2.5 - Economic Growth Flashcards
What is economic growth?
Trade helps economies grow further through export-led growth, this can attract demand for the whole world.
Actual economic growth
real growth measured using GDP figures, over a particular period of time
Potential economic growth
overall capacity for growth in the economy; average rate of growth over time
Benefits of economic growth
- more jobs
- better living standards
- reduced poverty
- more public goods
- improved government finances
Costs of economic growth
- environmental damage
- high inflation
- wider gap between the rich and poor
Causes of growth
Demand-side factors -> increases in the components of AD will increase growth (C,I,G,X-M)
Supply-side factors ->
- technological advancement
- education and skills
- demographic changes/migration
- government regulation
The trade cycle
(Business/boom-bust cycle)
Cyclical deficit
only caused by bust/recession
Economic boom
Economic growth - high
Unemployment - low
Inflation - high
Consumer/business confidence - high
Government finances - high tax revenues, low welfare spending
Exchange rate - strong currency (increase M, decrease X)
Economic recession
Economic growth - low
Unemployment -high
Inflation - low
Consumer/business confidence - low
Government finances - low tax revenues, high welfare spending
Exchange rate - weak currency (increase X, decrease M)
Effects of an economic boom
- u/e decreases, increase consumer demand, increase profits
- budget surplus on GS, increase tax revenues, decrease G on social welfare
- However, increase prices -> increase inflation
- businesses make more luxury goods to match increase in consumption
- increase animal spirits, lots of new businesses set up
Effects for an economic recession
- two consecutive quarters where GDP = negative
- increase u/e, decrease consumer demand, decrease investment, decrease inflation, decrease r/i
- decrease AD - cost of redundancies, decrease investment and stock for businesses
- small businesses struggle to survive and many close
What is an output gap?
the difference between actual and potential GDP
Negative output gap
actual real GDP < potential real GDP
Positive output gap
actual real GDP > potential real GDP - over capacity and high inflation
