ECONOMICS GROWTH 2.5

• What are the two main types of factors that cause economic growth?

  Actual growth and potential growth
• What can cause actual economic growth?


  An increase in consumption
• What is one factor that can lead to potential economic growth?

  An increase in business investment
• What is a potential cause of actual growth related to taxation?

  A reduction in income tax
• How can government spending on benefits contribute to actual growth?

  By increasing disposable income for consumers
• What is a potential cause of growth related to government spending?

  An increase in government spending on infrastructure
• How can improvements in technology lead to potential growth?

  By increasing productivity and efficiency
• What is one way to make markets operate more freely and competitively?

  Encouraging labor market flexibility
• What factors can improve the quantity and quality of production factors?

  • Increase immigration of working-age people
  • Increase retirement age
  • Discover new resources (e.g., fracking)
  • Cuts in corporation tax
  • Government grants for machinery
  • Encourage savings for investment
  • Support business start-ups
• What is one way to improve the quality of labor as a production factor?

  Increase the school leaving age
• How can subsidizing apprenticeships improve the quality of labor?

  By providing practical skills and training
• What is the definition of actual growth?

  An increase in real GDP

  
• How is actual growth measured?

  By calculating changes in national income quarterly
• What does Keynesian analysis suggest about actual growth?

  It results from an increase in output
• What does classical analysis say about actual growth?

  It is temporary due to increased output
• What happens to capacity during an increase in actual growth?

  Capacity decreases
• What occurs to the price level when actual output increases?

  Price level increases
• What is potential growth?

  Improvements in the productive potential of the economy
• How does potential growth shift the LRAS curve?

  It shifts the LRAS curve to the right
• What can lead to potential growth according to Keynesian analysis?

  Higher investment or government capital spending
• What is the effect of increased government spending on infrastructure?

  It increases output and employment
• What happens to productivity per worker during potential growth?

  Productivity per worker increases
• What is the impact of lower costs per unit on price levels?

  Price levels may decrease
• What is the definition of an output gap?

  The difference between actual and potential GDP

  
• What signifies a negative output gap?

  Actual GDP is less than potential GDP

  
• What does a positive output gap indicate?

  The economy is operating at over-capacity

  
• Why is measuring the output gap difficult?

  It requires estimating maximum potential output
• What does the trade cycle describe?

  Recurring trends in economic growth rates
• What typically follows an economic boom?

  An economic downturn or recession
• What are some characteristics of an economic boom?

  Fast growth of consumption and rising incomes
• How does an economic boom affect government tax revenues?

  Tax revenues will rise due to increased earnings
• What can happen to inflation during an economic boom?

  Inflationary pressures may increase
• What are the phases of the trade cycle?

  • Economic boom
  • Downturn
  • Recession
  • Upturn/recovery

  
• What are the effects of a positive output gap?

  • High demand
  • Deficient unemployment
  • Economic recessions
• What are the characteristics of a recession?

  • Declining GDP
  • Rising unemployment
  • Decreased consumer spending
• What are the characteristics of an economic downturn?

  • Slowing economic growth
  • Decreased business investment
  • Increased uncertainty in markets
• What are the characteristics of an economic recovery?

  • Increasing GDP
  • Rising employment
  • Increased consumer confidence
• What are the theoretical characteristics of an economic boom?

  • Fast growth of consumption
  • Increased demand for capital goods
  • More jobs created and falling unemployment
• What are the implications of high demand during a boom?

  • Larger trade deficit
  • Rising government tax revenues
  • Increased inflationary pressures
• What signifies significant growth in an economy?

  When national real output rises faster than trend