2.5 Economic Growth Flashcards
Negative Output Gap
Where actual output is less than potential output.
Positive Output Gap
Where actual output is greater than potential output.
Remittances
Remittances are money transfers sent by individuals working abroad to their home country, usually to support family members.
GNI & Net Factor Income
Menaing & Equation for GNI
GNI (Gross National Income) is total income generated by a country’s factors of production regardless of where those factors of production are located.
Net Factor Income is income earned by domestic Workers / Firms minus income earned by foreign Workers / Firms at home.
GNI = GDP + Net Factor Income
GDP measures of economic growth & living standards
Income = Output = Expenditure
But:
- Double Counting
- Informal Activity
- Error given vast data collection
- Negative Externalities
- Income inequality
- Output Produced
- Other quality of life aspects
GDP / Capita
GDP/Population
But:
- (Everything on GDP)
- Factor income abroad & significant remittances
- influence of FDI & Repatriation of profit
FDI (Foreign Direct Investment)
Repatriation of profit (when a company sends earnings made in a foreign country back to its home country)
Economic growth
Economic Growth is an increase in real GDP in an economy in a year caused by an increase in AD or an Increase in LRAS,
Actual Growth & Potential Growth Shifts
Short run growth (Actual Growth) 🠮 An increase in AD (using spare capacity to increase real GDP)
Long run growth (Potential Growth) 🠮 An increase in LRAS (increase in the productive capacity of the economy)
Causes of Short Run Growth
AD = C+I+G+(X-M)
- Increase interest rates = C,I,(X-M)
- Lower Income / Corporation Tax = C,I
- Higher consumer / Business confidence = C,I
- Higher government spending = G
- Weaker Exchange Rates = (X-M)
Economic Cycle
Boom 🠮 Recession / Trough 🠮Economic Recovery
Characteristics of Boom
- Growth faster than trend
- Higher profits
- Lower unemployment
- Higher consumer and business confidence
- High demand imports
- Rising tax revenues
- Inflation
Characteristics of Recession / Trough
- Decline AD
- Higher unemployment
- Sharp fall in confidence / Investment
- De-stocking / Discontinuing
- Fall House Prices & Construction
- Lower Inflation
- Loose Policy
- low demand for imports
Characteristics of Recovery
- Rising Consumer confidence
- Higher house prices
- Rising Business Confidence
- Higher Investment
- Increase in Construction
- loose Policy
Costs and Benefits of Economic Growth
Benefits:
- Higher disposable income
- Higher employment
- Higher profit for firms
- Fiscal dividend for government
Costs:
- Inflation
- Income Inequality (One sector dominance, Capital incentive, rural vs. urban, poor quality jobs, lack of welfare state)
- Environmental cost
- Current account deficit
Evaluation / Point for judgement:
i) sustainable growth
ii) Inclusive growth
iii) balanced growth
iv) role for private sector / government
