2.5 Flashcards
What is economic growth
Economic growth is a rise in the productive potential of an economy or a rise in goods/services produced,measured by a change in real GDP
What causes economic growth
- Increase in the quality or quantity of one of the 4 factors of production or them being used more efficiently
- Any factor which shifts LRAS also increases growth
- Land- new resources discovered eg oil= increases growth
- Labour- increase in quality/quantity = increased growth- migrants= new skill,desire and knowledge
- Capital- development on new tech= increases productivity, increases investment, also means more machines even though may not develop new tech
- Enterprise-offer tax breaks/grants= encourage development of firms= creates new jobs= more produced= increases growth. High taxes decrease incentive to work
- Efficiency= less resources needed to produce each good= more goods produced eg through competition policy to ensure lower prices or increased quality
- Technological progress= lower AC of production due to lower labour cost or quicker production,creates new product= increases consumption= increases MPC
What is actual and potential growth
Actual growth- economic growth measured by changes in real GDP over time
Potential growth- changes in productive potential of an economy
eg LRAS or PPF shifts eg resources discovered,fops that allows economy to grow but have not get produced them so GDP hasn’t risen
What is long term trends rate of growth
Long term trends rate of growth- the average sustainable rate of economic growth over a period of time
Importance of international trade for economic growth
- AD can effect economic growth through export led growth= rise in AD through increased exports eg Germany,Japan,China
-High export levels force firms to invest and increase demand for labour= economic growth
-Firm have to be efficient to compete in the international market
Why are output gaps difficult to measure
- Exact position of LRAS is unknown and initial estimates of real GDP are often inaccurate
- Theres no single monetary value for the level of variables eg machinery,workers,technology
What is a output gap, NOF and POG
Output gap- the difference between actual level of GDP and the estimated long run value for GDP
Negative output gap is wen actual output is less than potential output
Positive output gap is where actual output is greater than potential output
What is a boom and it’s characteristics
Boom- period of high levels of output within the economy
Characteristics of boom
- High national income and economy likely to be working above PPF where there is a positive output gap
- Increased consumption and investment = high tax revenue also increased wages
- Increased imports to meet demand of high income earners that cannot be met by goods produced within the country
- Inflationary pressure
What is a recession and it’s characteristics
Recession- real GDP falling in at least 2 consecutive quarters
Characteristics of a recession
- High unemployment= low consumption,investment and imports
- Decreased inflationary pressure and deflation may occur
- Output and incomes fall
- Decreased tax revenue
- Increased benefits as unemployment rises
Benefits of economic growth on consumers
- Positive wealth effect, increased demand for housing due to increased incomes as ppl can afford it = increase houses prices = PWE
- Firms shares= increase value as firms make more abnormal profit due to increased MPC= positive wealth effect
-People with lower incomes see an increase in happiness= easterlin paradox - Improved tech/efficiency= decreased prices and better quality goods
Costs of economic growth to consumers
- Increased inequality and so may not effect average consumer
- Depending on trade cycle if economic growth occurs= inflationary pressure= increased prices
Benefits of economic growth on government
-Invcreaswd tax revenue as more income put into public goods eg NHS= increase quality and equality= increase SOL
- Decreases budget deficit= allows money to be saved to help sustain future problems
Costs of economic growth on gov
- Increased expectation of gov to improve road quality or education= challenge as ppl may want this but avoid paying taxes at higher rates
Benefit of economic growth on firms
- Increased investment as increased demand/ MPC increase = increased abnormal profits and incentive as they can get better ROI
- Increased business confidence= increased innovation eg tech= increased productive efficiency= lower costs = decreased prices for consumers
- Higher demand= increased profits
Costs of economic growth on ftims
- Firms selling interior goods with negative YED lose out as demand for them reduced as ppl can afford higher quality goods= can cause structural unemployment as ppl may lack skills
Benefits of economic growth on curent/future living standards
- Decreased poverty as increased demand= increases incentives for production= increases job creation= decreased unemployment and ppl on benefits= increases disposable income
- More choice of goods= poor/low income earners will be able to afford goods= increases equality and SOL
- Increases quality of housing,food,health = workforce stays productive for longer as quality of life increases amd life expectancy. Also less ppl suffer from malnutrition and hunger and increased equality and SOL
Costs of economic growth on future/current SOL
- Future living standards can fall as exploitation of environment and depletion of non-renewable resources and increased demand= increased pollution,waste= increased health porblems in LR= decreased SOL
-EVAL-richer countires may devote resources for R+D for green tech=less resources needed for future and decreased health effect in LR - Increased inequalities between rich and poor, increased relative poverty as rich benefits. They may also decrease poor ppl SOL by exploiting them.
