2.5 economic growth Flashcards
short run cause for economic growth
increase in AD, any of its components
short run cause for increase in SRAS
change in the cost of production (wages, price of raw materials, taxes, exchange rates etc.)
long run reason for economic growth
an increase in the productive capacity of the economy
define economy of scale
the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing which causes scale increasing.
diagram for long run economic growth is the same as
PPF diagram
diagram for long run economic growth using the classical model
where LRAS moves to the right of LRAS1 along the AD line.
the economic has more economic output possible
constraints limiting economic growth / LRAS
an absence of capital markets & instability of govts
negative externalities that can come from economic growth
social issues
wealth inequality
high interest rates
environmental harm
define output gap
difference between trend rate and actual rate of economic growth
factors that impact economic growth / LRAS
investment
innovation
migration
changes in birth rates
increases in productivity
export led growth
what does actual GDP > trend line mean for the output gap
positive output gap = boom
periods of high economic growth
current account deficit will worsen
what does actual GDP < trend line mean for the output gap
negative output gap = bust
difficult to measure consumption because that would be expensive
also hard to measure AS - the skills of the labour force & changes in capital assets such as machinery
potential output
what occurs when the economy is working at full capacity over the long-term.
Period of high levels of economic activity is characterised by
High rate of economic growth High demand Low unemployment / high wages Inflationary pressure Labour skills shortage High confidence in the economy Capital investment is high
other names for the trade cycle
business cycle or economic cycle
