Chapter 8 - Economic Growth: Causes, Constraints, Benefits and Costs Flashcards
Actual Growth?
A measure of changes in real GDP. Either worked out by calculating total expenditure or total incomes within a country.
Real GDP?
The output of a country with inflation taken out.
Potential Growth?
The amount by which the country could increase its production if all resources were allocated efficiently. Useful for measuring the success of governments and assessing the likelihood of changes in living standards over time.
Output gap?
The difference between Actual Growth (GDP) and Potential Growth (GDP). The larger the gap, the more inefficient an economy is.
What causes an output gap?
Resources available not suited to the needs of the economy.
The welfare system pays generously for people not to work.
The effects of relocation and production to other countries.
Increased competitiveness of other countries.
Structural Changes: the economy no longer produces output that is tailored to the needs of the market.
What is sustainable growth?
The highest rate of economic growth which doesn’t compromise the ability for the economy to grow in the future.
Causes of Growth?
An increase of AD or AS. Hence, there will be a new equilibrium output at a level where more is produced.
Occurs with multiplier effects wen there is a shift in aggregate demand.
If the aggregate supply curve is vertical the when aggregate demand shifts there will not be growth. Growth cannot occur past full capacity.
When does AD increase?
When something causes one of its components to increase.
What would cause Consumption, and therefore AD the rise?
Cut in interest rates, reducing opportunity cost of taking out a loan. This money can be invested. Mortgage payments also fall.
Increase in confidence.
Wealth effects of rising house and share price.
What would cause investment, and therefore AD the rise?
Firms invest more when the cost of borrowing falls.
Increase in confidence
What would cause government spending, and therefore AD the rise?
Fiscal Policy can be enacted by the government. Keynesian’s view is that an investment in health and education increases AD. Classical economists disagree with this and would posit that increased government spending would lead to inflation or debt.
What would cause net exports, and therefore AD the rise?
Export-led growth has been successful in China, Germany and many third world countries. To assist with this policy:
Exchange rates could be kept low.
Tariffs and quotas would be reduced.
Productivity and efficiency should be encouraged in export markets. This is a supply side policy but it has an impact on the demand side.
What would a right or downward shift in the AS show?
Supply-side policies for increasing growth. These techniques tend to be long-run and involve governments allowing firms to produce greater quantities at lower costs.
What policies could be implemented to increase the supply-side of an economy?
Cutting Corporation Taxes.
Removing regulations and other red tape.
Encouraging investment by forcing banks to lend money, cutting the interest rate or quantitative easing.
increasing competition in markets.
Privatising and subsiding industries (Royal Mail).
Increasing human capital (education) to improve labour market.
Increased government expenditure aimed at increasing living standards. e.g. health, less days of work.
Work incentives.
Reducing taxes on workers.
Improving infrastructure.
Measures to reduce the price of imports. As the UK is heavily dependent on imports this will increase disposable incomes.
Constraints to growth?
Could be seen as an absence of causes of growth.
Lack of investment funds or cash to run a business.
Weak or obstructive governments.
Currency instabilities or a fixed exchange rate or exchange rates too high.
Lack of human Capital.
Provate or public sector debt. Past debts prevent future investment.
lack of access to international trade.
