Economic Growth Flashcards
Economic growth
Economic growth is a long-term expansion of the productive potential of the economy
Growth drivers
Growth in physical capital stock - leading to rise in capital per employee (capital deepening)
Growth in size of the active labour force available for production
Growth in quality of labour (human capital)
Technological progress & innovation driving productivity improvements i.e. higher GDP per hour worked
Institutions - including maintaining rule of law, stable democracy, macro-economic stability
Rising demand for goods & services - either led by domestic demand or from external trade
Actual growth
Increase in real GDP
Real GDP
Output of an economy, with effects of inflation removed
Potential growth
Amount by which a country could increase its production if all resources were used efficiently
Output gap
Difference between actual GDP and Potential GDP
Sustainable growth
Highest rate of growth which does not compromise the welfare of future generations
Economic cycle
Downward & upward movement of GDP around its long-term growth trend
Characteristics of a boom
High employment, increasing living standards, increased investment, generation of wealth, BUT sometimes inflation, widening inequality, increased negative externalities
Characteristics of a recession
High unemployment, underemployment, lower or not increasing standards, low investments, sometimes lower inflation, narrowing inequality, decreased negative externalities
Benefits of growth (5)
- Increased incomes and living standards
- More employment & investment (sometimes less inequality)
- Governments benefit in a boom- less transfer payments, increased tax revenue
- Current and future living standards improve
- Accelerator effect- rising growth stimulates new investment- better growth attracts FDI
Costs of growth (5)
- Risks of higher inflation and interest rates
- Environmental effects
- Inequalities of income and wealth
- Balance of payments problems
- Opportunity cost to growth