2:4:1 - Economic Growth Flashcards
What is meant by the term actual economic growth?
Is an increase in real GDP
What is meant by the term potential economic growth?
Is an increase in the capacity of the economy
What happened to real GDP during a boom?
Real GDP rises fast
What happens to real GDP during a recession?
It falls for at least two consecutive quarters
What happened to real GDP during a slowdown?
- The level of GDP may be rising, but rising below the usual. - Or it may be falling
How can actual economic growth occur?
Increase in one of the components of aggregate demand - Consumption – Investment – government spending – net trade
What component of aggregate demand will increase consumer confidence or the availability of credit increase?
Consumption
What is meant by the term export led growth?
Economic growth caused by rises in net exports
Why is export led growth good?
– Improves current account of the balance of payments
Can actual economic growth also occur because of increases in aggregate supply or because of government supply-side policies? Why?
– Yes – increase in aggregate supply (This might happen because costs of production full) – government supply-side policies (deregulation of markets)
A shift in the AD or AS curve to the […….] should cause an increase in actual growth
Right However if a D increases on the vertical part of the AS curve then the only affect is inflation And the same thing happens on the horizontal parts however this isn’t inflationary but there will be no change in price levels or output
When can potential economic growth occur?
– When the vertical part of the aggregate supply curve shifts to the right (increasing the amount that the economy can produce)
What are the problems with export led growth?
– Makes the exporters vulnerable to changes in demand in other countries – or exchange rates Which are outside of their control
What is the currency of China?
Reminbi
What are the factors that constrain economic growth?
– Absence of efficient capital markets – government instability – labour market problems – external constraints
How does the absence of efficiant capital markets constrain economic growth?
Lenders charge high rates of interest because there is asymmetric information
How does government instability constrain economic growth?
- Cannot attract investment - currency might be unstable - Fiscal deficit (Less Power to spend and stimulate growth)
How does labour market problems constrain economic growth?
– This country to get richer birthrates tend to fall, in the long run this means labour supply falls
How does external constraints constrain economic growth?
– Trade is a key driver of growth – tariffs and subsidies can prevent A country from growing – global fears of a recession
What is meant by the term output gap?
The difference between actual and potential GDP
What does a negative output gap mean?
Country is not using its resources to the full
What happens to the economy if there is a positive output gap?
– Pressures will grow Such as: tight labour markets, waste pressures and shortages of raw materials
What does a negative output gap show about an economy?
Spare capacity Bank of England may cut interest rates to stimulate investment
Who measures the size of the output gap?
The office for budget responsibility
What can the trade cycle also be called?
– Economic cycle – business cycle
In the economic cycle booms tend to be followed by what?
Slumps or slowdowns
In the economic cycle slumps or slowdowns tend to be followed by what?
Recessions
In the economic cycle recessions tend to be followed by what?
A recovery phase
What are the benefits of economic growth on consumers?
- incomes and wealth rise - People can save money for future consumption - People feel more confident about their jobs - more willing to spend - likely to be more employment opportunities - wages might rise as firms try to keep hold of workers
What are the benefits of economic growth on Firms?
- Firms tends to make more profit - Firms take on more workers and are likely to invest (increases growth and future prospects)
What are the benefits of economic growth on Governments?
- People pay more tax when incomes rise and asset prices rise (cooperation tax, VAT, income tax) - Government pays less unemployment benefits - Government has a better fiscal position
What are the benefits of economic growth on Living Standards?
- Incomes rise which is likely to make people better off - Poverty rates fall as wages and employment rise - Government will spend more in areas to improve living standards - Firms May use cleaner technology because they can afford to • Standards of living increase as long as the cost of living does not also increase
What are the costs of economic growth?
- Income Inequality (unskilled are less likely to benefit from increased incomes) - Environmental Problems (Depletion of natural resources and external costs such as CO2 emissions) - Balance of Payments Problems on the Current Account (Higher incomes means people import more and there is less incentive for firms to export) - Bottlenecks (when there is little spare capacity, factors of production rise in price, Monopoly power could cause barrier of entry to be tightened) - Social Dislocation and Stress (Higher incomes will be earned by some but not all, could be increased household debt as people over spend, wealth effect) - Problems of rapid growth (cause short term prices to rise, growth too quickly could cause bad planning and shoddy workmanship)
Diagram showing a NEGATIVE output gap.
Diagram showing a Positive and Negative Output Gap
Diagram showing the Trade Cycle.
