Economic Growth and trade cycle (Macro) Flashcards
What affects economic growth in the short run?
Interest rates by central bank Fiscal policy Commodity prices (oil, gas) Exchange rates Trading conditions in other countries Confidence of business and household
What affects long run economic growth?
Productivity of labour and capital
Technological progress and strength of enterprise
Changes in labour force
Investment rates
What is an output gap?
The difference between actual level of real GDP and its estimated long term value at a point in time
What is the difference between a positive and negative output gap?
A positive output gap is above LRAS and a negative output gap is below LRAS
What does a recession suggest about the economy and its objectives?
High unemployment and deflation. Actual level of GDP below trend line so there is a negative output gap
What does a boom suggest about the economy and its objectives?
Low unemployment and inflation. Actual level of real GDP likely to be above trend line so a positive output gap exists
Imports demanded by consumers with high incomes
Consumption and investment higher
What does a downturn suggest about the economy and its objectives?
Output and income fall so there is a fall in investment and consumption
Tax rev falls and gov spending on benefits rise
Unemployment rise
Inflationary pressures ease and imports decline
What does a recovery suggest about the economy and its objectives?
National income and output begin to increase, unemployment falls.
Consumption, investment and imports being to rise
Workers confident to demand pay rise so inflationary pressures are caused
What factors may cause a trade cycle?
Housing market bubble bursting
Stock market crash
Rising interest rates
Gov taxes rise
How would the housing market cause a trade cycle?
High prices of houses leads to low demand so less consumption and less houses built so output falls and unemployment rises
How would the stock market cause a trade cycle?
Stock market crash reduces wealth of individuals
Consumption falls so reduced AD causes recession
How would interest rates cause a trade cycle?
Higher interest rates reduces consumption and investment causing a recession
How would government taxes cause a trade cycle?
Higher tax to combat inflation or balance budget will lower consumption and investment causing a recession
What are the benefits of economic growth?
Life expectancy tends to be associated with income People have enough to eat and drink Housing standards are very high Most people can read and write Health tends to be better
What are the issues of economic growth?
Growth is unsustainable - scarcity of resources, demand and consumption falls, price mechanism results in conservation, becomes profitable to look for new supplies then producers switch to substitute
Increasing inequalities - workers live off subsistence wages while the benefits go to the owners of the capital
