Chapter 7 Flashcards
What is econmic growth
definde as an increase in teh real output of goods and services produced in a country. Usually measured by teh annual change in real Gross Domestic Product. Desirable rate of growth is 3% p.a. If growth too rapid, there may be soem pressure on the level of prices if total demand is growing faster than the capacity of the economy.
How can economic growth be modelled
Through the Production Possibility model.
What is Nominal GDP
Nominal GDP is the value of output expressed in the prices of the day (current prices).
What is real GDP
Real GDP tells us what the value of output is worth as if there had been no price changes in the economy.
How can we calculate the GDP change between two different years?
GDP % Change = GDP (year 2) - GDP (year 1) / GDP (year 1) x 100
or
GDP % Change = GDP (year 2) / GDP (year 1) - 1 x 100
What is the problem with GDP?
it only includes the value of goods and services that are exchanged for payments. It does not regard important activities such as charities, houseworks and voluntary works.
It also understates changes in utility. E.g. people can now conduct conferences on their telephone. It does not capture the sigificant technological progress, and hence welfare.
GDP also doesnt account for rising productivity.
What effect does adjusting the growth measures have?
Adjusted measures estimate the value of items that may increase or decrease social welfare. Housework, parenting and volunteering increase welfare, but crime, commuting time, and the loss of productive land, reduces welfare. If social welfare has been reduced, the ‘Genuine Progress Indicator’ is flatter, and lower.
What is the difference between potential growth and actual economic growth?
potential economic growth are the things that increase the capacity of the economy to produce more goods and services.
Actual economic growth is determined by how much households, firms and government spending takes place.
What are the three determinants of potential growth?
Population growth: As population increases, more people working, hence more income, leading to more expenditure, etc. Migrants are more beneficial to the economy as they are already of working age and have necessary skills.
Participation: The participation rate is the proportion of people over the age of 15 who are in paid work or who are looking for paid work. More participation means more people earning income to satisfy needs and wants, and more goods and services being produced.
Productivity is the efficiency with which firms, industries and the economy as a whole convert factor inputs (labour, capital, raw materials) into output. Productivity grows when outputs grow faster than inputs. Labour Productivity: Workign less hours for same output. Capital Productivity: Value of output divided by value of all capital inputs. Goods and services hence cheaper, more quality, more wage rises, more spending.
What are the benefits of Economic Growth
Increases real income and material welfare.
Higher quality goods and services
More economic opportunities
A taxation dividend to government
Economic growth increases material welfare.
