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Chapter 18 Economic growth

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24 views

Chapter 18 Economic growth

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liashley159
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 18 Economic growth

1. Economic growth
Economic growth is an increase in an economy’s output. The economic growth rate
is the annual percentage change in output.

For many years, it was assumed that poverty would be eradicated and people would
experience development with econimic growth.
In reality, however, economic growth does not result in a rise in the living standards
and quality of life of everyone in an economy.
Economic development is the process of improving people’s economic well-being
and quality of life. More factors should be considerd, such as, a more equal
distribution of income or a reduction in pollution.

2. Nominal GDP and real GDP

Economic growth is measured in terms of changes in real GDP, that is the country’s
output.

Nominal (or money) GDP is GDP measured in terms of the prices operating in the
year in which output is produced.
Nominal GDP may give a misleading impression. This is because the value of
nominal GDP may rise simply because prices have risen (Inflation).

Real GDP is measured at constant prices (the prices operating in a selected year).

There are different kinds of price index. The price index used to convert nominal into
real GDP is called the GDP deflator, which measures the prices of products
produced, rather than consumed, in a country. It includes the prices of capital goods,
consumer products and exports but excludes the price of imports.

Part A
1. In 2020, a country’s GDP is $1000 bn. In 2021, nominal GDP rises to $1092 bn
and the price index increases by 4%.
Calculate: (a) real GDP; (b) the percentage increase in real GDP.

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3. Causes and consequences of economic growth
Condition 1:
If there is spare capacity, output can increase as a result of an increase in aggregate
demand.
(1) Production Possibility Curve (PPC)

The economy is initially producing at point X. Then the production point increases to
point Y and more goods and services are produced.
Efficiency and inefficiency: When an economy is producing inside its PPC, it is
inefficient.
(2) AS-AD diagram

The increase in aggregate demand brings into use previously unemployed resources,
and output (measured by real GDP) increases from Y to Y1.

Condition 2:
In order to achieve economic growth that can be sustained over time, it is necessary
for productive capacity and aggregate supply (LRAS) to increase.

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The PPC and AS-AD diagram to show productive capacity increasing.

The diagrams above only shows increase in aggregate supply.


Draw diagrams shows both aggregat supply and increase in aggregate demand.

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Part A
1. Complete the table below. Select ‘high’ or ‘low’ to go before each influence, to get
an influence that would promote economic growth.

2. Think about the benefits and costs of economic growth.


Benefits:

Cost:
Hint:
(1) If an economy is operating at full capacity, there will be an opportunity cost to
produce more capital goods.
(2) Where do rat race(involution) come from?
(3) The influece on environment.

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4. Without economic growth

Economic recession
Economic growth can be negative as it is possible that a country’s real GDP may fall.
A decline in real GDP over two consecutive quarters (six months) or more is called a
recession.

The main obstacle to develop for some low-income countries


The opportunity cost of allocating resources away from their current use. For
example, allocating more resources to education may mean that fewer resources can
be allocated, for instance, to healthcare. Producing more capital goods may mean
sacrificing consumer goods in the short run, which would lead to a decrease in living
standards.

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Part B

1. How is economic growth measured?


A changes in consumer expenditure
B changes in living standards
C changes in population size
D changes in real GDP

2. A country experiences a 4% rise in real GDP and a 4% rise in nominal GDP. What
would explain this combination of changes?

3. How would economic growth caused by an increase in aggregate demand and


economic growth caused by an increase in productive capacity be shown on a
production possibility curve diagram?

4. What may reduce economic growth in the short run but increase it in the long run?
A a decrease in government spending on healthcare
B a decrease in the size of the labour force
C an increase in the inflation rate
D an increase in the savings ratio

5. What is most likely to cause a recession?

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A a decrease in business optimism
B a decrease in unemployment
C an increase in government spending
D an increase in net exports

6. What cause of a fall in the price level is unlikely to result in a recession?


A advances in technology
B collapse of the banking system
C expectations of a fall in the price level
D reduction in international competitiveness

7. A country’s economy grows by 2%. The size of its labour force remains
unchanged. What would explain a rise in unemployment in these circumstances?
A a decrease in the capital-intensiveness of firms
B a decrease in the average hours people work
C an increase in labour productivity
D an increase in the ability of workers to change jobs

8. What must have increased as a result of a rise in real GDP?


A income inequality B inflation C output D population

9. What is not a possible benefit of economic growth?


A lower levels of poverty
B lower levels of unemployment
C higher government spending on education without any opportunity cost
D higher tax revenue without having to raise tax rates

10. Why may a government switch from aiming for a 5% growth rate to a 0%
economic growth rate?
A to avoid anyone being without a job
B to conserve non-renewable resources
C to maintain real GDP per head
D to reduce living standards

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