11.1 Economic Growth And Economic Cycle Flashcards
What is the measurement of economic growth?
Performed by simply measuring the the % of annual change in real gdp or possibly real gdp per capita
Diagram for both short-run and long-run economic growth
What is the demand side?
Relates to the impact of changes in AD on the economy (associated with Keynesian economics)
What is short run economic growth primarily cussed by?
Demand-some changes in the economy
Short run economic growth is shown by the AD equation
AD=C+I+G+(x-M)
What do the letters stand for
Aggregate demand
Consumption
Investment
Gov spending
Exports
Imports
Diagram for comparing the effects on economic growth of rightward shifts of the AD curve
What is x-M also known as
Net trade
What changes the position of the AD curve
The AD equation
AD=C+I+G+(x-M)
What is supply side ?
Relates to changes in the potential output of the economy which is affected by the availability of factors of production
E.g changes in the size of the labour force and the productivity of labour
What causes short run economic growth
Anything that will shift the SRAS to the right
What causes short run economic growth:
Give examples
Fall in money wage rates
Fall in cost of production
Fall of taxes on firms
Increase subsidies on firms
As output rises what happens to the SRAS curve?
Begins to slope upwards which means fitter increase of AD will lead to inflation as well as rising real output
When the economy reaches the LRAS curve what is needed for more growth ?
Short-run growth must give way for long-run growth
What leads to economic growth (supply side)
Anything that shifts SRAS to the right (although main effect of supply side is on the LRAS)
What is the trend growth rate?
The rate at which output can grow on a sustained basis,without putting upward or downward pressure on inflation. It reflects the annual average percentage increase in the productive capacity of the economy
What is the economic cycle
Upswing and downswing in aggregate economic activity taking place over 4-12 years
Diagram of long run economic growth shifting LRAS to the right
Where to the causes of long run economic growth lie?(it is in the supply side of the economy)(5)
Improvements in tech (investment and technical progress)
Increase in labour force size
Improvements in productivity
Mobility of factors or production
Economic incentives for entrepreneurs and workers they employ
Long run growth is affected by the supply side by why does AD have a part to play
Firms will only price more goods if there is sufficient demand to absorb the output
What are the two main theories of economic growth
Neoclassical theory
New growth theory
two main theories of economic growth
Neoclassical argument
A sustained increase in investment increases economys growth rate temporarily. Ratio of labour to capital goes up
Rate at which labour productivity Improves Is determined by technological progress
However theory does not say how technical progress comes about
two main theories of economic growth
New growth theory
Replaced neoclassical because it explains how technical progress comes about:
-profit seeking research
-openness to ideas from overseas
-accumulation of human capital
What are the costs of economic growth (6) (reduce economic welfare)
-uses up finite resources that can’t be replaced (oil and minerals)
-leads to pollution and other forms of environmental degradation
-can destroy local cultures and communities and widen inequalities in distribution of wealth and income
Leads to growth of bid cities-loss of good agricultural land
In early phases raid population increase-more people to feed-more people who are poor
-there are countries with low growth if there are ones with high growth (associate negatives e.g low profits low investment ect ect)
Benefits of economic growth(7)
Increases standard of living and ppls welfare
Provides new environmentally friendly technologies
May lead to more civilised communities
Route out of poverty
Produces a ‘fiscal dividend’ tax revs that growth generates (tax can be used to correct market failures)
Greater business confidence and increased investment in technology
Who benefits and who looses from economic growth
W: rich people higher welfare and incomes
L: poor, loss of jobs and increased inequality
Economic growth more harms than benefits to the environment
What are the two ways fluctuations happen in the economy?
-seasonal
Cyclical over many years
What is actual output
Level of real output produced in the economy in a particular year
(Don’t confuse with Trend level of output which is what the economy is capable of producing)
How long is an economic cycle ?
4-12 years
Diagram for economic cycle
Diagram for upswings and downswings in the economic cycle
What are the explanations for fluctuations in the phases of the economic cycle?
-fluctuations in AD
-supply-side factors
-the role of speculative bubbles
-political business cycle theory
-outside shocks hitting the economy
-changes in inventories
-the Marxist explanation
-multiplier/acceleration interaction
-climatic cycles
What are the explanations for fluctuations in the phases of the economic cycle?
The role of speculative bubbles
Rapid economic growth leads to a rapid rise and speculative bubbles in asset prices
What are the explanations for fluctuations in the phases of the economic cycle?
Changes in inventory
Firms can also invest in stocks of raw materials and in stocks of finished goods waiting to be sold -key determinant in recessions
As stocks accumulate firms forced to cut production by more than the original fall in demand
Diagram for output and employment in economic cycles
What are output gaps?
Show the level of actual real output in the economy either higher or lower than trend level of outoutn
Positive output gap
The level of actual real output in the economy is greater than the trend output level
Negative output gap
The level of actual real output in the economy is lower than the trend output level
Diagram for negative and positive output gaps in an economic cycle
When does a gov define an economic cycle as beginning and ending
When there are no output gaps
Negative and positive ouotungaps illustrated on an AS/AD diagram
