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9708 · 9.2

Economic growth and sustainability — practice questions

Practice and worked examples for 9708 Economic growth and sustainability. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Country Y's nominal GDP rises from 800bnto800bn to 880bn while the GDP deflator increases by 5%. Real GDP per capita rises from 12000to12 000 to 12 480 and the population grows by 2%.

(a) Calculate the rate of real GDP growth. (b) Evaluate whether this growth is likely to be sustainable. [10 marks]

Show solution outline

(a) Nominal growth = (880 − 800)/800 = 10%

Real GDP growth ≈ nominal growth − inflation = 10% − 5% = 5%

(Precise: real GDP = nominal/deflator; growth rate ≈ 10% − 5% = 5%.)

Per capita check: Real GDP per capita growth = (12 480 − 12 000)/12 000 = 4%, consistent with 5% real GDP growth minus 2% population growth (approx.).

(b) Arguments growth may be sustainable:

  • Real per capita rise — living standards improving, not just population-driven.
  • If investment is in renewable energy, education, infrastructure — supports LRAS long run.

Arguments against:

  • If growth is AD-driven beyond capacity → inflation, resource strain.
  • Environmental externalities not captured in GDP — pollution, carbon emissions may impose future costs.
  • Inequality: if gains accrue to top earners only, social sustainability weakens.

Judgement: 5% real growth is strong — sustainability depends on composition of growth (green investment vs fossil-fuel expansion) and distribution of benefits.

Worked example 2

An economy's long-run potential growth is determined by the growth accounting equation: %ΔY = %ΔA + 0.4(%ΔK) + 0.6(%ΔL), where %ΔY is potential output growth, %ΔA is total factor productivity (TFP) growth, %ΔK is capital stock growth, and %ΔL is labour force growth.

In a given year, the capital stock grows by 5%, the labour force grows by 1%, and TFP grows by 0.5%.

(a) Calculate the rate of potential economic growth for this year. (b) If the government wants to increase the potential growth rate to 4% next year solely through investment in new capital (assuming %ΔA and %ΔL remain the same), what rate of capital stock growth (%ΔK) would be required? (c) Discuss one reason why relying solely on capital accumulation for growth might be unsustainable.

Show solution outline

(a) Calculate potential growth: Step 1: Substitute the given values into the growth accounting equation. %ΔY = %ΔA + 0.4(%ΔK) + 0.6(%ΔL) %ΔY = 0.5% + 0.4(5%) + 0.6(1%) Step 2: Calculate the contribution of each component. %ΔY = 0.5% + 2.0% + 0.6% Step 3: Sum the components. %ΔY = 3.1% Answer: The potential economic growth rate is 3.1%.

(b) Calculate required capital growth: Step 1: Set up the equation with the target growth rate of 4%. 4% = 0.5% + 0.4(%ΔK) + 0.6(1%) Step 2: Simplify the equation. 4% = 1.1% + 0.4(%ΔK) Step 3: Solve for %ΔK. 2.9% = 0.4(%ΔK) %ΔK = 2.9 / 0.4 = 7.25% Answer: A capital stock growth rate of 7.25% would be required.

(c) Discussion on sustainability: Relying solely on capital accumulation for growth can be unsustainable because high rates of investment often require intensive use of natural resources and energy. For example, building new factories, roads, and infrastructure consumes large amounts of steel, concrete, and fossil fuels. This can lead to rapid depletion of non-renewable resources and increased negative externalities like pollution and carbon emissions, undermining long-term environmental sustainability.

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