase in the productive capacity of the economy which is caused by a shift of AS to the right.

Question 34

What is potential growth?

Answer 34

An increase in the productive capacity of the economy which is caused by a shift of AS to the right.

Question 35

How can potential growth be illustrated?

Answer 35

An outward shift of the PPF (capital goods and consumer goods should be on the axis), a rightwards shift in the AS curve and a rise in the long-term trend of real GDP.

Question 36

What are on the axis of the graph that represents the business cycle?

Answer 36

GDP is on the y axis and time is on the x axis.

Question 37

What does the actual GDP curve look like on the business cycle graph?

Answer 37

It oscillates.

Question 38

What does the long-term trend look like on the business cycle graph?

Answer 38

It is a constant line with a straight gradient.

Question 39

What happens during a boom in terms of inflation and unemployment?

Answer 39

Unemployment is low while inflation is high.

Question 40

What happens during a slump in terms of inflation and unemployment?

Answer 40

Unemployment is high while inflation is low.

Question 41

What is an economic slowdown?

Answer 41

A fall in the growth rate of GDP so the level of real GDP continues to rise but at a slower rate.

Question 42

What is an output gap?

Answer 42

It is the difference between actual GDP and trend/potential GDP.

Question 43

What is a positive output gap?

Answer 43

When actual GDP is larger than potential GDP.

Question 44

What are the effects of a smaller output gap on inflationary pressures?

Answer 44

There are higher inflationary pressures.