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ExamPass · IGCSE worksheet

Economic growth

NameClassDate

Key terms

Define each term.

1
Economic growth
2
Recession

Multiple choice

Circle the correct answer.

3

A country's GDP at current prices rises by 5% while inflation is 8%. What has happened to real GDP?

  1. It has risen by 13%
  2. It has risen by 5%
  3. It has fallen by approximately 3%
  4. It is unchanged
4

Which of the following would raise an economy's long-run growth rate rather than simply its current output?

  1. A temporary cut in income tax that boosts consumer spending
  2. A rise in exports because a trading partner is booming
  3. Investment in education that raises workers' productivity
  4. A fall in the savings rate as households spend more

Worked problems

Show your working.

5

Separating real growth from inflation. A country reports that its GDP measured at current prices rose by 7% last year. Inflation over the same period was 4%. Calculate the approximate real growth rate. Then state what would have happened to real output if inflation had been 9% instead.

Diagrams

6

Draw a diagram with real GDP on the vertical axis and time on the horizontal axis. Draw a straight upward-sloping trend line, then draw the actual path of GDP as a wave oscillating around it. Label boom, downturn, recession and recovery, and mark where unemployment would be highest and where inflationary pressure would be greatest.

Answers

1

Economic growth: An increase in the real output of an economy over time, usually measured as the percentage change in real gross domestic product.

2

Recession: A period of falling real GDP, usually defined as two consecutive quarters of negative economic growth.

3

C. Real growth is approximately nominal growth minus inflation, so 5% - 8% = -3%. Prices rose faster than the value of output, which means the actual quantity of goods and services produced fell. The economy contracted despite a positive headline figure.

4

C. Education raises what each worker can produce, so productive capacity itself increases and the effect is permanent. The other three raise demand and therefore current output, but leave capacity unchanged, so their effect fades. A lower savings rate arguably reduces long-run growth by financing less investment.

5

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.

6

Two things to get right. The trend line slopes upward, because long-run growth continues through the cycle; drawing it flat implies an economy that never grows. And the actual path crosses the trend line rather than merely touching it, since an economy in a boom is producing above its sustainable level, which is precisely why booms end.