Economic growth/cycle Flashcards
Macro Economic Objectives of the Government:
- Sustainable economic growth
- Low unemployment
- Control of inflation (inflation target is CPI = 2% +/- 1)
- Satisfactory Balance of Payments (e.g. low current account deficit)
- Supporting a stable exchange rate
- Low government borrowing
- Maintaining equality within society
- Protecting the environment
Real GDP per capita
measures the average income of a citizen in an economy (taking into account inflation). It is a rough guide to average incomes, and the amount of output produced in an economy.
Limitations of GDP as a measure of living standards
- It is difficult to calculate the total output of an economy because GDP statistics will ignore the underground economy because transactions are not recorded.
- GDP includes negative externalities, such as, pollution; therefore it will overestimate living standards on this count.
- GDP does not take into account how hard people work; for example, if you increase your income by working longer hours does this improve living standards?
- GDP per capita ignores distribution of income; some people may be very poor despite the country being rich.
- It depends what the economy produces, for example, it is preferable to spend money on health care rather than military spending.
- When comparing countries GDP, in a common currency like the dollar, we cannot get a true comparison because there will be a different purchasing power of the local currency, e.g. in India a $ would buy more than in Japan.
Human Development Index (HDI)
- The HDI is an alternative measure of economic welfare. It takes into account real GDP per capita, but also includes measures, such as, health and education standards in a country.
- The Human Poverty Index (HPI) also takes into account the distribution of welfare within a country to try and measure relative poverty levels.
Causes of Growth
- In short term, an increase in AD. (AD= C+I+G+X-M)
* In long term, it requires an increase in LRAS (productive capacity)
Sustainable economic growth suggests three things:
- Low inflationary growth
- Growth that is not dependent upon growing levels of personal debt
- Environmentally sustainable – limited impact on environment.
Sustainable economic growth bulletpoints
- The shows non-inflationary economic growth. Aggregate Supply is keeping up with growth in Aggregate Demand. Sustainable growth implies the growth rate is close to the long run trend rate of growth. (In the UK this is approx. 2.5%).
- If economic growth is much faster than long run trend rate of growth then we tend to get a boom and inflation. This growth tends to be unsustainable.
- Sustainable growth also suggests that growth is balanced. This means that economic growth is spread out amongst different sectors. For example, if growth is mainly led by consumer spending, this may lead to current account deficit and impose limitations in the future.
Environmental Sustainability
- In the long term, growth needs to be environmentally sustainable. For example, if growth is caused by cutting down forests or creating pollution, it may lead to lower living standards in the future.
- Sustainable growth would use renewable sources of energy and not rely solely on non-renewable sources.
- To make growth more sustainable, it may require an economy diversifies from relying on producing primary products.
Costs of growth 1
Inflation - If AD increases faster than AS then economic growth will be unsustainable.
Boom and bust economic cycles - If economic growth is unsustainable then high inflationary growth may be followed by a recession. This occurred in the UK in the late 1980s and early 1990s. When the economy grew 5% and inflation rose 10%, then the government increased interest rates leading to a recession.
Increased economic growth tends to cause an increase in spending on imports therefore causing a deficit on the current account
Costs of growth 2
Environmental costs - Increased economic growth will lead to increased output and therefore increased pollution and congestion. This will cause health problems such as asthma and therefore will reduce the quality of life. Economic growth also means greater use of raw materials and can speed up depletion of non-renewable resources.
Inequality - growth often benefits a small section of society more than others. The rich will see a proportionally bigger rise in the market value of rents and their wealth. Those unskilled without wealth may benefit much less from growth.
Benefits of growth 1
Higher average incomes - This enables consumers to enjoy more goods and services and enjoy better standards of living.
Lower unemployment - With higher output and positive economic growth firms tend to employ more workers creating more employment
Lower government borrowing - Economic growth creates higher tax revenues and there is less need to spend money on benefits such as unemployment benefit. Therefore economic growth helps to reduce government borrowing.
benefits of growth 2
Improved public services - With increased tax revenues the government can spend more on public services, such as the NHS and education etc
Money can be spent on protecting the environment - With higher real GDP a society can devote more resources to promoting recycling and the use of renewable resources
Investment - Economic growth encourages investment and therefore encourages a virtuous cycle of economic growth.
Causes of growth - short run increase in AD
Lower interest rates
Increased wages - increase disposable income
Increased government spending (G).
Fall in value of sterling which makes exports cheaper and increases quantity of exports(X).
Increased consumer confidence.
Lower income tax which increases disposable income.
Rising house prices, which create a positive wealth effect and encourages homeowners to spend more
Causes of growth - LRAS
Increased capital. e.g. investment in new factories or investment in infrastructure, such as roads and telephones.
Increase in working population, e.g. through immigration, higher birth rate.
Increase in Labour productivity, through better education and training or improved technology.
Discovering new raw materials.
Technological improvements to improve the productivity of capital and labour e.g. Microcomputers and the internet.
