2.5 Economic Growth Flashcards
1
Q
What is short run economic growth ?
A
- an increase in real GDP ie. an increase in actual output
- also known as actual growth (the % annual increase in a country’s real GDP over a period of time)
- caused by an increase in AD
2
Q
What are the causes of short run economic growth ?
A
- changes in interest rates
- fiscal policy (changes in govt spending and taxation)
- commodity princes eg. oil, gas and food
- currency changes (affect export and import demand)
- trading conditions in other countries eg. competitive exchange rates
- confidence of businesses and households
3
Q
What is long run economic growth ?
A
- also known as potential growth
- a sustained rise in a country’s productive potential
- the main drivers of this is higher productivity and gains from innovation and rising real incomes for households
- caused by an increase in AS
- potential output is that which could be produced if there was full employment of resources
4
Q
What are the causes of long run economic growth ?
A
- investment
- productivity
- labour supply
- research and development
- innovation
- enterprise
5
Q
What is export led growth ?
A
- where a significant part of the expansion of real GDP, jobs and per capita incomes flows from the successful exporting of goods and services from one country to another
🔔 export led growth important for many countries but have to ensure they are exporting a sufficiently diverse range of products (eg. avoid risks from primary product dependancy) + the benefits from increased exports and growth are widely dispersed across the population
6
Q
What are the advantages of export led growth ?
A
- exports are an injection into the circular flow leading to a rise in AD and an expansion of output, this helps to raise per capita incomes and reduce extreme poverty especially in developing countries
- growing export sales provide revenues and profits for businesses which can then feed through to an increase in capital investment spending through the accelerator effect, higher investment ➡️ increased productive capacity ➡️ increases potential for exports
- many industries help to facilitate trade such as trade insurance, logistics and port facilities, countries with fast-growing export sectors are likely to see increased investment and employment in these related industries
7
Q
Advantages of export led growth ?
A
- rise in AD and expansion of output
- growing export sales = more profits
- increased investment and employment
8
Q
What are the potential risks of export led growth ?
A
- over dependence on the economic cycles of trade partner countries ➡️ vulnerable to external economic and political shocks
- encourages/incites a protectionist response from other nations who feel that the benefits of trade have been unequally skewed in favour of exporting countries
- allocated goods and services for exports cannot be used to meet domestic needs and wants ➡️ cause dip in domestic living standards unless the country is also prepared to import goods and services using the revenue from exports
- rapid export led growth might lead to demand pull inflation + higher interest rates ➡️ export industries less competitive in overseas markets + domestic producers less price competitive against imports
- might be unsustainable if it contributes extraction of natural resources beyond what is required for long term balanced growth to be maintained eg. deforestation
9
Q
What is the output gap ?
A
- the difference between the actual level of GDP and its estimated potential level (usually expressed as a % of the level of potential output)
10
Q
What is a negative output gap ?
A
- occurs when the level of actual GDP is less than potential GDP, large margin of spare capacity
- some factor resources are under-utilised eg. demand deficient unemployment, suggests economy is under efficient
- main problem is likely to be higher unemployment + possible deflation risk
- policies used: lowering interest rates
11
Q
What is a positive output gap ?
A
- occurs when actual GDP is greater than the estimated potential GDP, possible excess AD
- some resources working beyond usual capacity (shift work & overtime), suggest economy is very efficient
- main problem is rising demand causing pull & cost push inflationary pressures
- policies used: raising interest rates
12
Q
Why is it difficult to asses the output gap ?
A
hard to measure/asses:
- productivity
- size of labour force
- business output and confidence
- underemployment
13
Q
Showing output gaps using AD/AS diagrams
A
- negative output gap: LRAS past equilibrium
- positive output gap: LRAS before equilibrium
14
Q
What is an economic boom ?
A
- a period when the rate of growth of real GDP is fast and higher than the long-term trend
15
Q
What is a slowdown ?
A
- a weakening of the rate of growth, real GDP is still rising but increasing at a slower rate
16
Q
What is a recession ?
A
- a period of at least six months when an economy suffers a fall in aggregate output, employment, investment, real incomes and confidence ie. fall in GDP
17
Q
What is economic recovery ?
A
- a phase after a recession, during which real GDP starts to increase and unemployment begins to fall
18
Q
What is a depression ?
A
- a prolonged downturn in the economy and where a nation’s GDP falls by at least 10%
19
Q
Characteristics of a boom ?
A
- rising incomes
- rising confidence
- rising employment
- rising wages
- rising inflationary pressure
- rising business profits (unless the business sells inferior goods)
- rising trade deficit
- increasing use of scarce resources
- rising investment, the ‘accelerator effect’ will cause investment to rise more quickly than GDP
- rise in construction
- falling budget deficit ie. falling govt borrowing
20
Q
Characteristics of a recession ?
A
- falling incomes
- falling confidence
- rising unemployment
- stagnant wages
- falling inflationary pressure (if caused by lack of demand)
- falling business profits (unless the business sells inferior goods)
- falling trade deficit
- possible less use of scarce resources + reduced environmental damage
- falling investment, the ‘accelerator effect’ will cause investment to fall more sharply than GDP
- fall in construction
- rising budget deficit ie. rising govt borrowing
21
Q
What are the possible causes of a recession ?
A
- external events: a recession in a trading partner eg. EU or a sharp rise in global commodity prices eg. rising oil prices
- tightening of macro policy: higher interest rates leading to more expensive loans or a rise in taxation or a cut in govt spending
- fall in asset prices or supply of credit: steep decline in the level of share or house prices or a collapse in the supply of credit eg. global financial crisis
- drop in business and consumer confidence: businesses cut investment ➡️ job losses OR less spending and more saving
22
Q
Recession caused by an inward shift of AD ?
A
- AD decreases, leading to an increase in spare capacity i.e. a rising negative output gap, and a fall in real GDP from Y to Y1.
23
Q
Recession caused by an inward shift of AS ?
A
- can also be caused by a supply shock, leading to an inward shift of short run AS
eg. higher import prices ➡️ rise in general price level ➡️ lower real incomes for consumers and falling profits for business - a supply shock may lead to a period of stagflation (slower economic growth and higher inflation)
24
Q
What are the short term effects of a recession ?
A
❗️impact depends in part on causes and how long it lasts
- fall in business profits and capital investment: due to falling demand as well as planned investment declining
- unemployment: steep decline in AD ➡️ fall in demand for labour ➡️ rise in cyclical unemployment
- growing fiscal deficit: decline in tax revenues and more welfare spending ➡️ increased budget deficit + rising national debt
- lower rate of inflation: businesses offer price discounts to off load excess unsold stocks, deep recession risks causing a period of sustained deflation
25
Q
What are the long term economic effects of a recession ?
A
- rising structural long-term unemployment and regional decline
- low rates of investment can reduce the size of the capital stock
- persistent budget (fiscal) deficits and a rising national debt leads to austerity (cut in public services)
26
Q
What are the long term social effects of a recession ?
A
- falling real wages hits average living standards and reduces demand
- widening inequality of income and wealth leading to rising poverty
- social costs such as loss of social cohesion and threats to democracy
27
Q
What are the benefits of economic growth ?
A
- higher living standards: real GNI per capita, helps to lift people out of extreme poverty + improves development outcomes
- employment: sustained growth creates jobs + contributes to lower unemployment ➡️ reduces inequality, poverty and social problems
- fiscal dividend: raise in tax revenues, allowing govt to spend more on public and merit goods or help cut a fiscal deficit
- accelerator effect: rising growth stimulates new investment eg. in low-carbon technologies and it provides profits that fund research and innovation
- greater business profits: stimulates further investment, R&D, innovation
- additional income can be used for savings: this provides protection against future loss of income due to sickness / lack of demand, can support retirement, deposits for houses etc or can be used to pay for more
leisure time
28
Q
What are the costs of economic growth ?
A
- risks of higher inflation & interest rates: can lead to demand pull and cost push inflation, central banks may decide to raise interest rates to control inflation, rising consumer spending ➡️ increasing trade deficit
- environmental effects: negative externalities eg. pollution and waste + risk of unsustainable extraction of finite resources, causing a long run depletion of natural resources
- inequalities of income & wealth: rapid growth can lead to a higher level of inequality and social divisions, the distribution of gains from growth are often unequal (may only go to a few people but the growth may be at the expense of hours worked and increased stress)
29
Q
What does the impact of economic growth depend on ?
A
🔔
- the cause of the growth
- actions taken by the government / central bank to prevent excessive growth
- consumer and business attitudes
- the rate of growth
- legislation in place to protect the non-working, the environment etc
