Causes of economic growth Flashcards
What is long run growth?
an increase in potential output
What is short run growth?
an increase in real GDP, driven by an increase in AD
that draws unemployed resources into use.
What are factors which cause short run economic growth?
Any event or policy that increase components of AD (i.e. C+I+G+X-M)
stimulates an extension in AS and uses up some unemployed
resources; movement from a point inside the economy’s PPF to a point
on the PPF.
What are factors that cause long run economic growth?
The productive potential of the economy increases if there is an
increase in:
* The quantity of the factors of production
* The quality of the factors of production
* There is a technological advance
There is an outward shift of the economy’s PPF or LRAS shifts right.
What are examples of using FoPs to cause long run economic growth?
Land (natural resources): finding and mining a new cobalt find;
reclaiming land from the sea; fertilising agricultural land
Labour/enterprise (human resources): immigration to increase
quantity and quality (filling in skills gaps); education & training
Capital (man-made resources): investment increases quantity but
also quality as new technology is integrated
What is actual output?
the current level of production (real GDP) in an economy. Some resources may be unemployed
What is potential output?
the economy’s productive capacity or the largest
output that could be produced, given the prevailing state of
technology and stock of available resources.
What are examples of factors that can constrain growth?
Some examples are: economic shocks
(e.g. pandemic, Brexit, financial crisis), poor macroeconomic management, political
instability, poor productivity growth, lack of investment, inadequate infrastructure
(transport, energy and communication networks), small export base/primary product dependency, shortage of human capital, brain drain, poor access to finance, high food prices, weak financial and legal institutions etc.
What is export led growth?
A significant part of the expansion of real GDP, jobs and per capita
incomes flows from successful exporting of goods and services.
Exports are an injection into the circular flow and may also stimulate more
investment, another injection. Industries supporting the increase in exports e.g.
logistics will also grow (an export and investment multiplier effect)
What is balanced growth?
when output and the capital stock grow at the same rate. Also refers to balanced expansion of components of aggregate demand and/or the different sectors in an economy
Explain a negative output gap
actual GDP is below potential GDP. This means that there is
spare capacity in the economy. Some resources are not fully employed. We would
expect some unemployment. There is not enough demand in the economy for all
resources to be fully utilised.
Explain a positive output gap
Actual GDP is above potential GDP. This puts resources in the
economy under strain. Demand growth exceeds supply growth. Firms may find it hard to recruit workers with the right skills and they may find they have to compete for other resources, such as raw materials, that are in short supply. This puts upwards pressure on wages and other costs and may lead to inflation. Consumers may buy more imports if domestic suppliers cannot meet their demand, increasing
the trade deficit.
