Chapter 35 - Economic Growth Flashcards
Factors which cause economic growth
o Increase in AD, either from domestic demand or from trade.
o Improving the labour force, with a better quality and quantity to increase
productivity. The larger the size of the labour force, the greater the
productive potential of the economy.
o Improved technology, which is more productive
o More investment, to fuel economic growth
o Capital deepening which is an increase in the size of physical capital stock.
Actual growth
This is short run growth and it is the percentage increase in a country’s real GDP. It is
usually measured annually and is caused by increases in AD
Potential growth
This is the long run expansion of the productive potential of an economy. It is caused
by increases in AS. The potential output of an economy is what the economy could
produce if resources were fully employed.
Constraints on growth
Access to credit and banking
Without a safe, secure and stable banking system, there is unlikely to be a lot of
saving in a country. Hence, the rate of growth is limited.
Infrastructure
Poor infrastructure discourages MNCs from setting up premises in the country. This
is since production costs increase where basic infrastructure, such as a continuous
supply of electricity, is not available.
This is important for developing human capital. Adequate human capital ensures the
economy can be productive and produce goods and services of a high quality. It
helps generate employment and raise standards of living.
Absence of property rights
Weak or absent property rights mean entrepreneurs cannot protect their ideas, so
do not have an incentive to innovate.
Corruption
In sub-Saharan Africa, the money lost from corruption could pay for the education of
10 million children per year in developing countries.
Poor governance/civil war
This could hold back infrastructure development and is a constraint on future
economic development. It could destroy current infrastructure and force people into
poverty.
Vulnerability to external shocks
For example, an earthquake prone country is likely to find it hard to develop their
infrastructure, and people might be pushed into poverty. Nepal was already one of
the poorest countries in the world, but the Nepal earthquake in 2015 pushed more
people into poverty.
Characteristics of recession
Negative economic growth
Lots of spare capacity and negative output gaps
Demand-deficient unemployment
Low inflation rates
Government budgets worsen due to more spending on welfare payments and lower
tax revenues
Less confidence amongst consumers and firms, which leads to less spending and
investment
Definition of recession
In the UK, a recession is defined as two consecutive quarters of negative economic
growth.
Demand Side-Shock
A sudden and large impact on aggregate demand
Productive potential
The maximum output of an economy if all its resources are fully and efficiently utilised
Supply-side Shock
A sudden and large impact on aggregate supply.
