2.3.1 - Economic Growth and the Economic cycle Flashcards
what is short run economic growth
the percentage increase in a countries real GDP and its usually measured annually and it is caused by increases in AD.
what is long run economic growth
occurs when productive capacity of the economy is increasing and refers to the rate of growth of real national output in an economy over a period of time. it is caused by increase in AS
what is the potential output of an economy
what the economy could produce if resources were fully employed
when does an output gap occur
when there is a difference between the actual level of output and the potential level of output. its measured as a percentage of national output.
what is a negative output gap
it occurs when he level of output is less than the potential level of output.
This puts downward pressure on inflation. It usually means there is the unemployment of resources in an economy, so labour and capital are not used to their full productive potential. This means there is a lot of spare capacity in the
economy.
what is a positive output gap
it occurs when the actual level of output is greater than the potential level of output. It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation.
what is the economic/business cycle
It refers to the stage of economic growth that the economy is in.
what is the recovery stage
a period of economic growth following a recession where real output increases
what is an economic boom
when an increase in GDP is above trend growth GDP
what is a recession
a fall in GDP over two consecutive quarters and there is negative economic growth.
this could involve spending on welfare payments to help people who have lost their jobs, or cutting taxes.
it can lead to lower living standards particularly for the most vulnerable in society.
what is a slump
a prolonged period of recession
define GDP
the total amount of goods and services produced in an economy within a given time.
what is economic growth
when real GDP is rising (output is increasing) so more goods and services are being produced, unemployment is falling, consumer confidence is rising and living standards are rising
what is trend growth in GDP
the average rate of growth
what are the characteristics of a boom
High rates of economic growth
Near full capacity or positive output gaps
(Near) full employment
Demand-pull inflation
Consumers and firms have a lot of confidence, which leads to high rates of
investment
Government budgets improve, due to higher tax revenues and less spending on welfare payments
what are the characteristics of a recession
Negative economic growth
Lots of spare capacity and negative output gaps
Demand-deficient unemployment
Low inflation rates
Government budgets worsen due to more spending on welfare payments and lower
tax revenues
Less confidence amongst consumers and firms, which leads to less spending and
investment
what is the impact of recession on GDP
less gods and services are produced because income decreases so consumers buy less so firms decrease their labour quantity
* lower consumer confidence causes less spending on nonessential and luxury
goods.
what is the impact of recession on unemployment
businesses need to employ less people because demand decreases so more people lose their job and become unemployed.
+ increased business failures → more unemployment.
what is the impact of recession on government finances
tax revenues decrease + increased spending
on welfare due to increased unemployment → government borrowing
increasing.
* tax revenues decrease due to less VAT and lower in come taxes.
what is the impact of recession on equity
increased income inequality, unemployment rates rise as businesses try to reduce costs, which typically affects the lower income less skilled workers. so these workers find it harder to recover financilaly as they have less savings to rely on.
* many workers, income will also decrease over time due to fewer bonuses, less
sales commissions and lower profit related pay.
what is the impact of recession on inflation
inflation falls due to lower demand pull inflationary pressures and lower consumer confidence as people cut back on spending, so businesses may try to lower their prices in order to attract customers.
falling prices of commodities, as demand for things such as raw materials an energy drops.
what is the impact of recession on the current account of the balance of payments
the deficit would fall because less is imported as people earn les so reduce spending on nonessential and luxury goods such as holdays, cars ect. which are typically imports.
what is the impact of growth on GDP
its a sign that the economy is doing well.
(unemployment is likely to be increasing)
more goods and services are being produced because income rises and firms increase labour quantity.
what is the impact of growth on unemployment
as firms expand, they employ more people due to increased demand for goods and services.
* leads to increased wages and consumer spending
what is the impact of growth on government finances
improved public services
→ collect more tax revenue + Vat. which can be invested in public services such as healthcare and education.
+ less spending in welfare benefits
+ government borrowing is likely to fall
what is the impact of growth on equity
higher living standards (higher GDP per capita)
=> caused by increased employment + higher incomes which allows people
to afford more goods and services
+ provides more opportunities to less skilled workers => redistributing wealth
- however sometimes the capital owners benefit more than the labourers.
what is the impact of growth on inflation
demand-pull inflationary pressures are likely to rise (caused by higher production costs meaning the demand exceeds supply)
→ higher consumer confidence encourages investment
→ prices rises
what is the impact of growth on the current account of the balance of payments
Increased exports (growth → more production →
more exports → better balance)
*however as incomes rises consumers demand more imported goods → increased deficit.
+ exchange rate appreciation (currency appreciation could make imports cheaper and exports more expensive but it depends on interest rates and increased deficit may reduce rate)
how can you increase AD
Following the equation:
AD = C + I + G + (X - M)
If consumption, investment, government spending or exports increase or if imports fall, AD will increase.
what are the costs of economic growth
Risks of higher inflation and higher interest rates
Fast-growing demand can lead to demand-pull and cost-push inflation – this leads to a conflict between macro objectives
The central bank may decide to raise interest rates to control inflation
Environmental effects
More negative externalities such as pollution & waste
Risk of unsustainable extraction of finite resources – i.e. fast growing countries may cause a long-run depletion of natural resources
Inequalities of income and wealth
Rapid increases in real national income can lead to a higher level of inequality and social divisions
Many of the gains from growth may go to only a few people
what are the social costs of high unemployment
- Financial strain: Unemployment can lead to a reduction in income and an increase in financial insecurity, people may not have the resources to meet their basic needs or pay for necessities such as housing, food, and healthcare.
- Mental health problems: Unemployment can have a negative impact on mental health, as individuals may experience stress, anxiety, and depression due to their financial situation and loss of purpose and social connections.
- Social disruption: High levels of unemployment can lead to social disruption and unrest, as individuals may feel isolated
from their communities. - rise in income inequality; individuals are unable to find work, so struggle to meet their basic needs, and have to rely on government welfares or other forms of support. This can create a cycle of poverty, as individuals may struggle to improve their financial situation or escape poverty. A reduction in real wages, employers may be able to find a larger pool of workers who are willing to accept lower pay due to the lack of job options. So gap widens between low-income workers and those who are able to secure higher-paying jobs.
Certain groups, such as racial and ethnic minorities, women, and young people, may be more likely to experience unemployment and discrimination in the job market. This can lead to further disparities in income and opportunities.
what are the economic costs of high unemployment
- Lost Output: High unemployment results in a loss of potential output, as unemployed workers are not able to contribute to the economy. The economy is operating well within their production possibility frontier.
- Decreased Consumer Spending: Unemployed workers have less real disposable income, which can result in decreased consumer spending and a reduction in aggregate demand. This in turn can cause a fall in planned investment spending by firms increasing the risk of a deeper recession.
- Reduced Tax Revenue: High unemployment can also reduce direct and indirect tax revenue, as fewer workers are paying into the system and more are receiving unemployment benefits.
- Increased Government Spending: High unemployment can increase government spending on social welfare programmes, which then leads to a rise in the size of a government’s budget deficit and a higher level of national debt.
- Reduced Investment: High unemployment can reduce investment, as firms may be less confident in the future prospects of the economy and may not be willing to invest in new projects or expand their operations.
- Lower Labour Force Participation: High unemployment can lead to discouragement, where workers drop out of the labour force and may not return, reducing the size of the potential labour force and the economy’s long run productive capacity.
- Increased Relative Poverty: High unemployment can result in increased poverty, as unemployed workers are unable to meet their basic needs and may require government support.
Overall, high unemployment can result in significant economic costs, including lost output, decreased consumer spending, reduced tax revenue, increased government spending, reduced investment, lower labor force participation, and increased poverty.
