2.5 Economic Growth LS10 Flashcards
Economic growth definition?
- 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)
What are the inputs of productive output in an economy?
- Land
- Labour (demography, participation rates, immigration)
- Technical progress
- Efficiency
What is the economic cycle?
The fluctuations in GDP around the long term trend growth path of output
What are some benefits of economic growth?
- Improved life expectancy
- Higher income
- Reduced poverty
- Improved government finances
- Improved education
What are some costs of economic growth?
- Unsustainability (use of non-renewable resources)
- Current account deficit
- Inflation
- Increased inequality
- Pollution
- Disease of affluence
Describe what an economy is like during a peak or boom
- 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
Describe what an economy is like during a downturn
- 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
Describe what an economy is like during a recession/depression/trough/slump
The bottom of the cycle
- Low economic activity
- High unemployment
- Consumption, investment and imports low
- Few inflationary pressures, prices may be falling (deflation)
Describe what an economy is like during a recovery/expansion
- 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
What causes fluctuations in the short run rate of growth of real GDP
Demand-side shocks and supply-side shocks
Examples of demand-side shocks?
- 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
Examples of supply-side shocks?
- 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
Output gap definition?
The difference between the actual level of real GDP and its estimated long term value at a point in time
How are positive output gaps filled?
- With long term economic growth
- OR a recession (leftwards shift in AD and SRAS)
How are negative output gaps filled?
- AD likely to rise faster than long run growth with rightwards shift of AD curve and LRAS curve
Potential evaluation points for output gaps?
- 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)
What are some fundamental advantages that economic growth can bring for consumers?
- Improved life expectancy
- People have enough to eat and drink
- High housing standards
- High literacy rates
- Improved health
How does economic growth affect firms?
- 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
How does economic growth affect the government?
- Rising incomes = tax revenue rises
How does economic growth affect the environment?
- 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
How does economic growth affect the economy?
- Could result in creation of more jobs
- OR lead to less jobs if existing workers become more productive
How does economic growth affect living standards?
- 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
Why do GDP/GNI not accurately measure the ‘true’ value of output?
- 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
Why do GDP/GNI not accurately measure standards of living?
- 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
