Causes And Consequences Of Undesirable Economic Growth Flashcards
Explain how a fall of AUTONOMOUS AD leads to negative/weak economic growth (11 steps give or take)
- Assuming economy initially at equilibrium
- Total planned expenditure is less than total planned output
- Surpluses where all demand is met but not all output is sold
- Unplanned investment
- Stock levels fall below optimal
- Firms cut back on production in the next cycle, employ less FOPs
- Firms pay out less factor income
- RNY, which is the sum of all factor incomes, decreases
Reverse multiplier:
9. More than proportionate fall in real RNY
10. Many rounds of induced decrease in Cd, which results in further decrease in RNY due to surpluses
11. Falling economic growth
What are the 5 AS side factors for weak/negative economic growth
- Lack of fixed capital investment
- Lack of/fall in quantity and quality of natural resources
- Lack of investment in human capital
- Lack of technological advancements
- Structural rigidities
Does a lack of fixed capital investment only affect actual growth?
No.
Actual + potential growth both affected
What results in a lack of fixed capital investment
- low savings rate
What are the 2 components that forms the formula for net investments
Net investments = gross investments - capital depreciation (spending to replace worn out/old capital)
Which 2 aspects of productivity does fixed capital investments affect (link to AS)
- productive capacity: potential growth
- labour productivity: actual growth
Which aspect of growth (actual or potential growth) does a lack of/fall in quantity and quality of natural resources affect)
Potential growth
Which 2 factors can improve human capital
- education
- upskilling
Describe (using exact phrasing) how an increase in human capital investment leads to an increase in labour productivity, leading to POTENTIAL GROWTH
- rise in nation’s labour productivity
- ability to produce goods and services increases
- output per worker increases
- nation’s productive capacity rises
- AS curve shifts to the right
- potential growth
How does a rise in labour productivity lead to actual growth
- increase in labour productivity
- assume wages remain constant
- rise in labour productivity lowers COP
- rise in AS
- AS shifts downwards
- actual growth
What aspects of economic growth does tech advancements affect (and AD or AS)
Actual;
- AD (new investment opportunities
- AS (COP decreases)
Potential:
- new industries, production methods etc -> productive capacity increases
What are some specific causes of structural rigidity
- strict labour protection laws
- trade unions
- strong barriers to entry
What is the interplay between AD and AS that causes slow/weak growth (hint— compare rate of changes)
Productive capacity/level of AS cannot keep up with rise in AD — causing weak/slow growth
What are the 5 consequences of weak/negative economic growth
- higher unemployment
- lower standard of living and savings
- slower long term economic growth rate
- lower inflation rate
- BOT (both sides)
Can the lower inflation rate experienced due to a slow/negative economic growth rate be good?
Yes.
-if operating near/at full employment, suffering from overheating economy and high inflation
How can a weak/negative economic growth rate improve and worsen the BOP position
Improve:
Recession — fall in purchasing power — consume fewer normal goods including imports — net exports increases — improves BOT position
Worsen:
Recession — worsen investor sentiments — flight of capital — worsen CA and KFA of BOP
State the different consequences of unsustainable economic growth (3)
- economic growth — increased production and output — increased reliance on capital and machines — pollution (land and air)
- environmental degradation (deforestation etc)
- ## uncontrolled growth of motor vehicles — air pollution
