Before you start

Make sure you're comfortable with these topics first:

Aggregate Demand: Components and Determinants Aggregate Supply: Short Run, Long Run and Supply-Side Shocks

Method

Distinguish actual growth (a rise in real GDP this period, shown by AD shifting right along SRAS) from potential growth (a rise in the economy's productive capacity, shown by LRAS or the PPF shifting outward).
Learn the main causes of actual growth (rises in C, I, G or X-M) separately from the causes of potential growth (more or better labour, capital, land, enterprise, or improved technology and productivity).
Learn the four phases of the economic cycle (boom, downturn, recession, recovery) and the typical characteristics of each phase.
Learn the technical definition of a recession used in the UK, at least two consecutive quarters of negative real GDP growth, and be ready to identify one from a data table.
Explain economic growth using both the AD/AS diagram (for actual growth) and the PPF diagram (for potential growth, shown as an outward shift of the whole frontier).
Practise calculating percentage growth rates from real GDP figures across consecutive periods, and identifying trend growth from a data series.
Evaluate the causes and effects of growth using the state of the economy (spare capacity versus near full employment), the sustainability of the growth (demand-led and potentially inflationary, or supply-led and sustainable), and the time period under discussion.

Worked example

A country's real GDP (index, Year 1 = 100) was: Year 1: 100, Year 2: 102, Year 3: 101.5, Year 4: 100.8. Calculate the percentage change in real GDP in each of Years 2, 3 and 4, and state in which years, if any, the economy was in recession, using the standard UK definition.

Year 2 growth: (102 - 100) / 100 x 100 = 2.0 percent.
Year 3 growth: (101.5 - 102) / 102 x 100 = approximately minus 0.49 percent, so real GDP fell in Year 3.
Year 4 growth: (100.8 - 101.5) / 101.5 x 100 = approximately minus 0.69 percent, so real GDP fell again in Year 4.
A recession requires at least two consecutive periods of negative growth.
Since real GDP fell in both Year 3 and Year 4, the economy meets the definition of a recession over that period.

Practice questions

Try each question, then tap to reveal the answer.

Q1Give the standard UK definition of a recession.Show answer

Answer: At least two consecutive quarters of negative real GDP growth.

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Q2Distinguish actual growth from potential growth.Show answer

Answer: Actual growth is a rise in real output this period; potential growth is a rise in the economy's productive capacity, what it could produce if all resources were fully and efficiently employed.

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Q3On a PPF diagram, how is potential growth shown?Show answer

Answer: As an outward shift of the whole production possibility frontier.

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Q4Name the four phases of the economic cycle in order.Show answer

Answer: Boom, downturn (slowdown), recession, recovery.

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Q5State one typical characteristic of the boom phase of the economic cycle.Show answer

Answer: Low unemployment and rising inflationary pressure, alongside high consumer and business confidence and strong investment.

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Q6Real GDP was 250bn in Year 1 and 260bn in Year 2. Calculate the percentage growth rate.Show answer

Answer: (260 - 250) / 250 x 100 = 4 percent.

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Q7Give one cause of potential (long-run) economic growth, other than an increase in the size of the labour force.Show answer

Answer: An increase in the capital stock through investment, or an improvement in technology or productivity, or an improvement in the skills and education of the workforce.

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Exam-style questions

Written in the style of a A Level Economics exam paper, with a full mark scheme.

Q1[6 marks]

Explain two causes of an increase in a country's potential economic growth.

Show mark scheme

Tick each line you got. Your score builds from the marks on the scheme.

identifies cause 1, e.g. an increase in net inward migration of working-age people.1 mark
development, e.g. this increases the size of the labour force, raising the economy's productive capacity and shifting LRAS/the PPF outward.1 mark
identifies cause 2, e.g. a sustained rise in investment in capital equipment.1 mark
development, e.g. more, or better, capital raises output per worker, again shifting LRAS/the PPF outward.1 mark
correctly notes these are supply-side (long-run) causes, distinct from a rise in AD, which only causes actual growth.1 mark
overall correct linkage to a rightward shift of LRAS and/or the PPF.1 mark

Nothing ticked yet - 6 available

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Q2[15 marks]

Evaluate the likely impact of a prolonged period of strong actual economic growth, driven mainly by rising consumer spending, on a country's macroeconomic performance.

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Tick each line you got. Your score builds from the marks on the scheme.

states growth raises real GDP, incomes and employment, with little development or use of AD/AS.3 marks
explains the chain (rising C shifts AD right, raising real output and employment along SRAS) and identifies at least one likely cost, e.g. rising inflationary pressure or a worsening current account, with some development and a diagram.3 marks
develops a balanced argument covering benefits (higher employment, higher living standards, higher tax revenue and lower benefit spending, a positive effect on business confidence and investment) and costs (demand-pull inflation, especially near full capacity; a worsening current account via a higher marginal propensity to import; the risk that growth is unsustainable if not matched by rising productive capacity), with reference to a diagram.3 marks
sustained, well-supported evaluation reaching a judgement on the overall impact, explicitly weighing that the outcome depends on how much spare capacity exists, on whether the government or central bank responds with contractionary policy, and on whether consumption-led growth is sustainable in the long run compared with growth driven by rising productive capacity.3 marks
Content that earns credit: demand-pull inflation; current account effects via the marginal propensity to import; spare capacity/the output gap; the sustainability of consumption-led versus investment-led growth; the likely policy response.3 marks

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See real A Level Economics past-paper questions, with official mark schemes →

Free printable worksheet

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Economic Growth: Causes, Types and the Economic Cycle

Before you start

Method

Worked example

Practice questions

Exam-style questions

Free printable worksheet

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