2.5 Economic Growth Flashcards
How does economic growth occur
For economic growth to occur, there needs to be an increase in quality or quantity in one of the four factors of production: land, labour, capital, enterprise, or these being used more efficiently.
How does land effect economic growth
The discovery of new resources, for example, oil, will increase economic growth. Economists argue that developing countries tend to grow the most from exploiting new resources, whilst they do not have significant effect in developed countries.
How does the size of the workforce effect economic growth
Changes in the size of the workforce can come from immigration, demography of the country or participation rates. A change in the age profile of the population I.e. the amount of people of working age will affect economic growth: the more people of working age there are, the more growth there will be
How does the quality of the workforce effect economic growth
In the long run, improving the quality of labour is perhaps more important; this can be done through education. Improved education will improve labour quality as it will mean that workers have all the skills they need and are more efficient, so output per worker increases
How does capital effect economic growth
If a country receives sustained investment, they will be able to access or develop new technology which will enable the country to improve productivity. It will also mean more machines can be bought and used, so more goods can be produced.
How does enterprise effect economic growth
If the government offers tax benefits and grants, they will encourage the development of business, creating jobs and meaning more goods and services are produced , which will increase growth
How does technological progress effect economic growth
Improved technologies mean that the average cost of production is lower, whether this is because it is quicker to produce or less labour or equipment is needed. Also, it creates new products for the market and this helps to increase consumption and keeps MPC high as there are new things to buy.
How does efficiency effect economic growth
How can the government ensure efficiency
Efficiency is important in bringing about economic growth as it means less resources are needed to produce each goods, so more can be produced.
One way the government can ensure efficiency is to keep up competition as it will mean producers are forced to lower prices or increase quality so will have to improve efficiency to keep profits high
What is actual growth
The actual growth is the percentage change in GDP. It is when the economy is actually produced more goods and srtvjves
What is potential growth
The change in productive potential of the economy over time, so the LRAS or PPF curve shifts
How is productive potential determined and what does it actually show/mean
Determined by the factors of production and so potential growth means there have been resources discovered or more technology developed that will allow the economy to grow more
What does the PPF show
The PPF shows the potential output of the economy
How can international trade increase economic growth
Many economists argue that AD can affect economic growth, through export led growth: a rise in AD through increased exports
Been effective Germany, Japan, china
Although exports initially increased AD rather than LRAS, sustained high export levels will encourage, or force, firms to invest and increase demand for labour, which will lead to growth.
What is the long run trend rate of growth
The average sustainable rate of economic growth over a period of time. It is what tends to happen over a long period of time; the average
What is an output gap
An output gap is the difference between the actual level of GDP and the estimated long-term value for GDP. This is shown on the trade cycle diagram which demonstrates how the actual GDP is not always on the Trent
What’s a positive output gap
When GDP is higher than estimated
What’s a negative output gap
When GDP is lower than estimated. There is spare capacity in the economy with factories, offices and workers not being utilised to produce goods and services
Why are output gaps difficult to measure
The exact position of the LRAS is unknown and because initial estimates of the real GDP are often inaccurate.
Some economists also believe they are so difficult to measure that they are not a valid concept to use from the purpose of economic policy
How can output gaps be illustrated using the AS AD diagram
LRAS shows the full capacity output where all resources are being fully utilised.
An equilibrium to the right of the LRAS shows the economy working over capacity in the short term but to the left it shows the economy working under capacity
What do classical economists argue will happen to the output gaps in the long run
Positive output gap would be filled by long run economic growth moving the LRAS curve, a recession which would decrease AD or a rise in the costs of production which would decrease SRAS
They would also argue that the negative output gap would be brought back to equilibrium by rising AD or a fall in SRAS due to lower costs of production
What is the trade (business) cycle
This is the periodic but irregular up and down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. Each business cycle is different but tend to have the 4 main phases
Boom, downturn, recession (slump), recovery
Why does the trade cycle exist
The cycle exists because of demand and supply side shocks.
What are characteristics of a boom
When economy is at its peak, national income is high and the economy is likely to be working above the PPF where there is a positive output gap.
Consumption and investment tend to be high as are tax revenues, and wages will be increasing
There will also be inflationary pressure
What happens in a downturn
During a downturn, the economy begins to move from a boom to a recession, output and income fall which leads to a fall in consumption and investment as well as tax revenues.
Characteristics of a recession
When the economy is at the bottom of the cycle, it is in a slump, trough, depression or recession. there tends to be high unemployment causing low consumption, investment and imports. Inflationary pressure will be low and there may even be deflation.
Define recession
Where real GDP falls in at least two successive quarters
What happens in a recovery phase
As the economy moves out of a recession, it moves into a recovery/expansion phase as national income and output begin to increase with unemployment falling and consumption, investment and imports increasing. Inflationary pressure brings to grow as workers start to demand higher wages
Impact of economic growth on consumers
• increase in demand for housing as people have more money and so are able to afford to buy properties, which will increase house prices. Share are likely to increase in value. This leads to a positive wealth effect
• improved productive efficiency due to better technology could lead to lower prices or higher quality goods.
• some argue that increased economic growth will lead to increased happiness (not necessarily the case)
• on the other hand, economic growth could lead to increased inequalities and so may not have any effect on the average consumer and may lead to inflation.
Impact of economic growth on firms
• investment will increase since businesses are more successful.
• business confidence will improve as there are potential demand increases for business’ products; therefore, they will increase investment
• tech will improve, more RND done to invent more tech and more firms will be able to have the best technology
• combo of higher demand and lower costs likely to lead to higher profits
• economic growth also produces the opportunity for new firms to establish themselves and allows existing ones to make more profit.
The effect of economic growth on the government
• tax revenues will rise as more goods and services are being bought, more income is being learnt and more profits being made. This means government has more money to put into NHS, education, benefits.
• it can help reduce the budget deficit, perhaps even bringing about a budget surplus which would allow money to be saved for future recessions
• however, economic growth tends to mean people expect more from the government
Effect of economic growth on current and future living standards
• lower poverty levels
• more goods and services for people to enjoy, poor will be able to get what they need
• housing standards and the quality of food increases
• increased government spending will lead to improved living standards
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