3. Economic Issues - Economic Growth Flashcards
Economic Growth refers to…
an increase in a country’s productive capacity, as measured by an increase in real GDP
Real GDP is…
an increase in national output adjusted for inflation.
Circular flow of income (see note word doc.)
…
Y (disposable income) = …
C (consumption) + S (savings)
MPS (marginal propensity to save) = …
ΔY(change in income) / ΔS (divided by change in savings)
Aggregate demand (AD) = …
aggregate supply (AS) (equilibrium)
S (savings) + T (taxes) + M (imports) = …
I (investments) + G (government spending) + X (exports)
C (total consumption) = …
Co+cY (total consumption = autonomous consumption + MPC x Y) Consumption Function
Y (total income) = …
= C + I + (G-T) + (X-T) (Y = total income, C = consumption expenditure; G = government expenditure; I = investment expenditure, X = exports and M = imports)
I, G & X = …
Io, Go & Xo (they are autonomous)
M = …
M = Mo + mY (m is the marginal propensity to spend on imports)
MPC + MPS & APC + APS = …
1
Simple multiplier (k) = …
1 / 1 - MPC or k = 1 / MPS
Relationship between MPC, MPS & multiplier
- If the MPC is larger, then the MPS must be smaller. As a result, the multiplier is larger
- If the MPC is smaller, then the MPS must be larger. As a result, the multiplier is smaller
Measurement of economic growth formula (Real GDP)
generally measured in the CHANGES in real GDP. (Nominal GDP x 100/CPI)
Calculating economic growth (Growth Rate of Real GDP)
(Current GDP - Previous GDP) / Previous GDP x 100
Sources of economic growth
Stems from the main sources of aggregate demand. (C + I + G + X – M)
Consumption spending (C) is.. (influence)
mainly influenced by expendable income and consumer confidence. These factors are influenced by the level of taxation, wages and interest rates.
Investment spending (I) is… (influence)
investment spending by firms is influenced by profits, interest rates, taxation and expectations about the economy.
Govt. Spending (G) is… (influence)
largely influenced by amount of tax revenue, budget priorities and state of the economy.
Effect of economic growth on GDP per capita and living standards
Increased use of resources and production possibility increases incomes. Higher incomes allows greater purchasing power and ability to improve standards.
Effect of economic growth on Savings
Higher economic growth encourages higher levels of savings. Increased incomes allows private individuals to reduce debt and save.
Effect of economic growth on productivity and technology
EG often arises from increases in productivity and efficiency. Efficiency gains can be made by technological progress (cost reducing technology) or increases to labour productivity.
Effect of economic growth on Employment
increases employment and reducing unemployment. Encourages higher labour force participation.
Effect of economic growth on Business investment
Higher consumption achieved through EG can greatly encourage businesses to expand
Effect of economic growth on Exports
Economic growth leads to increased output, leading to higher exports. Export income can be used to fund imports.
Cost of economic growth in Environment
pursuing higher economic growth can lead to damage to the environment.
Cost of economic growth in structural unemployment
Technological change = structural unemployment. Governments will need to increase spending on retraining and education.
Cost of economic growth in Consumerism and Materialism
adversely affects traditional and family values
Cost of economic growth in income inequality
occurs if the benefits of economic growth do not “trickle down” to the lower and middle classes.
Cost of economic growth on inflation
Higher demand for limited resources leads to DEMAND-PULL inflation. Can also lead to increased costs for businesses and cause COST-PUSH inflation. Increased spending on imports could lead to a deficit on the current account.
Increase in Agg. Supply occurs as a result of economic growth because…
In the long run, economic growth is heavily impacted by a country’s PRODUCTIVE CAPACITY.
Aggregate supply (AS) is… (also what does a shift in the right mean)
the total output in the economy. A shift to the right in the AS represents an increase in the Total Output.
When AS=AD, equilibrium is achieved. If AD increases and AS doesnt change…
prices will increase (inflation). This will restrict future growth.
Types of efficiency
Technical / Allocative / Dynamic
Technical (productive) Efficiency
when businesses produce output using the least
cost combination of resources. In microeconomics, this means a business has
achieved technical optimum. (economies of scale)
Allocative efficiency
when firms change prices to reflect the marginal cost of production so that prices reflect consumer preferences.
Dynamic efficiency
when firms adapt to changing economic conditions by using cost-reducing technology.
Trends in labour productivity
Australian growth in GDP per capita has risen due to gains in labour productivity. This was above 2% up to the early 2000s but has since declined to between 0.5 and 1%.
Labour productivity can be influenced by…
- Expenditure on research and development
- The use of e-commerce
- The quality of labour (education, skills and training)
Policies to promote economic growth
Monetary, fiscal, microeconomic reform.
