Y1 - Economic growth

Question 1

Define actual economic growth

Answer 1

An increase in real GDP

Question 2

Define potential economic growth

Answer 2

An increase in the productive capacity of the economy

Question 3

What are the boom/recession/slowdown criteria?

Answer 3

BOOM = real GDP increases fast
RECESSION = falls for at least two consecutive quarters
SLOWDOWN = may be rising but will be below the trend rate

Question 4

Define export led growth

Answer 4

Economic growth caused by rises in net exports

• Has benign (positive) effect of stimulating the domestic economy while improving trade balance
• E.g. China = v dependant = vulnerable when external shocks (2008)

Question 5

What are constraints on growth?

Answer 5

• Absence of efficient capital markets (LDCs) = asymmetric info (high interest rate)
• Government instability = cannot attract FDI and unstable currency (also fiscal deficit)
• Labour market problems = shortage of skilled labour, size of workforce (out migration)
• External constraints = tariffs = less trade

Question 6

Define output gap

Answer 6

The difference between actual and potential GDP or growth in GDP

• Yfe - Y1
• can be positive or negative

Question 7

Define positive output gap

Answer 7

When economy is growing faster than trend

- economy overheats and interest rates rise

Question 8

Define negative output gap

Answer 8

When the economy is growing below trend (spare capacity)

- Interest rates may fall = less inflation pressure

Question 9

What are the benefits of economic growth on consumers?

Answer 9

• Incomes and wealth rise = more saving
• also more job security = more consumption
• more job opportunities = potential wage rise

Question 10

What are the benefits of economic growth on firms?

Answer 10

• More profit from more spending
• Revenue and profit rises = employ more workers and increase investment = increase future growth prospects and LR increase in productive efficiency

Question 11

What are the benefits of economic growth on governments?

Answer 11

More tax revenue and less JSA = health fiscal position

Question 12

What are the benefits of economic growth on SoL?

Answer 12

• Total incomes rise = SoL rise = employment rise = poverty down
• Governments can also afford to invest in public facilities

Question 13

What are all the costs of economic growth?

Answer 13

• Income inequality (rich get richer)
• Environment = depletion of natural resources, more pollution (but might be cleaned up from increased gov rev)
• BoP current account = income up, exports down and domestic firms export less (not true if export led growth)
• Bottlenecks = little spare capacity (more monopoly power)
• Social = inequality, potential unemployment
• Rapid growth = short run price spikes = hard if country not planned for it