2.5 - Economic growth Flashcards
Theme 2: The UK economy – performance and policies
Economic growth
The expansion of the productive potential of the economy.
6 factors that cause economic growth
Increases in the quantity or quality of factors of production, such as:
*Higher investment
*Technological progress
*Improvement in human capital (education and training)
*Population growth or immigration
*Discovery of new resources
When does a country have a comparative advantage?
When a country can produce goods and services at a lower opportunity cost than another.
What does export led growth mean?
It means that the economy is unbalanced. As there is a surplus on the current account on the balance of payments. As net injections are often unsustainable.
Actual growth
The increase in real GDP over time.
Potential growth
The increase in the productive capacity of the economy (shown by a shift in the PPF or LRAS).
Why is international trade important for economic growth?
It enables export-led growth, which increases demand for domestic goods and services, improves efficiency through specialisation, and gives access to larger markets.
Potential output
What the economy could produce if resources were fully employed.
What is the difference between actual growth rates and long-term trends in growth?
Actual growth rates are short-term changes in GDP.
Long-term trends reflect the sustainable rate of growth of productive capacity.
What causes long term trends in growth rates?
The expansion of the productive potential of an economy. Increase in AS.
Positive output gap
When the actual level of output is greater than the potential level of output.
often inflationary due to excess demand.
Negative output gap
When the actual level of output is less than the potential level of output.
indicating spare capacity and unemployment.
Why is it difficult to measure output gaps?
Because potential output is not directly observable and depends on estimates of full employment and productivity.
How is an output gap shown on an AD/AS diagram?
A negative gap: AD intersects SRAS to the left of LRAS.
A positive gap: AD intersects SRAS to the right of LRAS.
Trade (business) cycle
Fluctuations in economic activity over time, typically consisting of four phases: boom, downturn, recession, and recovery.
What are the characteristics of a boom?
- High consumer confidence
- Low unemployment
- Rising inflation
- High levels of investment and spending
What are the characteristics of a recession?
- Two consecutive quarters of negative growth
- Falling output and demand
- Rising unemployment
- Low business and consumer confidence
Benefits of economic growth
Higher living standards
Increased tax revenues
Lower unemployment
Improved public services
More business profits and investment
Costs of economic growth
Environmental damage
Income inequality
Inflationary pressures
Overuse of finite resources
How does economic growth impact consumers?
Higher income and better access to goods/services, but may face inflation.
How does economic growth impact firms?
More demand, higher profits, and investment opportunities.
How does economic growth impact the government?
Higher tax revenue, reduced welfare payments, and a better fiscal position.
How does economic growth affect current and future living standards?
Current standards usually improve, but sustainability depends on whether growth is environmentally and socially balanced.
