Economic development Flashcards
Define Short Run Economic Growth
A rise in real GDP (output) in an economy over a given period of time
Why is economic growth (EG) important?
Economic growth:
- Improves material standards of living
- Improves the welfare of the population
- Reduces unemployment
- Reduces poverty
- Gives a nation increased power on the international stage
Explain how EG results in a rise in material standards of living
AD increases resulting in incomes increasing through greater employment. This gives individuals greater purchasing power so they are able to afford more goods and services which ultimately increases their material standards of living and gives them a better quality life.
Explain how EG leads to a reduction in unemployment
AD increases and so there is a greater demand for goods and services. Derived demand for labour increases and firms hire more workers, causing unemployment to decrease.
What are the conditions for the multiplier to take effect?
% increase in income > the % rise in population
Explain how EG leads to a reduction in poverty
Some poor individuals who were previously not working will get a job due to derived demand for labour increasing when there is economic growth. They, as a result, have greater real disposable income which helps them get out of absolute poverty and gives them the ability to afford necessities that are essential for survival.
Explain how EG leads to increased power on an international stage
Countries with higher output have more power and so have better ability to negotiate trade agreements that favour them.
How does economic growth benefit developing nations?
It removes people from absolute poverty so it is clearly beneficial in these economies as a large proportion of people are struggling to survive and cannot afford basic necessities.
What is the traditionally assumed relationship between economic growth and happiness?
EG = More RDI, therefore more purchasing power. More goods and services can be consumed so material standards of living increases, ultimately leading to an improvement in the quality of life for individuals. It also provides the resources to enable people to enjoy a higher quality of life
What is the theory that explains why EG may not result in happiness?
Easterlin paradox- suggests happiness and income are not positively correlated. “As income levels rise in a country, the levels of happiness does not follow”. This is due to happiness being derived from relative wealth rather than absolute wealth.
Define: Recession
2 consecutive quarters of negative economic growth.
What effect does a recession have on citizens of a country?
Unemployment tends to be high due to reduced derived demand for labour. This gives individuals low RDI and lower purchasing power therefore inhibiting their ability to purchase goods and services, leading to a decline in their material standards of living. Essentially, it results in a fall in the quality of life of citizens.
What is the effect of a recession on a government?
When there is negative economic growth, unemployment is high. This increases the volume of benefits given out and minimises the volume of tax collected. Less tax revenue is generated through VAT due to the decline in PP leading to the overall decline in the governments budget- and could even take them into a deficit. This leaves them with less funds to spend elsewhere (away from benefits) on things like healthcare and education…
Define: development
Process by which real income per capita increases and inhabitants of a country are able to benefit from improved living conditions such as an enhanced education or better healthcare provision.
What is the general relationship between economic growth and development?
Economic growth is the essential prerequisite for development. This is because EG increases income per capita including the income of the poorest which helps them afford food, clothes, water & other needs that are essential for survival.
