2.5 Economic Growth

What causes short-run economic growth?

caused by changes to any of the components of aggregate demand:

• Consumption (C)

• Investment (I)

• Government expenditure (G)

• Exports - Imports (X-M)

Define the term long-run economic growth.

long-run economic growth occurs when there ae improvements to the quality and/or quanitity of the factors of production

True or False?

Short-run economic growth can be illustrated by a rightward shift in AD on an AD/AS diagram.

True

Short-run economic growth can be illustrated by a rightward shift in AD on an AD/AS diagram.

What is actual economic growth?

Actual economic growth is an increase in the quantity of goods and services produced in an economy in a given period of time.

How is actual economic growth often measured?

Perentage change in real GDP

What does potential growth demonstrate?

Potential growth demonstrates an increase in the productive potential of an economy.

True or False?

Potential growth is shown by an inward shift of the production possibility frontier (PPF)

False.

Potential growth is shown by an outward shift of the production possibility frontier (PPF).

What is export-led economic growth?

Export-led economic growth occurs when there is an increase in the sale of goods and services to other countries

How does an increase in the value of exports affect real GDP?

An increase in the value of exports increases real GDP.

Which component of aggregate demand does international trade affect?

The net trade compenents - (X-M)

What is the relationship between the value of exports and GDP for many developing countries?

For many developing countries the value of exports represents a large proportion of AD. This increases Gross Domestic Product (GDP)

Which large country experienced significant export-led economic growth from 1988 to 2008?

China experienced significant export-led economic growth from 1988 to the global financial crisis of 2008

Define long-term growth trend.

A long-term growth trend is the underlying trend rate of economic growth over a longer period of time

How is an increase in the productive capacity of an economy illustrated on an AD/AS diagram?

An increase in the productive capacity of an economy is illustrated by a rightward shift of the long-run aggregate supply curve (LRAS

Define the term output gap.

An output gap is the difference between the actual level of real national output (real GDP) and the maximum potential level of real national output

What is a positive output gap?

A positive output gap is when the real GDP is greater than the potential real GDP.

True or False?

A negative output gap occurs when real GDP is greater than potential real GDP.

False.

A negative output gap occurs when real GDP is less than potential real GDP.

What can signal a positive output gap is emerging?

Rapidly rising prices can indicate a positive output gap is emerging.

Which macro-economic performance indicators suggest a negative output gap is increasing?

Rising unemployment and a slowdown in economic growth can indicate that a negative output gap is increasing.

What does a negative output gap reveal about an economy's capacity?

A negative output gap means that there is spare capacity in the economy. It could produce more goods and services than are being produced.

How is a negative output gap illustrated on an AD/AS diagram?

A negative output gap is illustrated on an AD/AS diagram by showing the actual real national output below the potential real national output.

What is the classical view on negative output gaps?

The classical view is that real national output will return to the potential level in the long-run at a lower price level.

What is the Keynesian view on negative output gaps?

The Keynesian view is that an economy can remain in a negative output gap in the long-run.

True or False?

A positive output gap is sustainable in the long run.

False

A positive output gap is not sustainable. The classical view states that real national output will return to the potential output but at a higher price level

What is a trade or business cycle?

A trade or business cycle refers to the changes in real GDP that occur in ana economy over time

What is the relationship between real GDP fluctuations and the long-term trend rate of growth?

The relationship is that real GDP fluctuates above and below the long-term trend rate of growth.

What are the four stages in the trade cycle?

1. Recession

2. Recovery

3. Slowdown/downturn

4. Peak/boom

How is a positive output gap identified on a trade cycle diagram?

A positive output gap is identified by real GDP growth exceeding the trend line on a trade cycle diagram.

True or False?

A negative output gap occurs when real GDP growth is above the trend line.

False.

A negative output gap occurs when real GDP growth is below the trend line.

How can the flow of real GDP through the different stages of the trade cycle be managed?

The flow of real GDP through the different stages of the trade cycle can be managed through government intervention

What is a recession?

A recession is defined as at least two consecutive quarters (6 months) or more of negative economic growth

What happens to unemployment during a recession?

During a recession, unemployment increases or remains high

How does a recession affect business and household confidence?

A recessionleads to low confidence for firms and household

What typically happens to government expenditure during a recession?

During a recession there is typically an increase in government expenditure. This could lead to a greater budget deficit

What happens to unemployment during a boom?

During a boom, unemployment decreases and job vacancies increase.

True or False?

Inflation usually falls during a boom.

False

During a boom there is usually an increasing rate of demand-pull inflation

What is considered to be the key cause of rising living standards?

Economic growth is considered to be the key cause of rising living standards.

How does economic growth affect absolute poverty?

Economic growth leads to decreased levels of absolute poverty.

What is a possible environmental benefit of economic growth?

A possible environmental benefit of economic growth is an improvement in the development of environmentally friendly technology. This will help to reduce external costs.

True or false?

Economic growth always leads to an equitable income distribution.

False.

Economic growth can lead to a lack of equity in the distribution of income. The rich may get richer and the poor may get poorer.

How does economic growth affect a government's tax revenue?

Economic growth leads to higher tax revenue for a government due to rising incomes for consumers and profits for firms.

What is a possible negative effect of economic growth on a country's exports?

A possible negative effect of economic growth on a country's exports is that increased inflation can harm the sale of exports.

How might economic growth affect workers' leisure time?

Economic growth might decrease workers' leisure time as greater output often requires more time from workers.

What is a possible social benefit of economic growth?

A possible social benefit of economic growth is that increased employment should remove some of the detrimental social impacts of unemployment

How might economic growth affect the consumption of de-merit goods?

Economic growth might lead to an increase in consumption of de-merit goods due to higher incomes

True or False?

Economic growth always leads to environmental damage.

False

While economic growth can cause environmental damage it can also lead to improvements in environmentally friendly technologies

What effect does economic growth usually have on a firm's profits?

Economic growth usually leads to higher sales revenue for firms and, therefore, greater profits

How might economic growth affect a government's expenditure on benefits?

Economic growth might lead to reduced expenditure by governments on benefits