2.5 - Economic Growth Flashcards
Describe the short run economic growth diagram.
For short-run economic growth to occur, there has to either be a rise in the aggregate demand or short run aggregate supply. Therefore, if the AD or SRAS curve shifts to the right, then they will both ultimately result in real national output rising from Y to Y1. However, if the AD curve shifts to the right then the price level will rise from P to P1, yet the SRAS curve to the right decreases the price level from P to P2.
Describe the PPF diagram illustrating long run economic growth.
In the PPF diagram, the initial position with all factor resources fully employed, is at X1Y1. If there is an increase in the quantity or quality of the factors of production, such as an increase in the employment of labour, then the PPF curve will shift to the right. The new position/combination of capital and consumer goods will now be X2Y2. However, although it is assumed that by shifting to the right the factor resources are fully employed, in real life it will be difficult to do this for short run or long run.
How is long run economic growth occur?
Long run economic growth is mainly caused by an increase in long run aggregate supply (this rises by an increase in the quantity/quality of the factors of production), which increases the productive capacity of an economy, causing potential economic growth.
Describe the classical model illustrating long run economic growth.
Starting at equilibrium, a rise in the quantity/quality of the economical factors of production will cause a shift to the right in the perfectly inelastic LRAS curve from LRAS to LRAS1. This will cause real national output to increase from Y to Y1. As a result, price level falls from PL to PL1.
Give a factor affecting LRAS and long run economic growth.
Migration is the movement of people from one country to another. Immigration is one type of migration where people live permanently in a foreign nation, and this is good as it increases the labour factor and productive capacity, hence shifting the LRAS curve to the right.
Give another factor affecting LRAS and long run economic growth.
Increased investment in capital can increase quantity of capital goods to produce consumer goods as well as quality of capital goods.
Describe a third factor affecting LRAS and long run economic growth.
Export-led growth: This leads to an increased investment in capital goods, which will increase the productive capacity, overall shifting LRAS to the right.
Give the three types of injections.
Government expenditure, investment, exports
Give the three types of withdrawals.
Savings, taxes, imports
Give a constraint affecting LRAS and long run economic growth.
An absence of capital markets: There may not be enough finance to raise investment of capital. As a result of this, the lower capital quantity and quality will shift LRAS to the left, decreasing it. This is a problem in several African nations.
Give a benefit of economic growth.
Through economic growth, firms will make more profits and they may reinvest this into higher wages and salaries for workers. This can help workers redistribute their disposable income.
Give another benefit of economic growth.
Also economic growth can drive up demand for goods and services, so firms will employ more workers to help with productivity. This will result in increased employment.
Give a disadvantage of economic growth.
Income inequality: as the GDP increases, the rise in income may only apply to the leading sectors of the economy. This means not all areas will experience a positive change.
Give another disadvantage of economic growth.
Increase in the trade deficit: economic growth drives up consumption through rise in real disposable income of consumers. This significantly strengthens aggregate demand and demand for imports rises. However, the stronger imports creates a sucking effect, where households spending on imports from abroad cause imports to exceed exports, further widening the current account trade deficit.
