2.5 Flashcards
Define actual growth
The measure of changes in real GDP, found by adding all the incomes in the country, or all the spending, or all the output
Explain the causes of actual growth
Lower interest rates C,I(x-m)
Lower income/corporation tax C,I
Higher consumer/ business confidence CI
Higher government spending G
Weaker exchange rate X-M
Define potential growth
Shows how much the economy could produce if there was full employment of all the resources in the economy. Potential growth is reflected in changes in LRAS
Explain the causes of potential growth
Increase labour productivity, quality of labour and productive efficiency by-
Increase workforce size
Investment of more and better capital
Infrastructure improvements
Increase in competition
New resource discoveries
Define positive and negative output gap
Positive - When growth rates are higher than the economy can sustain
Negative-
Exists when actual growth are below potential growth rates
Explain why output gaps are difficult to measure in the real world
Its difficult to measure the level of potential output. All we know is the actual output (real GDP) at a point in time
Potential level of real output depends on spare capacity, which is hard to actually estimate.
Reasons include: resources available aren’t suited to the economies needs, structural changes or major shocks in the economy may occur causing some productive capacity to be permanently lost, production is relocated to other countries
List Characteristics of a boom
Low unemployment
Less underemployment
Increasing living standards
Increasing rate of inflation- if caused by rising AD
Increasing income inequality- if associated with rising asset prices
Increasing levels of investment
List characteristics of a recession
Rising rates of unemployment
More underemployment
Falling living standards
A falling rate of inflation- if caused by falling AD
Increasing income inequality- if associated with higher unemployment
falling levels of investment
Benefits and costs of economic growth on consumers (actual growth)
Benefits:
Increased incomes
Increased living standards
Increased job opportunities
Costs:
Inequality – benefits may not be spread equally
AD based growth will lead to higher prices
A future recession would eliminate any benefits
Benefits and costs of economic growth on firms (actual growth)
Benefits:
Higher profits due to rising incomes that increase sales
Greater confidence allows more investment opportunities and easier access to finance
Costs:
AD based growth may lead to greater resource scarcity
Increases in AD are likely to be inflationary - pushing up costs
Benefits and costs of economic growth on firms (potential growth)
Benefits:
If growth is productivity based, lower production costs
Changing technologies creates opportunities in new markets
Costs:
Changing technologies will lead to some markets disappearing
Benefits and costs of economic growth on the gov (actual growth)
Benefits:
Rising incomes leads to increased tax revenues
Job creation may reduce unemployment and therefore spending on benefits
Costs:
If growth is funded through expansionary fiscal policy then the budget deficit may worsen before it gets better
Benefits and costs of economic growth on the gov (potential growth)
Benefits:
Long run improvements to technology and living standards should increase society’s affluence and reduce need to spend as much on welfare payments
Costs:
If economic growth is the result of supply-side policies it may have taken significant spending to be achieved
Financial benefits of growth will come with a long time lag
Impact of actual economic growth on economic objectives
Benefits:
Economic growth is achieved - still the fundamental way most people judge an economy’s success
Job creation lowers unemployment
Costs:
Rising inflation and worsening current account if growth is from increases in AD
More production/consumption means more resources being used up and greater pollution
May not be distributed evenly (greater inequality)
Trade-off of objectives
Impact of potential economic growth on economic objectives
Benefits:
Lower inflation and improved current account if growth is supply-side (e.g. increases in productivity)
Job creation lowers unemployment
Economic growth can lead to advances in cleaner technologies (environmental)
Costs:
Tech advance may cause structural unemployment
More production/consumption means more resources being used up and greater pollution
May not be distributed evenly (greater inequality)
Trade-off of objectives
