2.5 Economic growth Flashcards
Define economic growth
Increase in real GDP
OR
The expansion of the productive potential of an economy
Factors which cause economic growth
o Improving the labour force, with a better quality due to higher education.
o A larger labour force. This may be due to migration, birth rates or improved participation rates.
o Improved technology, which is more productive. This means resources are used more efficiently.
o More investment, to fuel economic growth. More machinery can be bought, which will increase production.
o Discovering new resources, such as oil.
o Incentives for enterprise, such as tax breaks or subsidies
Define potential growth
Long run expansion of the productive potential of an economy
(caused by increases in AS)
Define actual growth
% change in a country’s real GDP and it’s usually measured annually.
(caused by increases in AD)
What is potential output
The potential output of an economy is what the economy could produce if resources were fully employed.
Define recession
Negative economic growth for 2 consecutive quarters
Define output gap
The difference between actual output of an economy and potential output
N.O.G= actual ouput below potential output
P.O.G= actual output above potential output
Explain the difference between automatic stabilisers and discretionary fiscal policy.
- Automatic stabilisers means government spending & taxation vary without direct government decision-making over the course of the economic cycle/ progressive tax bands
- Discretionary fiscal policy – deliberate alteration of government expenditure & taxation designed to achieve its economic objectives
- Discretionary fiscal policy could occur at any point on the trade cycle
- In a positive output gap you would expect less government spending/more tax revenues as part of automatic stabilisers
Chains of reasoning
Accelerator effect and economic growth
- ↑in rate of growth of consumer demand= ↑in planned capital investment by firms
- Businesses ↑capital spending- need extra supply capacity + want to make ↑profits in LR
- ↑in net investment = size of country capital stock↑
- Amount of capital per worker employed will also ↑
- Expansion of nations productive potential= improvement in labour productivity efficiency
- Increase LR economic growth- outward shifts for LRAS
Describe the Piketty graph
- Rate of return exceed rate of economic growth
- Wealth inequality ↑ as rich accumulate wealth faster than the overall economy expand
- =inequality as capital owner will benefit more
- Decreasing the richer than average population where growth can occur
Explain trickle down effect
- Rich accumulate more wealth
- Tax breaks and benefits for corporations will trickle down to everyone else
- As rich pay more tax in progressive tax system= more tax revenue for govt= more spent on welfare benefits
- Or rich employ more to meet spare capacity in economy= people earn more disposable income
Environmental Kuznet curve
- Low-Income Stage: In the early stages of economic development, countries tend to focus on growth and industrialization. This often involves increased pollution, and degradation of natural ecosystems - environmental quality deteriorates.
- Middle-Income Stage: As economic growth continues, the negative impacts on the environment tend to peak. At this point, environmental degradation may be at its worst due to increased industrial activity, urbanization, and consumption.
- High-Income Stage: Beyond a certain level of income, the theory suggests that societies become more concerned about environmental issues. They start investing in cleaner technologies, adopting stricter environmental regulations, and promoting sustainable practices. Environmental quality begins to improve despite ongoing economic growth.
Kuznet curve on income inequality
Increasing inequality occurs after rural labour migrate to urban areas and becomes socially mobile
Rich might invest and employ more
Rich own capital and land= income = ↑capital and land
Rich taxed more (progressive tax)
Government revenue increases
Spent on benefits to the poor
Costs of economic growth
Reduces protection of the environment
* Until viable renewable resources are available growth depletes finte resources, worsens tadgedy of the commons and pollutes the environment, which negatively impacts our living standards, health and happiness
Income inequality
* As capital and land owners benfit from higher demand and prices during growth, earning more income to buy more capital= rich get richer
One reason why international trade is important for economic growth.
The rising incomes in the overseas markets that are targeted will mean that even if the domestic markets suffer a downturn or recession, the export markets can remain a sustainable source of continued economic growth
