2.5 Economic Growth Flashcards
economic growth
- increase in national output as measured by the annual change in real GDP
- expansion of productive potential of the economy
- depicted by an outward shift in the PPT or of a country’s LRAS curve
factors which cause economic growth
- occurs due to an improvement in quality / quantity of one of the FoP or an increase in efficiency in the way they’re used, e.g;
- improving the labour force, e.g. higher skills due to higher education
- a larger labour force, e.g. due to migration, birth rates or improved participation rates
- higher investment to fuel economic growth
- discovering new resources, e.g. oil
- incentives for enterprise such as subsidies or tax breaks
actual and potential growth
- actual; the % increase in a country’s real GDP
- potential; an increase in the productive potential of an economy as demonstrated by a shift outward of the PPF or LRAS curve; caused by increases in AS
the importance of international trade for export-led growth
- export-led growth occurs when countries open up their economies to the international market
- e.g. China has had export-led growth for many years
- international trade is important for this as countries can specialise where they have a comparative advantage (producing at a lower OC than others) and this increases world output and lowers average costs
- export-led growth can mean a surplus on the current account of the BoP but this isn’t necessarily sustainable, but the growth in the economy may lead to an increase in imports which will balance it
difference between actual growth rates and long-term trends in growth rates
- actual growth rates refer to increases in AD and changes in real GDP over time
- long-term trends in growth rates refers to the long-run expansion of the productive potential of an economy (what they could produce if resources were fully employed) caused by increases in supply, and refers to changes in capacity over time or sustainable rate of growth
positive and negative output gaps
- output gap; the difference between actual and potential growth
- positive OG; if actual growth > potential growth
- negative OG; if potential > actual (occurs in most economies)
positive output gaps
- the economy is operating at over-capacity, e.g. labour working overtime
- productivity is growing so output gap becomes positive but it increases inflationary pressures
- e.g. China has high inflation rates due to fast and increasing demand
negative output gaps
- economy is operating with spare capacity, so there’s high unemployment
- maybe because resources aren’t suited to the needs of the economy, i.e. causing structural unemployment, e.g. shipbuilding when govt. cut back on the navy size
difficulties with measuring the output gap
- the structure of the economy often changes so estimates may be inaccurate, e.g. level of spare capacity is different after a recession and after a boom
- changes in ER may offset some inflationary pressures of a positive output gap
- data isn’t always reliable
- we can’t tell the level of potential output as that’s guessing how much our economy can produce at full employment
illustrating output gaps
- diagram 1
- keynesian; output gaps exist in both short and long-run
- classical; output gaps only exist in the short-run as markets clear at full employment in the long-run
trade (business) cycle
- 2.2 diagram 3
- boom=fast economic growth - inflationary or unsustainable
- recession= fall in real output and negative economic growth
- recovery=periods of economic growth and real output rises
- during recessions, govt may increase spending to stimulate economy, e.g. increased welfare payments or cutting taxes
- during periods of economic growth, govt. may recieve more tax revenue due to higher income and consumption and they may spend less as the economy doesn’t need stimulating and fewer people are claiming benefits
characteristics of a boom
- high rates of economic growth
- near full capacity or positive output gaps
- near or at full employment
- demand-pull inflation
- higher consumer and business confidence leading to more spending and investment
- improving govt. budget due to higher tax revenues and less spending on welfare payments
characteristics of a recession
- negative economic growth (over 2 consecutive quarters in the UK)
- lots of spare capacity and negative output gaps
- cyclical (demand-deficient) unemployment
- low inflation rates
- low consumer and business confidence leading to less spending and investment
- worsening govt. budget due to higher spending on welfare payments and lower tax revenues
causes of a recession
- lack of investment funds or cash to run businesses
- too high ER
- lack of access to international trade or a high level of tariffs and other forms of protectionisim
costs / benefits of economic growth on consumers
+ average consumer income rises as more people are in employment and wages increase
+ higher consumer confidence which increases consumption and leads to higher living standards
- those on low / fixed incomes may be worse off if there’s high inflation and inequality may increase
- likely to be higher demand-pull inflation due to higher levels of consumer spending
- consumers will face more shoe leather costs, i.e. spending more time / effort to find the best deal when prices are rising
- benefits of more consumption may not last after the first few units due to the law of diminishing returns
