2.5 - Economic growth Flashcards
What is actual economic growth?
The increase in real GDP.
What is potential economic growth?
Shows how much the economy could produce if there was full employment of all resources in the economy.
What are the 2 factors that could cause economic growth?
An increase in AD or LRAS.
What is an output gap?
The difference between actual GDP and potential GDP.
What is the importance of international trade for export-led growth?
Increases AD due to a greater value of net trade.
Improves the state of the current account.
What may a country do in order to stimulate exports?
Engineer a weak currency to make exports cheap and imports expensive.
Adopt policies to improve productivity of export markets.
What is the long-term trend rate of economic growth?
Calculated as the average rate of economic growth over several years.
What is a negative output gap?
Where actual growth rates are below potential growth rates.
What is a positive output gap?
Where growth rates are higher than the economy can sustain.
Why is it difficult to measure output gaps?
It is very hard to accurately measure spare capacity in an economy and therefore potential growth.
Why is it hard to measure spare capacity in an economy?
Not all resources are suited to the needs of the economy.
Production is reallocated to other countries.
Structural changes may occur causing some productivity to be permanently lost.
What does the trade cycle show?
How the level of real output in an economy fluctuates over time.
NOTE TO SELF:
Revise the trade cycle graph.
What are 4 characteristics of a boom?
Low unemployment.
Better living standards.
Increased investment.
Increased inflation.
What are 3 characteristics of a recession?
High unemployment.
Falling living standards.
Falling investment.
