economic growth Flashcards
economic growth
refers to an increase in real GDP. which is an increase in the real value of goods and services produced in an economy in a given period of time.
Gross Domestic Product
the value of goods and services produced by an economy over a given period of time.
actual GDP
is used to measure short-term growth, it shows the size of the economy now.
potential GDP
is used to measure long term growth, it shows the size of the economy when all resources are fully utilised.
nominal GDP
the total economic output of an economy, measured in that years price. it is calculated by total output x price.
real GDP
the total economic output of an economy, adjusted for changes in prices. it is calculated by total output x base year price.
macroeconomic indicators
- growth
- unemployment
- inflation
- trade
- distribution of income
macroeconomic objectives
- strong, sustained, sustainable growth
- low unemployment, full employment
- low and stable inflation at 2%
- balanced trade
- fair distribution of income
benefits of economic growth
- rising incomes lead to better standards
- better job prospects
- less unemployment
- affordability of goods and services
- better access to health and education
- higher tax revenue
- higher international competitive exports
dangers of economic growth
- environmental concerns such as pollution
- unsustainable growth
- wealth and income inequality
- inflation
sustained and sustainable growth
this is economic growth that occurs without compromising the ability of future generations to meet their own needs.
economic development of countries
- primary sector
- secondary sector
- tertiary sector
environmental damage
increasing the level of production year-on-year will lead to a depletion of resources and potential adverse effects, e.g. climate change.
recession
a period of decline in general economic activity, typically defined when an economy experiences a decrease in its gross domestic product for two consecutive quarters.
potential causes of a recession
- a global financial crisis
- a bad harvest in an agricultural based economy
- a trading partner experiencing a recession
positive output gap
- when the actual level of real GDP is greater than the potential underlying level of real GDP.
- this is when the economy is producing beyond its productive potential.
- only possible for a short time, leads to workers being paid overtime and workers and machines being overused.
- this causes inflationary pressures
negative output gap
- when the actual level of real GDP is less than the potential underlying level of real GDP.
- spare capacity, so there will be unemployment (demand-deficient), and demand-pull inflationary pressure will be low as there are lots of resources and factors of production not being used.
stages of the economic cycle
boom- a period of sustained growth above trend
slowdown- growth begins to plateau
recession- two consecutive quarters of negative growth
depression- when an economy shrinks by more than 10%
recovery- economy starts to grow again after a period of negative growth.
features of a recession
- low inflation
- cheaper factors of production
- higher unemployment
Boom
workers are working over-time and wages are rising. demand for luxury goods and imports is high.
slowdown
once the boom is in full flow, eventually it starts to become unsustainable. people start to worry that house prices and share prices are too high.
recovery
as investment increases, real GDP grows. unemployment falls as jobs are created and workers are needed to produce goods and services.
characteristics of a boom
-high rates of economic growth
-near full capacity or positive output gaps
-(near) full employment
-demand-pull inflation
- consumers and firms have a lot of confidence- high rates of investment
government budget improves- due to higher tax revenues, less spending on welfare payments
characteristic of a recession
- negative economic growth
- lots of spare capacity and negative output gaps
- low inflation rates
- government budgets worsen- due to lower tax revenues, more spending on welfare payments
- less confident amongst consumers and firms- less investment
- demand-deficient unemployment
factors which cause economic growth
- increase in AD
- improving the labour force- the larger the size of the labour force, the greater the productive potential of the economy
- improved technology
- more investment
- capital deepening which is an increase in the size of physical capital stock
actual growth
this is the 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.
costs of economic growth
consumers
- does not benefit everyone equally- those on low and fixed incomes might feel worse off
- higher demand-pull inflation
- shoe leather costs-spend more time and effort finding the best deal
- benefits of consumption might not last- law of diminishing returns
benefits of economic growth
consumers
- consumer income increases as more people are in employment and wages increase.
- consumers feel more confident
benefits of economic growth
firms
- make more profit- increase investment
- higher levels of investment could develop- new technology to improve productivity and lower average costs in the long run
- more competiton- make them more productive and efficient and give them more sales opportunities
costs of economic growth
firms
could face more menu costs as a result of high inflation. this means they have to keep changing their prices to meet inflation.
costs of economic growth
the government
-increase their spending on healthcare if the consumption of demerit goods increases
benefits of economic growth
the government
-government budget might improve, since fewer people require welfare payments and more people will be paying tax
