Economics Department
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Economics Department |
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Economic Growth in the UK Economy
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Economic Growth is an increase in the real level of national output as measured by the annual percentage change in real GDP. It is also defined as a long-term expansion of the productive potential of the economy, although it can be split into actual and potential growth.
1) Explain, with the aid of a PPF diagram, the distinction between actual and potential growth. (4 marks)
Source ONS Sustained growth should lead higher real living standards and rising employment. Real GDP measures the value of goods and services produced within the economy adjusted for the effects of inflation. If national output falls we are in an economic recession. If real GDP starts to rise, then the economy is in a recovery phase.
2) Discuss whether rapid economic growth is always likely to prove beneficial. (6 marks)
An economic slowdown means that the pace of growth is falling - but the economy is still expanding (albeit a little slower than previously).
We expect national income to go up each year because prices tend to go up. A real increase in spending, income or output is an increase above the rate of inflation (i.e. above the average level of price increases). So, if national income rose by 5% but prices rose by 7%, then real economic growth would be - 2%.
The British economy has experienced nine years of economic growth since the last recession ended in the autumn of 1992. Since 1996 the level of real national output has grown in excess of two per cent each year - leading to a large rise in total real GDP and an increase in average living standards.
In the short run, economic growth comes from the economy making more intensive use of its existing factors of production. Growth comes from a higher level of aggregate demand leading to an expansion of aggregate supply. This supply comes from utilising existing labour and capital inputs more intensely. We have seen since 1993 a large fall in the rate of unemployment and a decline in the amount of spare capacity in the economy. In the long run, economic growth comes from increasing the stock of available inputs (land, labour and capital) together with improvements in factor productivity and also technological change. These factors cause an increase in long-run aggregate supply and allow the economy to operate at a higher level of potential output.
3) With reference to the passage, examine policies that the UK government might use to raise economic growth in the short and long run. Distinguish between interventionist and free market approaches. (10 marks)
Source ONS 4) Describe the UK’s record on Economic growth over the last 20 years (5 marks)
5) Use an AS/AD, X/M diagram to illustrate the impact of rapid economic growth on the current account of the balance of payments (3 marks)
As can be seen from the chart, the UK Economy has grown steadily since the early 1990s. Continued growth, however is likely to be increasingly dependent on the state of the world economy.
6) Explain why the US economy is likely to important for UK economic growth. How significant are the events of September 11th proving in an economic context? (4 marks)
7) Account for possible differences in the growth rates illustrated above. (6 marks)
Many commentators have argued that the UK is becoming increasingly difficult to manage through monetary policy, partly due to the development of a two speed economy. This is reflected in the relative growth rates of manufacturing and services, seen below:
Source: ONS
7) Why might UK manufacturing industry have not had the same economic growth rate as the service sector? (4 marks)
8) Summarise the key factors affecting UK economic growth (8 marks) 50 marks |
