economic growth Flashcards
what is economic growth defined as?
economic growth is the annual increase in productive potential of an economy
what does economic growth measure in theory?
in theory, economic growth measures the increase in productive capacity of an economy
how is the productive capacity of an economy shown?
the productive capacity of an economy is shown using the production possibility frontier (PPF)
what is the problem with the production possibility frontier as a measure of economic growth?
the production possibiliuty frontier does not measure economic growth precisely
what is used instead of the production possibility frontier to measure economic growth?
percentage change in GDP over a period of time is used to measure economic growth instead
what does GDP stand for?
GDP stands for gross domestic product
what is GDP?
GDP is the total value of goods and services produced in a year within an economy
what is output measured in?
output is measured in monetary terms
what is nominal GDP?
nominal GDP is the value of output at that year’s price level
what is real GDP?
real GDP is nominal GDP adjusted to inflation
what is the economic growth target in the UK?
the target for economic growth is 2.5% (not official)
what are the two types of economic growth?
the two types of economic growth are short-run economic growth and long-run economic growth
how does short-run economic growth arise?
short-run economic growth normally arises from increases in aggregate demand
what does short-run economic growth lead to in terms of macroeconomic equilibrium?
short-run economic growth leads to a macroeconomic equilibrium at a higher level of real GDP
how does long-run economic growth usually arise?
long-run economic growth arises from the factors that increase long-run aggregate supply
how does an increase in LRAS happen?
an increase in LRAS usually happens due to the rise in the quality or quantity of inputs (the factors of production)
what are inputs also known as?
inputs are also known as the factors of production
what are increases in long-run growth caused by?
increases in long-run economic growth are caused by an increase in aggregate supply
how can economic growth be shown?
economic growth can be shown using the economic cycle diagram, a AD/AS diagram and a PPF diagram
how is short-run growth shown on a PPF?
short-run growth is shown on a PPF diagram as the outward movement of a point, while the PPF curve is fixed
how is long-run growth shown on a PPF?
long-run growth is shown on a PPF diagram as the outward shift of the PPF curve from PPF to PPF1
how is a positive output gap show on a PPF diagram?
a positive output gap is shown when the point is outside the PPF curve
how is a negative output gap shown on a PPF diagram?
a negative output gap is shown when the point is inside the PPF curve
what point would show an economy at full capacity?
a point on the PPF curve would show the economy at full capacity
what is a boom?
a boom is a long period of high economic growth
what is a recession?
a recession is where there are at least two consecutive quarters of negative growth
what happens during a boom?
during a boom, aggregate demand is rising
which leads to a rise in price levels (inflation) and low unemployment
what happens during a recession?
during a recession, aggregate demand is falling which leads to a fall in price levels and a rise in unemployment
what happens during a recovery?
during a recovery, the economy begins to grow again
what happens to economic growth during a recovery?
during a recovery, economic growth goes from negative economic growth to positive economic growth
how is long-run economic growth shown on the economic cycle diagram?
long-run economic growth is shown by an increase in the trend rate of growth on the economic cycle diagram
what is the trend rate of growth?
the trend rate of growth is the average rate of economic growth over a period of both economic booms and slumps
what is a positive output gap?
a positive output gap is where the actual output is above the trend rate
when does a positive output gap occur?
a positive output gap occurs when there is a boom
what does a positive output gap mean?
a positive output gap means that there is an upwards pressure on inflation and low unemployment as resources are being fully used or overused
what is a negative output gap?
a negative output gap is where the actual growth is below the trend rate
when does a negative output gap occur?
a negative output gap occurs when there is a recession
what does a negative output gap mean?
a negative output gap means there is a downwards pressure on inflation and higher unemployment as resources will be unused or underused
what happens to the output gap during a recovery?
during a recovery, the output gap goes from a negative output gap to a positive output gap
