UNIT 6.

3
ECONOMIC GROWTH
1(a) Identify two ways a government could conserve its country’s resources. [2]
▪ Ban or place a limit on the amount of resource consumed.
▪ Import resources to reduce consumption of the country’s own resources.
▪ Reduce exports to reduce consumption of limited resources.
▪ Put tax/increase tax on resources to reduce demand.
▪ Educate consumers to reduce consumption/conserve resources.
▪ Control immigration to reduce consumption of resources.
▪ Encourage recycling of resources e.g. metals/plastic.
▪ Subsidise firms that conserve natural resources.
(b) Explain two external benefits that can arise from education. [4]
▪ External benefits/positive externalities are those benefits which are enjoyed by
third parties in the production or consumption process.
▪ Education is a merit good which brings more benefits to people than they realise.
The consumption of education generates positive spillover effects[SB>PB].
▪ There will be higher output/GDP due to a more skilled labour force and thus raising
productivity in the economy. Also, firms may have to spend less on training due to
greater supply of skilled workers.
▪ Workers can use more advanced technology due to ideas/ability to operate new
technology. Thus better quality output will be produced due to more efficient
workers.
▪ Educating people on health issues may improve their mental and physical conditions
and thus prevent the spread of contagious diseases as they will be able to make
more informed decisions. For instance people may become more aware regarding
the benefits of vaccination.
▪ The level of pollution might fall if people become more educated on environmental
issues. This may lead to a sustainable environment in the LR.
(c) Analyse how a cut in the rate of interest could reduce poverty. [6]
▪ A cut in the ROI is regarded as an expansionary monetary policy to reflate
the level of AD in the economy.
▪ A lower rate of interest may encourage a rise in consumer expenditure due
to fall in the cost of borrowing and thus encouraging firms to expand. This in
turn will increase output and thus raise employment and eventually raising
the level of incomes of the poor.
▪ A lower interest rate will increase the purchasing power of the poor who
have borrowed before and therefore will make it easier/cheaper to borrow.
Hence, this will enable them to buy more necessities and also to spend on
education and enabling them to get better jobs which may increase their
earning potential in the LR.
▪ Higher output and spending may increase tax revenue enabling the
government to increase its spending on items such as education, health
care services and housing in order to reduce poverty.
(d) Discuss whether or not economic growth always increases living standards. [8]
▪ Economic growth is defined as an increase in the real GDP of a country over
a given period of time.
▪ This will result in higher output and hence may enable people to enjoy more
goods and services especially if GDP per head rises[GDP increases faster than
the population size]. Also E.G raises employment and incomes thereby
increasing the material SOL.
▪ Higher output may increase tax revenue of the government and thus more
resources and higher quality of resources can be devoted to education and
health care services. This in turn would raise the adult literacy rate and life
expectancy of the people. Consequently, this will improve the country’s HDI
score.
▪ Higher output may enable more resources to be devoted to improve
environmental conditions such as to reduce pollution. This in turn may
improve the quality of life of the people.
However;
▪ The benefits of E.G may not be evenly shared if there is high income and wealth
inequality in the country. Consequently, very little might trickle down to the poor
and thus not reducing poverty and raising SOL of the majority.
▪ Higher output may have been achieved by increasing working hours and perhaps
working conditions may have been also declining. This may add more stress onto
workers and thus lowering their non-material SOL.
▪ Expansion of heavy industries to enjoy E.G may have created pollution and
therefore reducing life expectancy.
▪ Non-renewable resources may have been depleted and thereby reducing the
opportunity to achieve sustainable development.
▪ Economic growth may not be sustainable if the increase in demand is not matched
by an increase in supply. Eventually this would cause inflation and hence a rise in
COL.
▪ Economic growth has been achieved because the economy is producing more
capital goods at expense of consumer goods resulting in fewer goods available for
consumption.
2(a) Define net immigration. [2]
Net immigration is defined as a situation when more people coming to live and work in the
country than leaving the country to live elsewhere. In other words, the number of
immigrants exceeding emigrants.

(b) Explain how market forces would respond to a shortage of drinking water.[4]
▪ In a free market economy the price of any good or service is determined by the forces of
demand and supply through the price mechanism.
▪ A shortage of drinking water means that the demand for water would exceed the supply
of water. As a result, the price of water would rise.
▪ The rise in price would induce suppliers to supply more water due to the profit motive
and also sending signals to producers to allocate more resources towards the production
of water leading to an increase in the quantity supplied of water. On the other hand, the
rise in price would ration out the demand for water among competitive buyers resulting
in a fall in the quantity demanded.
▪ Since water is a basic necessity its demand is likely to be price inelastic and thus resulting
in a large rise in price.
(c) Analyse what determines the demand for labour. [6]
▪ Demand for labour refers to the willingness and ability of firms to hire workers at a given wage rate
over a given period of time. Labour is regarded as a derived demand because it is not demanded for
its sake but rather for the services it provides.
▪ State of the economy-For instance during a period of economic boom the level of NY rises; this in
turn raises the demand for labour as labour is seen as a derived demand.
▪ Productivity of labour- If labour productivity increases due to better training and education then
higher labour productivity should increase the demand for labour.
▪ Price of labour-If wage rate rises then COP will also rise; this implies that higher wage rates will
reduce the demand for labour.
▪ Price of capital- higher price of capital may increase the demand for labour if they are substitutes as
firms will be encouraged to replace machines by workers. However, if they are complements then
demand for labour would fall.
▪ Non-wage costs-For e.g. employer’s contribution to pension scheme would result in higher costs
and thus reduce the demand for labour.
▪ Government employment subsidies; higher subsidies to firms will encourage them to hire more
workers thus causing an increase in the demand for labour.
(d) Discuss whether or not increased government spending will increase economic
growth. [8]
▪ Economic growth is defined as a sustained and continuous increase in the Real GDP of a
country over a given period of time. It may be achieved as a result of an increase in AD
and/or an increase in AS in the LR.
▪ Higher government spending will directly increase AD since G is a component of it.
Higher total demand may encourage firms to increase output and thus resulting in a
rise in economic growth.
▪ Higher government spending on education and training should raise labour productivity
as workers become more educated and trained resulting in an increase in the
productive potential of the economy thus causing an increase in the long run economic
growth.
▪ Higher government spending on infrastructure will ensure smooth running of economic
activities. This should reduce costs of production and thus encouraging firms to expand
production. Better infrastructure may attract MNCs/FDI causing a rise in output.
▪ Higher government spending on R & D would lower costs whereby new methods of
production would become available and thus raising the productive potential of the
economy in the LR.
However;
▪ Higher government spending may increase inflation if the economy is working at
full capacity. Thus an increase in G causes in increase in price level rather than a
rise in real output. In addition this may make domestic products less
internationally price competitive and thereby reducing net exports[X-M] causing
AD to fall and thus reducing real output and economic growth.
▪ Higher government spending may not cause an increase in AD if it is offset by e.g. a
fall in consumer expenditure/investment.[offsetting changes]
▪ Higher government spending may not increase AD if it is accompanied by higher
taxation to cover the increased expenditure .
▪ Higher government spending on education and training may not increase labour
productivity if the quality of education and training provided is poor.
▪ Higher unemployment benefits may reduce the incentives for the unemployed to
look for jobs and this may lower productivity and hence economic growth.
▪ Government spending may be spent wastefully or inefficiently and thus failing to
raise real output.
3(a) What is meant by ‘redistribution of income’? [2]
Redistribution of income aims at achieving fairness or justness in the distribution of
income. In other words, it aims at creating greater equality or reducing inequality by
reducing the gap between rich and poor. For example taking income from the rich and
giving it to the poor by using a progressive taxation and state benefits.

(b) Explain two reasons why the rich spend more in total than the poor. [4]
• The rich have greater income which means they have more purchasing power and thus
spend more in total
• The rich have greater wealth/assets which generates income such as interest, dividends,
capital gains and thus they have greater ability to spend more in total.
• The rich have greater ability to borrow because banks are more willing to lend them
money as they have more collateral to offer as security.
• The rich are more confident than the poor because they expect that their purchasing
power will continue to increase in the future.
(c) Analyse why the elimination of absolute poverty would not solve the
economic problem. [6]
▪ Absolute poverty also known as extreme poverty is a situation where people do not have
access to basic necessities such as food, shelter and clothing. In fact people are living on
less than $1.90 per day according to the World Bank income threshold poverty line.
▪ The basic economic problem is scarcity which arises because human wants are unlimited
while resources available to satisfy the wants are limited.
▪ Even if everyone had access to basic necessities, people would still want more products
for e.g. better quality food and shelter. Thus, there would be more pressure on the
existing resources to satisfy the ever increasing wants of the people. This would give rise
to relative poverty as the rich will still be able to spend more than the poor.
▪ Over time what is considered to be absolute poverty is likely to change for instance
because of changes in price levels, government welfare programmes and revision of the
international poverty line.
(d) Discuss whether GDP per head is the best measure of comparative living
standards. [8]
▪ Standard of living refers to the social and economic wellbeing of individuals in a country
at a point in time.
▪ GDP is regarded as the traditional/baseline indicator to measure SOL. GDP is the total
output/income generated in a country.
▪ Since income/output is an important influence on living standards; higher incomes would
mean people can consume greater quantity and better quality of goods and services
which in turn raises their material SOL.
▪ GDP per head is a good indicator of SOL because it takes into account the size of the
population. It is obtained by taking GDP divided by the size of population. If GDP rises
faster than the size of the population then GDP per capita would rise resulting in a rise in
material SOL.
▪ Higher GDP per head can increase tax revenue which can be spent on items such as
education and health care which in turn increases living standards.
▪ GDP per head is measured by all countries and hence cross country comparisons become
possible. Also, it is relatively easy to calculate and understand.
However;
▪ GDP per head is just an average figure. It does not take into account distribution of
income. For instance GDP per head may be high but some people may be still poor if
incomes are not distributed fairly.
▪ GDP per head does not take into account leisure time. GDP per head may be high but if
people are working long hours then quality of their lives may be poor. This is particularly
true in work aholic societies.
▪ Increases in output may be accompanied by an increase in the level of negative
externalities such as pollution. For instance lower air quality may reduce living standards.
▪ GDP per head may not fully reflect the quality of goods produced which may increase
even if GDP per head does not change.
▪ GDP per head may not fully reflect the quantity of goods produced due to the existence
of the informal/shadow economy where many transactions go unrecorded.
▪ GDP per head does not include safe drinking water which has a significant influence on
health and quality of life especially in developing countries.
▪ There are wider/more accurate measures of living standards such as HDI which takes into
account education/literacy and health/life expectancy.