Economic Growth Flashcards
What is the trade cycle
It is the repeated pattern of fluctuating levels of economic activity measured by the changes in real GDP over time
What are the 4 stages of the trade cycle
Boom
slowdown
recession
recovery
What is the average potential growth rate
It is the underlying trend growth for the economy
What is a boom
It is when GDP rises faster than its long term trend
What is a slowdown
When GDP is still rising but the rate of growth has decelerated to a below trend rate
What is a recession
This is when GDP is falling for 2 consecutive quarters
What is recovery
This is when GDP rises and the economy moves out of recession. GDP growth will pick up towards its trend rate
What is short run economic growth
It is an increase in real GDP over the course of one year
What is long run economic growth
It is when there is an increase in a country’s productive potential
What are causes of short run economic growth
Higher consumer spending
Increased investment
Increased Government spending
Increased net exports
What causes a higher consumer spending
Income tax cut
Wages rising faster than inflation
Lower interest rates
Higher house prices and share prices
Increased consumer confidence
What causes an increase in Investment
Corporation tax cut
Increased business confidence
Increased rate of technological change
Lower interest rates
Gov Subsidies
What causes an increase in G
Change of party
Expanding economy
What causes an increase in net exports
Rising GDP in other countries
Depreciation of £
Improving quality of UK exports
Lower UK production costs
Low relative UK inflation rate
Increased use of protectionism
What causes long run economic growth
Increase in the quantity of resources available
Increase in the quality of resources available
What causes the increase in the quantity of resources available
Lower rate of interest
Lower corporation tax
Relaxation of immigration control
Increased child benefit
Reduction in school leaving age/ increase in retirement age
Reduction in income tax
Reduction in value of out of work benefits
What causes the increase in the quality of resources available
Increase in education spending
Increased training subsidies
Research and development subsidies
What is the rule of 72
If you divide 72 by the growth rate of something then it tells you how long it takes to double
What are the benefits of economic growth
Rising income/ improve living standards
Increase employment
Extra tax revenue
Economic growth by an increase in AS causes a decrease in general price level
What are the drawbacks of economic growth
Less leisure time for workers
Rise in general price level
Environmental damage
What are outputs gaps
It is a measure of the difference between the values of a nations actual output and its full employment potential output
What are negative output gaps
It is when actual, short run output is less than the long run potential output
What causes a negative output gap
Productive inefficiency in the economy
Unemployment
Depressed price level
GDP and living standards could be higher
What are positive output gaps
It is when the actual short run output is greater than the economy’s sustainable long run potential output
What does a positive output gap mean
The economy is at a level that it cannot sustain in the long run
Short run incomes and living standards will be temporarily higher
Inflationary pressures
How do you close a negative output gap
AD increases to a more rightwards lying position
SRAS increases to a more rightwards lying position
How do you close a positive output gap
AD decreases
SRAS decreases
What is the trend economic growth
It is a measure of the average increase in a nations productive potential over time
What is the basic way living standards are measured
real GDP per capita
What is the Gini coefficient
It is a scale which measures equality of money in a country
0 is perfect equality
1 is no equality
Why is real GDP per capita a bad way to measure living standards
There could be inequality
The growth rate of GDP may not be sustainable
Rising GDP may be because of capital intensive productive methods
Economic growth may result in lots of pollution
What is economic development
It is all efforts to improve the quality of life of individual citizens of a nation
It focuses on qualitative improvements in the human condition
How is economic development measured
It is a process
Focuses on the outcomes of economic growth
Based on human well being
Economic growth is necessary for development but not sufficient, on its own
What is the Human Development Index
It is the most widely used known measurement of economic development
Scores between 0 and 1
What is HDI comprised of
GDP per capita
The adult literacy rate
Life expectancy at birth
What are the 4 categorise in the HDI
Very High - above 0.8
High - between 0.7 and 0.8
Medium - between 0.55 and 0.7
Low - below 0.55
What did Adam smith argue for countries to do about trade
It was in the best interest of countries to specialise in the areas of production in which they had an absolute advantage over other nations
What is absolute advantage
It is having an efficiency advantage in terms of being able to produce more output from a given level of inputs
How do countries trade where each one has an absolute advantage
- Find each countries absolute advantage and then each country specialise in making that product
- Both countries find a mutually beneficial exchange rate
- Trade products
What did David Ricardo argue`
It is not necessary to have a situation of absolute advantage in production in order to benefit from trade
What is comparative advantage
When a country produces a good with the largest margin of superiority or the smallest margin of inferiority in production compared to other nations
How would 2 countries trade if one country had an absolute advantage in everything
- Find each countries comparative advantage and specialise in that
- Find an exchange rate between the internal exchange rates of both countries
e. g. One exchange rate is 1:3 and the other is 1:1, use a 1:2 exchange rate - Trade goods for the other countries goods
What can free trade cause
- Allows countries to consume outside their PPF
- The distribution of benefits from trade is not equal, better countries gain more
- It is bad and risky to over specialise in one area
- A countries comparative advantage changes over time
- Opportunity cost affected by tariffs
What are the UK’s comparative advantage
Financial services
Entertainment
Chemicals and Pharmaceuticals
Aerospace
Medical Technology
What affects comparative advantage
The productivity of the country producing that good
This will affect costs and so competitiveness
What determines the relative costs of production
The quality and quantity of factors of production
Investment in R&D
Long Run movements in the XR
Relative rates of inflation
Import controls
Non price competitiveness of producers (design, quality of product)
What is free trade
It is when goods and services are able to move across international borders without any intervention by governments that affects the prices or quantity’s traded
What are trade liberalisation policies
Policies that promote free trade
What are protectionist policies
Policies designed to reduce free trade
What are the arguments for free trade
- Total world output can be increased leading to a rise in global living standards
- Consumers have a greater choice which means a lower price
- Competition causes firms to be efficient
- Firms can manufacture in greater quantities which means more efficient and lower prices
- Countries are more friendly and less war
What is protectionism
It is any measure taken by governments to distort the market in favour of domestic firms competition with foreign importers
What 2 ways does protectionism work
To reduce the purchase of imports
To increase the demand for exports
What protectionist measures are there
Tariffs
Subsidies
Quota
Currency depreciation
Non price protectionist measures
What are tariffs
It is an import tax on foreign goods
Shifts supply left
What are subsidies
A payment to firms to help reduce costs
Shifts supply to the right
What is a quota
It is physical limit on the amount of imports that can enter the country
Makes the supply curve perfectly inelastic
A ban is a more extreme quota
What are non price protectionist measures
They enforce strict quality and safety standards on imports to raise the cost of production
OR make it harder and slower for the imports to enter the country
Who are the losers from tariffs
Domestic consumers - higher prices and less consumer surplus
Who are the winners from tariffs
Inefficient domestic firms - increase sales and producer surplus
Government - Tariff revenue
What are the effects on efficiency of tariffs
There are 2 losses of welfare caused because some goods are never produced and some goods are made more inefficiently than they could have been
Who are the winners of export subsidies
UK firms - increase in producer surplus
Who are the losers of export subsidies
Government - Pay for subsidy
What is the effect of subsidies on efficiency
Loss of welfare from goods being produced less effectively
What are the arguments for protectionism
Meet macro objectives
Protect infant industries
Protect strategic industries
As an “anti-dumping “ policy
What is dumping
Selling goods at a lower than production costs price to get rid of other companies
What are the arguments against protectionism
Distorts comparative advantage
Higher prices for consumers
Retaliation
Long term dependency on protectionism
What is the World Trade organisation
international trade body that exists to promote free trade amongst nations
Supply side policies
Income and corporation tax changes - super deduction tax relief
Whole economy migration policies post Brexit
Trade agreements
Infrastructure Projects - HS2, smart motorways
Increases in state spending on health and social care
Increased funding of education at different ages
Make national labour markets flexible
