Economic Growth – Causes/Benefits/Costs – AS/A LEVELS/IB/IAL

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Economic Growth

Economic growth can be measured using measures of Real/Gross Domestic Product (GDP).

It’s an increase in the productive potential of the economy. It can be shown through an increase in the production possibility frontier (PPF) or an increase in aggregate demand (AD) and aggregate supply (AS).

Causes of Economic Growth

Economic Growth can be caused by an increase in the aggregate demand curve (AD) or the aggregate supply curve (AS).

A combination of demand-side (Fiscal & Monetary) and supply-side policies are used to stimulate Economic Growth.

Benefits of Economic Growth

Benefits of Economic growth can be split into benefits for consumers, producers and the government.

Consumers – Economic growth can help to increase incomes, living standards and reduce poverty in a country
Producers – Firms will experience an increase in demand for their products due to higher consumer confidence and an increase in consumers disposable incomes
Governments – They will collect more taxes and pay less benefit payments such as JSA. This is because a large amount of the population will be in employment.

Costs of Economic Growth

Damaged Environment – Higher economic growth usually means more firms producing and polluting. Economic growth is associated with increased levels of CO2.
Increased Income inequality – Economic growth leads to the gap between rich and poor increasing. Those at the top of the chain (CEO’s, Managers, shareholders etc.) seem to reap more rewards then those at the bottom of the chain (Employees such as cleaners and warehouse staff).
Balance of Payments – Economic growth is associated with higher levels of income and living standards. As incomes increases people tend to import more from abroad.
Demand-Pull Inflation – Economic Growth also leads to the AD curve shifting to the right. This causes increased demand for goods and services pushing prices up known as demand-pull inflation.

Current and Future Living Standards

Lower Poverty Levels – there will be less unemployment and less money spent on welfare benefits as the production of goods / services rises, increasing the amount of jobs available
Greater Choice – consumers will have access to greater variety and choice as the level of goods / services increase
Better Living Standards – the economy will be growing – more people will be employed and have access to greater income. Therefore, current and future living standards will be better
Health – people are likely to have improved health due to a better quality of life and access to greater facilities

The distinction between Actual and Potential Growth

Actual Growth

This is the percentage change in GDP and refers to the country producing more goods / services

Potential Growth

The change in productive potential of the economy over time, causing shifts in the LRAS of PPF curves.

The Potential Growth is determined by the factors of production and therefore the possibility of employing new resources or technology.

The PPF shows the potential output of an economy – an outward shift shows economic growth and an inward shift shows a decline in economic growth

The importance of International Trade for Economic Growth

Export-led Growth – a rise in Aggregate Demand through exports can result in greater economic growth and prevent a poor Balance of Payments from occurring
Increased exports will also result in a shift in LRAS as firms will invest more and the demand for labour will increase

Other measures of National Income

Gross National Income (GNI)

This is the value of goods / services produced by a country over a period of time, in addition to the net overseas interest payments and dividends
It measures income received domestically and from oversea investments

Gross National Product (GNP)

This is the value of output produced over a period of time through labour, domestically and overseas

Comparison of Growth Rates between countries over time

Real GDP per Capita – instead of GDP, using GDP per capita is more accurate when drawing comparisons between countries’ living standards
If a country’s population grows over time, GDP is likely to rise without necessarily causing a rise in living standards
Growth figures can also depict information about the economic welfare in a country

Purchasing Power Parities (PPP)

This compares how much a typical basket of goods in one country costs compared to that of another country, using the exchange rates system
It takes into account the cost of living when comparing the living standards in different countries
When PPP is used, the difference between the highest and lowest GDPs will be smaller

National Happiness

The UN report found seven factors affecting welfare:

GDP per capita
Health
Life Expectancy
Having someone to count on
Freedom to make choices
Freedom from corruption
Generosity

GDP only measures income

UK National Wellbeing

Measuring National Wellbeing report – this was launched in 2010 and monitors how lives are improving. Self-reported health, relationship status and employment status seemed to be the key factors affecting personal wellbeing
4 questions – four main questions are asked about life satisfaction, anxiety, happiness and worthwhileness
Scale – people answer the questions by choosing a number from 0 (not at all) to 10 (completely)

Income and Happiness

Psychological research suggests that happiness and income are positively related at low incomes
If your income rises when you are poor, happiness is said to increase
Easterlin Paradox – However, if you are rich and your income increases, happiness does not necessarily rise
Income and happiness also depends on the people around us

AQA Spec – Additional Content

The difference between Short Run and Long Run Economic Growth

Short Run Growth

This is usually measured annually and reflects the percentage increase in a country’s GDP. Short Run Economic Growth arises due to increases in the aggregate demand

Long Run Growth

This arises when there is an increase in the productive capacity of the economy and is the trend rate of the growth in an economy’s real national output

Growth occurs due to increases in aggregate supply

Causes of Cyclical Instability

Fast economic growth occurring in the present could imply weaker economic growth in the future as natural resources and sustainability of the environment are at risk of being depleted
The Boom period in the Trade Cycle usually incurs unstainable periods of economic growth

Excessive growth in credit and levels of debt

Economic Growth financed by public debt may be difficult to pay back in the future as there are no improvements in productivity – since it increases a country’s productive capacity. Therefore, this can be seen as unsustainable growth

Speculation and Animal Spirits

Destabilising speculation will affect the price level in the market due to the speculation of asset prices.

When speculators believe the price of assets will appreciate, they will purchase more.

When speculators believe the price of assets will depreciate, they will sell them to gain more money from a higher value

Animal Spirits – a term used in regards to the instincts and emotions of human behaviour, increasing the level of confidence in the economy

Asset Price Bubbles

When the price of an asset is expected to rise significantly, a market bubble occurs. This causes the demand to exceed the supply, driving the price upwards from the intrinsic value.

When the price then falls drastically, the ‘bubble’ bursts, causing panic and investors to sell their assets

Herding

This refers to the idea that some investors think other economic agents are better informed about the market so will react to their behaviour instead of the market.

This can cause instability in the market

Quick Fire Quiz – Knowledge Check

1. Explain the difference between a recession and a boom (4 marks)

2. Define what an output gap is (2 marks)

3. Draw an output gap using an AD/AS diagram (4 marks)

4. Explain what a positive output gap is (2 marks)

5. Explain what a negative output gap is (2 marks)

6. Identify the causes of actual economic growth (4 marks)

7. Identify two ways of creating economic growth (2 marks)

8. Identify what causes an increase in the productive potential or capacity of a country (2 marks)

9. Identify the causes of potential economic growth (2 marks)

10. Identify and explain four constraints on growth (8 marks)

11. Identify and explain three benefits of growth (6 marks)

12. Identify and explain six costs of growth (12 Marks)

13. Explain two other measures of National Income (4 marks)

14. Explain what Purchasing Power Parity is (4 marks)

15. Identify six factors affecting welfare (6 marks)

16. Explain what is meant by the UK National Wellbeing (4 marks)

17. Explain the relationship between income and subjective happiness (4 marks)

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