2.5 - Economic Growth Flashcards
Economic growth
An increase in the real output of goods and services in an economy over time, measured by the rise in real GDP
Causes of economic growth
There needs to be an increase in quality or quantity of one of the four factors of production, land, labour, capital or enterprise or these being used more efficiently
Land as a cause of economic growth
The discovery of new resources e.g. oil will increase economic growth
Labour as a cause of economic growth
An increase in the quality or quantity of labour will improve economic growth, such as through a larger workforce or higher skilled workers making them more efficient
Capital as a cause of 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, even if these are not a technological advancement, so more goods can be produced
Enterprise as a cause of 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 economic growth
Technological progress as a cause of 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
Efficiency as a cause of economic growth
Efficiency is important in bringing about economic growth as it means less resources are needed to produce each good, so more goods can be produced
Actual growth
The percentage change in GDP, which is when the economy has actually produced more goods and services, reflecting short-term economic expansion within an economy’s current capacity
Potential growth
The increase in an economy’s productive capacity over time, leading to a higher long-term sustainable output level, represented by an outward shift of the long-run aggregate supply curve or the production possibility frontier
Actual growth rates
The actual change (i.e. the change in real GDP) over time and its changes are what make up the business cycle
Long-term trends in growth rates
The average sustainable rate of economic growth over a period of time
Output gap
The difference between an economy’s actual output (real GDP) and its potential output (full capacity GDP)
Positive output gap
When actual Gross Domestic Product is above potential Gross Domestic Product, meaning the economy is producing beyond its sustainable capacity
Negative output gap
When actual Gross Domestic Product is below potential Gross Domestic Product, meaning the economy is underperforming with unused resources
Trade cycle
The recurring fluctuations in economic activity over time, characterized by periods of expansion and contraction in real GDP
Phases of the trade cycle
- Boom
- Recession
- Slump
- Recovery
Characteristics of a boom
High economic growth, low unemployment, rising inflation, strong consumer and business confidence
Characteristics of a recession
Two consecutive quarters of negative GDP growth, rising unemployment, falling demand and lower inflation
Characteristics of a slump
Severe and prolonged economic decline with high unemployment and low confidence
Characteristics of a recovery
Gross Domestic Product starts to rise, employment increases and confidence improves, leading back to expansion
Benefits of economic growth on consumers
- The average consumer income increases as more people are in employment and wages increase
- Consumers feel more confident in the economy, which increases consumption and leads to higher living standards
- Improved productive efficiency due to better technology could lead to lower prices or higher quality goods
Drawbacks of economic growth on consumers
- Economic growth does not benefit everyone equally. Those on low and fixed incomes might feel worse off if there is high inflation and inequality could increase
- Consumers could face more shoe leather costs, which means they have to spend more time and effort finding the best deal while prices are rising
- The benefits of more consumption might not last after the first few units, due to the law of diminishing returns
Benefits of economic growth on firms
- Investment will increase since businesses are more successful. They will have more money to invest and more incentive to invest as they will know they can make money from their investments
- Business confidence will improve as there are potential demand increases for businesses’ products and this confidence will also lead to increased investment
- There will be more research and development done to invent more technology and more firms will be able to have the best technology, which is likely to increase productive efficiency and lead to lower costs
Drawbacks of economic growth on firms
- Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation
- Firms who sell inferior goods (with negative income elasticities)
may lose out - Changing technologies and globalisation also mean that some firms find their markets disappearing e.g. DVD rental stores
Benefits of economic growth on the government
- Tax revenues will rise as more goods and services are being bought, more income is being earnt and more profits being made. This means the government has more money to put into the NHS, education, benefits etc.; the quality of these systems will be improved, and this will help to improve living standards
- Can help to reduce the budget deficit, perhaps even bringing about a budget surplus which would allow money to be saved for future recessions
Drawbacks of economic growth on the government
- Governments might have to increase their spending on healthcare if the consumption of demerit goods increases
- Economic growth tends to mean people expect more from the
government, which may cause conflict
Benefits of economic growth on current and future living standards
- Economic growth will result in lower poverty levels . An increase in the production of goods and services will increase jobs so there will be less unemployment and less people on benefits. Wages are also likely to increase
- Housing standards and the quality of food increases due to economic growth
- Increased government spending will lead to improved living standards both now and in the future, as better educated people usually have higher living standards
Drawbacks of economic growth on current and future living standards
- High levels of growth could lead to damage to the environment in the long run, due to increase negative externalities from the consumption and production of some goods and services
- Economic growth may result in increased inequalities between rich and poor. The rich may be the only ones that have gained from the economic growth and they may even lower the living standards of the poor by exploiting the poor
