1- Economic growth Flashcards
Causes of economic growth
Q^2 CELL
Anything that will shift LRAS
How does capital cause economic growth?
- Through investment
- More goods can be produced with better technology
BUT: Houses, buildings may not increase GDP
How does enterprise cause economic growth?
- Through gov tax incentives
- Lower corporation tax- encourages investment
- Lower income tax- more workers, more goods
- High taxes- equal wealth distribution- removes incentive.
How does labour cause economic growth?
Size: Immigration, demography, participation rates (women, high retirement ages).
- Quality: Productivity through education and training.
Greater occupational mobility- more innovation.
How does land cause economic growth?
- Through the discovery of new resources e.g. oil.
Other causes of economic growth?
- Technological progress
- Efficiency
How does technological progress cause economic growth?
- Improved technology- lowers costs- quicker to produce and less labour need.
- Creates new products, keeps MPC high, needed for growth.
How does efficiency cause economic growth?
- Less resources needed to produce each good.
- Promote competition- low prices- high quality.
Difference between actual and potential growth?
Actual growth- AD shifts
Potential growth- LRAS or PPF shifts
How does international trade cause economic growth?
- Export led growth increases AD.
- Export led growth can encourage investment increases LRAS.
- Increase efficiency as firms forced to be efficient.
When is a positive output gap possible?
Only in the short run
Problems with output gaps?
- Hard to measure
- GDP inaccurate
- LRAS unknown
4 phases of the trade (business) cycle
- Boom
- Downturn
- Recession (slump)
- Recovery
Characteristics of a boom
- High national income
- Positive output gap
- Consumption, investment, tax revenues high
- Wages increasing
- Inflationary pressures
- Imports
Characteristics of a recession
- High unemployment- low consumption, investment, imports
- Low inflationary pressures- maybe deflation
- Firms lower revenue and profits.
Hysteresis problem with recession
- Permanent loss of labour
- Loss of skills discourages workers
Problem with boom
- Those on fixed incomes will have a fall in their real income due to inflation.
Impact of economic growth on consumers
- Positive wealth effect- higher house prices and share prices
- Lower prices from improved productive efficiency
- Increased happiness
- Increased inequality
- Inflation
Impact of economic growth on firms
- Investment increases- more money, incentive and more chance of a return on investment.
- Business confidence increases- potential demand increases
- R + D from investment- lower costs
- High demand, lower costs = higher profits
- Firms who sell inferior goods may lose out.
Impact of economic growth on governments
- Tax revenues increase- VAT, income tax
- Help reduce budget deficit or budget surplus to help in future recessions.
- High expectation on government
Impact of economic growth on living standards
- Lower poverty levels
- More goods and services to enjoy
- Health increases
- Exploitation of environment- but R +D for cleaner fuels
- Increased inequality
