ch11 flashcards
describe the difference between short run and long run economic growth
- short run economic growth is bringing idle resources into production and takes up slack in the economy
- long run economic growth is shown by an outward shift of the economy’s PPF, increasing the economy’s productive potential
AD formula
AD = C + I + G + (X - M)
what are some things that can shift the SRAS curve to the right for firms
- fall in money wage rates
- fall in costs of production
- fall in taxes on firms
- increase in subsidies on firms
what is the economy’s trend growth rate
the rate at which output can grow sustained without putting upward/downward pressure on inflation
what are causes of long run economic growth
- improvements in technology resulting from investment and technical progress
- increases in size of the labour force
- improvements in productivity, attitudes and enterprise
- mobility increase of factors of production and economic incentives faced by entrepeneurs and the workers they employ
name the two economic growth theories
neoclassical growth theory
new growth theory
describe the neoclassical growth theory
- argues that a sustained increase in investment increases the economy’s growth rate, but only temporarily
- the rate of capital to labour goes up, the marginal product of capital declines and the economy moves back to a long-term path, determined by output growing at the same rate as the workforce
- the rate that labour productivity improves is determines by the technological progress, which is the weakness: the cause of growth is outside of the theory so there is no explanation of why economic growth occurs
describe the difference between the neoclassical and new growth theory
- unlike neoclassical, the determinants of technological progress are brought into the model
describe the new growth theory
- profit seeking research - the rate at which technological progress occurs depends on the stock of ideas. new ideas by new research is added to the capital stock of ideas
- it is assumed that having more researchers means countries have higher growth rates
- economic growth can derive either from domestic innovation or from technological transfer from other countries
- human capital accumulates through educating and training a workforce and through migration, a high level of human capital is necessary but not sufficient for successful economic growth,
- a technological change requires workers to possess the skills for adapting to new technologies rather than those that used to be necessary for old, declining technologies
- new growth theory suggests that appropriate government intervention can create the supply side contitions (encouraging research, externalities, incentives for firms to innovate)
what are the costs of economic growth
- uses up finite resources such as oil that cannot be replaced
- leads to pollution and other forms of environmental degredation
- can destroy local cultures and communities, widening inequality
- leads to urbanisation and rapid growth, taking agricultural land
- countries suffering low growth can get into a negative cycle
what are the benefits of economic growth
- increases standard of living
- leads to communities that improve the environment
- provides new technology which can help environment
- provides a route out of poverty
- generates positive cycle of growth for benefiting countries
draw a graph showing the economic cycle
graph 11.6 on flashcards
what is a recovery
when GDP begins to grow after the end of a recession
- recovery gives weigh to the boom
what is a boom
level of real output becomes greater than the trend level of output
- ends when the upswing gives way to the downswing
what are the 7 causes of change in economic cycle phases
- fluctuations in AD/AS
- role of speculative bubbles
- outside shocks
- political business cycle theory
- marxist theory
- multiplier/accelerator interaction
- climate cycles
describe how fluctuations in AD/AS cause change in economic cycle phases
- Keynes argues that recessions are caused by fluctuations in AD which are caused by consumer and business confidence
- Prescott and Kydland argue that changes in technology might be as important as AD changes
describe how the role of speculative bubbles cause change in economic cycle phases
- rapid economic growth leads to rise in speculative bubbles which arew when people realise that house and share prices have risen above the asset’s real value so people sell, causing the bubble to burst, destroying consumer confidence, as people stop spending and recession occurs
- the result is cyclical instability
describe how political business cycle theory causes change in economic cycle phases
- in democratic countries, general elections take place every 4/5 years.
- as it approaches, a political party tries to influence people by engineering a boom
- after the election, the party in power deflates AD to prevent the economy from overheating until the next election approaches
describe how outside shocks hitting the economy cause change in economic cycle phases
- e.g. a war in the middle east leads to an oil shortage which increases business costs of production (this is a supply shock)
describe how changes in inventories cause change in economic cycle phases
- as well as capital, firms also invest in stocks (inventories) of raw materials and finished goods waiting to be sold (stock building)
- these stocks build up when firms overestimate demand, so they accumulate and firms are forced so stop production, causing a recession
describe how the marxist theory suggests how change in economic cycle phases are caused
- marxists believe recessions create conditions in which stronger firms either take over weaker competitors or buy assets of firms that have gone of business
- in marxist theory economic cycles are deemed necessary for the regeneration and survival of capitalism
describe how multiplier/accelerator interaction cause change in economic cycle phases
- Keynesian economists have argued that business cycles are caused by interaction of of multiplier process (increased investment leads to increases in national income) and the accelerator (increase in income causes change in investment)
- the relationship between investment and income is mutual-investment affects income which affects investment demand-income and employment fluctuate in a cyclical manner
describe how climatic cycles cause change in economic cycle phases
- Stanley Jevons recognised the economic cycle, believing there was a connection between the timing of economic crises and the solar cycle
- variations in sunspots affect the power of the sun’s rays, influencing quality of harvests and price of grain, affecting business confidence
what are the indicators used to identify economic cycle phases
- usually GDP, but also rate of inflation, investment and unemployment can influence the economic cycle phases
- employment increases and unemployment decreases in the recovery and boom plases