3.1 Economic Growth Flashcards
What is GDP
The total value of final goods and services produced within a country in a given period of time
What is the definition of economic growth?
The change in a country’s level of real GDP over time
What is real GDP?
nominal GDP adjusted for inflation
what is rate of growth of GDP as a formula?
New GDP - Original GDP /Original GDP x 100
What is GDP/Capita
Measures total GDP divided by population, which means more meaningful comparisons can be made
What factors affect the usefulness of GDP/capita figures?
- statistical inaccuracies in data collection
- figures need to be converted into a common currency so values may be subject to exchange rate fluctuations
- The hidden economy, the figures do not include the informal sector or illegal activities, which will underreport income
- Distribution of income is not shown
- Quality of goods may change so comparisons can be difficult
What is short-run economic growth?
Refers to growth in actual real GDP
What is long-run economic growth?
Refers to growth in potential or trend real GDP
Increases in Aggregate Spending lead to?
Short-Run economic growth
What are the 4 components of Aggregate Spending?
- Consumption
- Investment
- Government Spending
- Net Exports (Exports - Imports)
2 Factors that affect consumption?
- Amount of Disposable Income
- Rate of Interest
2 Factors that affect investment?
- Rate of Interest
- Rate of Corporation Tax
How will a fall in income tax rates lead to short run economic growth
- Cut in income tax
- Increase in Disposable Income
- Increase in Consumption
- Increase in Aggregate Spending
- Short-Run Economic Growth
How does long-run economic growth occur?
Means there is an increase in the productive capacity of the economy, usually happens due to an increase in the quantity and quality of factors of production
Benefits of Economic Growth?
- Lead to a rise in the standard of living, as increased output means more labour demanded (derived) so wages increase as firms make more profit leading to more disposable income
- Can lead to lower unemployment as more workers are needed to produce additional output
- can lead to increased tax revenue for the government
- Higher profits for firms, circular flow in income, investment increases
What factors can be used to evaluate economic growth
- The size of the rate of economic growth
- Duration of the economic growth
- Causes of growth
- mitigation of costs of growth
- The level of development of the country (better for less developed)
What can economic growth do to the environment?
It can lead to increased pollution and other environmental costs as there is more output so more raw materials are used
How can economic growth lead to income inequality?
May lead to increasing income inequality as increases in income will only go to the top of income distribution, and workers will not benefit
How can economic growth lead to a lower standard of living?
- may lead to a lower standard of living as workers are producing more output so they may need to work longer hours
- also due to environmental costs
How can economic growth affect unemployment?
- may decrease unemployment as economic growth leads to a larger output and more workers are required to produce this output
- may also increase as growth may have been driven by substituting capital for labour
How can economic growth affect inflation?
Short run economic growth can lead to inflation as aggregate demand and aggregate spending may outstrip the productive capacity of the economy leading to demand-pull inflaation
