Economic Growth Flashcards
Economic Growth
An increase in the real national income of a country over time, expressed as a percentage change in GDP.
Real GDP
Total monetary value of all final goods and services produced within a geographical boundary during a given period of time, adjusted for changes in inflation rate.
A positive rate of change in real GDP means that there is an increase in real GDP.
Real GNI
GDP plus factor incomes earned by residents overseas minus factor incomes earned by non-residents in the domestic economy, adjusted for changes in inflation rate.
Actual Growth
The increase in level of real national output in the economy.
Actual Growth is caused by an increase in any of the components of AD, and/or an increase in the SRAS.
Potential Growth
The increase in level of full employment of national output.
Potential Growth is caused by an increase in: Quantity of FOP/Captial stocks, Quality of FOP/Capital Stocks, Technological advancements.
Sustainable Economic Growth
A rate of growth that can be maintained without creating other significant economic problems, particularly for future generations. It implies positive and stable growth rate over an extended period of time.
Inclusive Economic Growth
A rate of growth that is sustained over a period of time, is broad based across economic sectors, and creates productive employment opportunities for the majority of the country’s population. It takes income distribution into consideration and does not contribute to worsening income inequality.
Negative Economic Growth
A decrease in a country’s real GDP.
Advantages of Economic Growth
a) Higher SOL: Rise in income, Rise in Consumers’ purchasing power, causes a higher level of consumption of G&S, individuals are able to satisfy more wants, thus material SOL improves.
b) Higher Non-Mat SOL: Higher real disposable income, consumers may get better healthcare and education services, longer life expectancy, lower mortality rate, and higher literacy rate, thus non-material SOL improves.
c) Higher Employment: Actual Growth results in unplanned stock depletion, derived demand for labour increases as firms increase production, thus higher employment in the economy.
d) Enhances further actual and potential growth: Economic growth causes higher level of savings and investments which enhances actual and potential growth. As national income increases, people have more money to save. Thus, more savings means that banks are able to lend more to firms for investment purposes. Firms are more willing to borrow to purchase new capital goods to expand production as well.
e) Attract FDI and capital Inflow: High and stable economic growth may boost investor’s confidence and it suggests that demand for G&S is increasing. Attracting more FDI to the economy, creating more employment for residents.
Causes of Slow Economic Growth
a) Slow increase in AD: Consumers may choose to save than spend due to a poor economic outlook, C thus rises slowly. A sharp fall in business confidence also results in low investment expenditure. Causing a slow rate of economic growth.
b) Slow increase in SRAS and LRAS: May be due to insufficient resources to sustain growth. Capital depreciation may occur where the economic value of capital stock gradually falls, this results in a fall in productivity of the economy, causing economic growth to be limited. There could also be lack of skilled labour, resulting in lower labour productivity. State of technology could also result in slowing growth, where productivity stagnates and results in weak economic growth.
Excessively high or rapid Economic Growth
A situation where a country’s economic growth rate is too high or growing too fast. This occurs when AD is rising too quickly especially when the economy is approaching full employment level.
Consequences of Slow/Negative Economic Growth Rate
a) Lower material/ non-material SOL: Real national income falls when there is negative economic growth, lower real disposable income, less ability to purchase, lowering material SOL. Govt collects less tax revenue, less spending on healthcare and education, fall in non-material SOL.
b) Lower level of employment and prolonged downturn: Causes demand deficient unemployment, real output falls, firms cut back and produce less to minimise losses, employ fewer resources, higher unemployment rate. Decreases in firms and consumers confidence. As a result C and I falls, bringing a further fall in AD, worsening slow/negative growth.
c) Worsening Inequity: Negative economic growth will result in lower household income and firms’ profits which results in a fall in tax revenue. Govt has less ability to reduce inequity, through creating productive employment opportunities or redistributing tax revenue to lower income citizens. Low-income HH receives less grants, support for basic necessities and thus perpetuating inequality in the long run.
d) Fall in Capital Inflows: Slowing/ Negative economic growth would reduce the expected rate of return from investment in the economy and affect the investors’ confidence level. Hence, there could be an outflow of foreign direct investments as firms shift to other markets. Reducing level of capital stocks in the economy and reduce potential growth of the economy.
Consequences of Excessively High Economic Growth Rate
a) Price instability: Demand pull inflation is a result of high economic growth. Rise in AD is not matched by a sufficient increase in AS, resulting in a shortage which exerts an upwards pressure on general price level. GPL increases but there is no increase in real output once the economy is near or at full employment level.
b) Lower Non-material SOL: Excessive production of G&S causes industries to emit more pollutants and waste, which will become serious concerns if they remain unaddressed or are not addressed adequately. Worsening non-material SOL.
c) Rise in Structural Unemployment: Excessively high economic growth may result in rapid structural changes in the economy. The more rapid the rate of growth the more rapid the rate of change in production techniques. People may find their skills are no longer relevant, or their jobs are replaced by machines, and are unable to find new jobs, becoming structurally unemployed.
d) Slower Future Economic Growth: Certain non-renewable resources will run out faster in future, depletion of non renewables will limit country’s ability to increase productive capacity as the rate of increase in QQ of resources is impeded. This means a slower rise in LRAS which results in slower future economic growth. Current growth can therefore endanger future sustainable growth.
