BOOKLET

• What are the two types of economic growth?

  Actual and potential economic growth
• What does actual economic growth reflect?

  The increase in real GDP over a short period

  
• How is potential economic growth defined?

  Increase in maximum possible output when resources are fully employed
• How is actual economic growth measured?

  By the % change in real GDP

  
• What factors can cause actual economic growth?

  Short-term changes like increased consumption
• What are long-term factors that can cause economic growth?

  Increased business investment and government spending
• What can improve potential economic growth?

  Increases in quantity or quality of production factors
• What are the factors of production that can be improved?

  Labour, land, capital, and enterprise
• How can the quantity of labor be increased?

  By increasing immigration of working-age people
• What is one way to improve the quality of labor?

  Increasing the school leaving age
• What does potential growth refer to?

  Improvements in the productive potential of the economy
• How do Keynesian and classical economists view potential growth?

  Both agree it is beneficial for the economy
• What happens to the LRAS curve with potential growth?

  It shifts to the right
• What is the effect of increased competition on potential growth?

  It encourages more small businesses to open
• What is the impact of investment spending on actual growth?

  It injects money into the economy
• How does government spending on capital projects affect growth?

  It increases actual and potential growth
• What is export-led growth?

  Growth from successful exporting of goods and services
• Name one country that has experienced rapid export growth.

  China
• What is one advantage of export-led growth?

  It raises per capita incomes and reduces poverty
• What is a drawback of export-led growth?

  Over-dependence on trade partner countries
• How can rapid export-led growth affect inflation?

  It may lead to demand-pull inflation
• What is the long-term trend growth rate?

  The long run average rate of growth
• How is actual growth measured?

  By changes in GDP over time

  
• What is the output gap?

  The deviation of actual growth from potential growth

  
• How can the size of the output gap be estimated?

  By estimating the economy’s maximum potential output
• What does a positive output gap indicate?

  Actual growth exceeds potential growth

  
• What is a negative output gap?

  When actual growth is below potential growth

  
• What is the importance of measuring output gaps?

  It helps assess economic performance and capacity

  
• What are the factors causing economic growth?

  • Short-term factors:
  • Increase in consumption
  • Reduction in income tax
  • Increase in government spending on benefits
  • Long-term factors:
  • Increase in business investment
  • Increase in government spending on infrastructure
  • Improvements in technology
• What are the difficulties in measuring output gaps?

  • Estimating maximum potential output is complex
  • Requires continuous data revision
  • Involves multiple methods of GDP measurement

  
• What are the advantages and drawbacks of export-led growth?

  Advantages:

  • Increases aggregate demand
  • Provides new external money
  • Boosts capital investment

  
  

  Drawbacks:

  • Over-dependence on trade partners
  • Risk of protectionist responses
  • Potential for demand-pull inflation
• What is the relationship between actual and potential growth?

  • Actual growth reflects short-term performance
  • Potential growth indicates long-term capacity
  • Both can be influenced by investment and government spending
• What is the significance of the long-term trend growth rate?

  • Indicates sustainable growth without inflation
  • Reflects average growth over several years
  • Affected by economic events like financial crashes
• How does an AD/AS diagram illustrate output gaps?

  • Shows the relationship between aggregate demand and supply
  • Indicates levels of spare capacity in the economy
  • Helps analyze changes affecting output gaps

  
• What is an output gap in an economy?

  The difference between actual and potential output
• Why is it difficult to estimate the size of the output gap?

  It requires estimating the economy's maximum potential output

  
• What was the output gap for the UK in 2007 Q3?

  Positive output gap
• What was the output gap for the UK in 2009 Q3?

  Negative output gap
• What could be a reason for the change in output gap from 2007 to 2009?

  Economic recession affecting growth rates
• What does the graph indicate about the economy from 2015 Q1 to 2016 Q1?

  It shows a stable or improving economic condition