1.6 Economic growth Flashcards
How is economic growth illustrated?
Can be represented using an LRAS/AD curve or a PPF
What causes short run growth?
- Changes in interest rates
- Fiscal policy
- Commodity prices such as oil, gas and food
- Currency changes SPICED
- Trading conditions
- Confidence of businesses and consumers
What causes long run growth?
- Investment
- Productivity
- Labour supply
- R&D
- Innovation
- Enterprise
What countries have experienced export led growth - what are the advantages?
BRICS, Ireland, SK, Singapore, Honk Kong, Vietnam - other emerging economies
Advantages:
- Exports are injection to circular flow, rise in AD and multiplier and output - raises per capita incomes and reduces poverty.
- Provides revenues and businesses for profits which can then be reinvested through capital investment. Higher investment increases a country’s productive capacity which increases potential for exports
- Industries facilitate trade - fast growing export sectors likely to see increased investment and employment in these industries
What are the drawbacks of export led growth?
- Over dependence on trade partners
- Persistent trade surpluses might incite protectionist measures from other nations
- Production capacity allocated to supply goods and services for exporting cannot be put to use meeting domestic needs and wants
- Rapid export led growth leads to demand pull inflation and higher interest rates - if inflation is higher relative to other countries than export industries may become less competitive in oversea markets and domestic producers less price competitive against imports
- May be unsustainable if contributes extraction of natural resources beyond what is required for long term growth to be maintained.
What are positive/negative output gaps? Why are they hard to asess?
Positive - GDP is above potential GDP - sign of excess AD in economy
Negative - economy has spare capacity of factor resources
This can be diagrammed if equilibrium price of AD/SRAS is less or more than the YFE of LRAS
May be hard to assess as other factors come into play such as productivity, size of labour force, business output and confidence, underemployment.
What is the business cycle?
Shows an upward general trend of GDP activity over time in an economy
A boom shows when the rate of GDP growth is fast and higher than the long term trend
A slowdown is when growth rates fall - GDP still rising but at a slower rate
Recession - period of at least 6 months when economy suffers a fall in output, employment, investment and confidence
Recovery: GDP starts to increase after a recession
Depression: prolonged downturn when GDP falls by at least 10%
These show negative and positive output gaps - positive during a boom and negative in a recession
What are the characteristics of a boom/recession?
Boom:
- Higher wages
- Higher confidence for firms and consumers
- Rising incomes
- Rising employment/falling unemployment
- Inflation
- Business profits
- Reduced trade deficit
- Use scarce resources
- Investment
- Construction of infrastructure
- Falling budget deficit - less government borrowing
Recession:
- Falling income
- Falling confidence
- Falling employment/rising unemployment/underemployment
- Stagnant wages
- Falling business profits
- Falling inflationary pressure
- Less use of scarce resources
- Falling investment
- Less construction of infrastructure
- Rising budget deficit
What are the causes of a recession?
- External - trading partner recession or commodity prices rising
- Macro policy - higher interest rates, rise in taxation or cut in G
- Fall in asset prices or credit supply - decline in level of share or house prices
- Drop in confidence - cut investment and spending - more saving.
This may be illustrated by a shift inwards of AD or a shift inwards of AS, lowers equilibrium output level and in AS case can cause cost push inflation.
What are the effects of a recession?
- Fall in confidence
- Fall in business profits and investment - MEC
- Unemployment, fall in demand for labour - contraction plus cyclical unemployment
- Tax revenues decline, more welfare spending - increase budget deficit
- Deflation and lower profitability as such
Long term:
- Structural long term unemployment
- Reduced capital stock
- Cut in public services and austerity
- Falling real wages
- Widened inequality
- Social costs
What is hysteresis and creative destruction?
Hysteresis:
when economy is in recession big risk of permanent loss of national output. Loss of productive capacity due to low capital investment and many business closures.
High rates of structural unemployment may cause a shrinking labour force perhaps through outward migration.
Creative destruction:
- Capitalist markets bounce back from recession
- Emergence of new business models and start ups
- New firms and technologies act as catalyst for growth and investment.
What are the benefits of economic growth?
- High SOL, GNI per capita - lifted out of extreme poverty
- Employment - job creation
- Fiscal dividend - raised tax revenues, less spent on welfare more spent on public services
- Accelerator - stimulates new investment
- profits - reinvested, R&D, innovation
- Additional income used for saving - protection against future loss of income due to sickness/lack of demand, supports big spending like retirement and houses
What are the costs of economic growth? What do the costs/benefits depend on?
- Inflation - demand and cost pull
- Central bank may raise interest rates to control inflation
- Increased trade deficit
- Environmental effects
- Inequality and social divisions
- Gains go to few people
Depends on:
- Cause of growth
- Actions taken by government to prevent excessive growth
- Consumer and business attitudes and reactions
- Rate of growth
- Legislation to protect the non working.
