Explain how an increase in investment might lead to economic growth.

Discuss the possible consequences of economic growth on living standards, unemployment and inflation.

Answers may include:

• definitions of investment and economic growth
• diagrams might include AD/AS/LRAS or PPC to show the impact of investment on economic growth
• explanation of how investment in physical capital, human capital and natural capital can lead to increases in the quantity and quality of resources and subsequently an increase in productivity and/or how investment might increase aggregate demand (AD)
• examples of types of investment that have caused this or countries that have grown as a result of increased investment.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of economic growth, living standards, unemployment and inflation
• diagrams might include AD/LRAS showing an increase in AD or LRAS and impact on real GDP/living standards and inflation and/or labour market diagram showing an increase in AD, and accept AD_L
• explain how an increase in economic growth potentially raises living standards and decreases unemployment due to an increase in real output. Incomes are raised and due to the increase in demand for goods and services more workers are employed. In addition, the impact on inflation could be positive or negative depending on the cause of the economic growth
• examples of countries that have experienced economic growth and the subsequent effect on living standards, unemployment and inflation
• synthesis or evaluation (discuss).

Discussion may include: the impact on different stakeholders. Workers may benefit due to there being more jobs available but consumers may not benefit because of the increase in prices. Or living standards may not increase equitably. In addition, the discussion may focus on the cause of the economic growth. If it is caused by an increase in AD then it is more likely to lead to inflationary pressure than if it was caused by an increase in LRAS. However, in the Keynesian range of the LRAS curve any increase in AD may not necessarily lead to an increase in inflation.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.