Economic growth Flashcards
Explain the long run underlying trend rate of growth
The annual average growth of full capacity caused by a shift outwards in LRAS (2.5%)
What has been the rate of growth in the UK in recent years
Slower economic growth in the last decade (1.9%) since the 2008/9 financial crisis
What is the key to long run economic growth
Successful supply side policies
Do shifts in AD cause economic growth
- Just shifting AD does not cause long run economic growth
- However, stable growth in AD promotes capital investment which causes LRAS to shift out
What happens if LRAS shifts out but AD stays the same
Potential growth increases but actual growth stays the same (growing negative output gap)
Standard of living stays the same
What are the 4 ways of improving the economy from a supply-side point of view
1) Increase the size of the working population
2) Increasing the labour activity rate
3) Increasing the hours worked per employee per week
4) Increase the output per employee per hour (labour productivity)
Which of the 4 ways of improving the economy from a supply-point of view is the most important
- Increasing labour productivity
This is because the others have limitations and could be controversial
What are the 3 ways that the government can increase the size of the working population
- Increase the retirement age i.e pension age
- Encourage net immigration (especially those of working age)
- Increase birth rate
Explain the dependency ratio
- Ratio of working age population to dependents
- Important to increase real GDP per capita
How has the post WW2 baby boom impacted the dependency ratio
Increased the dependency ratio when the children joined the work force but having reverse effects recently because many have now retired
What is the main limitation of increasing the activity rate as a means of improving the economy
The UK has one of the highest activity rates in the developed world, so there is limited scope for it to increase further
What is the limitation of increasing number of hours worked per employee
limit of increasing hours worked so unsustainable and unethical
What is the benefit of increasing productivity above other supply-side policies
There is no limit to productivity
How do more competitive (easier to enter) markets improve productivity
Firms have to be more productive and innovative to survive, raising overall efficiency
How does increasing fixed capital investment increase productivity
Increases both the quantity and quality of capital equipment
How does education and training improve productivity
Improves skill level of the population so workers can carry out complex tasks more efficiently
Explain why there is pessimism about long term growth
- worsening dependency ratio
- Big decrease in productivity since 2008 financial crisis
Why has productivity and long run growth significantly decreased since 2008/9 financial crisis
Banks are more cautious about lending and businesses are more cautious about investing
What is the government objective regarding short term economic growth
Keep the growth rate stable without significant positive and negative output gaps
What was the NICE decade
- Early 90s till 2008
- Non-inflationary continuous expansion
- Expanded for 63 consecutive quarters
What was the financial crisis
- 2008/2009
- 5 consecutive quarters of negative growth
What are the characteristics of an economic boom
- Rate of growth is well above trend rate
- no demand deficient unemployment
- increasing demand pull inflation
- Increasing imports as incomes rise
What are the characteristics of a downturn
- Rate of growth is falling slightly below trend rate
- Rise in demand-deficient employment
- Disinflation ( even potentially deflation)
- Imports reduced as incomes fall
What are the characteristics of a recession
- Rate of growth is negative for 2 consecutive quarters
- Sharp rise in demand deficient unemployment
- Imports reduced as incomes fall
