Macro Unit 2- Economic growth

Question 1

Define a recession?

Answer 1

A fall in real GDP for two consecutive quarters. There is a decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale- retail sales.

Question 2

What is a recession caused by?

Answer 2

Economic recessions are caused by a loss of business and consumer confidence.

Question 3

What does the government aim for?

Answer 3

Sustainable growth- growth of real gross domestic production- sustainable in keeping inflation low and reducing the environmental impact of growth.

Question 4

What is the impact on economic agents from a recession?

Consumers-
Firms-
Government-

Answer 4

Consumers- increase in unemployment (less disposable income) and less job security- AD shifts inwards (consumer spending)- price levels decreases

Firms- AD shifts inwards- business demand less labour- more pressure on government due to more people on benefits

Government- under pressure due to high unemployment- benefits

Question 5

What is actual growth?

2 graphs?

Answer 5

This refers to the amount that output (GDP/GNP) actually grew in any given year- short term growth.

Look at notes

Question 6

What is potential growth?

2 graphs?

Answer 6

Improvement in the productive potential of the economy in future- long term growth. The rate of growth in potential output of all resources were being used most efficiently.

Look at notes for graphs

Can increase when resources and existing factors of production (CELL) are used more efficiently to increase productive capacity of the economy e.g. quality/efficiency- better technology etc.

Question 7

When a boom happens what happens to the following?

1. When does it occur?
2. Consumer spending
3. Unemployment
4. Inflation
5. Government taxation

Answer 7

1. A boom occurs when real national output is rising at a faster rate than the trend of growth.
2. Increase- consumer spending
3. Decreases- AD increases so business can now afford to supply more labour
4. Increase- AD increases- more injections
5. Increases- consumers can afford more- pay more taxes

Question 8

When a recession happens what happens to the following?

1. When does it occur?
2. Consumer spending
3. Unemployment
4. Inflation
5. Government taxation

Answer 8

1. A fall in the level of real national output I.e. a period when growth is negative.
2. Decreases- less consumer confidence
3. Increases- businesses can no longer afford to pay employees due to AD shifting inwards
4. Decreases- AD shifts inwards- price level to decrease due to lower disposable incomes
5. Decreases- people have less disposable income- tax is lowered

Question 9

When a slump happens what happens to the following?

1. When does it occur?
2. Consumer spending
3. Unemployment
4. Inflation
5. Government taxation

Answer 9

1. Prolonged and deep recession leading to a significant fall in output and average living standards.
2. Decreases- less consumer confidence, less purchasing power, job security problems
3. Increases- AD shifts inwards leading to business supplying less labour
4. Decreases- AD shifts inwards causing price level to decrease due to lower disposable income
5. Decreases- people have less disposable income- tax is lowered

Question 10

When a recovery happens what happens to the following?

1. When does it occur?
2. Consumer spending
3. Unemployment
4. Inflation
5. Government taxation

Answer 10

1. This occurs when real GDP picks up from the trough reached at the low point of the recession
2. Increases- increase in consumer confidence- increase in employment- disposable income
3. Decreases- businesses can afford to pay for more employees due to AD shifting outwards.
4. Increases- AD increases- more injections into the circular flow
5. Increases- consumers pay higher taxes e.g. on income consumers can afford to buy more

Question 11

What is demand side growth?

Answer 11

Associated with increase in aggregate demand that stimulates firms to expand output and so use any spare capacity they have.

Question 12

Name some factors that could affect actual (short term) growth?

Answer 12

1. Changes in short run AS
2. Rise in government spending on goods and services
3. Lower interest rates reduce the cost of borrowing
4. Changes in AD (C + I + G + X - M)
5. Rising hour prices, which create a positive wealth effect and encourages homeowners to spend more
6. Increased exports
7. Reduction in import spending
8. Fall in value of sterling which makes exports cheaper and increases quantity of experts (WIDEC)
9. Increase in consumer confidence
10. Higher consumer spending
11. Lower income tax

Question 13

Name some factors that could affect potential (long term) growth?

Answer 13

1. increasing the number of workers available
2. Improving the productivity of workers
3. Cost of production
4. Use of better technology
5. Potential output/ trend growth
6. Technological progress
7. Productivity of labour
8. Improvements in the quantity and quality CELL
9. Better education and training
10. Full employment of resources
11. Investment in infrastructure, such as roads and telephones

Question 14

Define economic growth?

Answer 14

Economic growth is the increase in the inflation adjusted market value of the goods and services produced by an economy over time. Economic growth is a long-term expansion of the productive potential of the economy.

Question 15

Explain some of the best methods of improving economic growth in the U.K.?

Answer 15

1. Discovery of more natural resources
2. Increasing the number of workers available
3. Improving the productivity of workers
4. Investment and enterprise of businesses
5. Improving technology and updating of capital in the economy

Question 16

Discovery of more natural resources

1. Explanation of how it can affect the economy?
2. Impact on growth
3. Limitation/ to what extent/ it depends on

Answer 16

1. It can effect the economy by adding firms as they will be able to produce a higher quantity of goods and services at a cheaper price- AD will shift outwards
2. The discovery of more natural resources like oil or mineral deposits may boost economic growth- higher employment
3. Not infinite- the natural resources can run out
   Monopolies- counties who specialise in the food could increase prices- trade retaliation
   Resource curse- countries invest lots of money but the economy could go into a recession for example

Question 17

Increase the number of workers available

1. Explanation of how it can affect the economy?
2. Impact on growth
3. Limitation/ to what extent/ it depends on

Answer 17

1. This can affect the economy because it can change the demographic of the economy as unemployment would decrease, rising people’s disposable income- less pressure on government
2. Boots the economy as there are more injections into the circular flow due to more consumption- supply shift out
3. This depends on:
   - increasing the birth rate/decrease
   - Migration
   - Wages decrease
   - Time lag

Question 18

Improving the productivity of workers

1. Explanation of how it can affect the economy?
2. Impact on growth
3. Limitation/ to what extent/ it depends on

Answer 18

1. If higher motivation to work, then this will encourage workers to be more productive and therefore the supply of goods and services will increase. This may be a result of better education and training programmes aided by government subsidies
2. The economy grows as the supply of labour has increased. PPF- shift outwards
3. The demand of labour may decrease- employees are becoming more productive- firms no longer employ as much people

Question 19

Investment and enterprise of businesses

1. Explanation of how it can affect the economy?
2. Impact on growth
3. Limitation/ to what extent/ it depends on

Answer 19

1. Lower interest rates reducing the cost of borrowing-increase AD
   Subsidies and grants- giving people financial help to set up small business- employment will increase- more competition- lower prices
2. Economic growth- consumption increases and investment increases
3. Investment may not work
   If inflation rates get too low or too high this may lead to a recession

Question 20

Improving technology and updating of capital in the economy

1. Explanation of how it can affect the economy?
2. Impact on growth
3. Limitation/ to what extent/ it depends on

Answer 20

1. firms become more competitive
   Average costs of production will fall- higher profits and lower prices
   Stimulate innovation and intervention- creates new products for the market- encourages consumers to spend their higher incomes
2. Economy grows as lower prices from higher competition- more consumption
   Cost of production falls- higher profits (AS shifts out)
3. Some independent businesses can not survive due to chain brains lower prices

Question 21

What are some benefits of economic growth?

1. Firms
2. Households
3. Government

Answer 21

1. Higher output, investment, greater business confidence, higher profit margins, improved infrastructure
2. Improved public services, higher incomes, money can be spent on protecting the environment, spend more on the NHS and education
3. Lower unemployment, lower government borrowing, raise tax revenues

Question 22

What are the main benefits explained ?

For households ?

Answer 22

1. Higher incomes-This enables consumers to enjoy more foods and services and enjoy better standards of living- increase in injections- AD will shift outwards- price increase- more profit for firms
2. Improved public services- with increased tax revenues the government can spend more on the NHS and education etc- increase supply of labour- improved productivity due to better quality and quantity of goods (LRAS shift out graph?
3. Money can be spent on protecting the environment- With higher real GDP a society can devote more resources to promoting recycling and the use of renewable resources- improves the quality of living- health standards improve- more people available for work

Question 23

What are the main benefits explained ?

For the government?

Answer 23

1. Lower unemployment- with higher output firms tend to employ more workers creating more employment- the government spends less money on benefits- less withdraws- more people earning so AD shifts out. Money can be used elsewhere
2. Lower government borrowing- economic growth creates higher tax revenue and there is less need to spend money on benefits- less reliant on other countries- more sustainable- more tax coming in- reduce debt= under less strain

Question 24

Costs of economic growth?

Answer 24

1. Higher inflation and interest rates- if Ad increases faster than AS then economic growth will be unsustainable- AD increasing too high in a short period of time leads fo less consumer confidence and a reduction in consumption- increase in interest rates
2. Boom and bust economic cycle- economic growth is unsustainable then high inflationary growth may be followed by a recession- low prices and high employment shifts AD out- inflationary pressure causing a bust
3. Balance of payments deficit-increased economic growth tends to cause an increase in spending on imports therefore causing a deficit on the current account- withdraw from circular flow