economic growth chapter 18 Flashcards
economic development
an increase in welfare and quality of life
what does economic growth indicate
it is a key indicator of macroeconomic performance
economic growth
an increase in an economy’s output.
economic growth rate
it is the percentage change in real GDP from one time period to another
how can people enjoy more goods and services
output has to increase by more than any growth in population. In such a case, GDP per head (per capita) would increase.
how does economic growth impact poverty
it was assumed that poverty would be eradicated if countries managed to sustain economic growth. As a result, economic growth and economic development were seen as the same thing. The extent to which growth reduces poverty depends on the degree to which the poor participate in the growth process and share in its proceeds
how economic growth impact development
It was assumed that if economies grew they would also experience development. The increased availability of goods and services in an economy would lead to a ‘trickle down’ effect that would have an impact upon all in terms of jobs and other economic benefits
does economic growth result in a rise in living standards
economic growth does not result in a rise in the living standards and quality of life of everyone in an economy. It is also possible for a high proportion of people to achieve an improvement in their living standards and quality of life even if economic growth does not occur
how is economic growth measured
measure in terms of changes in real GDP (the country’s output). Government statisticians first measure GDP in the prices operating at the time. They then take out the effects of changes in the price level to get real GDP.
nominal (or money) GDP
total output measured in current prices in which output is produced. it has not been adjusted for changes in the price level
problem with nominal GDP
Nominal GDP may give a misleading impression of how well a country is performing. This is because the value of nominal GDP may rise not because more goods and services are being produced but simply because prices have risen. so economists convert nominal GDP into real GDP.
how is real GDP measured
economists measure GDP at constant prices. This ensures the effect of inflation that distorts nominal GDP is removed.
formula to calculate real GDP
nominal GDP x price index in base year/price index in current year
GDP deflator
the price index of all domestically produced goods and services. measures the prices of products produced, rather than consumed, in a country. So it includes the prices of capital goods as well as consumer products and includes the price of exports but excludes the price of imports.
real GDP
total output measured in constant prices
base year
the reference point in time. it is the starting year in an index and is a given a value of 100
constant prices
prices in a base yea
price index
a way of comparing changes in the price level over time. the value of the first year in the index is set at 100 and the value of each following year is a percentage of it
what happens if there is spare capacity
output can increase as a result of an increase in aggregate demand. For instance, greater consumer confidence may lead to higher consumer expenditure and so an increase in aggregate demand. Making more use of existing resources can be shown on a production possibility curve diagram
how does economic growth occur from higher aggregate demand
The increase in aggregate demand brings into use previously unemployed resources, and output (measured by real GDP) increases
how to achieve economic growth that can be sustained over time
it is necessary for productive capacity and aggregate supply to increase. There are two broad causes of such an increase: more resources or better quality resources.
how is an increase in productive capacity shown using PPC
the PPC shift to the right
how is an increase in productive capacity shown using LRAS curve
it shifts to the right
how does productive capacity increase
the ability of an economy to make both consumer goods and capital goods has increased.
advantage of higher productive capacity
it is now possible to produce a higher maximum combination of the two types of goods
why does not an economy produce as much as it is capable of making
it is wasting resources. there may be, for instance, unemployed workers and unused machines. it would be possible to produce more of one type of good without having to give up any of the other type of good
recession
a decline in real GDP over at least two consecutive quarters (6 months)
what makes economic growth negative
it is possible that it is due to a country’s real GDP
why can there be a decline in a country’s output
may decline as a result of decrease in aggregate demand or a decrease in aggregate supply
obstacle to increases in the quantity and quality of resources in some low-income
the opportunity cost of allocating resources away from their current use. Producing more capital goods may mean sacrificing consumer goods in the short run, which would lead to a decrease in living standards. Research and development that can result in advances in technology also use resources that have alternative uses.
what happens when an economy is operating at full capacity
there will be an opportunity cost involved in achieving economic growth. To produce more capital goods, in order to increase the country’s productive capacity, some resources will have to be moved from producing consumer goods to producing capital goods.
consequence of an economy operating at full capacity
The consequence is that the current consumption of goods and services will have to be reduced. However, this will only be a short-run cost since, in the long run, increased investment will increase the output of both capital goods and consumer goods and services. some other potential costs may exist in both the short run and long run
what is a growing economy like
it is like a dynamic (changing) economy that undergoes structural changes, with some industries expanding and some declining.
how does a growing economy affect workers
Workers may have to learn new skills and may have to change their occupation and/ or where they live. Some workers may find such changes difficult to cope with. may also be accompanied by increased working hours and pressure to come up with new ideas and improvements.
effect of economic growth on enviroment
may be accompanied by the depletion of natural resources and damage
effect of economic growth on environment
may be accompanied by the depletion of natural resources and damage
main benefit of economic growth
the increase in goods and services that become available for the country’s citizens to enjoy. This can raise people’s living standards. Higher incomes and more spending increase tax revenue and some of this extra revenue may be given to the poor. Without any increase in output and income, a government may have to raise the tax rates on higher income groups, and so reduce their living standards, in order to help the poor.
how does economic growth increase employment
may also be accompanied by a rise in employment. A rise in real GDP caused by higher aggregate demand is likely to create extra jobs. An increase in aggregate supply may make a country’s products more internationally competitive and so may generate more jobs.
how does a stable rate of economic growth help
A stable rate of economic growth tends to increase business and consumer confidence, which encourages investment. Economic growth in itself can help encourage further economic growth.
what else can a economic growth increase
economic growth may increase a country’s international prestige and power.
