2.5 Economic Growth Flashcards
What is potential economic growth?
An increase in the productive capacity of the economy
What is actual economic growth?
An increase in measured real GDP
What 4 factors affect economic growth?
- the wealth effect
- interest rates
- govt spending
- exchange rates
What 3 factors can influence potential economic growth?
- improvements in quality and quantity of the good
- increase in AS
- increases in the PPF
What 4 issues are there that affect economic growth?
- demography
- increase in the participation of the work force
- quality of investment
- technology
What is export-led growth?
Strategy for achieving rapid growth through the promotion of exportation
What is an output gap?
The difference between actual real GDP and potential real GDP
What is a negative output gap?
When the economy is operating below the level of full employment, or actual real GDP is below the trend level
What is a positive output gap?
When the economy is operating above the full employment level
Consequences of a negative output gap?
- unemployment
- idle capital
Consequences of a positive output gap?
-inflation // unsustainable
On a classical model of the AD and AS diagram, where would you find a negative output gap?
On the left of the vertical LRAS line
On a classical model of the AD and AS diagram, where would you find a positive output gap?
On the right of the vertical LRAS line
On the Keynesian model of the AD and AS diagram, where would you find a negative output gap?
Where the LRAS line begins to slope downwards
On the Keynesian model of the AD and AS diagram, where would you find a positive output gap?
On the vertical LRAS line
Where on the trade cycle would you find a recovery?
On the upward sloping bit
Where on the trade cycle would you find a boom?
At the high point
Where on trade cycle would you find a recession?
On the downward sloping bit
Where on the trade cycle would you find a slump?
At the low point
Characteristics of a boom?
- high levels of spending
- high business confidence
- inflation
- low umployment
Characteristics of a recession?
- spending levels fall
- low con. and buss. confidence
- deflation or disinflation
- spare capacity increases
Characteristics of a recovery?
- weak spending
- increasing levels of business confidence
Characteristics of a slump?
- business failures
- rising unemployment
- deflation
Benefits of economic growth to citizens?
- income and wealth rise
- standards of living rise
- real incomes rise
- employment opportunity
Benefits of economic growth to firms?
- more revenue and more profit
- consumer spending increases
- higher investment
Evaluation point of benefits of economic growth to firms?
Firms making inferior goods are likely to suffer
Benefits of economic growth to the government?
- receive more in tax revenue
- less govt spending on unemployment benefits
- budget surplus
- symbol of effective government
Cost of economic growth to environment?
- finite resources
- unsustainable
- expensive
- pollution
Cost of economic growth to the Balance of Payments?
- increase level of imports
- firms making a profit have no need to export goods
Evaluation point of cost of economic growth on the Balance of Payments?
-will not occur if growth has come from export led growth
Cost of economic growth to inquality?
- low skilled workers may not see benefits of growth
- widening the income gap
- increase of relative poverty
How does a high level of economic growth lead to lower levels of unemployment?
High levels of economic growth leads to a high level of demand for goods and services, which increases the demand for labour.
How does a high level of economic growth lead to an improved balance of payments?
High levels of economic growth means the productive capacity of the economy is rising. The means more goods can be exported. Exporting goods is an injection into the circular flow of income
How does a high level of economic growth lead to an increase in Foreign Direct Investment?
High levels of economic growth can attract investment from multi national corporations. Due to high level of AD. Can create jobs.
