6. GDP Growth Flashcards
what is GDP?
the monetary value of all final goods and services produced in a country in a given time period usually a year.
what is economic growth?
is the increase in the market value of the goods and services produced by an economy
how does this show up on SRAS diagrams?
in the short run, this is shown by an outward shift in AD, output increases to keep up with increased demand.
in the long run it is an increase in the capacity of a country to produce more goods and services: an increase in the productive potential. This is shown as a right shift in LRAS or an outward movement of the macro PPF.
what is the ideal form of economic growth?
when AD and LRAS increase/shift right together
What is nominal GDP?
What is inflation?
nominal: the total market value of goods and services produced in country’s border in a given time period. Real GDP is nominal GDP after inflation has been taken into account
inflation: is a rise in the general price level. This equated to a fall in the real value of money : the same money will buy you less if prices have increased.
How do you calculate nominal GDPs?
using percentage changes
What is GDP per capita?
GDP divided by the population
what is standard of living?
the material well being of citizens in an economy / an individual’s access to goods and services.
what are the benefits of growth to households?
more growth creates jobs and creates higher incomes
what are the benefits of firms?
higher incomes for households, mean more spending and therefore higher profit. This can lead to more investment by firms. This will create better technology and more choice and more goods and service, which eventually creates even more jobs etc etc.
What are the benefits of growth to the government?
higher incomes for households means more tax revenue and less money spent on benefits as less people need them. The government can spend more on better health and education.
create a chain of reasoning to show how standards of living can increase because of growth?
As an economy grows, there is increased demand for goods and services. In order to produce these, firms demand more labour - an increase in derived demand. More jobs are available and fewer people are unemployed (lower cyclical unemployment). Newly employed workers enjoy incomes and scarcity of labour increases existing wages. Households consume more goods and services to meet their needs and wants.
create a chain of reasoning to show fiscal dividend as an automatic stabiliser
As an economy grows, there is increased demand for goods and services. Workers pay more income tax; firms pay more corporation tax; consumers pay more sales tax. Government receives more tax revenue and reduces spending on benefits. Government finances improve and there is more to spend on investment and public services. Improved public services contribute to improved standards of living.
Explain why a higher rate of economic growth for a country is likely to reduce a government’s budget deficit.
A budget deficit occurs the revenues when state spending exceeds tax revenues causing the government to borrow money through the issue of bonds.
An increase in short term economic growth represents an expansion of real GDP which in theory will lead to higher per capita incomes and rising consumer spending.
As a result, the revenues received from direct tax revenues such as income tax and indirect taxes such as VAT will grow.
For example, as unemployment falls, there will be more people in work earning above 50,000 pounds a year at which the marginal tax rate rises from 20% to 40%.
Thus, if more people are earning higher incomes, state spending on means-tested welfare support such as universal credit will also drop.
Consequently, we expect a period of rapid economic growth to cut a fiscal deficit.
create a chain of reasoning to show how investment can increase because of growth?
as an economy grows, there is increased demand for goods and services. Firms re incentivised to invest in human and physical capital as there is potential for profits. This will increase the quantity and quality of capital and labour. Increased investment increases productivity - output per hour per worker - creating long run growth. Investment is the key to long run growth - an increased productive potential.
explain the accelerator effect
if firms see a rise in demand and expect it to be maintained, then they will soon start to reach full capacity. Therefore, to meet the future demand, they will respond by investing in order to increase capacity. Thus an increase in the rate of economic growth will cause a correspondingly larger increase in the level of investment.
Explain is the easterlin paradox
the relationship between GDP per capita growth and happiness is positive to a point, then the marginal happiness gains diminish. This is because richer people are happier than poorer people but if a country becomes richer over time, the change in income relative to others does not change, leading to no change in happiness.
what are the limitations of GDP
1) doesn’t measure distribution of income
2) doesn’t measure the external cost of production
3) doesn’t indicate the nature of economic activity
4) doesn’t measure many things of value
5) the PPP problem
6) shift away from physical goods
What can government do to achieve demand side growth? What will this do?
Fiscal Policy: Increase G and decrease T
Monetary Policy: Decrease interest rates
–> this will increase the components of AD = (C+I+G+(X-M)
Give some examples of fiscal policies the government could implement:
1) increasing spending on schools, hospitals and roads
2) increase benefits payments and subsidies
3) decrease income taxes on individuals
4) decrease corporation taxes on business profits
Give some examples of monetary policies the bank of england could implement:
1) decrease interest rates
2) decrease money supply
3) decrease exchange rate
Give some examples of supply side policies the government could implement:
1) increasing spending on schools,hospitals and roads
2) decrease income taxes on individuals
3) decrease corporation taxes on business profits
4) deregulation of industries e.g. no minimum wage, less rules
