Economic growth

Step 1. Apply the relationship. Real GDP growth = nominal GDP growth - inflation = 7% - 4% = 3%.

Step 2. Check against the exact calculation. Exactly: (1.07 / 1.04) - 1 = 0.0288, or 2.88%. The approximation of 3% is close enough at these rates.

Step 3. Interpret the result. Output of actual goods and services rose by about 3%. The remaining 4 percentage points of the headline figure were prices rising, not more being produced.

Step 4. Recalculate with higher inflation. Real growth = 7% - 9% = -2%. Real output has fallen even though GDP at current prices rose by 7%. The economy contracted while the headline number went up.

Step 5. Draw the wider point. A rising nominal figure tells you nothing on its own. In a high-inflation economy, impressive-looking growth in current-price GDP can conceal a shrinking real economy, which is why every serious comparison is made in real terms.

Step 4 is where the marks are. Candidates who can produce a negative real growth rate from a positive nominal one have understood the distinction; those who report 3% and stop have only done arithmetic.

Step 1. Apply the rule of 70 to Country A. Years to double = 70 / 3.5 = 20 years.

Step 2. Apply it to Country B. Years to double = 70 / 7 = 10 years.

Step 3. Project both forward forty years. Country A doubles twice, so its output is 4 times its starting level. Country B doubles four times, so its output is 16 times its starting level. Country B's economy is four times the size of Country A's, having started level.

Step 4. Draw the conclusion about policy. A sustained difference of 3.5 percentage points, which sounds modest in any single year, produces a fourfold divergence within a working lifetime. This is why raising the long-run growth rate matters far more than managing any individual year of the cycle, and why supply-side policy, though slow, has larger eventual effects than demand management.

Step 5. Add the necessary qualification. Compounding cuts both ways. Sustained high growth of this kind is rare and usually reflects catch-up from a low starting point, where imported technology and surplus labour allow rapid gains. Countries already at the technological frontier cannot grow this way, so extrapolating any high growth rate over decades is unreliable.

Step 5 matters. A candidate who projects 7% growth over forty years without noting that catch-up growth decelerates has produced arithmetic rather than economics.

G, D, F, E, C, A, B

1. Firms increase investment in new machinery and buildings, perhaps following a fall in interest rates or a cut in corporation tax.
2. Investment is a component of aggregate demand, so AD shifts right immediately and actual output rises.
3. The multiplier amplifies this, since the firms supplying the machinery gain income and spend part of it.
4. Over the following years the new capital comes into use, so the capital stock per worker rises.
5. Workers with more and better equipment produce more per hour, so labour productivity rises.
6. Productive capacity increases, so LRAS shifts right and potential output grows.
7. The economy can now sustain a higher level of output without generating inflation, so growth is non-inflationary rather than merely cyclical.

Investment is the one variable that appears on both sides of the model, raising demand now and supply later, and saying so explicitly is worth marks. It is also why investment is the component of AD that policy most often tries to protect during a downturn.

D, G, E, B, A, F, C

1. An economy grows rapidly by expanding output in resource-intensive industries.
2. Extraction and production deplete natural capital, whether soil fertility, fish stocks, aquifers or air quality.
3. The depletion is recorded as output in the national accounts but the loss of the asset is not recorded at all, so measured growth overstates the gain.
4. Environmental degradation imposes costs on production itself: agricultural yields fall, health deteriorates and so does labour productivity.
5. Firms and government must divert resources to remediation, which counts as further output while merely restoring what was lost.
6. Meanwhile the natural capital that supported the original growth is smaller, so the same activity cannot be repeated at the same scale.
7. Potential output growth slows, and in the extreme the economy's capacity falls, so the growth was borrowed from the future rather than created.

Step 3 and step 5 are the ones examiners reward, because both concern how the measurement misleads rather than merely asserting that pollution is bad. This chain converts an environmental point into an economic one.

Define and frame: Define sustainable economic growth as growth maintainable without depleting the capital base future generations depend on, and distinguish it from growth as such. Identify the word carrying the question, which is 'always'. State that the answer turns on the type of investment, the terms on which it arrives and the institutional capacity of the host country, and that a single counter-example is sufficient to defeat 'always'.

Analysis: the case for: Run the mechanisms properly rather than listing benefits. Foreign direct investment relieves the savings gap by supplying capital domestic savings cannot fund, and the foreign exchange gap by bringing hard currency. It transfers technology and management practice, and trains local workers, raising human capital. Employment raises incomes, and the multiplier spreads the effect. Tax revenue funds public investment. Backward linkages to local suppliers can raise productivity across a whole sector.

Analysis: why 'always' fails: Attack the exclusivity claim, since that is where the marks concentrate. Profit repatriation means much of the return leaves the country, so measured GNI rises far less than GDP. Extractive investment depletes natural capital and may leave nothing once the resource is gone. Enclave investment with imported inputs and expatriate management generates few linkages and little skill transfer. Competition can destroy local firms rather than developing them. Tax incentives competed away between host countries can leave minimal revenue. And weak environmental or labour regulation means the host may bear costs that do not appear in the growth figures at all.

Evaluation: Weigh the conditions rather than balancing lists. The type of investment is decisive: manufacturing with local sourcing behaves very differently from extraction. Institutional capacity determines whether the host can tax, regulate and bargain effectively, and a country lacking it captures little of the gain. Time horizon matters, since skill and technology transfer accrue slowly while environmental costs may be immediate. Consider the counterfactual seriously: the realistic alternative to imperfect FDI is often no investment at all, which is not obviously better.

Judgement: Reject 'always' plainly and then say what determines the outcome. MNC investment promotes sustainable growth where it is in sectors with local linkages, where the host has the institutional capacity to tax and regulate it, and where returns are partly reinvested locally. It does not where investment is extractive, where profits are fully repatriated, or where environmental costs exceed the recorded gains. The defensible conclusion is that MNC investment is a potential contributor whose effect depends on host country policy, which reframes the question from whether to invite it to how to govern it.