Economic Growth Flashcards
What is potential growth?
Potential growth is the amount by which a country could increase it’s production if all resources were employed efficiently.
What is the gap between actual growth and potential growth?
The output gap.
What are the effects of a persistent output gap?
A persistent output gap tends to lead to a fall in potential output.
What is an output gap a sign of?
Inefficiently employed resources or that a country is at their maximum potential.
Why are output gaps formed?
- Resources available are not suited to the needs of the economy.
- The welfare system pays generously for some people to not work.
- The effects of relocation of production to another country.
- Increased competitiveness with other countries
- Structural changes so that output is not tailored to the needs of the market.
What is sustainable growth?
Sustainable growth is the highest rate of growth which does not compromise the ability of an economy to grow in the future.
What causes growth?
An increase in aggregate demand or aggregate supply, meaning there is a higher level of equilibrium output.
What is actual growth?
Actual growth is the measure of changes in real GDP.
What are the benefits of growth?
- Increased incomes and standards of living.
- Firms are likely to experience increased profits.
- Governments benefit in a boom as taxes are higher and welfare is lower.
What are the costs of growth?
- Increased pollution and environmental damage.
- Balance of payments problems.
- Widening income distribution.
- The oppurtunity cost of growth.
What are the constraints on growth?
- Lack of investment funds or cash for businesses.
- Weak or obstructive governments.
- Exchange rates problems.
- Lack of human capital (e.g. Brain Drain).
- Private and public sector debt.
