Economic Growth Flashcards
What is Long Run Growth?
An increase in an economy’s potential output
What is Short Run Growth
An increase in real GDP, driven by an increase in AD
that draws unemployed resources into use.
What are some factors that lead to Short Run Growth?
Any event or policy that increase components of AD (i.e. C+I+G+X-M)
stimulates an extension in AS and uses up some unemployed
resources; movement from a point inside the economy’s PPF to a point
on the PPF.
Factors that cause Long Run growth?
The productive potential of the economy increases if there is an
increase in:
• The quantity of the factors of production
• The quality of the factors of production
• Technological advances
There is an outward shift of the economy’s PPF ie LRAS shifts right.
Examples could be:
Land (natural resources): finding and mining a new cobalt find;
reclaiming land from the sea; fertilising agricultural land
Labour/enterprise (human resources): immigration to increase
quantity and quality (filling in skills gaps); education & training
Capital (man-made resources): investment increases quantity but
also quality as new technology is integrated
What is export led growth?
Export led growth: a significant part of the expansion of real GDP, jobs and per capita incomes flows from successful exporting of goods and services
Exports are an injection into the circular flow and may also stimulate more investment, another injection.
Industries supporting the increase in exports e.g. logistics will also grow (an export and investment multiplier effect)
What is balanced growth?
Balanced growth: when output and the capital stock grow at the same rate.
Also refers to balanced expansion of components of aggregate demand and/or the different sectors in an economy
What are some factors that can constrain growth?
Economic shocks (ie pandemic, brexit)
Poor macroeconomic management
Political instability
Poor productivity growth
Benefits of economic growth?
• Higher standards of living
- growth often leads to higher per capita incomes, which in turn can improve the standard of living for a nation’s citizens
• Greater profits for firms
- allows expansion and can create jobs
• Job creation
- growth can help reduce unemployment rates and provide
individuals with greater financial stability
• Reduced poverty
- growth increases access to education, healthcare, and
necessities leading to progress in reducing extreme poverty and
improvements in human development outcomes (HDI Index) such as higher life expectancy
• Greater income equality
- more jobs, less poverty reduce inequalities and the associated social problems
• Increased government revenue
- a growing economy generates higher tax revenues – a fiscal dividend - that can then be used to fund better public services such as education & healthcare.
• Investment opportunities
- growth attracts domestic and foreign investment (FDI!!) leading to innovation, increased productive capacity (LRAS), and further job creation
• Improvement in environment
- more efficient, green and cleaner
technology is used
Costs of economic growth?
• Inflation
- rapid growth can lead to demand-pull and cost-push inflation, eroding real purchasing power and potentially leading to economic
instability.
• Environmental costs
- fast growth of GDP can lead to overexploitation of
scarce non-renewable natural resources, causing resources degradation and depletion, compromising sustainability.
• Income Inequality
- benefits of growth may disproportionately accrue to certain segments of the population, leading to increased income &
wealth inequality as measured by the Gini Coefficient.
• Financial Instability
- if rapid growth is fuelled by excessive borrowing
and speculative investment, this can result in financial bubbles and
subsequent crashes.
• Wider trade deficit
- rapid growth means consumers/businesses will buy from abroad if home supply cannot grow fast enough increasing
imports.
• Sacrificing current consumption
- the opportunity cost of producing
more capital goods to boost productive capacity is a loss of the
production of consumer goods
• Human costs
- growth may lead to less leisure time or more stress/mental health issues for workers
