Economic growth Flashcards
Factors leading to actual economic growth
- Increase in AD
- Increase in SRAS: shift to the right due to a change in costs e.g. fall in taxation, fall in wage rate, fall in prices of raw materials, rise in exchange rate
Factors leading to potential economic growth
Increase in factors of production
- Improved technology
- Increase in size and or skill level of labour force
- Increased investment in capital goods and infrastructure
- Growth in enterprise
Actual and Potential growth
Actual: short-term economic growth (% change in GDP when the economy is actually producing more goods and services)
Potential: long-term economic growth, sustained rise in a country’s productive potential (LRAS or PPF curve shifts)
Export-led growth
Where a significant part economic growth comes from an increase in the value of exports
- AD can affect economic growth through export-led
growth: a rise in AD through increased exports.
Advantages of export-led growth
Disadvantages of export-led growth
Actual growth rates
Actual change (change in real GDP) over
time and its changes are what make up the business cycle The difference between
the two is an output gap.
Long-term trends in growth rates
The average sustainable rate of economic growth over a period of time
- what tends to happen over a long period of time;
the average
Output gap
The difference between the short-term actual growth and the potential long-term rate of growth
Output gap calculation
Actual level of real GDP - Potential long-term trend rate of growth
Positive output gap
Where actual/real GDP is higher than the long-term/potential GDP. This could indicate: there is excess AD and a boom period, business and consumer confidence is high, low rates of unemployment, factors of production are over-utilised, inflationary pressure exists
Negative output gap
Where actual/real GDP is less than the long-term/potential GDP. This could indicate: factors of production are under-utilised (spare capacity), higher rates of unemployment, business and consumer confidence is low, downward inflationary pressure, there is a recessionary period
Measuring output gaps
It’s very difficult to measure output gaps as the potential output of an economy is very difficult to measure
Potential output can only be estimated and there is an assumption the long-term trend can be measured. Challenges in assuming this are:
- assessing future productivity levels
- business confidence
- underemployment
The trade (business) cycle
Tends to have four stages: boom, downturn, recession, depression and recovery. It’s created by fluctuations in real GDP around the long-term trend of growth, so linked to positive and negative output gaps
- negative output gap indicates a recession
- positive output gap indicates a boom or peak
Characteristics of boom period
Increase in:
- income levels
- consumer and business confidence
- employment
- wages
- inflationary pressure
- profit levels
- trade deficit
- use of resources
- investment
- construction
Decrease in:
- budget deficit i.e. less government borrowing
