2.5 Economic Growth Flashcards
Define Actual Growth
Increase in level of real GDp in an economy (SRAS)
What causes Actual growth?
Anything causing a rise in one of the components of AD
Define potential growth
Increase in productive potential of an economy (LRAS)
What causes potential growth?
Factors causing an increase in LRAS or PPF (Supply side factors)
Long run increase in economic growth
Factors causing an increase in quality/quantity of factors of production (CELL)
What is a positive output gap?
When actual output is more than full capacity output
What is a negative output gap
A negative output gap occurs when an economy’s output is less than what it could produce at full capacity
Why are output gaps hard to measure in real world?
Hard to quantify potential output of an economy (Estimation of what is not currently being produced but could be produced)
What are characteristics of a boom?
Low unemployment
More consumer spending
Less gov spending
Less spare capacity
Rising real incomes
Rising sales of normal goods
What are the characteristics of a recession?
High unemployment
Less consumer spending
More gov spending
More spare capacity
Falling real incomes
Rising sales of inferior goods
Give benefits to consumers of actual growth
increased real incomes
Increased living standards
increased job opportunities
Give costs to consumers of actual growth
inequality
AD based growth (Higher prices)
Future recession would eliminate benefits
Give benefits to consumers of potential growth
Could lead to more meaningful long term improvements in living standards
Give costs to consumers of potential growth
Take longer to take effect
Changing structure of economy could cause structural unemployment
Give benefits to firms of actual growth
higher profits due to rising incomes that increase sales
greater confidence allows more investment and easier access to finance
Give costs to firms of actual growth
AD based growth may lead to resource scarcity
Increased in AD likely to be inflationary
Give benefits to firms of potential growth
If growth is productivity based, there are lower production costs
Changing technologies could create opportunities in new market
Give costs to firms of potential growth
Changing technologies could lead to markets disappearing
Give benefits to governments of actual growth
Rising incomes leads to increased tax revenues
Job creation may reduce unemployment and therefore spending on benefits
Give costs to governments of actual growth
Budget deficit may worsen before getting better if growth funded through expansionary fiscal policy
Give benefits to government of potential growth
Long run improvements should increase societies affluence meaning less spending on welfare payments
Give costs to government of potential growth
Supply side policies may require significant spending
Financial benefits of growth will come with long term lag
Give benefits to living standards of potential growth
Job creation lowers unemployment
Economic growth can lead to advances in cleaner technologies (environmental)
Give costs to living standards of potential growth
Tech advances could cause structural unemployment
More production may cause structural unemployment
May not be distributed evenly (more inequality)
Trade off of objectives
Give benefits to living standards of actual growth
Economic growth achieved
Job creation lowers unemployment
