ECONOMIC GROWTH Flashcards
what is actual economic growth
increase in actual national output
when is an economy undergoing recession
when it faces 2 consecutive quarters of negative actual growth
how to draw ppc and what does its shifts mean
y-axis - capital goods x-axis - consumer goods
outward shift means productive capacity increase
how does actual growth change
changes in AD
changes in horizontal AS - UCOP
how to increase an economy’s productive capacity
increase the quantity or quality of its FOPs
how to increase the quantity of FOPS
- capital - a countrys capital stock is its collection of durable assets that are used for producing goods and services. increasing a countrys capital stock means it generates more goods and services so potential to produce increases. done when net investment = gross I - capital depreciation is positive.
- labour - increase population size for exp, higher birth rates, lower death rates
- inflow of foreign workers depending on attractiveness of work and govt policy towards labour - land - discover new mines or oil fields
- entrepreneurs - legal framework
- funding
- culture - risk-taking and innovative
how to increase quality of FOPS
- increase the level of physical capital - physical capital can also increase the productivity of other land and labour
- increase the level of human capital - human capital is the knowledge and skills that workers acquire through training and experience. by investing in education and skills upgrading, it raises a nations ability to produce goods and services through greater knowledge and better skillsets.
how to increase quality of FOPS
- increase the level of physical capital - physical capital can also increase the productivity of other land and labour
- increase the level of human capital - human capital is the knowledge and skills that workers acquire through training and experience. by investing in education and skills upgrading, it raises a nations ability to produce goods and services through greater knowledge and better skillsets.
- level of tech - RAD or transfer of knowledge
what is sustained economic growth
refers to the situation where an economy’s real national output increases over an extended period of time without accelerating inflation rates.
- means that productive capacity and AD both have to increase
what are the benefits of high economic growth for HHs
a benefits of high economic growth for households is the increase in standard of living that they get. assuming that the economic growth exceeds the increase in population, then the real income per capita would have increased. this means that the average person now has more purchasing power, granting them a higher ability to consume goods and services, increasing their material SOL.
when there is high economic growth, the governments tax revenue also increases as they are able to collect more money through the streams of income tax, corporate tax and sales tax. for example as the economy grows and income rises, they collect more from direct income taxes but also collect more from sales tax and a higher income induces induced consumption. Hence the govt can spend more money on public goods with positive externalities granting HHs higher material SOL. They can also spend more on cleaning up the environment and dealing with pollution, increasing the non-material SOL.
what are the benefits of high economic growth for the govt
- helps to alleviate other macro problems - given spare capacity in the economy, if the economic growth is a result of increased AD, this means that firms are now producing at higher levels to meet the increase in demand. In order to increase their output, firms would hire more labour and reduce demand deficient unemployment
- redistributive benefits - if there is no economic growth and the economy is stagnant then in order to improve equity and redistribute wealth, the govt would have to take more from the rich to give to the poor resulting in a situation where one group becomes worse off to make another better. However, if there is high economic growth, then the income of the rich is likely to rise and be taxed more by the govt. this increases the amt of taxes the govt is able to collect without the rich losing in absolute terms and they can spend it on programs to alleviate poverty such as financing subsidies for farm machinery which will improve labour productivity and income for poor farmers.
- greater ability to address environmental degradation -increased revenue that arises from economic growth provides govt with the funds they need to fund measures that address pollution and destruction of the natural environment. This can be in the form of better enforcing their existing pollution policies or grants for those working with clean energy. Moreover, as people become more affluent, they tend to be less preoccupied with their own consumption and start caring about the cleanliness of the environment they live in.
what are the costs of high economic growth rates for HHs
There will be a lower standard of living for HHs. if the growth of the economy is brought about by making workers work longer hours and having less leisure time then the increased stress and fatigue will decrease their non-material SOL. Economic growth usually also comes at the cost of environmental degradation because profit-maximizing firms often disregard the negative externalities brought about by their production of GAS. Hence the non-material SOL of the population might fall
In order to achieve sustained economic growth, not only must there be actual growth but potential growth as well. This means that a country’s capital stock must increase in order to improve its productive capacity. However, the purchase of capital goods which are investments are funded by savings meaning the opp cost of purchasing capital goods is the purchase of consumer goods, meaning there is less consumption in the current period. material SOL decreases
what are some of the costs of high economic growth for the govt
- trade off with other macro goals (increased structural unemployment) - structural unemployment happens when there is a mismatch of skills that a job seeker has and those demanded by firms, this happens when there is factor immobility or structural change. With economic growth, there is often a change in the type of goods and services produced and in terms of the techniques used and skills required. the more rapid the rate of EG the faster structural changes occur. when this happens, if the education and skillset of the labour force does not improve as quickly, many will find their jobs being replaced by machines or made redundant, resulting in structural UNN. workers who cannot and are unable to learn new relevant skills will remain structurally unemployed.
- worsening BOT and more ppl import more - greater inequality for income distribution - increase in EG is brought about by greater incentives to specific sectors of the economy like higher personal Y tax cuts then ppl in these sectors get wealthier as their disposable income or profits rise. However, without a corresponding transfer of income, there will be no benefits for the other ppl not in these sectors resulting in inequality
what is sustainable EG
rate of growth that is sustained without creating any significant socio-economic issues
why shld govt pursue sustainable EG
- higher material SOL in the future - not all natural resources are renewable so exploitation of it could result in insufficient natural resources for future generations to produce GAS so future material SOL decreases
- higher non-material SOL - by keeping environmental degradation and pollution low which profit-maximising firms often disregard, then a depletion of clean water and breathable air for residents will be avoided, ensuring future generations dont face a decline in non-material SOL
