2.5.1 - Economic Growth Flashcards
Define Actual Growth
(Short Run Growth)
Economic growth measured by change in GDP over time
. An increase in actual growth is shown by a shift in the AD curve or movement inside towards the PPF curve.
Define Potential Growth
(Long Run Growth)
Economic Growth measured by changes in the productive potential of the economy over time
. An increase in potential growth is shown by a shift to the right in LRAS curve from LRAS 1 to LRAS 2 or the PPF shifting outwards
Define Economic Growth
A rise in output in an economy. There will be a rise in real GDP and national income
. It can be EITHER potential growth or actual growth
. Caused by an increase in LRAS or AD
Define Long - run and short - run economic growth
Long run growth is potential growth
Short run growth is actual growth
1.) Long - run economic growth refers to an increase the productive potential capacity of the economy.
It is when LRAS shifts to the right to LRAS2 or when the PPF curve shifts outwards.
2.) Short - run economic growth is when a country’s GDP increases using spare capacity to close the negative output gap
It is represented by a shift on the AD curve to the right or movement inside towards the PPF curve
Define Export Led Growth
What is the importance of international trade for export led economic growth?
. A rise in aggregate demand caused by a rise in exports
. Initially a rise in exports will increase AD rather AS. However, a permanent increase in exports will force to UK firms to invest in capital and lead to a rise in demand for labour to satisfy the increased demand.
.The rise in investment will increase the productive potential of the economy shifting LRAS and increase long run economic growth
. Additionally, competitiveness and efficiency will increase. To export, UK firms need a competitive advantage over domestic firms in foreign markets. For example, price have to lower or the goods have to be better quality. Additionally, firms have to increase their productive efficiency. This results in an increase in LRAS and leads to economic growth
Name causes of short - run economic growth
. These are factors that cause a shift in AD from AD1 to AD2 by using spare capacity in the economy
- Refer to consumption, investment, government expenditure and net trade section
Examples :
1.) Cut in in interest rates
2.) Reducing corporation tax
3.) Increased government spending
4.) The exchange rate could be weakened by reducing interest rates (reduced hot money flows), increasing the money supply or selling domestic currency reserves.
A weak exchange rate makes exports cheaper and imports dearer. This means the demand and expenditure on imports will decrease, whilst the demand and revenue from exports will increase.
Both effects lead to an improvement in the trade balance of the current account and reduce a current deficit or move it to a surplus. As (X-M) is a component of aggregate demand, AD will rise from AD1 to AD2
Important Note for PPF diagram in macroeconomics
In macroeconomic PPF diagrams you must use goods and services OR capital goods and consumer goods as the x and y axes
Explain impact of interest rates on exchange rate
(Additional Information)
An increase in interest rates offer a higher rate of return in savings account, which attracts foreign capital from investors through investment ( increased hot money flows), increasing the demand for the pound sterling resulting in the exchange rate strengthening.
A stronger exchange rate makes imports cheaper and exports dearer. This means that the expenditure and demand on imports increases, whilst the revenue and demand for exports decreases, resulting in a fall in AD from AD2 to AD1 due to (X-M).
Name causes of long - run economic growth
. These are factors that cause a shift in LRAS or the PPF curve.
Remember that shifts are caused by quantity / quality changes in factor of production because they change the productive potential or productive efficiency of the economy)
- Refer to LRAS section
Examples :
. changes in education and skills
. demographic changes and migration
. technological advances
Define Spare capacity
when long run aggregate supply is greater than aggregate demand meaning there is a negative output gap
