2.5 Economic growth Flashcards
Short run economic growth
Changes to any of the AD componenets will cause SR economic growth.
represented by:
a right shift in AD
PPF moving from a point inside the curve to closer to the curve
Long run economic growth
Improvements to the quality or quantity of the factors of production. Includes all the determinants of LRAS
LRAS will shift right
What is the difference between actual and potential growth
Actual: increase in the quantity of g/s produced in the economy in a given time period (often measured by a % change in GDP)
Potential: increase in the potential productive potential of the economy (demonstrated by a shift out of the PPF or LRAS)
at any given point, actual may be less than potential
International trade and export-led economic growth
International trade is an important source of income for many countries. Export-led growth refers to the growth that occurs because of an rise in exports
- net exports is a component of AD
- for many developed, exports account for a high proportion of AD and GDP
- when the value of exports rise, GDP rises
Distinguish between actual growth rates and long-term trends in growth rates
Actual growth: increase in the quantity of g/s produced in the economy in a given time period (often measured by a % change in GDP)
long-term trends in growth rates: trend rate of economic growth over a long period of time.
Constant increases in the productive capacity of an economy (AS).
> demonstrated by right shift LRAS
Define output gap
an output gap is the difference between the actual level of output (Real GDP) and the maximum potential level of output
Difference between positive and negative output gaps
+ real GDP is above the potential
- real GDP is below the potential (there is spare capacity in the economy)
Why is it difficult to measure output gaps accurately
TIB it is hard to know accurately measure an economy’s productive capacity. It would be necessary to have data for all firms, business investments and skills of the workforce
use a Classical diagram to show a positive output gap
LRAS (perfectly inelastic) = YFe
SRAS = Y
(LRAS equilibrium needs to be on the left of SRAS equilibrium)
YFe = potential output
YFe-Y = positive output gap
ACCORDING TO CLASSICAL VIEW, NOT SUSTAINABLE AS OUTPUT WILL RETURN TO YFE AT A HIGHER LEVEL
Define trade cycle
the changes in real GDP that occur in an economy over time
THIS IS ACTUAL GROWTH
Demonstrate the trade cycle (output gap) on a graph
- boom (peak of +OG)
- slowdown (GDP falling)
- recession (trough)
- recovery
Characteristics of the trade cycle exam tips
- govt intervention can moderate the flow of GDP
- some firms may thrive during a recession as consumers switch to purchasing inferior goods (Poundland).
- AD components don’t rise and fall at the same rate (during a recession, consumption may increase well before investment)
Characteristics of a recession
2 or more consecutive quarters of negative EG
Increasing/high unemployment
Increasing - OG and spare
production capacity
low confidence
low inflation
Increased govt spending, can lead to a greater budget deficit
Characteristics of a boom
Increasing/high rates of EG
Decreasing unemployment and increasing job
vacancies
Reduction of - OG or creation of a + OG
Spare capacity is reduced or eliminated
High confidence, more risky decisions are taken
Increasing rate of inflation - usually demand pull
Improved govt budget as
tax revenues rise and expenditure falls
Benefits of Economic growth on - consumers, firms, govt and living standards
Increased incomes = better standards of
living
Decreased levels of absolute poverty
Improvement in the quality/quantity of
environmentally friendly technologies
Higher sales revenue for firms and greater profits
Increased investment by firms increases the
potential output of the economy
Reduced govt expenditure on benefits
Higher govt tax revenue due to rising incomes and surging corporate profits
Increased employment resolves some -ve social impacts of unemployment
