2- Economic Growth Flashcards
What are the 4 economic objectives?
- economic growth
- price stability (inflation)
- minimising unemployment
- stable balance of payments on current accounts
Give examples of when the governments can influence the economy to achieve economic aims?
- when economic growth is low and unemployment is high, government should increase its own spending to boost the economy
- if inflation was too high, government should cut its spending in order to reduce demand so that prices fall
Define GDP is?
A country’s GDP is the monetary value of the total number of finished goods and services produced in the economy within a given period
Define what nominal GDP is?
Nominal GDP measures the value of GDP before inflation has been accounted for .
BUT if prices rise by 5% and nominal GDP rises by 5%, the value of goods and services has stayed the same
Define real GDP?
Real GDP
- nominal GDP adjusted to eliminate changes caused by orice changes (inflation)
Define economic growth?
Economic growth is the percentage increase in productive capacity of an economy. Can be SR and LR
What is economic growth measured in?
In theory, growth measures the increase in productive capacity of an economy as shown in PPF. However this cannot be measured precisely, so economists use %change in GDP over a period of time (usually a year) to measure economic growth
Define short run economic growth?
SR economic growth
- the actual annual percentage change in real national output.
Arises from factors that shift SRAS to right and therefore lead to macro equilibrium at a higher level of real GDP
Define Long run Economic Growth?
LR Economic growth-
- An increase in the potential productive capacity of the economy
In LR m, government can try to increase the PPF and LRAS by improving the UK’s Productivity. This will help LR economic growth, and as AS increases, it should help keep prices low
How does economic growth conflict with other objectives?
If AD increases…
It increases economic growth and leads to higher employment
BUT
Increase inflation and worsens balance of payments
Define economic cycle?
Economic cycle
- variations in the level of productive capacity of an economy over time
Aka when the actual Output (GDP) tends to fluctuante though u can go years without a phase
Define productive capacity?
Productive capacity
- the maximum amount of goods and services that we can produce with the resources we have available
What is economic growth a government target?
Economic growth is a government target because high real GDP means more wants are satisfied and the population has higher living standards.
What are the possible problems that need to be considered with economic growth?
The problems include:
- what affect does growth have on environmental factors such as pollutions and congestion?
- is growth sustainable or are scarce resources being used up?
- is growth leading to greater inequality of income and wealth?
Define the boom phase?
Boom is where GDP reaches its maximum output before a decline
Define recession phase?
- Decline in economic growth
- where gdp falls for two successive quarters or more
- economic growth starts to fall for a downturn
Define slum/trough?
Slump
- where GDP reaches a minimum before a period of growth . Economic decline
Define the recovery stage?
Recovery
- when GDP is expanding
Define what an output gap is?
An output gap is the difference between the economy’s productive capacity and its actual GDP. Can be -ve and +ve
Actual GPP minus sustainable GDP
Define a positive output gap?
A positive output gap occurs when actual GDP is ABOVE the productive potential of the economy
This occurs if resources are used more extensively than normal eg workers undertaking overtime), but it is more difficult to sustain
Define negative output gap?
A negative output occurs when actual GDP is BELOW the productive potential of the economy
Occurs when resources are underused eg periods of unemployment
Characteristics of boom phase?
- high rate of economic growth
- high demand
- low unemployment
- inflationary pressure
- labour skills shortages
- high confidence in economy
- high capital investment
Characteristics of recession?
- fall in demand
- unemployment begins to rise
- firms start going out of business
- low confidence
- firms reduce investment
Characteristics of slump?
- low or -ve growth
- low demand
- high unemployment
- low inflation
- low confidence
- high rate of bankruptcy
Characteristics of recovery?
- economic growth starts to rise
- demand increases
- unemployment falls
- inflation starts to rise
- confidence starts to rise
- capital investment starts to rise
Economic indicators to recognise the stages of the economic cycle?
- economic growth
- investment
Using economic growth to recognise the stage of the economic cycle?
Economic growth because economic cycle shows actual output (real GDP)
+ve economic growth= recovery and boom
-ve economic growth= slump and recession
When real GDP is expanding, the economic cycle will move towards capacity. This means
⬆️demand for resources> ⬆️wages and costs therefore causes higher inflation
⬆️demand for resources> ⬇️unemployment as more resources demanded
The results indicate economic growth
Using investment to recognise the stages of economic cycle?
Investment
>Firms expect high economic growth
»investment in new capital to ⬆️ their capacity to produce
And vice versa therefore good indicator
