What is economic growth?
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What is economic growth?
Economic growth is the annual increase in the level of national output, as measured by an increase in the gross domestic product (GDP).
Define the term Gross Domestic Product (GDP).
Gross Domestic Product (GDP) is the total value of all goods and services produced in an economy in a year.
State the formula for calculating GDP.
Formula.
GDP = Consumption (C) + Investment (I) + Government spending (G) + Exports (X) - Imports (M)
What is meant by consumption?
Consumption is the total spending on goods and services by consumers (households) in an economy.
Define the term investment.
Investment is the total spending on capital goods by firms.
What is included in government spending?
Government spending is the total spending by the government in the economy, including public sector salaries and the provision of goods and services, but excluding transfer payments.
Define the term net exports.
Net exports is the difference between the revenue gained from selling goods and services abroad and the expenditure on goods and services from abroad.
True or False?
A 1% increase in consumption has a larger impact on GDP than a 1% increase in net exports.
True.
A 1% increase in consumption or government spending will have a much larger impact on economic growth than a 1% increase in net exports.
What is nominal GDP?
Nominal GDP is the actual value of all goods and services produced in an economy in a one-year period, without adjustment for inflation.
Define the term real GDP.
Real GDP is the value of all goods and services produced in an economy in a one-year period, adjusted for inflation.
How is GDP per capita calculated?
Formula.
GDP per capita = GDP ÷ the population
Which GDP measure makes it easier to compare standards of living between countries?
GDP per capita makes it easier to compare standards of living between countries.
What causes economic growth?
If any component of real GDP (consumption, investment, government spending, net exports) increases, there will be an increase in total demand, causing economic growth.
True or False?
Growth caused by a change in total demand shifts the production possibilities curve outwards.
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.
Define the term potential growth.
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.
How can the quality of labour be improved?
The quality of labour can be improved through training and education.
State one way in which the quantity of factors of production can be increased.
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 or False?
Growth caused by a change in the quantity or quality of factors of production shifts the entire production possibility curve outward.
True.
Growth caused by a change in the quantity or quality of factors of production shifts the entire production possibility curve outward.
True or False?
Economic growth always improves standards of living.
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.
What are three benefits of economic growth?
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
State two costs of economic growth.
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
True or False?
Economic growth caused by a change in total demand, shifts the production possibilities curve outward.
False.
Economic growth caused by a change in total demand, causes a movement from within the existing production possibility curve towards its boundary.
What is a recession?
A recession is a period of at least six months (two quarters) of economic decline, causing a decrease in real gross domestic product (GDP).
State two demand-side factors that can cause a recession?
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
State two supply-side causes of a recession.
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 or False?
Recessions can be caused by both demand-side and supply-side factors.
True.
Recessions can be caused by both demand-side and supply-side factors.
How can a recession caused by supply-side factors be illustrated on a production possibility curve?
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.
State two consequences of a recession?
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 or False?
The consequences of a recession depend on its severity and length.
True.
The consequences of a recession depend on the severity and length of the recession.
State a severe consequence of a prolonged 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.
How does a recession impact national output?
During a recession, national output (real GDP) falls.
What is the impact of a recession on unemployment?
During a recession, both unemployment and underemployment increase.
How does a recession affect investment?
During a recession, both domestic and foreign investment by firms decreases or stops.
What is the potential impact of a recession on government spending?
During a recession, government spending on unemployment benefits increases.
What is fiscal policy?
Fiscal policy is a demand-side policy that aims to influence total demand in an economy by adjusting government taxation and spending.
Define monetary policy.
Monetary policy is a demand-side policy that aims to influence total demand in an economy by adjusting the money supply in the economy.
How can import tariffs boost growth?
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.
Define the term subsidy.
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 or False?
Increasing unemployment benefits boosts growth.
True.
Increasing unemployment benefits provides more income to the unemployed, increasing their consumption and total demand.
What is a free port zone?
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.
How does government spending increase total demand?
Government spending, such as building new infrastructure like schools, employs companies and workers, increasing total demand.
Which policy lowers interest rates to boost growth?
Monetary policy lowers interest rates to boost growth.
What is the impact of an exchange rate depreciation?
Exchange rate depreciation makes a nation's currency cheaper for foreigners, boosting exports and increasing total demand.
What is quantitative easing?
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.
Define welfare benefits.
Welfare benefits are financial aid provided by the government to households.