2.5 Economic growth Flashcards
what is short run economic growth?
an increase in real GDP i.e. an increase in actual output
what are the causes of short run economic growth?
- Lower interest rates
- Lower income/corporation tax
- Higher confidence
- Weaker exchange rate
- low commodity prices
what is long run/potential economic growth?
a sustained rise in a country’s productive potential
- the main drivers of long run economic growth are higher productivity and gains from innovation and rising real incomes for households
what are the causes of long run economic growth?
- productivity
- investment
- labour supply
- innovation
- enterprise
advantages of export led growth?
- rise in AD and expansion of output
- growing export sales = more profits
- increased investment and employment
risks of export led growth?
- over-dependence on the economic cycles of trade partner countries ➡️vulnerable to shocks
- incite a protectionist response from other nations who feel that the benefits of trade have been unequally skewed in favour of exporting countries
- rapid export-led growth might lead to demand pull inflation and higher interest rates
- might be unsustainable if it contributes extraction of natural resources beyond what is required for long term balanced growth to be maintained
what is the output gap?
The output gap is the difference between the actual level of GDP and its estimated potential level
➡️ usually expressed as a percentage of the level of potential output
Positive output gap?
where actual GDP is above potential GDP, possible excess AD
Negative output gap?
growth is lower than what was expected
-where the economy has large margin of spare capacity of factor resources
why’s it difficult to asses the output gap?
hard to measure
- productivity
- size of Labour market
- business output and confidence
- underemployment
boom?🌟
A period when the rate of growth of real GDP is fast and higher than the long-term trend
slowdown?
A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate
recession?🌟
A period of at least six months when an economy suffers a fall in aggregate output, employment, investment and confidence
recovery?
A phase after a recession, during which real GDP starts to increase and unemployment begins to fall
depression?
A prolonged downturn in the economy and where a nation’s GDP falls by at least 10 perent
possible causes of a recession?
- external events
- tightening of macro policy
- fall in assets price
- supply of credit reduced
- drop in confidence
how can AS create a recession?
if it shifts inwards
impact of recession?
Negative output gap
Reduced production/supply
Less profits
High unemployment
Less confidence ➡️less consumption and investment
Widening inequality
Rising national debt
Lower rate of inflation
Hysteresis views about effect of depression?
- when an economy is disabled by recession there is a big risk of a permanent loss of national output
- loss of productive capacity due to low capital investment + many business closures
- high rates of structural unemployment may cause a shrinking labour force perhaps through outward
migration
Creative Destruction views about effect of recession?
- recessions can cast a dark shadow, but capitalist market economies usually bounce back eventually
- recessions see the emergence of new business models and an increase in start-ups
- new technologies can act as a catalyst for renewed economic growth and investment
benefits of economic growth?
- higher living standards
- lower unemployment
- raises tax revenues and allowing the government to spend more on public and merit goods or help cut a fiscal deficit
- accelerator effect
- great business profits
cost of economic growth?
- risks of higher inflation and higher interest rates
- environmental effects
- inequalities of income and wealth
how can you use a AD diagram to see if the output gap is positive or negative?
negative = LRAS in front of equilibrium
positive = LRAS behind equilibrium
what is spare capacity?
when a business is not making full use of its available capacity – there are spare factors of production including land, labour and capital
when an economy has lots of spare capacity what happens?
short run aggregate supply (SRAS) is elastic and the output gap is negative
what’s the difference between actual and potential growth in an economy?
actual growth
- real increase in the output of goods and services produced by an economy over a specific period of time
potential growth
- the maximum sustainable rate at which an economy can grow over the longer term
