Economic Growth + Economic Cycle

Question 1

Economic growth and the PPF

Answer 1

• Short run (actual) growth represents increases in real GDP
• Long run (potential) growth represents increases in an economy’s productive capacity. (Increase in quantity/ quality of factors of production) growth

Question 2

Economic growth PPF

Answer 2

SR economic growth - movement from a point inside the frontier to a point on the frontier

LR economic growth - Outward movement / shift of PPF

Question 3

Trend rate of growth

Answer 3

Long run economic growth occurs with an increase in long run aggregate supply.

• Business cycle theory = there is an upward trend in the productive capacity of the economy over time, known as the ‘trend’ rate of growth

Question 4

Trend rate of growth - diagram

Answer 4

This trend represents the productive capacity in an economy increasing over time - it therefore illustrates long run economic growth

Question 5

The economic cycle

Answer 5

In the short run, real GDP fluctuates around the trend rate of growth. There’s fluctuations are known as the economic cycle.

Question 6

Upswings and downswings in the economic cycle

Answer 6

Question 7

Characteristics of a boom

Answer 7

• Above average short term economic growth
• Low/ falling unemployment
• Lower government spending (spend less on unemployment benefits)
• Higher imports
• Rising/ high inflation

Question 8

Characteristics of a recession

Answer 8

• Negative growth (for at least two consecutive quarters)
• Rising/ high unemployment
• Deflation
• Lower imports
• Current account surplus

Question 9

Economic cycle - negative output gaps

Answer 9

Negative output gaps exist when actual output is lower than trend output

Question 10

Economic cycle - positive output gap

Answer 10

Positive output gaps exist when actual output is greater than trend output

Question 11

Causes of changes in the phases of the economic cycle (principle explanations)

Answer 11

• Fluctuations in aggregate demand (changes in consumption)
• Supply side factors (increasing the supply of goods leads to economic growth)

Question 12

Causes of changes in the phases of the economic cycle (other factors)

Answer 12

• The role of speculative bubbles
• The political business cycle theory
• Outside shocks hitting the economy
• Changes in inventories
• The Marxist explanation
• The multiplier/ accelerator interaction
• Climatic cycles

Question 13

Negative and positive output gaps

Answer 13

Question 14

Benefits of economic growth

Answer 14

• Higher employment -> increased consumption + better SOL
• Higher average incomes -> increased consumption
• Provides new and more environmentally friendly technologies
• Higher life expectancy and reduced disease
• Produces fiscal dividend
• Create a virtuous cycle of greater confidence, increased investment and even more growth
• More civilised communities (low unemployment + SOL + treat people fairly)

Question 15

Fiscal dividend

Answer 15

Fiscal dividend – higher economic growth will raise tax revenues and reduce government spending on unemployment & poverty related welfare benefits

Question 16

Costs of economic growth

Answer 16

• Uses finite resources
• Leads to pollution and other forms of environmental degradation
• Widens income inequalities
• Leads to population increases which the food supply may not be able to keep up with

Question 17

Benefits - Higher living standards

Answer 17

Higher living standards – i.e. Real GNI per capita – helps to lift people out of extreme poverty and improve development outcomes (e.g. rising HDI)

Question 18

Benefits - Employment effects

Answer 18

Employment effects – sustained growth stimulates jobs and contributes to lower unemployment rates which is turn helps to reduce income inequality.

Question 19

Benefits - accelerator effect

Answer 19

Accelerator effect - rising growth stimulates new investment e.g. in low-carbon technologies. Better growth may attract foreign direct investment projects

Question 20

Costs - inflation

Answer 20

Risks of higher inflation and higher interest rates

• Fast-growing demand can lead to demand-pull and cost-push inflation – this leads to a conflict between macro objectives

-The central bank may decide to raise interest rates to control inflation

Question 21

Costs - environmental effects

Answer 21

Environmental effects

• More negative externalities such as pollution & waste
• Risk of unsustainable extraction of finite resources – i.e. fast growing countries may cause a long-run depletion of natural resources

Question 22

Costs - Inequalities of wealth

Answer 22

Inequalities of income and wealth

• Rapid increases in real national income can lead to a higher level of inequality and social divisions
• Many of the gains from growth may go to only a few people

Question 23

Economic shocks

Answer 23

Economic shocks are sudden and unexpected events hitting the economy (often negative)

• They can disturb aggregate demand or aggregate supply
• Demand shocks often hit consumer and business confidence
• Supply shocks often hit the supply and prices of commodities (such as oil)

Question 24

Economic growth - example 9 marker

Answer 24