Economic Growth Flashcards
What is short-run economic growth?
Utilisation of spare capacity and increase in real output through a rise in aggregate demand (AD). Represented by movement from point A (inside the PPF) to point B (on the PPF).
What is long-run economic growth?
Increase in production potential, represented by an outward shift of the PPF (e.g., from PPF to PPF2). This reflects a rightward shift in LRAS (e.g., LRAS1 to LRAS2 in AD-AS diagrams).
What does a PPF diagram illustrate in terms of economic growth?
- Axes: Two types of goods (e.g., capital goods vs. consumer goods).
- Point A: Inside PPF, showing underutilisation of resources.
- Movement A → B: Short-run growth via increased AD.
- Movement B → C: Long-run growth due to expanded production potential (outward shift of PPF).
What does an AD-AS diagram illustrate in terms of economic growth?
- Axes: Price level (vertical) vs. Real output (horizontal).
- LRAS shift from LRAS1 → LRAS2: Increase in potential output.
- AD shift from AD1 → AD2: AD keeps pace with increased LRAS to maintain price stability.
- Outcome: Output rises to Yn2 without inflation (price level remains constant at P1).
What is economic growth?
Increase in real GDP. However, it does not guarantee improved welfare for all (e.g., income inequality, resource depletion).
What is economic development?
Broader improvement in human welfare, measured by:
- Reduced poverty and suffering.
- Access to basic resources (food, housing).
- Opportunities for education, training, and healthcare.
- Sustainability of resources (renewable > non-renewable).
What are the primary drivers of long-run economic growth?
- Supply-side Factors:
* Increased labour productivity due to capital investment, human capital accumulation, and technological progress. - Sufficient Aggregate Demand:
* Necessary to absorb increased output.
Who proposed the Neoclassical Growth Theory, and what does it state?
Proponent: Robert Solow (1950s).
Key Points:
* Sustained investment temporarily increases growth, but diminishing returns to capital return growth to its long-term path.
* Growth determined by workforce growth and labour productivity improvement (driven by exogenous technological progress).
Criticism: Fails to explain why technological progress occurs (“exogenous” factor
What is the New Growth Theory (Endogenous Growth) and who developed it?
Developed by: Paul Romer and others.
Key Points:
Technological progress is endogenous and influenced by:
* Profit-seeking research.
* Openness to foreign ideas (e.g., technology transfer).
* Accumulation of human capital (education and skills).
Role of government: Encourage research, provide externalities, and enforce intellectual property rights
Provide empirical evidence supporting the New Growth Theory.
- Countries open to trade and technology transfer (e.g., South Korea) often experience higher growth.
- Investment in education (e.g., Scandinavian countries) correlates with sustained economic growth.
Why is sustainability important for economic growth?
Growth must minimise resource depletion by prioritising renewable energy and resource regeneration (e.g., sustainable farming, fisheries).
What are the differences between short-run and long-run economic growth policies?
- Short-run policies: Focus on cyclical issues (e.g., monetary/fiscal stimulus) but do not increase production potential.
- Long-run policies: Critical for sustainable growth, involving R&D investment and education
How does economic development differ from economic growth?
Development focuses on holistic welfare improvement, addressing quality (e.g., education, healthcare) alongside quantity (GDP).
Why is a policy mix important for economic growth and development?
To balance supply-side reforms (e.g., infrastructure, education) with demand-side measures (e.g., stimulating consumption/investment).
