Economic growth L1-L2

Question 1

What is economic growth?

Answer 1

Economic growth is the change in output of an economy over a period of time.

Question 2

What is the UK’s economic growth?

Answer 2

2.5%

Question 3

what is used to measure economic growth?

Answer 3

GDP

Question 4

What is the productive potential of an economy?

Answer 4

when the economy is at full employment and output utilising its resources

Question 5

Draw productive potential of an economy being higher than current GDP on a D/S diagram.

Question 6

what are reasons why productive potential of an economy would be higher than GDP?

Answer 6

if the factors of production aren’t being fully utilised

Question 7

What are the 2 things that economic growth can mean?

Answer 7

actual growth or potential growth

Question 8

Why is economic growth measured in GDP ?

Answer 8

because it is not possible to measure the productive potential of an economy so changes in actual growth (GDP) are used to represent economic growth

Question 9

Why isn’t it possible to measure productive potential of an economy?

Answer 9

because you can’t put a monetary value on the value of variables such as machinery, workers, tech etc

Question 10

What is a problem of using GDP to measure economic growth?

Answer 10

the problem of using GDP to measure economic growth is that in the short term GDP fluctuates around the long term trend of growth

Question 11

what is the term used to describe GDP fluctuating around the long term trend rate of the economy?

Answer 11

The economic cycle/ trade cycle

Question 12

What are the 2 types of trade cycle?

Answer 12

Where GDP fluctuates around the long term GDP but real GDP continues to rise and where the economy GDP actually falls into a recession

Question 13

what is the peak in the economic cycle

Answer 13

where the economy is in a boom and national income is high
unemployment is low
investment/ tax revenue is high
wages/profit rising
inflation increases
but the economy is likely operating beyond full employment so overheating may be there.

Question 14

What does keynesians say about employment when the economy is operating at its peak?

Answer 14

When the economy is at its peak classical economists suggest there may be overheating as the economy is working beyond full employment. However, Keynesians suggest that the economy could be at less than full employment if there are bottlenecks.

Question 15

what happens to the current account when the economy is at its peak?

Answer 15

when the economy is at its peak imports will be greater than exports meaning there will be deterioration of the current account as expenditure is higher.

Question 16

what happens in the downturn of the economy?

Answer 16

when an economy is in a downturn:

output/ income falls meaning less consumption and investment
tax revenues fall and government expenditure rises due to benefits
unemployment rises and inflation decrease

Question 17

what happens in the recession phase of an economy?

Answer 17

In the recession phase of the economy:

economic activity is low

high unemployment

low investment,consumption and imports

deflation may occur due to low inflationary pressures

Question 18

What happens in the recovery phase of the economy?

Answer 18

national income increase
unemployment falls
consumption,investment and imports rise

Question 19

What is the definition of recession?

Answer 19

the definition of recession is where real GDP of an economy falls in at least 2 consecutive quarters.

Question 20

what are the causes of the economic/ trade cycle?

Answer 20

Demand side shocks
Supply side shocks

Question 21

List examples of demand side shocks?

Answer 21

Housing bubble bursts = high price leading to less demand and less output of the economy

stock market crashes = reduces wealth with leads to more saving and less spending

interest rates rise = people want to save due to extra interest

raised taxes = less disposable income

less government spending = less demand

world recessions = less AD for UK goods

Currency values = if one currency becomes more powerful than another less people may be able to afford imports from other countries which reduces AD for that countries goods

Question 22

What are some examples of supply side shocks?

Answer 22

Rise in commodity prices = less supply for imports leading to less output

rise in wage prices = increases price level of making a good = higher prices for consumer leading to less AD

Question 23

what is a commodity ?

Answer 23

Economic good or resource (can be used to make other goods)

Question 24

What is the output gap?

Answer 24

the output gap is the difference between the actual level of output in an economy and the productive potential of an economy

Question 25

What is a positive/ negative output gap?

Answer 25

a positive output gap is where output is greater than the productive potential (Long term growth trend) y1> yfe a negative output gap is where real output is slower than productive potential of an economy but not necessarily negative y1

Question 26

Draw a negative and positive output gap on an D/S diagram

Question 27

Draw the economic/ trade cycle

Question 28

What are automatic stabilisers ?

Answer 28

automatic stabilisers are expenditures that automatically rise during a recession and fall during a boom of an economy

Question 29

what are some examples of automatic stabilisers?

Answer 29

Gov expenditure on benefits - in a boom gov spending decreases as there is less need to create a multiplier effect

Question 30

what is the multiplier effect

Answer 30

an increase in investment or other injection in an economy will lead to an even greater increase in income

Question 31

what is hysteresis ?

Answer 31

hysteresis is where a variable doesn't return to its original value when changed

Question 32

What is hysteresis in terms of the trade cycle?

Answer 32

in terms of the trade cycle hysteresis refers to when the economy fails to return to its former long term growth trend after a recession

Question 33

why does the overall growth trend rate/ productive potential drop due to hysteresis

Answer 33

due to permanent losses of physical and human capital the economy remains at a lower level of output albeit its still growing trend rate

Question 34

What are the main causes of economic growth?

Answer 34

FOP (land,labour,capital,technology,eficiency)

Question 35

what is land in economics?

Answer 35

refers to all the natural resources used in production

Question 36

what is primary product dependency ?

Answer 36

an economy that depends on and is built of the rich endowments of natural resources it has e.g. oil - saudi arabia

Question 37

what is labour in economics?

Answer 37

labour is the workforce making a product - growth is likely to occur if quantity or quality of workers increases

Question 38

how do increases/ decreases in quantity of labour force occut?

Answer 38

changes in demography of an economy(birth rates) changes in participation rates e.g. retirement age/ proportion allowed to work 17 + immigration

Question 39

how can an economy increase the labour force quality ?

Answer 39

education training to help with flexibility of job roles

Question 40

what is capital in economics?

Answer 40

refers to assets that are used to produce other goods and services such as human/ physical/ financial capital

Question 41

what is the capital stock of an economy?

Answer 41

the capital stock of an business/economy is the total value of assets that aid production that it owns e.g. factories and equipment etc

Question 42

what are the factors affecting long term economic growth?

Answer 42

technological progress - increases growth by cutting down avg unit costs and creates new products keeping market interested efficiency - rise in output, competition brings about efficiency - competition can be increased via competition AD - increase in exports = rise in output

Question 43

Why should 4 distinctions be made when measuring GDP?

Answer 43

To get a comprehensive view of a countries performance

Question 44

What are the 4 distinctions?

Answer 44

1) it should be measured by changes in real GDP and NOT nominal GDP 2) Real GDP is a proxy measure of the volume of goods and services produced 3)Total GDP = total GDP is total output of an economy and when comparing economic growth use GDP per capita due to wealth inequalities 4) Falling economic growth doesn't mean the real level of GDP is falling it may just not be rising as fast e.g. 10% to 8% There is a difference between level of GDP and rate of growth of GDP