2.5 Economic Growth Flashcards
What is economic growth?
An increase in the quantity of goods/services produced in an economy over a period of time.
Often measured by the percentage change in real GDP.
What causes short-run economic growth?
Changes to any of the components of aggregate demand (AD).
Illustrated by a rightward shift in the AD curve.
What is represented by a rightward shift in the AD curve?
An increase in consumption, investment, government spending, or net exports.
This leads to an increase in real GDP.
How is short-run economic growth illustrated on a PPF model?
By moving from a point inside the curve to a point closer to the curve.
This signifies an increase in real GDP.
What factors contribute to long-run economic growth?
Improvements to the quality or quantity of the factors of production.
These include determinants of long-run aggregate supply.
What does an increase in long-run aggregate supply (LRAS) indicate?
An increase in the potential output of the economy.
This can be due to enhanced competition policies or increased number of firms.
What is the difference between actual and potential economic growth?
Actual growth is the increase in goods/services produced, while potential growth is the increase in productive potential.
Potential growth is illustrated by a shift outward of the PPF or LRAS curve.
What characterizes a positive output gap?
When real GDP is greater than potential real GDP.
Indicates that the economy is producing more than its sustainable capacity.
What indicates a negative output gap?
When real GDP is less than potential real GDP.
Suggests there is spare capacity in the economy.
What are the four stages of the trade (business) cycle?
- Peak/boom
- Slowdown/downturn
- Recession
- Recovery
These stages reflect fluctuations in real GDP.
What is a characteristic of a recession?
Two consecutive quarters of negative economic growth.
This often correlates with increasing unemployment.
What are the benefits of economic growth?
- Increased incomes leading to better standards of living
- Decreased levels of absolute poverty
- Improvement in environmentally friendly technologies
- Higher sales revenue for firms
- Increased investment by firms
- Reduced government expenditure on benefits
- Increased employment
These contribute to societal improvements.
What are the costs of economic growth?
- Demand-pull inflation
- Lack of equity in income distribution
- Environmental damage from production
- Increased inflation harming export sales
- Delayed investment due to decreased export sales
- Increased consumption of demerit goods
- Decreased leisure time and well-being
These can lead to social and economic challenges.
What does a long-term growth trend represent?
The underlying trend rate of economic growth over a longer period.
Determined by constant increases in productive capacity.
What can indicate a positive output gap is developing?
Rapidly rising prices.
Suggests the economy is over-producing relative to its sustainable capacity.
What does a negative output gap suggest about the economy?
There is spare capacity and a slowdown in economic growth.
Often associated with rising unemployment.
True or False: The components of aggregate demand rise and fall at the same rate.
False.
Different components may respond differently during economic cycles.
Define the term long-run economic growth
Long-run economic growth occurs when there are improvements to the quality and/or quantity of the factors of production.
True or False?
Short-run economic growth can be illustrated by a rightward shift in AD on an AD/AS diagram
True.
Short-run economic growth can be illustrated by a rightward shift in AD on an AD/AS diagram.
What is actual economic growth?
Actual economic growth is an increase in the quantity of goods and services produced in an economy in a given period of time.
How is actual economic growth often measured?
Actual economic growth is often measured by the percentage change in real Gross Domestic Product (GDP).
What does potential growth demonstrate?
Potential growth demonstrates an increase in the productive potential of an economy.
What is export-led economic growth?
Export-led economic growth occurs when there is an increase in the sale of goods and services to other countries.
How does an increase in the value of exports affect real GDP?
An increase in the value of exports increases real GDP.
Which component of aggregate demand does international trade affect?
International trade affects the net trade component of aggregate demand, (X-M).
What is the relationship between the value of exports and GDP for many developing countries?
For many developing countries the value of exports represents a large proportion of AD. This increases Gross Domestic Product (GDP).
Which large country experienced significant export-led economic growth from 1988 to 2008?
China experienced significant export-led economic growth from 1988 to the global financial crisis of 2008.
Define long-term growth trend.
A long-term growth trend is the underlying trend rate of economic growth over a longer period of time.
How is an increase in the productive capacity of an economy illustrated on an AD/AS diagram?
An increase in the productive capacity of an economy is illustrated by a rightward shift of the long-run aggregate supply curve (LRAS).
Define the term output gap.
An output gap is the difference between the actual level of real national output (real GDP) and the maximum potential level of real national output.
Which macro-economic performance indicators suggest a negative output gap is increasing?
Rising unemployment and a slowdown in economic growth can indicate that a negative output gap is increasing.
How is a negative output gap illustrated on an AD/AS diagram?
A negative output gap is illustrated on an AD/AS diagram by showing the actual real national output below the potential real national output.
What is the classical view on negative output gaps?
The classical view is that real national output will return to the potential level in the long-run at a lower price level.
What is the Keynesian view on negative output gaps?
The Keynesian view is that an economy can remain in a negative output gap in the long-run.
True or False?
A positive output gap is sustainable in the long run.
False.
A positive output gap is not sustainable. The classical view states that real national output will return to the potential output but at a higher price level.
What is a trade or business cycle?
A trade or business cycle refers to the changes in real GDP that occur in an economy over time.
What is the relationship between real GDP fluctuations and the long-term trend rate of growth?
The relationship is that real GDP fluctuates above and below the long-term trend rate of growth.
How is a positive output gap identified on a trade cycle diagram?
A positive output gap is identified by real GDP growth exceeding the trend line on a trade cycle diagram.
True or False?
A negative output gap occurs when real GDP growth is above the trend line.
False.
A negative output gap occurs when real GDP growth is below the trend line.
How can the flow of real GDP through the different stages of the trade cycle be managed?
The flow of real GDP through the different stages of the trade cycle can be managed through government intervention.
What happens to unemployment during a recession?
During a recession, unemployment increases or remains high.
How does a recession affect business and household confidence?
A recession leads to low confidence for firms and households.
What typically happens to government expenditure during a recession?
During a recession there is typically an increase in government expenditure. This could lead to a greater budget deficit.
What happens to unemployment during a boom?
During a boom, unemployment decreases and job vacancies increase.
True or False?
Inflation usually falls during a boom.
False.
During a boom there is usually an increasing rate of demand-pull inflation.
What is considered to be the key cause of rising living standards?
Economic growth is considered to be the key cause of rising living standards.
How does economic growth affect absolute poverty?
Economic growth leads to decreased levels of absolute poverty.
What is a possible environmental benefit of economic growth?
A possible environmental benefit of economic growth is an improvement in the development of environmentally friendly technology. This will help to reduce external costs.
True or false?
Economic growth always leads to an equitable income distribution.
False.
Economic growth can lead to a lack of equity in the distribution of income. The rich may get richer and the poor may get poorer.
How does economic growth affect a government’s tax revenue?
Economic growth leads to higher tax revenue for a government due to rising incomes for consumers and profits for firms.
What is a possible negative effect of economic growth on a country’s exports?
A possible negative effect of economic growth on a country’s exports is that increased inflation can harm the sale of exports.
What is a possible social benefit of economic growth?
A possible social benefit of economic growth is that increased employment should alleviate some of the detrimental social impacts of unemployment.
How might economic growth affect the consumption of de-merit goods?
Economic growth might lead to an increase in consumption of de-merit goods due to higher incomes.
True or False?
Economic growth always leads to environmental damage.
False.
While economic growth can cause environmental damage it can also lead to improvements in environmentally friendly technologies.
