2.5 Economic Growth Flashcards
Factors which cause economic growth
Improving labour force - with a better quality due to higher education
A larger labour force - May be due to migration, birth rates or improved participation rates
Improved technology - Improved productivity as resources are used efficiently
More investment - Fuels economic growth. More machinery can be bought, which will increase production.
Discovering new resources - such as oil increasing supply in the market (AS)
Incentives for enterprise - tax breaks or subsidies
What is actual growth?
The percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD.
What is potential growth?
The long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.
Why is international trade important for export led growth?
Export led growth occurs when countries open up their economies to the international market.
International trade is important for this, countries can specialise where they have a comparative advantage, which increases world output and lowers average costs.
A country has comparative advantage when it can produce goods and services at a lower opportunity cost than another.
It will initially increase AD, so will only bring about short term growth. However, it will encourage firms to invest and therefore bring about long term growth by improving the supply side of the economy.
It allows the government to bring about economic growth and high employment without seeing a current account deficit.
Export led growth means the economy is unbalanced, since there is a surplus on the current account on the balance of payments. This may be an injection but is not necessarily sustainable, however the growth in the economy may lead to an increase in imports which will balance the current account
Moreover, it means the country relies on the economic state of other countries.
What are some difficulties with measuring the output gap?
It is difficult to estimate the trend in a series of data.
The structure of the economy often changes, which means estimates may not always be accurate.
Changes in the exchange rate might offset some inflationary effects of a positive output gap.
Data is not always reliable, especially from emerging markets, and extrapolating data from past trends might lead to uncertainties.
How does economic growth benefit consumers?
The average consumer income increases as more people are in employment and wages increase.
Consumers feel more confident in the economy, which increases consumption and leads to higher living standards.
How does economic growth benefit firms?
Firms might make more profits which in turn might increase investment.
Higher levels of investment could develop new technologies to improve productivity and lower average costs in the long run.
If there is more economic growth in export markets, firms might face more competition, which will make them more productive and efficient, but it will also give them more sales opportunities.
How does economic growth benefit the government?
The government budget might improve, since fewer people require welfare payments and more people will be paying tax.
How does economic growth benefit living standards?
As consumer incomes increase, some people may show more concern for the environment.
Economic growth could lead to the development of technology to produce goods and services more greenly.
Higher average wages mean consumers can enjoy more goods and services of a higher quality.
Public services improve since governments have higher tax revenues, so they can afford to spend on improving serves. This could increase life expectancy and education levels.
How does economic growth negatively impact consumers?
Economic growth does not benefit everyone equally. Those on low or fixed incomes may be worse off due to inflation thus causing inequality to increase.
There is likely to be higher demand-pull inflation, due to higher levels of consumer spending.
Consumers could face more shoe leather costs, which means they have to spend more time and effort finding the best deal while prices are rising.
The benefits of more consumption might not last after the first few units, due to the law of diminishing returns, which states that the utility consumers derive from consuming a good diminishes as more of the good is consumed.
How does economic growth negatively impact firms?
Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation.
How does economic growth negatively impact the government?
Governments might increase their spending on healthcare if the consumption of demerit goods increases.
How does economic growth negatively impact living standards?
High levels of growth could lead to damage to the environment in the long run, due to increase negative externalities from the consumption and production of some goods and services.
