2.5.1 causes of growth Flashcards
What is economic growth?
An expansion of the productive potential of an economy, depicted as an outward shift in the PPF or LRAS. Measured by annual change in real GDP.
What are some factors that cause economic growth?
Occurs due to an improvement in the quantity/quality of FOPs, or increase in the efficiency of how they are used eg:
- improving the labour force, with better quality due to higher education
- larger labour force, due to migration, birth rates or increased participation rates
- improved technology, which is more productive, meaning resources are used more efficiently
- more investment, to fuel economic growth = more machinery can be bought to increase production
- discovery of new resources
- incentives for enterprises eg. tax breaks, subsidies
What is the difference between actual and potential growth?
Actual growth is the percentage increase in a country’s real GDP and is measured annually, caused by increase in AD.
Potential growth is the long run expansion of the productive potential of the economy, caused by increased AS. The potential output of an economy is what could be produced if resources where fully employed.
What is the importance of international trade for export-led growth?
Export-led growth occurs when countries open up their economies to the international market. Countries can specialise where they have comparative advantage, increasing world output and lowering average costs. Initially, AD will increase bringing about short term growth. However, firms are encouraged to invest, bringing about long term growth by improving the supply-side of the economy. This allows the government to bring about economic growth and high employment without a current account deficit. This means there will be a surplus on the current account, there are net injections into the economy. However, this may lead to an increase in imports balancing the current account. Also, it means the country relies on the economic state of other countries, since these are the consumers of their exports. If there is a recession, exports will fall and economic growth is reduced.
