2.5 Economic Growth Flashcards
How is short run economic growth caused?
by changes to any components of aggregate demand
How is short run economic growth shown diagrammatically?2
- by a rightward shift in AD
- or by moving a point inside the PPF closer to the curve
How is long run economic growth caused?
by any improvements to the quality or quantity of the factors of production
- including the determinants of long - run aggregate supply
What is actual economic growth?
when there is an increase in the quantity of goods/services produced in an economy in a given period of time
How is actual economic growth measured?
by the percentage change in real GDP
What is potential economic growth?
the increase in the productive potential of an economy as demonstrated by a shift outward of the PPF or the LRAS
What is international trade?
an important source of income for many countries
What is export-led economic growth?
refers to growth that occurs as a result of an increase in the sale of goods/service to foreign countries
What is a long-term growth trend?
underlying trend rate of economic growth over a longer period of time
How is long term economic growth determined?
by the constant increases in the productive capacity of an economy (AS)
- increase in productive capacity is illustrated by a rightward shift of the LRAS
What is an output gap?
the difference between the actual level of output (realGDP) and the maximum potential level of output
When does a positive output gap occur?
when realGDP is greater than the potential realGDP
When does a negative output gap occur?
when the realGDP is less than the potential real GDP
Why is it difficult to measure output gaps accurately?3
- hard to know the exact maximum productive potential of an economy
- rapidly rising prices can indicate a positive gap is developing
- rising unemployment and slowdown in economic growth can indicate that a negative gap is increasing
What is a trade cycle?
changes in realGDP that occur in an economy over time.
- the actual growth
What are 4 recognisable points in the cycle?
- peak/boom
- slowdown/downturn
- recession
- recovery
What are the 6 characteristics of a recession?
- 2 consecutive quarters or more of negative economic growth
- increasing/high unemployment
- increasing negative output gap and spare production capacity
- low confidence for firms/households
- low inflation
- increased government expenditure, leading to a great budget deficit
What are the 6 characteristics of a Boom?
- increasing/high rates of economic growth
- decreasing unemployment and increasing job vacancies
- reduction of negative output gap or creation of a positive gap. Spare capacity reduced or eliminated
- high confidence and more risky decisions taken
- increasing rate of inflation (usually demand pull)
- an improvement in the government budget as tax revenue rise and expenditure falls
Benefits of economic growth? (8)
- increased incomes lead to better standards of living
- decreased absolute poverty
- improvement in the quantity/quality of environmentally friendly technologies
- higher sales revenue for firms and greater profits
- increased investment by firms increases the potential output of the economy
- reduced expenditure by governments benefit
- higher government tax revenue due to rising incomes and surging corporate profits
- increased employment, resolving some of the negative social impacts of unemployment
Costs of economic growth (7)
- rising AD causing demand pull inflation; purchasing power of people on fixed incomes may fall
- lack of equity in the distribution of income, rich get richer poor get poorer
- environmental damage caused by negative externalities
- increased inflation can harm export sales
- decreased export sales may lead to a delay in investment by firms
- increased income usually leads to greater consumption of demerit goods
- greater output requires more time from workers, decreasing leisure time and in tern general well-being
