4.1. Economic growth, economic development and sustainability Flashcards
Economic Growth
An increase in a country’s output (actual/short-run) or an increase in a country’s productive capacity (potential/long-run)
Short-term / actual Growth
The annual % change in real national output
- demonstrated by movement inside PPC curve
- AD shifting right
Long-term Growth
an increase in the productive capacity of the economy
- PPC shifting outwards
- LRAS shifting outwards
Economic Development
An increase in the welfare and the quality of life
Sustainable Development
the needs of the present generation being met without compromising the well-being of future generations
Output Gaps
the difference between actual growth rate and and potential growth rate
Positive Output Gaps
When actual growth rate is above trend growth rate.
- AD is higher than LRAS
Impact: lower unemployment but higher inflation.
Negative Output Gaps
when actual growth rate is below trend growth rate.
- AD is lower than LRAS
Impact: lower inflation but higher unemployment.
Economic (trade, business) cycle
Fluctuations in economic activity over a longer time period (years)
- actual GDP growth rate goes through booms, peaks, recessions, slumps, recovery (fluctuation)
- long-term GDP is the average / medium (straight line)
Causes of actual growth
increase in aggregate demand
- increase in consumption, investment, govt spending
Cause of potential growth
improvements in quality and quantity of factors of production
Land - Causes of potential growth
Quantity
- discovery of new resources
- better weather
- invade and conquer
Quality
- irrigation
- selective breeding
- genetic modification
- fertilisers / pesticides
Labour - Causes of potential growth
Quantity
- Net immigration
- Natural increase
- Increase in retirement age
- Decrease in working age
Quality
- education and training
- healthcare
- skilled immigrants
Capital - Causes of potential growth
Quantity
- Net investment
- Finance for investment e.g. loans, subsidies
Quality
- R&D and innovation (technological progress)
- Import better technology
Enterprise - Causes of potential growth
Quantity
- Deregulation
- Privatisation
- Finance for business start-ups / expansion
- Lower corporate taxes
Quality
- Education and training
- information
- healthcare
Most important factors - Causes of potential growth
- infrastructure (e.g. roads and utilities)
- investment in capital
- productivity increases
- technological change
Benefits of economic growth
- more goods and services
- increased living standards
- job creation
- higher incomes
- more tax revenue to fund government spending
- business and consumer confidence
- reduced poverty
Costs of economic growth
- demand-pull inflation (AD>AS)
- cost push inflation (resource depletion)
- structural unemployment
- trade deficit
- inequality
- resource depletion
- environmental damage
- “problems of affluence” e.g. obesity, materialism
Using resources today benefits
- increases output
- creates jobs
- increases exports
- higher tax revenue for increased government spending
- opportunity costs for the future
Conserving resources for the future benefits
- encourages sustainable growth
- protects the environment
- benefits future generations
- encourages eco-tourism
Using vs Conserving resources evaluation
- Are resources renewable or non-renewable?
- How is tax revenue spent
- Future demand - more or less in future?
- Future prices - higher or lower in future?
- Comparative advantage - will this change in future?
Peak
Highest level of economic activity, unemployment is low, consumer and business confidence is high.
Recession
Fall in GDP, decline in C, I and (X-M), employment falls.
Slump
High unemployment, many business closures, low levels of C, I and (X-M), need Govt help
Recovery
Level of GDP starts to rise, C, I and (X-M) gradually rise, employment begins to increase
Boom
Level of GDP rises quickly, C, I and (X-M) increase fast, employment rises quickly
Harrod-Domar Growth Model
Stresses the importance of savings and investment as key determinants of growth
increased savings –> increased investment –> large capital stock –> increased output –> increased income..
Endogenous Growth Theory
Main contributors to economic growth:
- Human capital
- innovation
- knowledge
Endogenous Growth Theory can be achieved by policies that focus on:
- Promoting competition
- Increased investment
- investment in capital
- Encourage entrepreneurship
- Research & development
- Investment in human capital (education, training)
- Protection of private property rights
Solow Model
Growth comes from adding more capital and labour inputs and also from ideas and new technology.
