31 Economic growth Flashcards
Economic growth
Change in national output over time as measured by GDP
Policy objective of economic growth
- government seek economic stability and a reduction in the fluctuations of actual economic growth around trend rate
- often primary policy objective as it is an indicator of the health of the economy and performance of other key indicators such as inflation and efficacy of policy measures
- government policy objectives from economic growth may differ depending on the stage in economic development
Stages of economic cycle
Boom: rate of actual economic growth exceeds the trend rate and the output gap is narrowed
Downturn: economic growth rates begin to fall and approach zero
Recession: two consecutive periods of negative economic growth
Recovery: economic growth becomes positive after a recession
Real GDP
Takes inflation into account when GDP is calculated
Nominal GDP
At current prices does not take inflation into account when calculating GDP
Short run econ growth
- A change in demand side is caused by an increased component of AD
- a change in factor input costs affects the supply side resulting in econ growth
- real GDP increases for both
Long run econ growth
Caused by supply side policies that increase productive capacity of the economy
- the expansion of productivities potential is illustrated by the shift in long run aggregate supply and ull employment shifts to the right
- extension of aggregate demand
Causes of econ growth
- short run econ growth is caused by shifts in aggregate demand or supply
- change on the demand side are caused by changes in the components of AD of an injection or leakages from the circular flow of income
- any alteration in macroeconomic policy measures, monetary and fiscal which will casue a change in aggregate demand
Benefits of economic growth
- rise in average household incomes as indicated by GDP per capita
- reduced unemployment through creation of job opportunities as more workers are needed to produce s higher level of output - higher derived demand for labour
- rise in material standards of living as households are able to purchase products with higher income elasticity of demand
- reduction in absolute poverty levels
- improvements in public services, an increase in government taxation receipts that could increases government expenditure on merit goods such as healthcare
Costs of econ growth
- demand-pull inflationary pressure as spare capacity is used up
- rising income inequality as measured by the gini coefficient and Lorenz curve
- relative poverty could rise
- environ meant degradation through the divergence between MSC and MPC which hinders sustainable economic development
- wealth concentration resulting in greater division between geographical areas the economy