economic growth chapter 18

Question 1

economic development

Answer 1

an increase in welfare and quality of life

Question 2

what does economic growth indicate

Answer 2

it is a key indicator of macroeconomic performance

Question 3

economic growth

Answer 3

an increase in an economy’s output.

Question 4

economic growth rate

Answer 4

it is the percentage change in real GDP from one time period to another

Question 5

how can people enjoy more goods and services

Answer 5

output has to increase by more than any growth in population. In such a case, GDP per head (per capita) would increase.

Question 6

how does economic growth impact poverty

Answer 6

it was assumed that poverty would be eradicated if countries managed to sustain economic growth. As a result, economic growth and economic development were seen as the same thing. The extent to which growth reduces poverty depends on the degree to which the poor participate in the growth process and share in its proceeds

Question 7

how economic growth impact development

Answer 7

It was assumed that if economies grew they would also experience development. The increased availability of goods and services in an economy would lead to a ‘trickle down’ effect that would have an impact upon all in terms of jobs and other economic benefits

Question 8

does economic growth result in a rise in living standards

Answer 8

economic growth does not result in a rise in the living standards and quality of life of everyone in an economy. It is also possible for a high proportion of people to achieve an improvement in their living standards and quality of life even if economic growth does not occur

Question 9

how is economic growth measured

Answer 9

measure in terms of changes in real GDP (the country’s output). Government statisticians first measure GDP in the prices operating at the time. They then take out the effects of changes in the price level to get real GDP.

Question 10

nominal (or money) GDP

Answer 10

total output measured in current prices in which output is produced. it has not been adjusted for changes in the price level

Question 11

problem with nominal GDP

Answer 11

Nominal GDP may give a misleading impression of how well a country is performing. This is because the value of nominal GDP may rise not because more goods and services are being produced but simply because prices have risen. so economists convert nominal GDP into real GDP.

Question 12

how is real GDP measured

Answer 12

economists measure GDP at constant prices. This ensures the effect of inflation that distorts nominal GDP is removed.

Question 13

formula to calculate real GDP

Answer 13

nominal GDP x price index in base year/price index in current year

Question 14

GDP deflator

Answer 14

the price index of all domestically produced goods and services. measures the prices of products produced, rather than consumed, in a country. So it includes the prices of capital goods as well as consumer products and includes the price of exports but excludes the price of imports.

Question 15

real GDP

Answer 15

total output measured in constant prices

Question 16

base year

Answer 16

the reference point in time. it is the starting year in an index and is a given a value of 100

Question 17

constant prices

Answer 17

prices in a base yea

Question 18

price index

Answer 18

a way of comparing changes in the price level over time. the value of the first year in the index is set at 100 and the value of each following year is a percentage of it

Question 19

what happens if there is spare capacity

Answer 19

output can increase as a result of an increase in aggregate demand. For instance, greater consumer confidence may lead to higher consumer expenditure and so an increase in aggregate demand. Making more use of existing resources can be shown on a production possibility curve diagram

Question 20

how does economic growth occur from higher aggregate demand

Answer 20

The increase in aggregate demand brings into use previously unemployed resources, and output (measured by real GDP) increases

Question 21

how to achieve economic growth that can be sustained over time

Answer 21

it is necessary for productive capacity and aggregate supply to increase. There are two broad causes of such an increase: more resources or better quality resources.

Question 22

how is an increase in productive capacity shown using PPC

Answer 22

the PPC shift to the right

Question 23

how is an increase in productive capacity shown using LRAS curve

Answer 23

it shifts to the right

Question 24

how does productive capacity increase

Answer 24

the ability of an economy to make both consumer goods and capital goods has increased.

Question 25

advantage of higher productive capacity

Answer 25

it is now possible to produce a higher maximum combination of the two types of goods

Question 26

why does not an economy produce as much as it is capable of making

Answer 26

it is wasting resources. there may be, for instance, unemployed workers and unused machines. it would be possible to produce more of one type of good without having to give up any of the other type of good

Question 27

recession

Answer 27

a decline in real GDP over at least two consecutive quarters (6 months)

Question 28

what makes economic growth negative

Answer 28

it is possible that it is due to a country’s real GDP

Question 29

why can there be a decline in a country’s output

Answer 29

may decline as a result of decrease in aggregate demand or a decrease in aggregate supply

Question 30

obstacle to increases in the quantity and quality of resources in some low-income

Answer 30

the opportunity cost of allocating resources away from their current use. Producing more capital goods may mean sacrificing consumer goods in the short run, which would lead to a decrease in living standards. Research and development that can result in advances in technology also use resources that have alternative uses.

Question 31

what happens when an economy is operating at full capacity

Answer 31

there will be an opportunity cost involved in achieving economic growth. To produce more capital goods, in order to increase the country’s productive capacity, some resources will have to be moved from producing consumer goods to producing capital goods.

Question 32

consequence of an economy operating at full capacity

Answer 32

The consequence is that the current consumption of goods and services will have to be reduced. However, this will only be a short-run cost since, in the long run, increased investment will increase the output of both capital goods and consumer goods and services. some other potential costs may exist in both the short run and long run

Question 33

what is a growing economy like

Answer 33

it is like a dynamic (changing) economy that undergoes structural changes, with some industries expanding and some declining.

Question 34

how does a growing economy affect workers

Answer 34

Workers may have to learn new skills and may have to change their occupation and/ or where they live. Some workers may find such changes difficult to cope with. may also be accompanied by increased working hours and pressure to come up with new ideas and improvements.

Question 35

effect of economic growth on enviroment

Answer 35

may be accompanied by the depletion of natural resources and damage

Question 36

effect of economic growth on environment

Answer 36

may be accompanied by the depletion of natural resources and damage

Question 37

main benefit of economic growth

Answer 37

the increase in goods and services that become available for the country’s citizens to enjoy. This can raise people’s living standards. Higher incomes and more spending increase tax revenue and some of this extra revenue may be given to the poor. Without any increase in output and income, a government may have to raise the tax rates on higher income groups, and so reduce their living standards, in order to help the poor.

Question 38

how does economic growth increase employment

Answer 38

may also be accompanied by a rise in employment. A rise in real GDP caused by higher aggregate demand is likely to create extra jobs. An increase in aggregate supply may make a country’s products more internationally competitive and so may generate more jobs.

Question 39

how does a stable rate of economic growth help

Answer 39

A stable rate of economic growth tends to increase business and consumer confidence, which encourages investment. Economic growth in itself can help encourage further economic growth.

Question 40

what else can a economic growth increase

Answer 40

economic growth may increase a country’s international prestige and power.