Causes of Economic Growth Flashcards
What are the 2 types of economic growth?
1) Actual economic growth
2) Potential economic growth
What is actual economic growth?
Actual economic growth- an increase ⬆️ in real GDP
What is potential economic growth?
Potential economic growth- an increase ⬆️ in capacity of economy
What leads to actual economic growth?
- ⬆️ in any component of AD-> actual economic growth- because ➡️ward shift of AD curve
- ⬆️ in AS-> actual economic growth- because ➡️ward shift of AS curve
What leads to potential economic growth?
- Vertical part of AS curve shifts ➡️-> potential economic growth
- PPF curve outward shift-> potential economic growth
What is export led growth?
Export-led growth- growth driven 🚙 by ⬆️ in net exports (X-M)-> ➡️ward AD shift
What is an issue with export led growth and what is a real life example of where this has happened?
Problem- exporters vulnerable to changes in demand/exchange rates in other countries
- E.g. 🇨🇳’s growth slowed after 2008
What are constraints on growth?
1) Absence of efficient capital markets
2) Labour market problems
3) Government instability
4) External constraints
How are labour market problems a constraint in growth and how can this issue be solved?
Labour market problems- shortage of skilled labour 👎- as countries get ⬆️ 💰, birth rates ⬇️-> ⬇️ labour supply
- Solved by ⬆️ immigration BUT skilled workers leaving low-income countries 👎- ‘🧠 drain’
How are the absence of efficient capital markets a constraint on growth?
Absence of efficient capital markets- e.g. ⬆️ interest rates ⬇️ investment & growth where asymmetric info present (lender knows ⬇️ about borrower & … charges ⬆️ rate to cover risk)-> only corrupt borrowers can afford-> even ⬇️ lending- ✖️ equilibrium rate established
How is government instability a constraint on growth?
Government instability- when governments incompetent, lack transparency/💪 political backing-> ✖️ attract investment-> fiscal deficit-> inability to spend to encourage growth
How do external constraints contribute to lower growth?
External constraints- uneven access to 🌎 markets due to tariffs, subsidies (protectionism)-> ⬇️ country growth ALSO global recession slows trade
3% ⬆️ in 🌎 trade = 1% ⬆️ in world GDP … constraints on 🌎 trade = constraint on growth
What is an output gap?
Output gap- difference between actual & potential GDP
What does an output gap look on a diagram?
See bottom of page 12 on economics theme 2 notes
What is a positive output gap?
Positive ➕ output gap- economy ⬆️ faster than trend growth (boom 💥)
What does a positive output gap lead to?
- > inflation-> ⬆️ interest rates
- > tight labour market (economy close to full employment-> wage pressures)
- > shortages of raw materials
What is a negative output gap?
Negative ➖ output gap- economy ⬆️ slower than trend growth (recession)
What does a negative output gap lead to?
-> low demand … ⬇️ interest rates
-> lose labour market (spare capacity)
What is measuring an output gap like?
Difficult to measure- ✖️ all unemployed resources would have same impact on economy if employed
What does a positive output gap look like on a diagram?
See page 13 of economics theme 2 notes
What does a negative output gap look like on a diagram?
See page 13 of economics theme 2 notes
What is the pattern of the trade business cycle?
Boom 💥 -> slowdown-> recession-> recovery-> boom 💥
What are the benefits of economic growth?
👍- consumers- ⬆️ incomes & wealth 💰, ⬆️ job confidence-> ⬆️ spending e.g. 🚙 📱 etc, ⬆️ employment opportunities-> close to full employment-> ⬆️ wages so firms keep workers
👍- firms- ⬆️ profit, ⬆️ consumer spending-> ⬆️ firm sales & profit-> ⬆️ more workers employed (⬇️ unemployment) & ⬆️ investment-> ⬆️ future growth prospects
👍- governments- ⬆️ incomes, asset prices & profits-> ⬆️ income tax, VAT, capital gains tax (tax payed on profit when asset sold that has ⬆️ in value) & corporation tax ALSO ⬇️ demand for unemployment benefits & income support
👍- current & future livings standards- ⬆️ incomes, asset value & employment-> ⬆️ wealthy 💰 people & ⬇️ poverty ALSO ⬆️ government revenue spent on improving town centres, libraries 📚, cleaner technology (improve living standards)
What are the negatives of economic growth?
👎- income inequality- unwaged (out of work or doing unpaid work) & unskilled ⬇️ likely to benefit from ⬆️ incomes-> 2 speed economy (some ppl income ⬆️ but can’t get out of low skill slow lane) ALSO short-term unemployment for those without labour market flexibility as ⬇️ skill production ⬇️ during growth
👎- environmental problems- natural resource depletion, carbon emissions & other pollution ⬆️ with growth BUT ⬆️ tax revenue could be used by governments to clean up 🧼 environment
👎- balance of payments problem- ⬆️ incomes-> ⬆️ demand for imports BUT if export-led growth then current account improves
👎- bottlenecks in economy- ⬇️ spare capacity in economy-> factors of production ⬆️ in price e.g. labour wages
