Theme 2 - economic growth

Question 1

recession in economic cycle

Answer 1

GDP for is for at least two consecutive quarters

Question 2

slowdown in economic cycle

Answer 2

the level of GDP may be rising, but rising below the trend, or GDP might be falling

Question 3

export-led economy

Answer 3

the economic growth is caused by rises in net exports. it has the benign effect of stimulating the domestic economy while improving the trade balance

Question 4

constraints on growth

Answer 4

• absence of efficient capital markets - issues with asymmetric info in credit markets-lender know less than borrower, charges higher rates to cover enormous risk-only corrupt borrowers afford it-market becomes a missing market (no equilibrium price of credit)
• government instability -check revision guide
• labour market problems - shortage of skilled workers
• external constraint - anything holding back on trade constrains growth; uneven world access to tariffs and subsidies prevent growth. also, global recession or fears of terrorism slow trade.

Question 5

output gap

Answer 5

difference between potential and actual GDP or growth in GDP

Question 6

long-term trend in growth rates

Answer 6

The long-term trend in growth rates is the long run expansion of the productive potential of an economy. It is caused by increases in AS.

Question 7

negative output gap

Answer 7

A negative output gap occurs when the actual level of output is less than the potential level of output.
This puts downward pressure on inflation. It usually means there is the unemployment of resources in an economy, so labour and capital are not used to their full productive potential. This means there is a lot of spare capacity in the economy.

Question 8

positive output gap

Answer 8

A positive output gap occurs when the actual level of output is greater than the potential level of output.
It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation.
Countries, such as China and India, which have high rates of inflation due to fast and increasing demand, are associated with positive output gaps.

Question 9

Difficulties with measuring the output gap

Answer 9

• It is difficult to estimate the trend in a series of data - as not all unemployed resources would have the same impact if eventually employed.
• The structure of the economy often changes, which means estimates may not always be accurate. For example, immediately after a recession, the level of spare capacity might fall below the level anticipated, since some workers might become economically inactive, firms might close and some banks might be unwilling to lend.
• Changes in the exchange rate might offset some inflationary effects of a positive output gap.
• Data is not always reliable, especially from emerging markets, and extrapolating data from past trends might lead to uncertainties.

Question 10

Trade cycle (economic/business cycle)

Answer 10

A phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern.
-Booms tend to be followed by economic slowdown/slumps, followed by a recession, before economy moves into a recovery stage and then back into a boom.

Question 11

boom

Answer 11

The boom is when economic growth is fast, and it could be inflationary or unsustainable.

Question 12

effect of recession

Answer 12

During recessions, the real output in the economy falls, and there is negative economic growth.
During recessions, governments might increase spending to try and stimulate the economy. This could involve spending on welfare payments to help people who have lost their jobs, or cutting taxes.

Question 13

governments during economic growth

Answer 13

During periods of economic growth, governments may receive more tax revenue since consumers will be spending more and earning more. They may decide to spend less, since the economy does not need stimulating, and fewer people will be claiming benefits.

Question 14

Characteristics of a boom:

Answer 14

*High rates of economic growth
*Near full capacity or positive output gaps (Near) full employment
Demand-pull inflation
Consumers and firms have a lot of confidence, which leads to high rates of investment
*Government budgets improve, due to higher tax revenues and less spending on welfare payments

Question 15

Characteristics of a recession:

Answer 15

• In the UK, a recession is defined as negative economic growth over two consecutive quarters. The characteristics are:
• Negative economic growth
• Lots of spare capacity and negative output gaps
• Demand-deficient unemployment
• Low inflation rates
• Government budgets worsen due to more spending on welfare payments and lower tax revenues
• Less confidence amongst consumers and firms, which leads to less spending and investment

Question 16

economic growth and the benefits on Consumers

Answer 16

• The average consumer income increases as more people are in employment and wages increase.
• Consumers feel more confident in the economy, which increases consumption and leads to higher living standards.
• wealth rises
• people can afford to save none for future consumption

Question 17

economic growth and the benefits on Firms

Answer 17

*Firms might make more profits, which might in turn increase investment. This is also driven by higher levels of business confidence.
*Higher levels of investment could develop
new technologies to improve productivity and lower average costs in the long run.
*As firms grow, they can take advantages of the benefits of economies of scale.
*If there is more economic growth in export markets, firms might face more competition, which will make them more productive and efficient, but it will also give them more sales opportunities.

Question 18

economic growth and the benefits on Governments

Answer 18

*The government budget might improve, since fewer people require welfare payments and more people will be paying tax.

Question 19

economic growth and the benefits on Current and future living standards

Answer 19

*As consumer incomes increase, some people might show more concern about the environment.
*poverty rates likely to fall.
*Also, economic growth could lead to the development of technology to produce goods and services more greenly.
*Higher average wages mean consumers can enjoy more goods and services of a higher quality.
*Public services improve, since governments have higher tax revenues, so they can afford to spend on improving services. This could increase life expectancy and education levels.
(STANDARD OF LIVING INCREASES SO LONG AS COST OF LIVING DOES NOT INCREASE AT THE SAME TIME)

Question 20

economic growth and the cost on Consumers

Answer 20

• high inflation = inequality could increase.
• There is likely to be higher demand-pull inflation, due to higher levels of consumer spending.
• Consumers could face more shoe leather costs, which means they have to spend more time and effort finding the best deal while prices are rising.
• The benefits of more consumption might not last after the first few units, due to the law of diminishing returns.

Question 21

economic growth and the cost on Firms

Answer 21

*Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation.

Question 22

economic growth and the cost on Governments

Answer 22

*Governments might increase their spending on healthcare if the consumption of demerit goods increases.

Question 23

economic growth and the cost on Current and future living standards

Answer 23

*High levels of growth could lead to damage to the environment in the long run, due to increase negative externalities from the consumption and production of some goods and services.

Question 24

Effect of economic growth on balance of payments on the current account

Answer 24

*higher incomes = domestic consumers suck in more imports and there is less incentive for firms to export. however, if growth were export-led, the current account would improve.

Question 25

bottlenecks

Answer 25

Where restrictions in the capacity to increase production occur, meaning that prices will start to rise as output rises.

Question 26

economic growth and the cost on bottlenecks in the economy

Answer 26

• little spare capacity in the economy; skilled labour and fuel rise in price (factors of production)
• Monopoly power might develop

Question 27

economic growth and the cost on

Answer 27

*can cause short term spikes in prices.
however, this may need time to settle down in terms of income distribution and a strong government to ensure growth in planned effectively.