3. Economic Performance Flashcards
What is short-run economic growth?
Growth based on increased utilisation of unemployed resources
What is long-run economic growth?
Growth based on increasing the potential output level of the economy
How is short-run economic growth shown on a PPC curve?
Closer to the actual PPC boundary
How is long-run economic growth shown on a PPC curve?
Shifting PPC further out, involves expanding an economy’s capital
What are the Determinents of short-run growth?
- Increases in aggregate demand (AD)
- Increases in short-run aggregate supply (SRAS)
Tends to be an increase in AD
How is short-run growth measured?
Percentage change in GDP
How else is short-run growth referred to as?
Actual growth
What are the Determinents of long-run growth?
- Increases in the economy’s productive capacity
- Increases arise from improvements in the ‘supply side’ of the economy
- These improvements result in either quantity and/or quality of the factors of production available to an economy
- Shown as a rightward shift of the LRAS curve
What factors would increase long-run growth?
- Increases in the labour force (labour supply)
- Improvements in labour productivity
- Capital investment
- New technology
- Education
- Government policy
What are increases in the labour force as a factor of long-run growth?
- Population size limits the labour supply but it can be increased by allowing more immigration into the economy
- Increasing retirement age, or encouraging economically inactive to enter the work force
- Making it less financially attractive to be out of work (less unemployment benefits, increasing incentives to take work (cutting income tax))
What are improvements in labour productivity as a factor of long-run growth?
- Increase in workforce’s skill level
- Should therefore boost long-run growth
What are capital investments as a factor of long-run growth?
- Contributes to long-run and short-run growth (increases in LRAS)
- More investment in capital stocks (equipment, premises)
- Government can encourage businesses investment by creating a more stable macroeconomic climate - investement with greater confidence
- Tax incentives
What is new technology as a factor of long-run growth?
- Advanced technology leads to improved capital equipment productivity
- Technology improvements therefore raise the ability of an economy to produce more output with given capital stock
What is education as a factor of long-run growth?
- Improvements in education leads to improved workers productivity
- Occupational immobility can be reduced if education provides preparation for a variety of occupations
What is government policies as a factor of long-run growth?
Referred to as ‘supply-side’ policies
- ‘Trend growth’ estimated at. Between 2% and 2.5% a year in the UK
- Actual short-run rate of economic growth can rise above the long-run trend growth rate for short periods of time, long-run growth rate represents the overall long-term limit to economic growth
Benefits of economic growth?
- Higher living standards
- Easier to find jobs
- Improved social indicators (less crime)
- Increased tax revenue
- Reduced welfare expenditure
- Lower absolute poverty
- Greater international government status
Costs of economic growth?
- Increased inflation if short-run rises too quickly
- Depletion of natural resources
- Increases on inequality
- Increased negative externalities (congestion, pollution)
What is cyclical unemployment?
Unemployment caused by insufficient aggregate demand within the economy
What is frictional unemployments?
Unemployment resulting from ‘friction’ due to movements into and out of the job market, i.e. it occurs when people are between jobs
What is structural unemployment?
Unemployment resulting from mismatches between the labour supply available and the labour demand for differently skilled labour
What is voluntary unemployment?
Where people are unwilling to accept a job at the going wage rate despite there being jobs available
What is involuntary unemployment?
Where people are unable to find employment at the current market wage rate
What is real wage unemployment?
Unemployment that exists when the real wage is not allowed to fall to the market clearing level where labour demand equals labour supply
What is the natural rate of unemployment?
The rate of unemployment that consists of all voluntary, structural and frictional unemployment
Why may the natural rate of unemployment increase?
If replacement ratio is too high
How is the replacement ratio calculated?
Replacement ratio = disposable income out of work/disposable income in work
What is trend growth?
The rate of growth in LRAS over time, representing the maximum potential capacity of the UK economy
What is sustainable growth?
Economic growth that does not compromise the economy’s ability to grow in the future
How is sustainable growth maintained?
Maintained into long-run growth and does not rely on non-renewable resources to generate growth (which would only contribute once)
What are examples of government plans for sustainable growth?
‘Green’ subsidies, proposed ban of petrol cars, intent to go carbon neutral by 2050
What is the economic cycle?
The repeated pattern of fluctuations in short-run economic growth and how it differs from the trend growth of an economy
What does the economic cycle focus on?
Repeated patterns that occur over a number of years
What are the repeated phases on the economic cycle called?
Business cycle or trade cycle
What is ‘boom’ in the economic cycle?
Period above the average short-run economic growth
What is ‘downturn’ in the economic cycle?
Period where short-run economic growth falls from above average to below average
What is ‘recession’ in the economic cycle?
Two successive quarters of a year where short-run economic growth is negative
What is ‘recovery’ in the economic cycle?
When short-run economic growth starts to increase after a recession
What are output gaps?
The difference between actual growth and trend growth
What is long-run/trend growth?
Refers to the growth in the productive capacity of the economy
What is short-run/actual growth?
Will rarely be in perfect synchronisation with the trend growth rate
What is the difference between long-run and short-run growth rates?
Output gaps
What is a positive output gap?
Where actual growth is higher than trend growth (would be greatest in a boom)
What is a negative output gap?
Where actual growth is below trend growth (would be greatest in a recession)
What is the multiplier-accelerator model?
An explanation of the trade cycle where multiplier and accelerator effects combine to magnify cyclical fluctuations in encoding growth
What is the inventory cycle?
Changes in inventory levels held by businesses may lead to exaggerated increases or decreases in industrial output - contributing to economic growth
What are asset price bubbles?
Where a rise in an assets price becomes self-fulfilling and the price rises beyond the level that normal demand and supply conditions would generate, eventually leading to sharp falls in its price when the bubble is burst
What is animal spirits?
The collective feeling of consumer and business confidence the effects economic decisions, such as those affecting consumption and investment
What is herding?
Consumer and investor behaviour often moves in similar directions at the same time - in the same way as herd behaviour in groups of animals
Whta is excessive growth in credit?
Excessive credit levels mean sharp rises and sharp falls in consumer spending - magnifying the economic cycle
What are economic shocks?
Explain the movements form one phase to another of the economic cycle
What is full employment?
The level of employment where those who are economically active (either in work or seeing work) can find work if they are willing to accept jobs at the going wage rate
What are demand-side factors of unemployment?
Lack of aggregate demand
What are supply-side factors in unemployment?
Issues with productive potential of the economy, connected with the economy’s long-term aggregate supply
