2.5 - Economic growth Flashcards
2.5.1 - causes of growth
Economic growth can be achieved by either an increase in what?
AD or AS
interest rates affecting growth?
Decreased IR = more borrowing = increased investment = increase MPC = more consumption = increased AD = more growth
taxes affect on growth?
Decrease in taxes = increased disposable income and investment increases, more consumption = increased AD = more growth
gov spending effect on growth?
Increased gov spending = more investment = direct injection into the circular flow of income = increased AD = more growth
exports affecting growth?
Increased exports = more demand for goods/services = increased AD = more growth
Explain how changes in the following will lead to an increase in aggregate supply and hence growth–AS; interest rates
IR – decreased IR = cost of borrowing decreases = decrease in cost of raw materials / lower production costs = increased SRAS [right shift] - (fall in SRAS- decreased IR = decreased value of £)
cut IR = increase MPC –> increase AD = multiplier
Explain how changes in the following will lead to an increase in aggregate supply and hence growth–AS; taxes
Taxes – decreased taxes = more disposable income = decreased costs = can afford more labour = increase in SRAS
Explain how changes in the following will lead to an increase in aggregate supply and hence growth–AS; competition policy
Competition policy – increased competition = more firms enter the market = firms act more effectively and efficiently = increase in LRAS [
Explain how changes in the following will lead to an increase in aggregate supply and hence growth–AS; education
Education = increase in education – more skilled workers = increased supply of labour = increase LRAS
Actual growth?
occurs when there is an increase in the quantity of goods/services
produced in an economy in a given period oftime
This is often measured by the percentage change in real gross domestic product (GDP)
potential growth?
the increase in the productive potential of an economy as demonstrated by a shift
outward of the production possibilities frontier(PPF) or the long-run aggregate supply (LRAS) curve
At any given point in time, the actual economic growth may be less than the potential growth available
to the economy
importance of export lead growth?
-exports lead to increased AD hence growth
-some countries [ eg China] have generated economic growth though huge increases in the value of exports —> export-led growth
export-led economic growth refers to what?
s to growth that occurs as a result of an increase in the sale of
goods/services to foreign countries
Net exports (X-M)is a component of aggregate demand (AD)
For many developing countries,the exports represent a high percentage ofthe annual AD and
gross domestic product (GDP)
When the value of the exports rise, the real GDP rises significantly
2.5.2 - [output gaps]
The output gap is what?
is the difference between our actual level of output [measured by GDP] and our potential level of output [measured by long term growth rate]
Measuring the output gap is difficult, because we do not have completely accurate data for both of the following;
Current level of GDP
Potential [full capacity] GDP
A positive output gap?
occurs when real GDP is greater than the potential real GDP
A negative output gap?
occurs when the real GDP is less than the potential real GDP
There is spare capacity in the economy to produce more goods/services than are being
produced
It is difficult to accurately measure output gaps as?
This is because it is hard to know exactly what the maximum productive potential of an economy
is
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
2.5.3 - [trade business cycle]
-the trade or business cycle describes what?
how the economy tends to exhibit recurring trends in economic growth rates –> booms tend to be followed by economic slumps or slowdowns, which tend to be followed by a recession, before the economy moves into the recovery phase, and then back into a boom
trade (business) cycle refers to [simple]
- refers to the changes in real GDP that occur in an economy overtime
This is the actual growth
The real GDP will fluctuate above and below the long term trend rate of growth
what is a positive output gap?
-identified as growth of real GDP that is above the trend
negative output gap?
-is identified as growth of GDP that is below trend
this flow of real GDP can be moderated by what?
government intervention
characteristics of a Recession
-Two consecutive quarters (6 months) or
more of negative economic growth
-high unemployment
-low confidence
-Increasing negative output gap and spare
production capacity
-low inflation
-Increase in government expenditure
perhaps leading to a great budget deficit
characteristics of a boom?
-high rates of economic growth
-Decreasing unemployment and increasing job
vacancies
-Reduction of negative output gap or creation of a
positive gap. Spare capacity is reduced or
eliminated
-high confidence
-An improvementin the government budget as tax
revenues rise and expenditure falls
-increasing rate of inflation - usually due to demand pull
Economic boom:
[class paragraph]
During a boom, we would expect economic growth to increase, this leads to the level of unemployment decreasing as the economic growth requires more labour to be used to produce more goods and services. As more labour is being used, there is less spare capacity in the economy as we are using up more labour. This causes inflation to increase as there is a a rise in the average price level from PL to PL1. More economic growth leads to an increase in business and consumer confidence. As people earn higher wages the government sees an increase in budget as they have more tax revenue.
The opposite would happen in a recession.
2.5.4 - [impact of economic growth]
Benefits of economic growth?
-increased incomes = better standard of living
-decreased levels of absolute poverty
-Improvement in the quality/quantity of
environmentally friendly technologies
-Higher sales revenue for
firms
-increased investment = greater productive potential
-Reduced expenditure by governments on
benefits
-Higher government tax revenue due to
rising incomes and surging corporate
profits
-increased employment
costs of economic growth?
-Rising aggregate demand causes demand pull
inflation; purchasing power may fall
-lack of equity in the distribution of income
-environmental damage caused by negative externalities in production
-increased inflation
-Greater output often requires more time from
workers and can decrease leisure time and wellbeing
-greater consumption of demerit goods
Decreased export sales may lead to a delay in
investment by firms
