2.1 Economic Growth Flashcards
What is economic growth ?
economic growth occurs when there is a change in the real GDP of an economy over time
What is short run economic growth ?
short-run economic growth is an increase in the real GDP of an economy over a given period of time utilising current resources and technology
Short run growth is actual growth, reflects an increase in actual real output
What are the AD causes of short-run economic growth ?
An increase in AD leads to an increase is SR growth
Therefore:
- increase in disposable income or wealth
- increase in consumer confidence or business confidence
- a lowering of interest rates
- higher government spending or lower taxes
What are the AS causes of short-run economic growth ?
Anything that lowers firms cost of production increase SRAS
Therefore:
- fall in the cost of factors of production
- lower costs of finance
- increase in the quality of factors of production
What is long-run economic growth ?
long-run economic growth is an increase in an economy’s potential level of real output over time (increase in productive capacity)
What are the causes of long run economic growth ?
- anything that increases the long run aggregate supply of an economy will lead to an increase in potential real GDP
- meaning anything which increases the quantity and quality of factors of production will increase long run aggregate supply
What is the definition of productivity ?
Refers to the output per unit of factor input in a given time period
What are institutions ?
This refers to the established system of rule which facilitate socio-economic interactions
A highly effective institutional structure is characterised by:
- a stable and democratic political system
- a well-functional legal system
- effective and efficient financial system
- a developed welfare system
What is the policy objective of economic growth ?
The policy objective of the government is positive and stable economic growth
in the short run, this means minimising the effect of fluctuations in economic activity and it usually involved demand management stabilising policies
in the long-run, the goal is to achieve sustained and sustainable economic growth, which requires supply-side policies
What are the benefits of economic growth ?
higher employment - economic growth will lead to an increase in employment as firms demand more labour
higher living standards - economic growth leads to increased employment which leads to higher incomes for households, if there is an increase in real GDP per capita, there is a higher standard of living
increased tax revenue - increased income for households and increased profits for firms leads to greater tax revenue, leading to the government being able to redistribute income
multiplier and accelerator
increased business confidence
What are the costs of economic growth ?
growth might become unsustainable - current growth leads to a fall in the potential output of the economy in the future e.g exhausting non-renewable resources
rising income and wealth inequality - the benefits of economic growth tend to accrue to those who earn the most
What is the basic idea of the Harrod-domar model ?
What is the Harrod-Domar model ?
Economic growth is defined by ** ΔY/Y**
Saving(S) = MPS(s)*Y
Investment(I) = Δcapital stock (K)
The incremental capital-output ratio (k) = ΔK/ΔY
I = S
Rearranging these definitions we get that ** ΔY/Y = s/k ** - this means economic requires higher marginal propensity to save or a lower incremental capital-output ratio
