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Econ Theme 2 > 2.5 Economic Growth LS10 > Flashcards

2.5 Economic Growth LS10 Flashcards

1
Q

Economic growth definition?

A
  • The increase of the real value of goods and services as measured by the annual change in GDP
  • (aka the long run increase in a country’s productive capacity)
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2
Q

What are the inputs of productive output in an economy?

A
  • Land
  • Labour (demography, participation rates, immigration)
  • Technical progress
  • Efficiency
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3
Q

What is the economic cycle?

A

The fluctuations in GDP around the long term trend growth path of output

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4
Q

What are some benefits of economic growth?

A
  • Improved life expectancy
  • Higher income
  • Reduced poverty
  • Improved government finances
  • Improved education
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5
Q

What are some costs of economic growth?

A
  • Unsustainability (use of non-renewable resources)
  • Current account deficit
  • Inflation
  • Increased inequality
  • Pollution
  • Disease of affluence
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6
Q

Describe what an economy is like during a peak or boom

A
  • National income is high
  • Economy likely to be working beyond full employment
  • Consumption and investment will be high
  • Tax revenues will be high
  • Wages rising and profits increasing
  • Imports increasing as demand increases due to high incomes and businesses with lots of orders
  • Inflationary pressures increasing
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7
Q

Describe what an economy is like during a downturn

A
  • Output and income fall
  • Leading to a fall in consumption and investment
  • Tax revenue begins to fall and government expenditure rises
  • Imports fall
  • Inflationary pressures ease
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8
Q

Describe what an economy is like during a recession/depression/trough/slump

The bottom of the cycle

A
  • Low economic activity
  • High unemployment
  • Consumption, investment and imports low
  • Few inflationary pressures, prices may be falling (deflation)
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9
Q

Describe what an economy is like during a recovery/expansion

A
  • National income and output begin to rise
  • Unemployment falls
  • Consumption, investment and imports begin to rise
  • Workers feel confident about demanding wage increases and inflationary pressures begin to increase
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10
Q

What causes fluctuations in the short run rate of growth of real GDP

A

Demand-side shocks and supply-side shocks

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11
Q

Examples of demand-side shocks?

A
  • Stock market may crash (if stock market prices are too high) = reduced wealth = reduced consumption = reduced AD = recession
  • High interest rates = reduced consumption and investment = recession
  • High taxes/cuts in government spending = reduced AD = recession
  • World economy in recession = reduced UK imports = UK recession
  • Sharp rise in value of pound = reduced exports = increased imports = fall in AD = recession

A shock can also be positive e.g. large tax cuts

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12
Q

Examples of supply-side shocks?

A
  • Large rise in world commodity prices = UK inflation = cost of imports increase = fall in AS = lower output = recession
  • Trade union militancy (worker strikes) = large wage increases = increase in inflation = fall in AS = recession

A shock can also be positive causing the economy to boom e.g. a fall in world commodity prices

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13
Q

Output gap definition?

A

The difference between the actual level of real GDP and its estimated long term value at a point in time

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14
Q

How are positive output gaps filled?

A
  • With long term economic growth
  • OR a recession (leftwards shift in AD and SRAS)
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15
Q

How are negative output gaps filled?

A
  • AD likely to rise faster than long run growth with rightwards shift of AD curve and LRAS curve
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16
Q

Potential evaluation points for output gaps?

A
  • Output gap practically difficult to measure
  • Economists do not know exact position of LRAS curve (actually measured it inaccurately in 2008 and 2013 in the UK)
17
Q

What are some fundamental advantages that economic growth can bring for consumers?

A
  • Improved life expectancy
  • People have enough to eat and drink
  • High housing standards
  • High literacy rates
  • Improved health
18
Q

How does economic growth affect firms?

A
  • Rising incomes = opportunity for existing firms to increase sales
  • Opportunity for new firms to establish themselves
  • BUT change in technology can cause some markets to disappear
19
Q

How does economic growth affect the government?

A
  • Rising incomes = tax revenue rises
20
Q

How does economic growth affect the environment?

A
  • Economic growth = less pollution and cleaner environment (if rich and developed) because likely to spend on sustainability technologies and projects
  • Economic growth = increased pollution (if developing) => e.g. China’s serious pollution problem
21
Q

How does economic growth affect the economy?

A
  • Could result in creation of more jobs
  • OR lead to less jobs if existing workers become more productive
22
Q

How does economic growth affect living standards?

A
  • Depends on who receives benefit of economic growth
  • If only richest, no impact on majority of households
  • Developing country = everyone in society likely to benefit
  • Depends on strength of link between rising GDP and living standards
23
Q

Why do GDP/GNI not accurately measure the ‘true’ value of output?

A
  • Do not include non-marketed output
  • Do not include output sold in underground markets (the informal market)
  • Differing domestic price levels means it doesnt consider purchasing power
24
Q

Why do GDP/GNI not accurately measure standards of living?

A
  • Makes no distinctions about the composition of output (could be any type of good e.g. military or merit)
  • Doesnt represent levels of education, health and life expectancy (HDI developed to do this)
  • Distribution of income not considered
  • Number of hours worked not considered
  • Doesnt consider quality of life factors (e.g. crime rates, degree of political freedom etc)
  • Doesnt account for negative externalities (pollution etc)
  • Quality of goods and services not considered

Econ Theme 2 (5 decks)

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