2.5. Economic Growth - Edexcel (A) Economics A-level

What is required for economic growth to occur?

An increase in the quality or quantity of one of the four factors of production (land, labour, capital, enterprise) or using them more efficiently, which increases LRAS and potential output.

How does an increase in Long Run Aggregate Supply (LRAS) relate to economic growth?

An increase in LRAS means the economy can produce more goods and services, leading to higher potential output and economic growth.

How does land contribute to economic growth?

Discovery of new natural resources (e.g., oil) can boost growth, especially in developing countries where exploiting new resources drives large growth.

Why does resource discovery have less impact on developed countries?

Developed countries often already exploit most resources; growth is driven more by other factors like technology or capital.

What role does labour quantity play in economic growth?

Growth increases when the workforce size increases through immigration, demographic changes (more working-age people), or higher participation rates.

How can government policy increase labour participation?

By providing incentives like free childcare, encouraging groups (e.g., mothers) to enter or re-enter the workforce.

How does the quality of labour affect economic growth?

Better education and training improve worker skills, efficiency, and productivity, raising output per worker.

What is occupational mobility, and why does it matter?

The ability of workers to switch jobs; higher mobility reduces structural unemployment and boosts growth.

How can a skilled workforce contribute beyond just productivity?

Skilled workers foster innovation, new technology, and business ideas that drive economic growth.

How does capital investment promote economic growth?

Investment leads to more machinery and new technology, increasing productivity and the quantity of goods produced.

Why doesn't all investment lead to GDP growth?

Some investments fail or are unproductive (e.g., building houses may not immediately increase output).

How does enterprise contribute to economic growth?

Entrepreneurial activity creates businesses and jobs, increasing output.

What effect do tax benefits and grants have on enterprise and growth?

They incentivize business creation and investment, stimulating economic growth.

How can too much wealth redistribution harm economic growth?

High taxes reduce incentives for hard work and investment; generous benefits reduce the need to work, lowering enterprise and growth.

What is the role of technological progress in economic growth?

It reduces production costs, improves productivity, creates new products, and maintains high consumer spending.

Why is efficiency important for economic growth?

Efficiency means fewer resources are needed to produce goods, allowing higher output with the same inputs.

How can governments encourage efficiency?

By maintaining competition so firms improve quality and lower prices.

What happens if property rights are not protected?

People are less willing to save or invest, harming economic growth.

How does an inefficient capital market affect growth?

Without access to loans or finance (e.g., for farmers), businesses cannot expand, limiting growth.

How can civil wars or natural disasters impact economic growth?

They destroy human and physical capital, causing negative growth.

Why might a communist economy have lower efficiency?

Government monopoly leads to lack of cost-cutting motivation and inefficiency.

What is government failure, and how can it affect growth?

Government failure occurs when intervention causes inefficiency or market distortions, reducing growth.

What is actual economic growth?

The percentage change in real GDP, reflecting an increase in the actual production of goods and services in the economy.

What is potential economic growth?

The increase in the productive potential of the economy over time (shift in LRAS or PPF), representing resources or technology that allow more production in the future.

How does potential growth differ from actual growth?

Potential growth means the economy can produce more, but hasn't yet, so GDP hasn't increased; actual growth is when GDP actually increases.

Why is measuring productive potential difficult?

Because the exact position of LRAS or PPF is unknown, and factors like machinery, workers, and technology cannot be given a single monetary value.

What does an outward shift of the PPF represent?

Economic growth, showing an increase in the economy’s capacity to produce goods and services.

What does moving from inside the PPF to on the PPF signify?

Economic recovery (better utilization of resources), not economic growth.

How does international trade relate to economic growth?

Increased exports raise aggregate demand (AD), which can lead to economic growth through export-led growth strategies.

Give examples of countries that experienced export-led growth.

Germany, Japan, and China.

How can sustained high export levels encourage economic growth?

They increase demand for labour and encourage firms to invest, which boosts both AD and LRAS over time.

How does international competition affect domestic firms?

Firms must become more efficient to compete globally, improving productivity and contributing to growth.

What is the long-run trend rate of economic growth?

The average sustainable rate of economic growth over a long period, representing the normal growth path.

How does actual growth relate to the business cycle?

Actual growth fluctuates over time, forming the business cycle with periods of expansion and contraction.

What is an output gap?

The difference between actual GDP and the estimated long-term potential GDP (trend GDP).

What does a positive output gap indicate?

Actual GDP is above potential GDP, meaning the economy is over-performing and possibly overheating.

What does a negative output gap indicate?

Actual GDP is below potential GDP, meaning spare capacity exists (unused resources like workers and factories).

Why are output gaps hard to measure?

Because the exact position of LRAS is unknown and initial GDP estimates can be inaccurate.

How can output gaps be shown on AD-AS diagrams?

LRAS shows full capacity output; if AD and SRAS equilibrium is left of LRAS, there's a negative output gap; if right, a positive output gap.

What happens when equilibrium output is to the right of LRAS?

The economy is operating over capacity in the short run (positive output gap).

What happens when equilibrium output is to the left of LRAS?

The economy is operating under capacity (negative output gap).

How would classical economists expect a positive output gap to be resolved?

Through long-run economic growth shifting LRAS, a recession reducing AD, or rising costs reducing SRAS.

How would classical economists expect a negative output gap to be resolved?

Rising aggregate demand or falling SRAS (due to lower production costs) to bring the economy back to full capacity.

What is the trade (business) cycle?

Periodic but irregular fluctuations in economic activity measured by changes in real GDP and other macro variables.

What are the four main phases of the business cycle?

Boom, downturn, recession (slump), and recovery.

What is a mild trade cycle?

A cycle where GDP does not fall during recessions but grows more slowly than the trend.

What characterizes a boom phase?

High national income, positive output gap, high consumption and investment, rising wages, increased imports, and inflationary pressure.

What happens during the downturn phase?

Output and income fall, consumption and investment decline, tax revenues fall, unemployment rises, inflationary pressure eases, and imports decrease.

How is recession defined in the UK?

When real GDP falls for at least two successive quarters.

What are the characteristics of a recession?

High unemployment, low consumption, investment, and imports, low inflation or deflation.

What occurs during the recovery phase?

National income and output increase, unemployment falls, consumption, investment, and imports rise, and inflationary pressure starts to build.

What are the benefits of economic growth to consumers?

Increased demand for housing, rising house and share prices (wealth effect), improved product quality, and potentially higher happiness.

What are some potential consumer drawbacks from economic growth?

Increased inequality and inflation, which can negatively affect consumers.

How does economic growth affect firms?

Leads to increased investment, improved business confidence, better technology and productive efficiency, higher profits, and opportunities for new firms.

What challenges might some firms face during economic growth?

Firms selling inferior goods may lose out, and globalization or technological changes may cause market losses (e.g., DVD rental stores).

What are the benefits of economic growth for the government?

Higher tax revenues, improved funding for public services like the NHS and education, and reduced budget deficits.

What demands might increase on the government as a result of economic growth?

Expectations for better education, infrastructure, and public services.

How does economic growth impact current and future living standards?

Reduces poverty, creates jobs, raises wages, improves housing, food quality, health, and life expectancy.

How can economic growth improve future living standards through government spending?

By investing in education and healthcare, leading to a more skilled and healthier workforce.

What are environmental costs of economic growth?

Depletion of non-renewable resources, increased pollution, waste, and congestion, raising sustainability concerns.

What are arguments that economic growth could support environmental improvements?

Wealthier countries can invest in cleaner technologies and research, and higher income families tend to have fewer children, reducing population growth.

What is a social cost of economic growth related to inequality?

Economic growth may increase the gap between rich and poor, potentially worsening living standards for the poor.