Economic Growth Flashcards
What are the causes of economic growth
-Increase in AD, either from domestic demand or from trade.
-Improving the labour force, with a better quality and quantity to increase productivity. The larger the size of the labour force, the greater the productive potential of the economy.
-Improved technology, which is more productive
-More investment, to fuel economic growth
-Capital deepening which is an increase in the size of physical capital stock.
Distinguish between actual growth and economic growth
Actual growth is short run growth and it is the percentage increase in a country’s real GDP. It is usually measured annually and is caused by increases in AD where as potential growth is the long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.
When does an output gap occur
An output gap occurs when there is a difference between the actual level of output and the potential level of output. It is measured as a percentage of national output.
What is a negative output gap
occurs when the actual level of output is less than the potential level of output.
What is a positive output gap
occurs when the actual level of output is greater than the potential level of output
What are the difficulties with measuring the output gap?
-It is difficult to estimate the trend in a series of data.
-The structure of the economy often changes, which means estimates may not always be accurate. For example, immediately after a recession, the level of spare capacity might fall below the level anticipated, since some workers might become economically inactive, firms might close and some banks might be unwilling to lend.
-Changes in the exchange rate might offset some inflationary effects of a positive output gap.
-Data is not always reliable, especially from emerging markets, and extrapolating data from past trends might lead to uncertainties.
What is the trade cycle?
It compares sales with time showing whether economic growth is being achieved and if employment is reduced
What are the characteristics of a boom period?
- high aggregate demand
- low interest rates
- inflationary pressure
- high growth
- high employment
- debt reduced (less gov spending, more tax)
What are the characteristics of a recession?
- rate of growth starts to slow
- rate of inflation starts to slow
- reduced employment
- BofP improves
- mods government spending -benefits
- decline in confidence
Benefits of economic growth to the conSumer
-The average consumer income increases as more people are in employment and wages increase.
-Consumers feel more confident in the economy, which increases consumption and leads to higher living standards.
Costs of economic growth to the consumer
-Those on low and fixed incomes might feel worse off if there is high inflation and inequality could increase.
-There is likely to be higher demand-pull inflation, due to higher levels of consumer spending.
Costs of economic growth to firms
Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation.
Benefits of economic growth to firms
-Firms might make more profits, which might in turn increase investment. This is also driven by higher levels of business confidence.
-Higher levels of investment could develop new technologies to improve productivity and lower average costs in the long run.
Costs of economic growth to the government
Governments might increase their spending on healthcare if the consumption of demerit goods increases.
Benefits of economic growth to the government
The government budget might improve, since fewer people require welfare payments and more people will be paying tax. There is an increase in tax revenue.
