4.6-Economic Growth Flashcards
What is Economic Growth
Economic growth is in the short run an increase in the output of the economy and in the long run an increase in the productive potential of the economy.
What is GDP
GDP is the total value for all goods/services produced in an economy in a year
What are the components of GDP
GDP can be calculated using the value of the expenditure in an economy
GDP = Consumption (C) + Investment (I) + Government spending (G) + Exports (X) - Imports (M)
GDP = C + I + G + (X-M)
What is Real GDP (GDP)
Real GDP, GDP at constant market prices and adjust for inflation
What is Nominal GDP
Nominal GDP, GDP at current market prices and so not adjusted for inflation
How do you calculate GDP per capita
GDP per capita = GDP / the population
It shows the mean wealth of each citizen in a country
This makes it easier to compare standards of living between countries
Definition: the total value of all goods and services produced by a country in a particular year, divided by the number of people living there
What is national output
Add up the value of all goods and services produced across the whole economy.
What is national expenditure
Adding together the final spending of consumers firms government and net exports
What is national income
Adding together income earned by firms and individuals from productive activities
What are the causes of economic growth
- Growth Caused by a Change in Total Demand
Actual economic growth occurs when there is an increase in the quantity of goods/services produced in an economy in a given period of time
This is often measured by the percentage change in real gross domestic product (GDP)
If any component of real GDP increases (consumption, investment, government spending, net exports), there will be an increase in total demand
- Growth Caused by a Change in the Quantity/Quality of Factors of Production
Potential growth is the increase in the productive potential of an economy
This occurs when there is an increase in the quantity or quality of the factors of production available in an economy
One example of how the quality of a factor of production can be improved is through the impact of training and education on labour. An educated workforce is a more productive workforce and the production possibilities increase
One example of how the quantity of a factor of production can be increased is through a change in migration policies. If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase
Investing in new capital machinery increases the quality of capital
Investing in new technology results in an improvement to productivity
What would a diagram look like for growth caused by a change in the quantity/ quality of factors of production
Economic growth occurs when there is an increase in the productive potential of an economy
This is demonstrated by an outward shift of the entire curve represented
More consumer goods & more capital goods can now be produced using all of the available resources
What would a diagram look like for Growth Caused by a Change in Total Demand
Previously unused factors of production are now being employed
This is demonstrated by a shift from inside the production possibilities curve (PPC) such as Point E, towards the boundary of the PPC
At any given point in time, the actual economic growth may be less than the potential growth available to the economy
What are some of the consequences of economic growth
Economic growth is considered to be the main contributor to an improvement in the standards of living
National income increases to spend on luxuries and necessities
economic growth increases and national output increases. Increased derived demand for labour, firms produce more output. Unemployment falls.
Higher national expenditure there is an increase in taxation more government budget increased taxes and redistribution of goods and services
What are the benefits of economic growth
Increased incomes lead to better standards of living
Decreased levels of absolute poverty
Improvement in the quality/quantity of environmentally friendly technologies
Higher sales revenue for firms & greater profits
Increased investment by firms increases the potential output of the economy
Reduced expenditure by governments on benefits
Higher government tax revenue due to rising incomes and surging corporate profits
Increased employment resolves some of the negative social impacts of unemployment
What are some of the cost of economic growth
Rising total demand causes demand pull inflation & the purchasing power of people on fixed incomes may fall
Lack of equity in the distribution of income - the rich may get richer & the poor poorer
Environmental damage caused by negative externalities of production & consumption increases
Increased inflation can harm export sales
The level of imports usually increases negatively impacting the current account
Increased income usually leads to greater consumption of demerit goods
Greater output often requires more time from workers and can decrease leisure time & well-being
Resources are depleted more rapidly
What are the conflictions between Economic Growth and inflation
Aggregate Demand increases firms will respond by increasing their prices. Higher rate of economic growth causes higher levels of consumer spending. Economic growth causes inflationary pressures
What are the conflictions between Economic Growth and Environmental Sustainability
Economic growth often increases pollution, negative externalities & the depletion of non-renewable resources
The higher the growth, the faster the depletion
What are the conflictions between Economic Growth and inequality
If those with high incomes have high tendancy to import, more money will be leaving the country to be spent on imports worsen the balance of payments position
Increasesthe wealthys share of income. Without government intervention rate of return from wealty will lead to widening income inequality economic growth does solve this
What are the conflictions between Economic Growth and balancing the current account
Economic growth usually leads to higher incomes which leads to an increase in imports by households thereby worsening the current account balance
What are the conflictions between Low unemployment and Low inflation
The closer an economy moves to full employment the less workers will be available for hire & wage inflation will help increase overall inflation
What are the conflictions between Low unemployment and economic growth
Firms have difficulty employing sufficiently skilled labour when economic growth occours, growing quickly this leads to wage inflation and higher prices.
What is a recession
A recession is a period of at least six months (2 quarters) of economic decline which causes a decrease in the real gross domestic product (rGDP)
What can cause a recession
It can be caused by a fall in any of the factors that influence total demand (consumption, investment, government spending, net exports
It can also be caused by supply-side shocks that create challenges for firms & consumers
What are the some of the demand- side factors that can cause a recession
A fall in consumer confidence reduces consumption
A fall in business confidence reduces investment
Increasing levels of unemployment reduce consumption
Decreasing levels of government spending
Increased interest rates require borrowers to repay higher amounts on their loans - this reduces discretionary income which reduces consumption
Shocks to other economies can reduce demand for a country’s exports thus reducing total demand
What are some of the consequences of a recession
National output (rGDP) falls
More firms go bankrupt
Both unemployment & underemployment increase
Both exports & imports fall
Domestic & foreign investment by firms decreases/stops
Deflation may become an issue leading to even lower wage levels
Government spending on unemployment benefits increase
Opportunities for entrants to the workforce decrease (youth unemployment increases)
Governments may have to spend significant amounts of money to support the economy which carries several major opportunity costs
What are Demand side policies
Demand-side policies aim to influence the total demand in an economy
The two demand-side policies are fiscal policy & monetary policy
Any policy that increases consumption, investment, government spending or net exports is likely to cause an increase in real GDP
What are some examples of Fiscal policy used to boost economic growth
When the government increase spending for example on supporting key industries, providing subsidies or providing public goods they can also use expansionary fiscal policy to lower taxes and increase disposable income which ill increase economic growth cutting income tax means a larger disposable income
What are some examples of monetary policy used to boost economic growth
When the central bank want to introduce new money into the economy they buy open market assets such as bonds when they introduce these into the economy and by them back quickly a new injection of money is introduced into the money supply which causes economic growth, reward for saving decreases.
Howdo supply side policies promote economic growth
Lowering direct taxes consumers have higher level of disposable income firms have more income to invest in capital investment, which is increased prices go down aggregate demand goes up
What occours during a economic boom
When a boom happenes there is an increase in economic growth meaning income increases and so does a firms after tax profit. Their output will increase . This becomes unsustainable which then creates inflationary pressure. In a boom there is no need for government intervention
What occours during a economic recession
When an economic boom overheats. When this happenes demand revenue and profit go down so there is cut backs on production. This leads to a decrease in living standers consumption investment and GPL go down more inequality.
What happenes in a recovering economy
Government intervention, expansionary and fiscal policy can be used this creates rises in confidence, prices levels dependant on fiscal policy
