Economic Growth Flashcards
What is economic growth?
Measure of an increase in real GDP. GDP is the total amount of goods and services produced in a country in 1 year.
What is a recession?
When an economy suffers 2 consecutive quarters of negative economic growth. There is less spending, Income and output. Likely leads to closure of firms, causing increased unemployment and a fall in living standards.
What is nominal and real gdp?
Nominal GDP- money value of all goods and services produced by a country in 1 year
Real GDP- nominal gdp adjusted for inflation.
What is the difference between total and per capita?
Total is total gdp. GDP per capita is calculated by dividing GDP by the country’s population.
What is the difference between value and volume?
Volume of output is number of goods produced.
Value of output is amount of good multiplied by price at which they are sold.
What is the difference between GDP And GNI?
Gross national income (GNI)- measures income received by a country both domestically and via net incomes from overseas.
GNI= GDP + profits from companies operating abroad and income earned from nationals living in foreign countries.
What is Purchasing Power Parities?
They are used to compare GDP in different countries and take into account the cost of a ‘basket of goods’ that could be bought in each of the countries being compared.
What can GDP be used to compare?
The standard of Iiving over time and between countries. Standard of living refers to income and quality of life which includes housing, health, the environment and safety
What is short run economic growth and long run economic growth?
Short run economic growth- an increase in real gdp
Long run economic growth- an expansion of the productive potential of an economy.
What is a recession?
Occurs when real gdp falls for two or more consecutive quarters
What are the consequences of a recession?
FALLING TAX REVENUE AND INCREASED WELFARE BENEFITS- Firms are likely to make lower profits, resulting in lower corporation tax revenue for he government. Workers are likely to receive lower incomes and so the government is likely or receive lower income tax revenue. Additionally overall consumption is likely to be lower, resulting in less expenditure tax revenue from indirect taxes such as VAT. Lower tax revenue is not ideal especially considering the fact that unemployment levels are gonna be higher so government needs to increase spending on welfare benefits as well meaning this limits amount of money government can spend on health and education. Could lead to government borrowing more money meaning that government may raise taxes in the future to earn the necessary tax revenue to pay said loans back which is likely to have negative consequences in the long run.
Reduced investment- recessions are likely to reduce the confidence of firms and so may result in them being more apprehensive to invest, which limits levels of long run economic growth.
Lower wages and higher unemployment- can be shown using a labour market diagram. As there is 2 consecutive falls In real gdp this means there is 2 consecutive falls in real output. A reduction in output leads to a reduction in the amount of labour needed to produce the remaining level of output, resulting in a fall of labour demand from LD to LD1. This causes wages to fall from W TO W1 with quantity of labour employed falling from L to L1. Represents a fall in wages and a fall in the amount of labour employed meaning higher unemployment. Potential effects are made more severe if some firms go completely out of business. Even for workers who dont lose their jobs, they are likely to see hours cut meaning lower incomes.
What are the benefits of economic growth?
Higher standards of living- rising real gdp, particularly real GDP per capita means that on average consumers will have higher incomes and so be able to enjoy more goods and services thus enabling them to enjoy higher standards of living.
Lower unemployment and higher wages- economic growth is likely to encourage firms to employ more workers as higher economic growth means that firms will be producing more output and mean you need more workers.
Improved government finance and government spending- economic growth is likely to lead to higher corporation and income tax revenues for the government and the lower unemployment means that spending on benefits will likely be reduced. This means government will have less of a need to borrow money and may also be able to increasing spending on education and health services as well.
What are the problems with economic growth?
INCOME INEQUALITY- Real GDP per capita rising shows average level of income rising but doesn’t show how income is being distributed. Rise in incomes could be caused by incomes of high income earners rising rapidly meaning may be no improvements in levels of poverty. Meaning only a small portion of the population will benefit despite increase in economic growth.
WORKING CONDITIONS AND NEGATIVE EXTERNALITIES- economic growth may not benefit people as greatly if it has resulted in them working longer hours and under worse conditions. Real GDP also doesn’t include positive or negative externalities so if pollution rises, this wont do anything to affect real GDP even though people will experience a lower quality of life.
UNSUSTAINABLE ECONOMIC GROWTH- if economic growth is rapid and unsustainable this may result in futures generations being made worse off ( short run and long run) as a result of an overuse and misuse of non-renewable resources. Unsustainable economic growth is likely to lead to high inflation.
What is Gross National Income (GNI)?
GDP plus net income from abroad
What is purchasing power parity ( PPP)?
