Eduqas A Level Economics Economic Growth Exam Questions

About Eduqas A Level Economics Economic Growth

Economic growth is part of the macroeconomic objectives section of the Eduqas specification. You need to distinguish actual growth (an increase in real GDP) from potential growth (an increase in productive capacity), explain the output gap and the economic cycle, and analyse the demand side and supply side causes of growth using AD/AS diagrams and PPFs. You must also evaluate the benefits and costs of growth for consumers, firms, government and the environment. Examiners often give real GDP data and ask you to interpret trends, explain positive and negative output gaps, and judge whether faster growth is always desirable.

What you need to know

• Actual and potential growth Actual growth is the percentage increase in real GDP, usually shown by a movement towards the PPF or a rightward shift of AD. Potential growth is an increase in productive capacity, shown by an outward shift of the PPF or LRAS.
• Measuring growth GDP measures the value of output. Real GDP is adjusted for inflation, so it shows changes in volume. GDP per capita divides by population and is a better guide to living standards.
• Output gaps A negative output gap means actual output is below potential, with spare capacity and cyclical unemployment. A positive output gap means actual output is above trend, which creates inflationary pressure.
• The economic cycle Economies move through boom, slowdown, recession (two consecutive quarters of negative real GDP growth) and recovery around a long run trend growth rate.
• Causes of growth Short run growth comes from increases in AD (consumption, investment, government spending, net exports). Long run growth comes from increases in LRAS: more and better capital, a larger or more skilled workforce, technology and higher productivity.
• Benefits and costs of growth Benefits include higher living standards, more jobs, higher tax revenue and scope for public spending. Costs include inflation, current account deficits, environmental damage, depletion of resources and rising inequality.

Common mistakes in Economic Growth

• Using nominal GDP to judge growth. Real GDP removes the effect of inflation and shows whether output has actually increased.
• Saying GDP is falling when the growth rate falls. A fall from 3% to 1% growth means GDP is still rising, but more slowly.
• Showing long run growth only with an AD shift. Potential growth needs an outward shift of LRAS or the PPF.
• Assuming growth always improves living standards. Consider distribution, the environment, working hours and whether GDP per capita is rising.

Try three Economic Growth exam-style questions