Economic Growth Flashcards
Define economic growth?
The expansion of the productive potential of the economy
How can economic growth be shown?
Outward shift in PPF or LRAS
How is growth measured?
By the annual change in real GDP
6 Factors that cause economic growth
- improving the labour force
- larger labour force ( migration )
- improved technology
- more investment
-discovery of new resources - incentives for enterprise ( tax breaks or subsidies )
What is actual growth?
- The percentage increase in a country’s real gdp
- measured annually
- caused by increases in AD leads to
What is potential growth?
- the long run expansion of the productive potential of an economy
- caused by increases in AS
- what the economy could produce if resources were fully employed
When does export led growth occur
When countries open up their economies to the international market
What does comparative advantage do?
- allows countries to specialise
- increases world output
- lowers average costs
What is comparative advantage?
When a country can produce goods and services at a lower opportunity cost than another
What will comparative advantage do to AD?
- initially increases- short term growth
- also encourages firms to invest —> long term growth by improving supply side
What does comparative advantage allow the government to do?
Bring about growth and high employment without a current account deficit
Why does export led growth make the economy unbalanced?
- surplus on current account
- means the country relies on other countries
What’s the long term trend in growth rates?
- The long run expansion of the productive potential of the economy
- caused by increases in AS
When does an output gap occur?
- When there’s a difference between actual level of output and the potential level
- measure as a percentage of national output
When is there a negative output gap?
When the actual output level is less than the potential
What does a negative output gap cause?
- puts downward pressure on inflation
- labour and capital not used to full potential
- lots of spare capacity
When does a positive output gap occur?
When the actual level of output is greater than the potential level of output
What causes a positive output gap?
- resources used beyond normal capacity ( overtime )
- increased productivity
- upwards pressure on inflation
Why is it hard to measure the output gap?
- economy structure often changes
- changes in exchange rate can offset some inflationary effects of a positive output gap
- data not always reliable
Who believes that markets clear in the long run and there’s full employment?
Classical economists
Who believe that output gaps exist in both long and short run?
Keynesians
Characteristics of a boom
- high rates of growth
- near full capacity or positive output gaps
- near full employment
- demand pull inflation
- high investment - high confidence
- improved gov budgets
Characteristics of a recession
- negative growth
- lots of spare capacity and negative output gaps
- demand deficient unemployment
- low inflation
- gov budgets worsen
- less confidence
Define recession
Negative economic growth over 2 consecutive quarters
