Economic Growth Test Questions – Flashcards
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Define economic growth
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Economic growth is the increase in the potential level of real output the economy can produce over a period of time.
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Define Short term economic growth
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measured by the annual % change in real national output which is mainly driven by the level of AD but is also affected by shifts in SRAS.
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Define Long term economic growth
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The increase in trend or potential GDP, illustrated by an outward shift in a country's long run aggregate supply curve (LRAS)
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How is short-run economic growth shown on a PPF ?
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shown by a movement rather than a shift
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How is long run economic growth shown on a PPF ?
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Outward shift of the frontier
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Short-run growth makes use of what ?
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spare capacity and takes up slack in the economy
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what does long-run economic growth increase ?
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total productive capacity
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Is economic growth measured in real or nominal terms ?
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Real terms
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Economic growth is measured by what ?
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the percentage annual increase in real national output
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What does a growth rate of 3% mean ?
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the aggregate level of output produced in the economy over the last year is 3% higher than it was measured a year ago for the previous 12 months
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Define real national output
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the total of all goods and services produced in an economy over a period of time
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How can real national output be calculated ?
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Rate of change of nominal national income - rate of inflation
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How is nominal national income calculated ?
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real national income/ output X average price level
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What does the change in nominal income do to the growth rate ?
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overstates the growth rate
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Define national income / national output
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the flow of new output produced by the stocks of physical and human capital in the economy in a particular period, usually a year.
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To produce the flow of national output, what must the economy possess ?
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- a stock of physical capital goods (national capital stock) - a stock of human capital
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The national capital stock is part of what stock ?
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The stock of national wealth
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What is the stock of national wealth ?
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Comprises all physical assets owned by the nation's residents that have value
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What does the national capital stock include ?
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- capital goods - raw materials - social capital
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Give 3 examples of social capital
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- roads - hospitals - schools
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What does the national capital stock exclude ?
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consumer goods
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Consumer goods are a part of what ?
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the national wealth
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All ............. is wealth, but not all .......... is capital
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capital, wealth
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define national capital stock
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the stock of capital goods that has accumulated over time in the economy
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What is the depreciation of capital stock ?
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worn-out capital
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what does worn out capital reflect ?
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capital consumption
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What must happen to maintain the size of the capital stock to produce the same size of national income ?
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part of the year's national output must be replacement capital goods
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What happens if replacement investment does not take place ?
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- national capital stock shrinks - negative economic growth occurs - PPF shifts inwards
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Positive economic growth generally requires what level of investment ?
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over and above the replacement investment level
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Define net investment
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the extra investment needed to enlarge the capital stock
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Define gross investment
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the sum of replacement investment and net investment
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Net investment facilitates what ?
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Long-run positive economic growth
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In the short term, what is the easiest way to increase living standards ? What does this sacrifice and ultimately reduce ?
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- boost current consumption - Sacrifices saving and investment - reduces long-term economic growth
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What are two of the most commonly used measures of national income or output ?
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gross national income gross domestic product
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Define gross national income
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measures the total value of national income, including that generated in other countries
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Define net income from abroad
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the difference between inward and outward profit flows
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Uk residents and UK-based multinational companies receive what two things from the capital assets they own abroad ?
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profit interest payments
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What is included in GNI but excluded from GDP ?
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Net income from abroad
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why is GNI a better measure of standard of living currently enjoyed by UK residents than GDP ?
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it measures all the income available to spend in the UK
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what is GDP better at measuring ?
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Productivity of industries located in the UK
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Which is generally larger in the UK, GNI or GDP ?
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GNI
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What are the two main factors leading to economic growth ?
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investment and technical progress
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Economic growth results from investment in what two things ?
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- new capital goods - human capital
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New growth theory (endogenous growth theory) suggests what ?
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governments can create supply-side conditions that favour investment and technical progress, such as external economies for businesses and a judicial system that enforces intellectual property rights etc
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What is a better indicator than economic growth, of improved happiness and the ability to continue to improve happiness
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economic development
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Economic development is measured by what things ?
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- a general improvement in living standards that reduce poverty and human suffering - greater access to resources such as food and housing required for basic human needs - greater access to opportunities for human development (education and training) - environmental sustainability and regeneration through a reduction is resource depletion and resource degradation
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When does resource depletion occur ?
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when finite resources such as oil are used up and when soil fertility or fish stocks irreversibly decline
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What best illustrates resource degradation ?
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pollution of air, water and land
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To benefit people in the long-run, growth and development must be what ?
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sustainable
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Sustainable economic growth means the use of what ?
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- renewable resources - technologies that minimize pollution and other forms of resource degradation
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There is a trade-off between maintaining and improving environmental quality and what ?
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maximizing the economy's growth rate measured by GDP growth
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What are the main 3 components of standard of living ?
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- economic welfare derived from goods and services in the market economy - economic welfare derived from public goods and merit goods - economic welfare derived from quality of life factors
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What are the main threats / challenges to economic growth ?
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•Changes in the real exchange rate affecting competitiveness •Cyclical fluctuations in national output and external trade •Financial instability e.g. unsustainable credit boom and fall in savings •Volatility in world prices for essential imports and key exports •Political instability / military conflicts •Natural disasters and other external supply shocks •Unexpected breakthroughs in the state of technology - Inadequate investment in human capital
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why is economic growth an important macroeconomic objective ?
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it enables increased standard of living helps create jobs
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Define balanced growth
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growth that is sustainable, avoiding booms and busts
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define trade cycle
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The cyclical nature of economic growth
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How are supply side policies used to increase economic growth ?
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- government attempts to increase productivity and increase efficiency in the economy - aims to shift LRAS outwards
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How is monetary policy used to increase economic growth ?
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reducing interest rates to stimulate increases in AD and economic activity
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How is fiscal policy used to increase economic growth ?
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- higher government spending - cutting taxes to boost AD
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the rate of growth of an economy can depend on what ? (5)
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1. resources 2. investment in people 3. technology 4. capital goods 5. savings
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To help growth, what can the government do ?
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1. Promote savings (incentives) 2. promote R&D (tax breaks) 3. promote supply side policies (cut taxes, remove labour market barriers) 4. promote mobility of factors of production between industries 5. promote education (relevant qualifications, more funds)
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How is economic growth shown on a LRAS curve ?
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Outward shift
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What are the key drivers of growth ?
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1. growth in physical capital stock 2.growth in the size of active labour force 3. growth in quality of active labour force 4. technological improvements and innovation driving up productivity 5. Institutions
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What are the main advantages of economic growth ?
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1. higher living standards (increase in income per head) 2. higher employment 3. fiscal dividend 4. Investment - accelerator effect 5. Greater Consumer and business confidence 6. Possible environmental benefits from investment
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What is the virtuous cycle of growth ?
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Higher output - increased investment - higher productivity - increased wages - rising consumer demand
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What are the main disadvantages of economic growth ?
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1. inflationary risks 2. rising working hours 3. structural unemployment 4. environmental concerns 5. growing income and wealth inequality
