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H1 Econs > Chapter 9 - Economic Growth > Flashcards

Chapter 9 - Economic Growth Flashcards

1
Q

Define economic growth

A

Economic growth can be defined as the increase in real GDP or an expansion in the productive capacity of an economy.

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2
Q

What is the formula for economic growth?

A

Economic growth = (real GDP in year 2 - real GDP in year 1)/(real GDP in year 1) x 100%

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3
Q

What is the significance of the sign of economic growth?

A

Positive economic growth - economic expansion/boom
Negative economic growth - economic recession/contraction/bust

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4
Q

What is actual growth?

A

Actual growth occurs when there is an increase in the equilibrium level of RNY

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5
Q

What are the sources of actual growth?

A
  • Rise in AD: any factor raising component of AD
  • Rise in AS (Yf unchanged) or rise in SRAS
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6
Q

What is potential growth?

A

Potential growth is the rate at which the economy could grow if it were to use all its resources. Note: when there is potential growth, there would also be actual growth.

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7
Q

What are the sources of potential growth?

A
  • Rise in productive capacity
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8
Q

What is sustained economic growth?

A

Sustained economic growth occurs when an economy experiences non-inflationary rate of growth that can be maintained over time. It can be achieved when increase in AD is matched with increase in productive capacity/LRAS i.e. there is both actual and potential growth

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9
Q

What is the relationship between PPC and economic growth?

A

Actual growth: movement of ecoonomy from point within PPC to a point which is closer/on PPC
Potential growth: outward shift of PPC

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10
Q

What are the advantages of economic growth?

A

a) Benefits to households and the economy
- Rising Material SOL (rise in GDPpc)
- Rising employment and wages; lower crime rates (raise non-material SOL)

b) Benefits to firms and the economy
- Increased profits (greater revenue due to greater DD due to increase in purchasing power)
- Increased expenditure on R&D (rise in profits allows for greater investment in R&D)
- Sustained economic growth (econ growth encourages firms to invest, leads to actual and potential growth)

c) Benefits to the government and the economy
- Improvement in government budget: rising wages, profits and expenditure allow govt to collect more tax
- Making growth more inclusive: reduce level of govt borrowing; more transfer payment to lower income groups
- Achieving sustained economic growth: rising tax revenue allows govt to spend on infrastructure

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11
Q

What are the disadvantages of economic growth?

A
  • Inflation
  • Environmental degradation: econ growth leads to greater use of resources; degradation can eventually lead to falling AS
  • Increase income inequality and non-inclusive growth: different sectors expand at different pace; DD for labour in different sectors rise disproportionately; wages rise at different rates
  • Increased unemployment of low skillled labour: econ growth leads to more R&D on AI and Automation, replacing manual and low-skilled labour
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12
Q

Define slow growth

A

Slow growth is a period where real national output or real national income is rising but rising at a slower rate

AD/AS rises at slower pace; RNY rising at slower rate

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13
Q

Define recession (negative growth)

A

Recession is a period where real national output or real national income falls over a period of a year.

Falll in AD/AS/both; RNY falling

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14
Q

What is a demand-side policy?

A

Demand-side policies are focused on raising aggregate demand (AD). Examples include fiscal policy, monetary policy and exchange rate policy

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15
Q

What is a fiscal policy (aka budget deficit policy)?

A

Fiscal policy or fiscal measures involves the altering of government expenditure and/or tax revenue to affect the level of economic activity in the economy.

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16
Q

What is government budget balance?

A

Difference between government revenue (mainly consisting of tax revenue) and government expenditure (mainly consist of expenditure on goods and services, as well as transfer payments)

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17
Q

How does fiscal policy work?

A

a) Raising Goverment expenditure
- Raising government expenditure on goods and services (deliberate spending)
- Increase in transfer payment to households/firms (NOTE: transfer payment is not included in G component of AD but C and I)

b) Reducing tax rates
- Reduce direct taxes (corporate/income tax)
- Reduce indirect tax (lower export tax; raise import tariffs)

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18
Q

Explain how demand side policies work

A
  • Initial rise in AD causes an unplanned fall in firm’s inventory
  • To maintain inventory, firms will need to employ more resources like labour
  • More labour employed, higher wage rate, higher purchasing power
  • Leads to multiple rise in induced consumption
  • Multiple rightward shift in AD curve, AD is rising at decreasing rate
  • Overall rise in AD resulted in multiple rise in RNY
    Larger the size of multiplier, larger rise in AD and RNY
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19
Q

What are the limitations of fiscal policy?

A
  • Size of multiplier
  • Possibility of crowding-out effect: increasing government expenditure that leads to lower investment
  • Time lag: Decision lag, execution lag, time lag for measures to exert their effect
  • Government’s budget defecit: possibility of capital flight, sovereign debt fault
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20
Q

What is a monetary policy (centered on interest rates)?

A

Monetary policy (centered on interest rates) is the adjustment of interest rates via the regulation of the money supply in a country

21
Q

How do central banks adjust their country’s money supply?

A
  • Open market operations: Central bank purchase bonds raise money supply
  • Varying the cash reserve ratio: Reducing the ration raise money supply
  • Varying the bank rate: Raising the bank rate reduces money supply
22
Q

How does expansionary monetary policy work?

A

Keynesian transmission mechanism
- Rise in money supply leads to fall in interest rates
- Consumption expenditure rises
- Investment expenditure rises
- AD rises
- RNY rises (economic growth)

23
Q

What are the limitations of monetary supply?

A
  • Ability to control money supply: inflow/outflow of hot money neutralise effect of MP; small/open countries cannot use MP
  • Size of multiplier
  • Interest elasticity of investment and consumption: Marginal efficiency of investment; Consumer expectations/confidence
  • Liquidity trap: interest rates close to zero and consumers are very pessimistic about future growth
24
Q

What is quantitative easing (QE)?

A
  • QE is a form of MP to overcome credit squeeze by commercial banks, where central banks purchase govt bonds and other types of assets to increase liquidity in financial system.
  • QE is typically implemented when there is liquidity trap where interest ratesare close to zero
25
Q

How does QE work?

A
  • central banks purchase govt bonds and other types of assets to increase liquidity in financial system.
  • Banks are now less able to lend the govt
  • Banks are left with more cash rather than bonds
  • High level of liquidity compels the banks to increase lending to households and firms
  • Leads to rising consumption and investment expenditure
  • Raises AD and RNY
26
Q

What are the limitations of QE?

A
  • Risk appetite of banks and pessimism of households and firms: banks still may not lend to households/firms as they perceive them to be high risk
  • Inflation: QE can be inflationary as more liquidity is introduced
27
Q

What are some possible problems with expansionary MP?

A

Expansionary MP raise liquidity and/or quantity of money in an economy. With more money in economy, firms and consumers would tend to spend more.
Expansionary MP/QE may lead to asset (property and shares) bubbles, which may be destabilising should such bubbles burst.
Rising property prices directly impact affordability of housing and operating cost of firms, which have both social and economic implications.

28
Q

What is an exchange rate policy?

A

Exchange rate policy is the deliberate attempt by the central bank to manipulate th exchange rate of the country’s currency in order to influence the economy.

29
Q

How do central banks adjust their country’s exchange rate?

A
  • Appreciate the domestic currency: central bank buys domestic currency, leads to increase in demand of country’s currency in ER market and cause it to appreciate
  • Depreciate the domestic currency: central bank sells domestic currency increases supply of country’s currency in ER market and cause it to depreciate
30
Q

How does depreciation address recession/slow growth?

A
  • Depreciation reduce import expenditure and raises export revenue
  • net exports rises
  • AD rises
  • RNY rises
31
Q

What are the limitations of depreciation?

A
  • Size of multiplier
  • Rising cost of import raw material: rise in production cost, lowers AS; for depreciation to be effective, rise in AD > fall in AS
32
Q

What is income and price policies?

A

Incomes and price policies are economy-wide wage and price controls.

33
Q

How does DD-side IPP work?

A

Govt policies that influence wages would have direct impact on purchasing power and consumption expenditure e.g. CPF
- Reduce employee’s CPF contribution
- Increase worker’s disposable income and purchasing poewr
- Consumption expenditure rise
- AD rise and RNY rise

34
Q

What are the limitations of IPP?

A
  • Size of multiplier
  • Unintended consequences: reduction in employee contribution can adversely affect aim of CPF as social security system
  • Pessimism of households: weak consumer confidence/sentiments of future
35
Q

What are supply-side policies?

A

Policies that aim to reduce cost of production (SR) and to improve productive capacity and efficiency (LR).

36
Q

What is fiscal policy as a SR supply-side policy?

A
  • Reducing tariff
  • Reduction in govt fees and rentals
  • Govt subsidies

Limitations:
- budget deficit
- time lag

37
Q

What is ERP Appreciation as SR supply-side policy?

A
  • Appreciation allows domestic comestry to buy imported raw materials at a lower price, lowering COP

Limitations:
- proportion of imported input
- appreciation can result in fall in AD
- availability of foreign exchange

38
Q

What is IPP as SR supply-side policy?

A

Controlling factor costs through price ceilings
Limitation: permanent shortage and formation of black market

Lowering wages (e.g. lower employer’s CPF contribution rate)
Limitation: lower savings, undermine future consumption

39
Q

What are the LR supply-side policies which raise quantity and quality of labour?

A

FP - Provide tax incentives (e.g. cut income tax to raise after-tax wages)
Limitation: taxes have uncertain effects on incentive to work; people may decide to work less since they now have more income

FP - Increased govt spending on workfore trainning and education
Limitation: workers not receptive to training, increased govt spending, time lag

Compulsory education
Limitation: increased govt spending, time lag

Raising retirement age/lower school leaving age
Limitation: employers do not want to higher older workers as they are believed to be less productive yet more costly

Loosening immigration policy
Limitation: increased pressure on infrastructure, poor social integration

40
Q

What are the LR supply-side policies which raise quantity and quality of capital?

A

FP - providing tax incentives (e.g. lower corporate tax)
Limitation: may lead to rise in inflation rates due to rise in AD

FP - increasing govt exp on infrastructure
Limitation: enable production to be efficient, encourage investments

41
Q

What is sustainable growth?

A

Sustainable growth is acheived when economy grows at a strong and stable rate, without resulting in significant environmental degradation, and resource depletion for future generations.

42
Q

What are advantages and disadvantages of sustainable growth?

A

Advantages:
- advantages of economic growth
- improvement in quality of life
- securing the future

Disadvantages:
- disadvantages of economic growth
- economic cost of sustainable growth
- contraction of several industries and rising unemployment

43
Q

What are the policies that reduce environmental damage?

A
  • Tax on goods that creates pollution during production
  • Campaigns to encourage recycling and minimise waste
44
Q

What are the policies that reduce resource depletion?

A
  • Subsidies on R&D in green tech
  • Legislation to prevent over-usage of renewable resources
45
Q

What is inclusive economic growth?

A

Inclusive growth is achieved when economy grows at a strong and stable rate, without resulting in significant worsening of income or wealth inequality.

46
Q

What is inclusive economic growth?

A

Inclusive growth is achieved when economy grows at a strong and stable rate, without resulting in significant worsening of income or wealth inequality.

47
Q

What are the advantages and disadvantages of inclusive growth?

A

Advantages:
- advantages of economic growth
- reduction in social friction and improvement in SOL
- improved social mobility and rising productivity
- improvement in govt budget
- increased AD leading to economic growth and employment
- increased AS leading to economic growth, employment and low inflation

Disadvantages:
- reduced incentive to innovate and work

48
Q

What are the policies to reduce income inequality?

A
  • Redistribution of income via a progressive tax system
  • direct subsidies for low-income households
  • upgrading of skills and retraining
  • imposing a minimum wage

H1 Econs (12 decks)

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