Economic Growth Flashcards
Economic growth
An increase in a country’s productive capacity over a SPOT as measured by GDP
Recession
Two or more consecutive quarters of negative economic growth
GDP
Measures the total value of all G/S produced within a country over a SPOT
CFOI: economic growth formula
Income=Output=Expenditure
What affects short run EG (3)
Changes in AD and SRAS
Short term external shocks: D+S
Short term policies: changes in IR
Long term EG (5)
• Potential output/ trend growth
• Productivity
• Tech progress and strength of enterprise
• Labour force changes
• Investment rates
Factors affecting SREG (6)
• Lower IR
• Increased gov spending and lower tax
• Lower commodity prices: oil + basic food
• Depreciating exchange rate
• Trading conditions in other countries
• Confidence of business and households (animal spirits)
Factors affecting LREG (6)
• Finding new enterprise
• Discovery of new recourses
• Research
• Increased investment
• Improved productivity
• Increases labour supply
Benefits of EG (4)
Living standards
Employment effects
Accelerator effect
Fiscal dividend
What is the accelerator effect?
When GDP rises, foreign investment rises even more
Drawbacks of EG (4)
Price level
Inequality
Environmental damage
Sustainability
Difficulties in using GDP as a measure of living standards (4)
• GDP incompletely measures output
• Doesn’t take account of quality improvements
• Distribution of income and wealth not accounted for
• Doesn’t account for what is being produced
Other methods used to calculate economic welfare (2)
• Misery index: inflation and unemployment
• Human development index: life expectancy, education and GNP per capita
GDP as a measure of living standards evaluation
It’s not a perfect measure of living standards however evidence shows that there is a positive correlation with life expectancy, happiness and the HDI index.
Features of an economic slow down (4)
• Downward pressure on prices to stimulate demand
• Less income: less spending
• More business closures
• Less gov tax revenue
Features of a recovery (3)
• Increase in demand and employment
• Firms able to reduce excess capacity
• More investment as business confidence rises
Boom stage features (5)
• Fast growth of consumption: rise in incomes, confidence and wealth
• Business investment in capital goods
• Move towards full employment
• High demand for imports
• Improved public finances
Economic shock
A large unexpected event that results in large changes to EG, inflation and UE
Examples of external shocks (7)
• Global crisis: credit crunch
• Eurozone crisis: Brexit
• Changing relationships between nations
• Other nations see unexpected levels of growth or decline
• Currency volatility
• Extreme weather/ natural disasters
• Geo political issues: war and terrorism
Features of a recession (6)
• Fall in consumption and business investment
• Increase in business closures
• Increase in UE and job opportunities
• Decline of animal spirits
• Depreciation of value of X+M
• Fall in gov revenue and increased deficit
