Economic Growth Flashcards
Define economic growth
- Long run: an expansion in the productive capacity of the economy. Enables a society to produce more goods and services in any given period as a result of an expansion in its resources.
- Short run economic growth: an increase in actual GDP
Explain what is meant by the macroeconomic policy of objectives of sustained and sustainable economic growth
Sustainable development : development that meets the needs of the present without compromising the ability of future generations to meet their own needs
Policy instruments
Monetary policy : the decisions fmade by government regarding monetary variables such as the money supply and the interest rate
Fiscal policy: decisions made by the government on its expenditure, taxation and borrowing
Supply-side policies: range of measures intended to have a direct impact on aggregate supply - and specifically the potential capacity output of the economy
What is meant by a recession ?
Occurs when GDP falls for two consecutive quarters.
Represents an interruption to the exon growth process, and recovery may be slow
Nominal and real values
Nominal: value of an economic variable based on current prices, taking no account of changing prices through time (no inflation). Nominal is usually higher as a result
Real value: value of an economic variable, taking account of changing prices through time - the quantities produced after having removed the effects of price changes.
Consumer Price index formula
Nominal GDP
_______________ X 100
Real GDP
Why GDP and economic growth are measured
GDP: this measure can provide an indicator of the quantity of resources available to a country in a given time period- serving as an assessment of the standard of living
Used to fulfil macroeconomic objectives
Evaluate the difficulties on measuring economic growth and GDP
Pros ?
Positives:
- it is relatively straight forward and this widely understood
- well established indicator, available for almost every country on the world - it can be used to compare income levels across countries (need to account population sizes)
Negatives
Negatives
- average GDP per person neglects the important issues of income distribution.
- when undertaking international comparisons it is never absolutely certain that the accuracy in data collection is consistent across all countries, despite definitions of GDP and other variables internationally agreed.
- informal sector in underdeveloped countries allows for substantial unrecorded econ activity = misleading result
- exchange rate problems: official exchange rates are sometimes effected by government intervention : in this circumstance ER more likely to reflect gov policy than a country’s relative purchasing power.
- converting from a local currency into IS dollars may distort the use of GDP as a measure of purchasing power of local incomes
- may neglect important aspects of the quality of life : the quality of life depends on more things than simply the material resources that are available (education/ health /environment)
Calculating real and nominal economic growth and GDP
NOMINAL?
Nominal is simply the total of price x quantity (inflation ignored)
When prices are rising, nominal always overstates the growth rate of an economy
Calculating real GDP
Converting nominal to real
Takes into account inflation, used to analyse the growth rate of an economy - with a base year providing constant prices, offering more accurate comparison
(Nominal divided by real ) x100 =price index
Just rearrange to find other values
How to GDP per capita
Capita = head
Total GDP divided by population
Evaluate the causes of growth in the short and long run
Short term economic growth is an increase in real GDP within a country, whilst long term specifies an expansion within the economy’s productive capacity
Economic growth can stem from an increase in the inputs of factors of production, or from an improvement in their productivity (the efficiency with which the FOP are utilised)
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ST/actual:
- interest rates fall (£cheaper to borrow, rise in consumption)
- increase in I or GS
- reduction in tax = higher C
LR/potential
Rise in the quantity/quality of CELL
-increase in productivity/advancement of tech/rise in I
- infrastructure improvement (cop falls= more efficient&productive capacity)
- increase in net immigration (L rises)
Explain, with the aid of a PPC and AD/AS diagram the difference between SR and LR growth
Pic in album
PPC LR:
Characterised by an Outward movement of PPC curve. Enables a society to produce more g/a at any period as a result of expansion in resources.
PPC SR:
When an economy moves towards the ppc from a point WITHIN IT.
Costs and benefits of econ growth benefits
- expanding resources available also enables the standard of living to increase. For developing countries: may facilitate the easing of poverty, investment in human capital for future.
- industrial economies: steady improvements in incomes and resources.
- lower unemployment : E.G. =higher incomes, higher demand and higher need for workers from firms.
- positive impact on hoc finance: incomes rise, consumption rises :increase in wealth = increase in tax(gs). Also goods and services tax, sales tax (growth = profit = higher corporation tax). LESS On welfare so budget position is better
- promotes investment: which accompanies an increase in growth rate. Confidence / the excellerator effect
