economic growth Flashcards
what is actual economic growth?
increase in the economy’s level of real output over a given time period
what is potential economic growth?
increase in the productive capacity of an economy
what is sustainable growth?
sustained EG (AEG+PEG), without creating other significant economic problems (e.g. environmental depletion) for future generation
what is inclusive growth?
sustained EG (AEG+PEG), broad based across economic sectors, creates productive employment opp. for majority of the population
how does EFP help achieve economic growth?
1) increase in govt spending
increase G, AD increases
increase transfer payments (e.g. unemployment benefits, CDC vouchers), encouraging consumption
2) decrease taxes
reduction in corporate tax rates: increase firms’ after tax profits, higher post tax returns on investment, encouraging investment
reduction in personal income tax: increase household’s disposable income, increase consumption
what are the limitations of EFP?
1) crowding out effect
- govt borrow from banks to finance ⬆G, compete with private investors for limited amt of loanable funds
- DD for funds ⬆, interest rate ⬆
- firms cut down on investment ➡ ⬆G offset by ⬇I
2) small multiplier size
change in NY = k x change in injections
k = 1/mpw
small and open economy (SG) ➡ more dependent on imports ➡ higher mpw ➡ smaller multiplier effect
more govt spending needed for same increase in NY as compared to other countries with larger and less open economies (less import dependent)
how does MP centred on i/r help achieve economic growth?
reduction of interest rate
1) increase consumption
reduces cost of borrowing for households, hence households have higher incentive to borrow for the purchase of big ticket items such as cars and houses.
2)increase investment
reduces cost of borrowing for investment, increases returns on investments, higher incentive to borrow, increase investment
what are the limitations of MP centred on i/r?
1) interest elasticity of DD for money
if demand for money is perfectly interest elastic (liquidity trap), any further increase in money supply will not have any impact on level of interest rate
2) small multiplier size
high mpw, increase in NY leaked through savings and imports, smaller mutiplier effect, overall increase in AD small
how does MP centred on e/r achieve economic growth
modest and gradual appreciation policy
reducing imported inflation as the rise in prices of imported goods will become smaller
