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Economics Edexcel A Level > 2.5 Economic Growth > Flashcards

2.5 Economic Growth Flashcards

1
Q

What is potential economic growth?

A

An expansion of the productive capacity of the economy.

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2
Q

What is actual economic growth?

A

An increase in the GDP of an economy

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3
Q

How can actual and potential growth be shown on a diagram (2)?

A

PPF

AD/AS diagram

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4
Q

How are actual and potential growth shown on a PPF?

A
  • Potential: an outwards shift of the PPF

- Actual: movement towards the PPF

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5
Q

How are potential and actual growth shown on an AD/AS diagram?

A
  • Potential: outwards shift of LRAS

- Actual: Outwards shift of AD

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6
Q

What is the difference between the level of real GDP and the rate of economic growth?

A

The actual rate of growth is calculated in the percentage change in the level of real GDP

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7
Q

What is the business cycle?

A

A phenomenon whereby GDP fluctuates around its trend following a regular pattern.

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8
Q

What is an output gap?

A

The difference between actual real GDP and potential real GDP

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9
Q

Which line is considered potential real GDP?

A

The trend rate of growth

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10
Q

How can an output gap be shown on an AD/AS diagram?

A

Equilibrium below level of full employment of the economy

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11
Q

What does the business cycle look like?

A

GDP fluctuating around the trend rate of GDP.

Real GDP against time.

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12
Q

What are the names of the parts of the business cycle (6)? When do these occur?

A

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

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13
Q

When might it be a good time in the business cycle to stimulate AD?

A

When there is a negative output gap

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14
Q

Why might stimulating AD during a positive output gap be dangerous?

A

Because the main effect would be on the price level (inflation)

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15
Q

What is a recession?

A

A situation where GDP falls for two or more consecutive quarters

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16
Q

Why might it be difficult measuring output gaps?

A

If the economy never reaches full capacity, we will never be able to observe potential output directly

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17
Q

Countries follow common patterns in real GDP growth over some periods, what might this suggest?

A

The domestic economy policy isn’t the only influence on an economy’s performance

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18
Q

When is capacity output in an economy reached?

A

When all the FOP are being fully and efficiently utilised

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19
Q

What are the two ways of increasing capacity output?

A
  • Increasing the quantity of the FOP

- Increasing the efficiency of the FOP

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20
Q

Define productivity

A

A measure of the efficiency of a FOP

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21
Q

Define labour productivity

A

A measure of output per worker or per hour worked

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22
Q

Define capital productivity

A

A measure of output per unit of capital

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23
Q

Define total factor productivity

A

The average productivity of all factors, measured as the total output divided by the total amount of inputs used.

24
Q

Define investment

A

Expenditure undertaken by firms to add to the capital stock

25
Q

What is the closest thing economists have to measuring investment?

A

Gross fixed capital formation, which covers net additions to the capital stock, as well as any depreciation

26
Q

Define depreciation

A

The fall in the value of physical capital equipment over time as it is subject to wear and tear

27
Q

Define net investment

A

Gross investment minus depreciation

28
Q

What is the alternative economic choice to investment?

A

Using resources for current consumption instead of investment

29
Q

How has the contribution of capital to growth been reinforced?

A

By technological progress, which has enabled higher factor productivity.
Innovation of new capital can also aid economic growth.

30
Q

Why is labour just as important to growth as capital is?

A

Because the economy needs high skilled workers to install and operate the capital equipment

31
Q

What two aspects of labour are important to growth?

A
  • The size of the workforce

- The quality of labour/ productivity of workers

32
Q

How can the size of the workforce change in an economy (2)?

A
  • Migration

- Disease

33
Q

What are the two main ways of increasing labour productivity?

A
  • Improvements in healthcare

- Education + training

34
Q

Define human capital

A

The stock of skills and expertise that contribute to a worker’s productivity

35
Q

Why would individuals not invest as much into their own human capital as much as we may hope?

A

Because education and training are merit goods, meaning the full social benefits of them are not fully perceived

36
Q

What is a key part of economic growth for small countries?

Why is this?

A

International trade

Because if domestic demand is too low, economies of scale cannot be reaped

37
Q

What does international trade enable for smaller countries?

A

It allows smaller countries to specialise, and thus produce goods more efficiently by reaping the gains of large-scale production

38
Q

Apart from accessibility to a large market, what is another benefit of international trade for smaller countries?

A

It enables them to earn foreign exchange needed to import physical capital that cannot be produced domestically.

39
Q

Define export-led growth

A

A strategy for achieving rapid economic growth through the promotion of export activity

40
Q

Describe vaguely why economic growth is important to an economy?

A

Expanding the availability of resources in an economy enables the standard of living of the country to increase

41
Q

Why is economic growth important to developing countries?

A

It may facilitate the easing poverty and may allow investment in human capital, which will improve standards of living in the future.

42
Q

What is the impact of economic growth on households?

A

Economic growth may bring higher incomes to households, allowing average consumption and increasing standards of living.

43
Q

What is the impact of economic growth on
a) Firms?
b the government?

A

a) Higher profits

b) High tax revenue and an improved capacity to
provide public goods

44
Q

In less developed countries, what is often a debated topic regarding development?

A

Whether resources should be devoted towards achieving the growth objective, or to cater for basic needs.

45
Q

What downside may be necessary in order to promote economic growth?
In doing this, what would likely happen in the long-term?

A

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.

46
Q

What is the converse argument regarding development?

A

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.

47
Q

What occurred in the late 2000’s and what did this lead to?

A

The financial crisis of 2008, which lead to a slowdown in the growth of GDP, and a period of recession.

48
Q

How many successive quarters did the UK suffer of recession after the 2008 crash?

A

6 quarters

49
Q

Describe the vicious cycle that can result from recessions

A
  • 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
50
Q

What is the most notable cost of economic growth?

A

Pollution and the degradation of the environment

51
Q

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?

A

Pollution reduces quality of life

52
Q

Define sustainable development

A

Development that meets the needs of the present without compromising the future of future generations to meet their own needs

53
Q

What is another problem with environmental degradation?

A

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.

54
Q

In what economic way can we view the environment?

A

A factor of production, whose environmental capital must be utilised in the best possible way.

55
Q

If environmental capital is to be used effectively, what must we do, and why does this pose a problem?

A
  • 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
56
Q

What type of market failure does economic growth cause?

A

Negative externalities because loss of biodiversity and pollution has an effect globally, not just in the local economy.

57
Q

What are two other possible costs of economic growth?

A
  • Structural unemployment if resources are switched to expanding sectors
  • Effects on the BoP if the MPI is high

Economics Edexcel A Level (10 decks)

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