2.5 Economic Growth Flashcards
What is potential economic growth?
An expansion of the productive capacity of the economy.
What is actual economic growth?
An increase in the GDP of an economy
How can actual and potential growth be shown on a diagram (2)?
PPF
AD/AS diagram
How are actual and potential growth shown on a PPF?
- Potential: an outwards shift of the PPF
- Actual: movement towards the PPF
How are potential and actual growth shown on an AD/AS diagram?
- Potential: outwards shift of LRAS
- Actual: Outwards shift of AD
What is the difference between the level of real GDP and the rate of economic growth?
The actual rate of growth is calculated in the percentage change in the level of real GDP
What is the business cycle?
A phenomenon whereby GDP fluctuates around its trend following a regular pattern.
What is an output gap?
The difference between actual real GDP and potential real GDP
Which line is considered potential real GDP?
The trend rate of growth
How can an output gap be shown on an AD/AS diagram?
Equilibrium below level of full employment of the economy
What does the business cycle look like?
GDP fluctuating around the trend rate of GDP.
Real GDP against time.
What are the names of the parts of the business cycle (6)? When do these occur?
Recession- actual GDP is falling below trend rate of GDP
Trough- minimum point on business cycle
Recovery- after trough where actual GDP is rising
Boom- actual GDP is above trend rate of GDP
Peak- maximum point on business cycle
Downturn- actual GDP falling after peak
When might it be a good time in the business cycle to stimulate AD?
When there is a negative output gap
Why might stimulating AD during a positive output gap be dangerous?
Because the main effect would be on the price level (inflation)
What is a recession?
A situation where GDP falls for two or more consecutive quarters
Why might it be difficult measuring output gaps?
If the economy never reaches full capacity, we will never be able to observe potential output directly
Countries follow common patterns in real GDP growth over some periods, what might this suggest?
The domestic economy policy isn’t the only influence on an economy’s performance
When is capacity output in an economy reached?
When all the FOP are being fully and efficiently utilised
What are the two ways of increasing capacity output?
- Increasing the quantity of the FOP
- Increasing the efficiency of the FOP
Define productivity
A measure of the efficiency of a FOP
Define labour productivity
A measure of output per worker or per hour worked
Define capital productivity
A measure of output per unit of capital
Define total factor productivity
The average productivity of all factors, measured as the total output divided by the total amount of inputs used.
Define investment
Expenditure undertaken by firms to add to the capital stock
What is the closest thing economists have to measuring investment?
Gross fixed capital formation, which covers net additions to the capital stock, as well as any depreciation
Define depreciation
The fall in the value of physical capital equipment over time as it is subject to wear and tear
Define net investment
Gross investment minus depreciation
What is the alternative economic choice to investment?
Using resources for current consumption instead of investment
How has the contribution of capital to growth been reinforced?
By technological progress, which has enabled higher factor productivity.
Innovation of new capital can also aid economic growth.
Why is labour just as important to growth as capital is?
Because the economy needs high skilled workers to install and operate the capital equipment
What two aspects of labour are important to growth?
- The size of the workforce
- The quality of labour/ productivity of workers
How can the size of the workforce change in an economy (2)?
- Migration
- Disease
What are the two main ways of increasing labour productivity?
- Improvements in healthcare
- Education + training
Define human capital
The stock of skills and expertise that contribute to a worker’s productivity
Why would individuals not invest as much into their own human capital as much as we may hope?
Because education and training are merit goods, meaning the full social benefits of them are not fully perceived
What is a key part of economic growth for small countries?
Why is this?
International trade
Because if domestic demand is too low, economies of scale cannot be reaped
What does international trade enable for smaller countries?
It allows smaller countries to specialise, and thus produce goods more efficiently by reaping the gains of large-scale production
Apart from accessibility to a large market, what is another benefit of international trade for smaller countries?
It enables them to earn foreign exchange needed to import physical capital that cannot be produced domestically.
Define export-led growth
A strategy for achieving rapid economic growth through the promotion of export activity
Describe vaguely why economic growth is important to an economy?
Expanding the availability of resources in an economy enables the standard of living of the country to increase
Why is economic growth important to developing countries?
It may facilitate the easing poverty and may allow investment in human capital, which will improve standards of living in the future.
What is the impact of economic growth on households?
Economic growth may bring higher incomes to households, allowing average consumption and increasing standards of living.
What is the impact of economic growth on
a) Firms?
b the government?
a) Higher profits
b) High tax revenue and an improved capacity to
provide public goods
In less developed countries, what is often a debated topic regarding development?
Whether resources should be devoted towards achieving the growth objective, or to cater for basic needs.
What downside may be necessary in order to promote economic growth?
In doing this, what would likely happen in the long-term?
To allow inequalities of income in the short-run to continue, to provide incentives for entrepreneurs to pursue growth.
The benefits of the growth will start to trickle down, which will then allow poverty + basic needs to be addressed.
What is the converse argument regarding development?
The first priority should be to deal with basic needs, so people gain in human capital and become better able to contribute to the growth progress.
What occurred in the late 2000’s and what did this lead to?
The financial crisis of 2008, which lead to a slowdown in the growth of GDP, and a period of recession.
How many successive quarters did the UK suffer of recession after the 2008 crash?
6 quarters
Describe the vicious cycle that can result from recessions
- If output is falling, firms are likely reducing production, leading to workers being laid off, so unemployment rises
- This would lead to falling incomes, thus reducing AD, leading to further drops of output
What is the most notable cost of economic growth?
Pollution and the degradation of the environment
Why is it important that when designing long-term policies for growth, they must be aware of the need to maintain a balance between growth and safeguarding the environment?
Pollution reduces quality of life
Define sustainable development
Development that meets the needs of the present without compromising the future of future generations to meet their own needs
What is another problem with environmental degradation?
The loss of biodiversity, which can lead to extinction, and plants with healing properties may no longer be able to be used in future medicines.
In what economic way can we view the environment?
A factor of production, whose environmental capital must be utilised in the best possible way.
If environmental capital is to be used effectively, what must we do, and why does this pose a problem?
- It must be given an appropriate value because if it is under-priced as a FOP, firms will use to much of it
- It is a problem because property rights are not firmly established in LEDCs
- Also, it is difficult to legislate the protection of the environment
What type of market failure does economic growth cause?
Negative externalities because loss of biodiversity and pollution has an effect globally, not just in the local economy.
What are two other possible costs of economic growth?
- Structural unemployment if resources are switched to expanding sectors
- Effects on the BoP if the MPI is high
