2.5 - Economic growth Content Flashcards
2.5 - Economic Growth
Define recession
Two or more successive quarters of negative economic growth.
2.5 - Economic Growth
What are the conditions of having demand-led growth with no inflation?
If growth is sustainable and close to long run trend rate
(Proportionate shift in AD as well, with trend rate).
There has to be sufficient spare capacity in the economy.
2.5 - Economic Growth
How does demand-led growth affect balance of payments?
Tends to cause a deficit in the current account. This is because as consumer spending rises, there will be a rise in import spending.
(Especially true for UK, large MPM).
2.5 - Economic Growth
How does demand-led growth affect the bop?
Less favorable, more consumption = more imports.
Inflation could make exports less competitive.
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Define export-led economic growth and give an example
Can be increase in economic growth without causing a current account deficit. For example, Germany has seen strong economic growth, with a current acc surplus
2.5 - Economic Growth
How can we link macro eco growth to micro?
Can lead to efficiency increases for firms.
Increase DE, due to more profits.
2.5 - Economic Growth
Give evaluations of eco growth:
Those who sell inferior goods (with negative YED) lose out.
Changing tech. due to inc. investment leads to disappearing markets e.g. DVD rental stores. (This is the theory of CREATIVE DESTRUCTION).
Eco growth ≠ eco development.
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What does a country want economic growth to be?
Sustainable and long run
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What are the types of economic growth?
AS-led
AD-led
(long run, short run)
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How is economic growth measured?
Total income
Total expenditure
Total output
What is potential growth?
LR expansion of productive potential caused by an increase in AS
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What is the business cycle?
The stage of economic growth the economy is in.
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What are the effects of an economic boom?
- High eco growth.
- Positive output gaps.
- Near full employment.
- Demand-pull inflation.
- High investment, postive expectations.
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What are the effects of a recession?
- Negative output gaps
- low inflation rates
- Reduced tax revenue
- Decrease in employment, incomes, output, consumption, investment, CC.
- Increase in MPS and welfare benefit spending.
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Why does poor access to credit and banking hinder economic growth?
- No way to gain loans for spending, or investment
- People cannot save money
- Poor families have to resort to loan sharks with punitive interest rates, leaving them in debt. Cements people in poverty.
However,
* Technology might allow people to gain access to financial systems via mobile phone instead of physical branch.
* Microfinance encourages people to take out loans for investment.
2.5 - Economic Growth
Why does an ageing population hinder economic growth?
- Output falls because more workers have to retire.
- Puts pressure on parts of the economy that serve the elderly - health systems.
- Workers have to pay for this - higher tax buden.
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What are booms?
The peak of a business cycle, when the growth is high
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What happens if we add together the UK’s booms and busts?
We get a structural deficit.
(More and more in debt each year).
However, this is okay if there is sufficient growth and inflation to decrease the real value of debt.
2.5 - Economic Growth
Features of the trade cycle (4)
- Peak/boom
-> National income is high, economy is likely working past full employment
-> Tax revenue, consumption, investment, imports and profits are likely to be high - Downturn
-> Output and income fall leading to reduced investment and consumption, inflation tends to rise - Recession
-> At the bottom of the trade cycle -> low economic activity, high unemployment, low consumption, investment and imports - Recovery/recession
-> NI and output begin to increase and unemployment
2.5 - Economic Growth
Benefits of economic growth (6)
- Life expectancy increases
- Generally absolute poverty decreases when economies are growing
- Rising incomes for consumers
- Rising tax revenues for the government
- More finance available for the enviroment
- Better opportunities for firms to grow
2.5 - Economic Growth
What are the benefits of economic growth for consumers
- Increased Income and Wealth: Economic growth typically leads to higher income levels and increased wealth. Example: Rapid economic growth in China has lifted millions out of poverty and into the middle class.
- Improved Quality of Goods and Services: Higher incomes lead to greater demand for better quality goods and services. Example: Technological advancements leading to improved smartphones, healthcare, and education.
- Greater Employment Opportunities: Growth leads to job creation, reducing unemployment rates. Example: Expansion of the technology sector has created numerous job opportunities.
- Life expectancy increases
- Generally absolute poverty decreases when economies are growing
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What are the costs of Economic growth for consumers
- Inflation: Rapid growth can lead to inflation, eroding purchasing power. - Example: Hyperinflation in Zimbabwe in the late 2000s reduced consumer purchasing power drastically.
- Inequality: Benefits of growth may not be evenly distributed, leading to greater income inequality. - Example: Economic growth in the U.S. has led to rising income inequality since the 1980s.
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What are the benefits of economic growth for firms
- Higher Profits: Increased consumer spending boosts sales and profits. Example: Booming e-commerce has significantly increased profits for companies like Amazon.
- Economies of Scale: Firms can expand and achieve lower costs per unit due to larger scale production. Example: Automotive industry benefits from large-scale production reducing costs per vehicle.
- Innovation and Investment: Growth encourages firms to invest in new technologies and innovation. Example: Investment in renewable energy technologies by firms like Tesla.
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What are the negatives of economic growth for firms
- Increased Competition: More firms entering the market can lead to increased competition. Example: Entry of new tech firms increases competition for established companies like Microsoft and Apple.
- Resource Depletion: Rapid growth can lead to overuse of natural resources, increasing costs in the long term. Example: Deforestation in the Amazon due to increased agricultural and industrial activities.
2.5 - Economic Growth
What are the benefits of economic growth for the government
- Higher Tax Revenues: Economic growth increases incomes and corporate profits, leading to higher tax revenues. Example: Economic boom periods lead to increased tax collections, as seen in the late 1990s in the U.S.
- Public Investment: Higher revenues allow for greater investment in public infrastructure and services. Example: Improved transportation networks and healthcare systems in developed countries.
2.5 - Economic Growth
What are the costs of economic growth for the government
- Inflationary Pressures: Managing inflation becomes challenging during periods of rapid growth. Example: Governments implementing tight monetary policies to curb inflation during economic booms.
- Environmental Degradation: Economic growth can lead to pollution and environmental damage. Example: Industrial pollution in rapidly growing economies like China and India.
2.5 - Economic Growth
What are the benefits of economic growth for current and future living standards
- Improved Living Standards: Growth leads to better healthcare, education, and overall quality of life. Example: Increased life expectancy and literacy rates in countries experiencing sustained growth.
- Technological Advancements: Innovations improve efficiency and quality of life. Example: Advancements in medical technology improving health outcomes.
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What are the costs of economic growth for current and future living standards
- Environmental Sustainability: Growth can lead to environmental degradation, affecting future living standards. Example: Climate change impacts due to greenhouse gas emissions from industrial activities.
- Resource Exhaustion: Overuse of natural resources can lead to scarcity, impacting future generations. Example: Overfishing leading to depletion of fish stocks in oceans.
2.5 - Economic Growth
What is output gap?
The difference between the Actual output level and Potential output level.
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What is an negative output gap?
Actual level less than potential level of output.
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What is a positive output gap?
Actual level of output is greater than the potential level of output.
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What are the difficulties with measuring the output gap? (Consider reliability / what could change).
- Difficulty estimating trends.
- Structure of economy changes.
- Exchange rates change.
- Data not reliable.
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Causes of negative output gaps?
Underutilised resources.
Could be due to unemployment.
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Causes of positive output gaps?
Pushing resource use to maximum - labour working overtime, excessive use of capital.
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Positive output gap diagram?
2.5 - Economic Growth
Negative output gap diagram?
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What are the problems with a negative output gap?
- Puts downward pressure on inflation - might cause a deflationary spiral.
- Unemployment of resources, so factors of production are not being used to their full potential.
- Loss of potential growth, living standards, tax revenue.
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What are the problems with a positive output gap?
- Resources are being pushed beyond sustainable capacity - labour and capital are being overworked.
- Puts upward pressure on inflation.
- Countries such as India and China, that have high inflation due to high AD are associated with positive output gaps.
