Economic Growth

• What causes economic growth through demand?

  Increase in AD from domestic demand or trade
• How does improving the labor force contribute to economic growth?

  It increases productivity through better quality and quantity
• What role does improved technology play in economic growth?

  It increases productivity
• Why is more investment important for economic growth?

  It fuels economic growth
• What is capital deepening?

  Increase in the size of physical capital stock
• What is actual growth?

  Percentage increase in a country’s real GDP
• How is actual growth usually measured?

  Annually
• What causes potential growth?

  Increases in AS
• What is potential output?

  What the economy could produce if resources were fully employed
• What is a constraint on growth related to banking?

  Access to credit and banking stability
• How does poor infrastructure affect economic growth?

  It discourages MNCs from setting up premises
• Why is education important for economic growth?

  It develops human capital for productivity
• What is the impact of weak property rights on entrepreneurs?

  It reduces their incentive to innovate
• How does corruption affect economic growth in sub-Saharan Africa?

  It diverts funds that could educate children
• What is the effect of poor governance on infrastructure development?

  It holds back infrastructure development
• How do external shocks affect economic development?

  They can push people into poverty
• What are the costs of economic growth for consumers?

  Not benefiting everyone equally, inflation increases
• What is a benefit of economic growth for consumers?

  Higher average consumer income and confidence
• What are shoe leather costs?

  Time spent finding the best deal during inflation
• What does the law of diminishing returns state?

  Utility decreases as more of a good is consumed
• What are menu costs for firms?

  Costs of changing prices due to inflation
• How can firms benefit from economic growth?

  Increased profits and investment opportunities
• What is the impact of higher investment on firms?

  It develops new technologies and lowers costs
• What are economies of scale?

  Benefits firms gain as they grow larger
• How does economic growth in export markets affect firms?

  It increases competition and sales opportunities
• How might government spending change with economic growth?

  Increased spending on healthcare for demerit goods
• What happens to government budgets during economic growth?

  They improve due to higher tax revenues
• What are the environmental costs of high economic growth?

  Increased negative externalities from production
• How can increased consumer incomes affect environmental concerns?

  Some may show more concern for the environment
• How can economic growth lead to greener technology?

  It can develop technology for greener production
• What is an output gap?

  Difference between actual and potential output
• How is a negative output gap defined?

  Actual output is less than potential output
• What does a positive output gap indicate?

  Actual output exceeds potential output

  
• What can cause a positive output gap?

  Resources used beyond normal capacity
• How do countries like China and India relate to positive output gaps?

  They have high inflation due to fast demand
• What are difficulties in measuring the output gap?

  Estimation of trends can be inaccurate
• How can changes in the exchange rate affect output gaps?

  They might offset inflationary effects
• Why is data reliability a concern in measuring output gaps?

  Data from emerging markets may be unreliable
• What do Keynesian economists believe about output gaps?

  They exist in both the short and long run
• What do classical economists believe about output gaps?

  They believe markets clear in the long run