4.6 Economic Growth (Cambridge (CIE) IGCSE Economics)

Formula.

GDP per capita = GDP ÷ the population

GDP per capita makes it easier to compare standards of living between countries.

If any component of real GDP (consumption, investment, government spending, net exports) increases, there will be an increase in total demand, causing economic growth.

False.

Growth caused by a change in total demand, generates a movement from inside the production possibilities curve (PPC) towards the boundary of the PPC. Previously unused factors of production are now being employed.

Potential growth is the increase in the productive potential of an economy, occurring when there is an increase in the quantity or quality of the factors of production.

The quality of labour can be improved through training and education.

One way in which the quantity of factors of production can be increased is by:

• Change migration policies to increase labour

• Increase investment in new capital machinery and technology

True.

Growth caused by a change in the quantity or quality of factors of production shifts the entire production possibility curve outward.

False.

While economic growth is considered the main contributor to improving standards of living, there are negative aspects such as pollution and inequality in the distribution of income that arise.

The benefits of economic growth include:

• Increased incomes

• Better standards of living

• Less poverty

• Improvements in environmentally friendly technologies

• Higher profits and investment for firms

• Reduced government expenditure on benefits

• Less unemployment

Two costs of economic growth include:

• Demand-pull inflation

• Lack of equity in income distribution

• Environmental damage from negative externalities

• Increased imports impact the current account

• Depletion of resources

• Potential decreases in leisure time and well-being

False.

Economic growth caused by a change in total demand, causes a movement from within the existing production possibility curve towards its boundary.

A recession is a period of at least six months (two quarters) of economic decline, causing a decrease in real gross domestic product (GDP).

Demand-side factors that can cause a recession include:

• A fall in consumer or business confidence

• Increasing unemployment

• A decrease in government spending

• An increase in interest rates

• External shocks to export demand from other economies

Supply-side factors that can cause recessions include:

• Unexpected supply shocks

• A gradual decline in the education and training of workers

• Industrial action or worker strikes

• Weather events

True.

Recessions can be caused by both demand-side and supply-side factors.

A recession caused by supply-side interruptions that reduce the quantity or quality of available factors of production can be illustrated as an inward shift of the entire production possibility curve.

Consequences of recessions include:

• Falling national output (GDP)

• Increased firm bankruptcies

• Rising unemployment and underemployment

• Falling exports and imports

• Decreased domestic and foreign investment

• Potential deflation

• Increased government spending on unemployment benefits

• Reduced opportunities for workforce entrants

True.

The consequences of a recession depend on the severity and length of the recession.

A severe consequence of a prolonged recession, such as the Great Depression from 1929 to 1939, is that governments may have to spend significant amounts of money to support the economy. Future generations will be taxed to pay for this spending.

During a recession, national output (real GDP) falls.

During a recession, both unemployment and underemployment increase.

During a recession, both domestic and foreign investment by firms decreases or stops.

During a recession, government spending on unemployment benefits increases.

Fiscal policy is a demand-side policy that aims to influence total demand in an economy by adjusting government taxation and spending.

Monetary policy is a demand-side policy that aims to influence total demand in an economy by adjusting the money supply in the economy.

Reducing import tariffs reduces costs of production for firms, allowing them to produce more goods and services at lower prices, increasing total demand and economic growth.

A subsidy is a financial aid provided by the government to manufacturers, allowing them to produce goods and services more cheaply and sell them at lower prices, increasing total demand.

True.

Increasing unemployment benefits provides more income to the unemployed, increasing their consumption and total demand.

A free port zone is an area designated by the government with low or no taxes, incentivising companies to invest there, resulting in an increase in total demand.

Government spending, such as building new infrastructure like schools, employs companies and workers, increasing total demand.

Monetary policy lowers interest rates to boost growth.

Exchange rate depreciation makes a nation's currency cheaper for foreigners, boosting exports and increasing total demand.

Quantitative easing is when a central bank purchases bonds from commercial banks, firms, and investors, providing them with money to invest and consume, increasing total demand.

Welfare benefits are financial aid provided by the government to households.