11-analysing Growth (economic Growth) Flashcards
Real GDP
The output of an economy with the effects of inflation removed
Potential growth
Is the amount by which a country could increase its production is all resources were used efficiently
Output gap
The difference between actual GDP and potential GDP. Shows how a country is not using its resources efficiently or at their maximum potential
Actual growth
That increase in real GDP
Reasons for output gap
- resources available are not suited to the needs of the economy
- The welfare system pays generously for some people not to work
- structural changes meaning the economy no longer produces output that is tailored to the needs of the market
Causes of growth
- occurs with a multiplier of that when there is a shift in aggregate demand
- if the aggregate supply curve is vertical then when aggregate demand shifts there will not be growth as actual growth cannot occur beyond full capacity
Causes of growth
aggregate demand shifts
Increase in consumption
- Cut in the interest rate meaning the opportunity costs and savings falls&cost of borrowing to invest falls>fall in the cost of mortgage interest repayments>People have more money to spend
- increasing confidence
- wealth effects from rising house or share prices
Causes of growth
aggregate demand shifts
Increase in investment
- Firms invest more when the cost of borrowing falls
- increase in confidence of firms>If firms think there will be growth they are more likely to invest which is likely to stimulate growth
Causes of growth
aggregate demand shifts
Increase in government spending
Governments can use fiscal policy to stimulate the economy this means spending on government projects such as health and education when the rest of the economy is lacking in aggregate demand
Causes of growth
aggregate demand shifts
Increase in net exports X - M
- How the exchange rate down this makes exports relatively cheap and import relatively expensive however in the UK we have a freely floating exchange rate and no manipulation is possible
- Reduced tariffs and quotas encouraging trade tends to lead to an improvement in exports in the long run
- encourage productivity and efficiency in export markets
Causes of growth aggregate supply shifts - Corporation tax -investment(capital) - income tax and benefits
- Cutting corporation taxes (taxes on profit) so that firms have a strong incentive to produce more
- encouraging investment (to increase capital input) by forcing banks to lend money or by easing the credit situation (quantitative easing) or even cutting interest rates
- improved incentives for workers by cutting income tax rates and cutting benefits for out of work members of the labour force
Causes of growth aggregate supply shifts -labour size of workforce -infrastructure -Cutting tariffs -Labour market
- increase in the size of the workforce increases the output e.g through internal migration
- improving infrastructure e.g. UK transport system
- measures to make imports cheaper e.g. cutting tariffs>for firms production costs will fall
- improving the labour market by increasing educational standards
Constraints on growth
- Lack of investment funds or cash to run businesses
- weak or obstructive governments
- currency instability or a fixed exchange rate or exchange rates too high
- lack of human capital
- high level of tariffs so cannot acquire raw materials or capital goods
Benefits of growth
-increase income and standard of living
-increased income and standards of living:
total income for the country is increasing when there is economic growth as long as inflation is not increasing at the same rate people will be better off: LEDCs so may decrease poverty, higher life expectancy
-the distribution of income is likely to change&gap between the rich and poor may increase
Benefits of growth
- firms experience increased profits
- This is likely to mean that they can make more profits and shareholders can enjoy increased returns
- however firms making inferior goods (where demand falls when income rises) are likely to suffer
Benefits of growth
- Government benefit in a boom
Increase in the amount of people working and paying tax means that fewer people need benefits such as Jobseeker’s Allowance> expect there to be a fiscal improvement in a boom
Costs of growth
damage to the environment
E.g. through increase carbon emissions the byproduct of most industrial production is CO2 and this has an impact on the ozone layer acid rain and a small group also causes a rise in fuel emissions(because a greater number of people are travelling to work with travelling to a holiday destination at home or abroad)
Costs of growth
damage to the environment
evaluation
Higher incomes can> that there is more money to clear up environmental damage e.g. catalytic converter is can be fitted to cars, firms can be forced to use a certain percentage of biofuels or renewable energy, money available for investment in new machinery&firms&gov can adopt carbon offset schemes
Costs of growth
Balance of payments problems
High incomes mean that people can afford to import more and firms do not need to export as higher profit margins can be made through selling at home rather than abroad so X Falls M rises and the BOP worsens
Costs of growth
Balance of payments problems
Evaluation
If growth is caused by increasing exports then an improvement of the BOP is expected, which means export led growth ( occurs when the country grows mainly through increasing exports)
Costs of growth
widening income distribution
- Distribution of income=measure of the difference in income between different groups in an economy -groups can be measured in a variety of ways(e.g to compare the highest 10% of income earners with the lowest decile)
- when the economy grows it tends to be those who already have a good job who benefit from growth
Costs of growth
widening income distribution
With continued growth workers may want higher income and the rewards may trickle down to those on the lower paid jobs especially if there is a shortage of labour and these workers cannot be replaced by machinery
-The higher the appropriate skill level the more likely they are to benefit
Costs of growth
The opportunity cost of growth
Achieving economic growth means an economy has to give up other objectives
e.g. a country could give more foreign aid or improve the welfare of pensioners through more generous State aid. Transfer payments are not recorded as growth but may have great value in terms of improved standards of living
Costs of growth
The opportunity cost of growth
Evaluation
The opportunity cost of growth is very hard to measure as we cannot barely know what would happen if another policy had been used
