2.1 Economic Growth Flashcards
What is economic growth?
Change in national output over time as measured by GDP or GNP
What is short run economic growth?
Increase in actual GDP
What is long run economic growth?
Increase in the productive potential of an economy.
What is the policy objective of economic growth?
Governments seek economic stability and a reduction in the fluctuations of actual economic growth around the trend rate of growth. In the Uk, the govt policy objective of economic growth is a steady rate of economic growth.
Economic growth often primary policy objective as it is an indicator of how the economy is doing and of the performance of other key indicators e.g inflation, employment rates and efficiency of policy measures.
Govt policy objectives for economic growth depend on stage of economic development.
What are the different stages of the economic cycle?
Boom: rate of actual economic growth exceeds trend rate and the output gap is narrowed
Slowdown/downturn: economic growth rates begin to fall and approach zero
Recession: two consecutive periods of negative economic growth
Recovery/upturn: economic growth becomes positive after a recession
What is real and nominal gross domestic product?
Real GDP= takes inflation rates into account
Nominal GDP= at current prices doesn’t take inflation into account
If we know GDP at current prices and we know the relevant price index, we can calculate the real value of GDP
How can you calculate real GDP?
(1.613/105.2) x 100
What changes in GDP occur over time?
Changes are caused by changes in the demand and/or supply sides of the economy
Rates of change in GDP over time relates to the stage of economic development. E.g less developed countries are likely to grow at a faster rate than those that are economically developed
How do you calculate economic growth rates?
Economic growth rates= (change in GDP/ original GDP) x 100
What is GDP per capita?
Gross domestic product per head eg it measures the average level of national income per person in a population
How do we calculate GDP per capita?
GDP per capita= GDP/ population
Explain short run economic growth due to a demand in aggregate
Diagram page 133
A change in the demand side of the economy is caused by an increased component of aggregate demand (consumption, investment, government expenditure and net exports)
This in turn leads to a rise in real GDP= positive economic growth
Explain long run economic growth
Diagram page 134
Growth caused by supply-side policies that increase the productive capacity of the economy
The expansion of productive potential is illustrated by the shift in long run aggregate supply, resulting in an increase to real GDP and the full employment level shifting
The shift causes a fall in price level and there is an extension in aggregate demand
Explain short run economic growth caused by a rise in short run aggregate supply.
Diagram page 133
A change in factor input costs (labour costs) affects the supply side of the economy, resulting in an increase in short run aggregate supply from SRAS 0 to SRAS 1
What are the causes and consequences of economic growth in the short and long run?
Shifts in aggregate demand and/ or aggregate supply
Changes on demand side are caused by changes in the components of aggregate demand e.g consumption, investment, govt expenditure and net exports
Changes on the demand side are caused by an injection into, or leakage from, the circular flow of income
An alteration in macroeconomic policy measures, monetary and fiscal policy will cause a change in aggregate demand
What are the consequences of short and long run economic growth?
This depends on what has caused it. You need to highlight that policy measures on the demand side need to be balanced e with supply-side policies in order to have a sustainable economic growth
What are the benefits of economic growth?
Rise in average household income as indicated by GDP per capita
Reduced unemployment through job opportunities being created in order to produce a higher level of output thus creating a higher derived demand for labour
Rise in material standards of living as households are able to purchase products with a higher income elasticity of demand
Reduction in absolute poverty levels
Improvements in public services, an increase in govt taxation receipts that could increase govt expenditure on merit goods such as education and healthcare
What are the costs of economic growth?
Demand- pull inflationary pressure as spare capacity is used up
Rising income inequality as measured by the Gini coefficient and Lorenz curve
Relative poverty could rise
Environment degradation through the divergence between MSC and MPC, which hinders sustainable economic development
Wealth concentration resulting in greater division between geographical areas of the economy
