2.1 - economic growth Flashcards
What are the seven macroeconomic objectives?
- economic growth
- low unemployment
- price stability = inflation @ 2% CPI
- BOP current account equilibrium
- fiscal prudence = balanced budget
- environmental protection
- greater income equality
How is economic growth measured?
It is measured by the change in real GDP over time. (national income/output/expenditure)
What is GDP?
Gross Domestic Product is the total value of the output produced by the economy. The sum of the value of goods and services produced in the economy.
What is real GDP?
GDP adjusted for inflation.
How does change in real GDP show economic growth?
If the measure is up on the previous three months, the economy is growing. If its negative, the economy is shrinking or contracting.
How do we know when a recession has occurred?
2 consecutive quarters (three month periods) of contraction = recession.
What is the national income identity?
National output = national income = national expenditure.
What is the output measure?
The total value of goods and services produced by all sectors of the economy: agriculture, manufacturing, energy, construction, service sector and the government.
What is the expenditure measure?
The value of all goods and services bought by households and by government, investment in machinery and buildings. Includes the value of exports minus imports.
What is the income measure?
The value of income generated mostly in terms of profits and wages.
What is GDP per capita?
A measure of the country’s economic output per person.
How can you calculate GDP per capita?
GDP / population
What is the difference between volume and value?
Volume = quantity
Value = a variable in monetary terms, the current monetary worth of a given volume.
How is value calculated?
Value = volume x price
What is nominal data?
Raw data not adjusted for levels of inflation, reflects current prices
What is real data?
Nominal data adjusted for inflation, reflects constant prices
What are index numbers?
Economists use index numbers to analyse time series data. A base year is selected and assigned the value 100. Data for subsequent years is represented by a number that shows how the variable has changed relative to the base.
How can you calculate an index number?
Index number = (current figure / figure in base year) x 100
How can you calculate the real value of nominal data?
Real value = (index of comparison / index of current) x nominal value
What are some limitations of using GDP per capita to compare living standards over time?
- price have increased over time
- statistics are inaccurate
- changes in population over time
- quality of goods and services may improve over time but they may fall in price
- proportion of national income devoted to defence should be considered
- national income spent on investment affects living standards
- externalities aren’t taken into account eg. pollution
- increased national income may not mean individuals have increased incomes
What are the limitations of using GDP per capita to compare living standards between countries?
- they may use different accounting conventions to calculate NI
- the quality of data varies
- the size of the unrecorded economy differs between countries
- quality of goods and services differs
- countries spend different proportions of GDP on defence and other expenditures
- externalities aren’t considered
- income distributions differ between economies
- geography distorts comparisons eg. size/temperature
- market exchange rates don’t reflect purchasing power, may distort comparisons
- different countries have different purchasing power parity rates that they can survive at
- informal/black market activity not recorded
- percentage change is misleading
- population rates distort the data
- spending on investment goods will raise future living standards at the expense of current living standards
What are purchasing power parities?
GDP is converted into a common currency at a PPP rate - a rate of exchange that allows a given amount of money in one country to buy the same amount of goods in another country after exchanging one currency into the other. It is an exchange rate of one currency for another comparing how much a typical basket of g/s costs compared to in another country.
What is the Easterlin Paradox?
Happiness and income are positively related at low levels of income. Higher levels of income are not associated with increases in happiness.
Why are income and happiness weakly correlated?
Happiness is caused by a variety of different factors.
Why do those with above average incomes tend to have higher levels of happiness?
This may be because people see income as a symbol of social status and this make people happier. Also, higher incomes are correlated with other factors associated with happiness eg. better health, less likely to be unemployed.
What is short-run economic growth?
A change in Y/Q or AD, closes the output gap. Shown by an increase in AD on a diagram.
What is short-run economic growth caused by?
- increase in AD
- export-led growth = positive net exports
- utilisation of spare capacity = more efficient use of existing FOPs
What is long-run economic growth?
The underlying rate of growth the economy can sustain without generating inflationary pressure. The speed at which the economy could grow, an increase in the productive capability of the economy.
What is long-run economic growth caused by?
- an increase in the quality/quantity of land, labour and capital
- technological improvements increase the marginal efficiency of capital
What is the quantity of labour determined by?
Size of the labour force:
- participation rate = the economically active labour force
- size of population - net migration and demographics
What is the quality of labour determined by?
- training and education
- healthy workers are more productive
How is long-run economic growth illustrated on a diagram?
Increase in aggregate supply.
How is short-run economic growth illustrated on the PPF?
Actual growth = a movement from inside the PPF, where FOPs are underemployed, towards the boundary
How is long-run economic growth illustrated on the PPF?
Potential growth = an outwards shift from the boundary
What are the characteristics of an economic boom?
- positive output gap
- economy operating at full capacity
- low unemployment
- high profits
- increased business /consumer confidence
- demand induced investment
- firms increase stocks and production
- positive multiplier
- increased consumption
- budget surplus
- demand-pull inflation
- high levels of borrowing from banks
What are the characteristics of an economic recession?
- negative output gap
- economy operating below trend
- spare capacity
- increased unemployment
- falling profits
- decreased business and consumer confidence
- investment falls
- firms reduce stocks and production
- negative multiplier
- consumption falls
- budget deficit
- disinflation or deflation
- low levels of borrowing from banks
What is a positive/inflationary output gap?
Economy is growing faster than trend AD, increasing faster than capacity. Temporarily operates beyond capacity
How is a positive output gap illustrated on a diagram?
Short run equilibrium (SRAS = AD) at a higher level than long run equilibrium.
What is a negative/deflationary output gap?
Actual GDP is below trend GDP, the economy is growing below trend reducing inflationary pressure
How is a negative output gap illustrated on a diagram?
The short run equilibrium (SRAS=AD) is below the long-run equilibrium
What determines the trend growth rate of the economy?
The productive potential of an economy which is determined by the FOPs available to an economy. Affected by quality/quantity of FOPs, technological advances and efficiency
Why do economies grow at different rates?
Natural resources - if they have resources such as gas and oil, they can export them to increase their economic growth rate
Participation rates - if a large number of the population are working age, they have an increased labour force causing economic growth. However some countries have an aging population, so growth is slowing.
Investment levels - capital stock needs to be increased to sustain economic growth, so high investment means the economic growth rate can be increased.
What is the difference between total and per capita?
Total = overall value
Per capita = total value divided amongst population
What is Gross National Income (GNI)?
The value of goods and services produced by an economy during a year plus the net overseas interest payments and dividends for the time. Essentially GDP plus income paid into the country by other countries.
How are comparisons about growth over time made?
- Changing levels of national income can show if the country has grown or shrunk over a certain period of time
- Data can be compared to other countries to see if the country is growing at a good rate or not
- Can show changes in economic welfare as growth suggests a rise in living standards
- Important to use real and per capita values. This accounts for possible population growth and inflation within the economy.
How are comparisons about growth between countries made?
- Countries have different population sizes so it is important to use per capita values, as this may not reflect a difference in living standards
- Real GDP figures should be used as inflation can be different within each country
How does the UK measure national wellbeing?
- In 2010, the Prime Minister launched the Measuring National Wellbeing report to measure how lives in the UK are improving
- People answer questions about life satisfaction, anxiety, happiness and worthwhileness. The report is updated on a quarterly basis.
- From 2012-2016, life satisfaction, happiness and worthwhileness all increased whilst anxiety initially fell but then began to increase. This may be due to a fall in unemployment, rise in GDP but a concern about global security.
