Economic Growth + Economic Cycle Flashcards
Economic growth and the PPF
- Short run (actual) growth represents increases in real GDP
- Long run (potential) growth represents increases in an economy’s productive capacity. (Increase in quantity/ quality of factors of production) growth
Economic growth PPF
SR economic growth - movement from a point inside the frontier to a point on the frontier
LR economic growth - Outward movement / shift of PPF
Trend rate of growth
Long run economic growth occurs with an increase in long run aggregate supply.
- Business cycle theory = there is an upward trend in the productive capacity of the economy over time, known as the ‘trend’ rate of growth
Trend rate of growth - diagram
This trend represents the productive capacity in an economy increasing over time - it therefore illustrates long run economic growth
The economic cycle
In the short run, real GDP fluctuates around the trend rate of growth. There’s fluctuations are known as the economic cycle.
Upswings and downswings in the economic cycle
Characteristics of a boom
- Above average short term economic growth
- Low/ falling unemployment
- Lower government spending (spend less on unemployment benefits)
- Higher imports
- Rising/ high inflation
Characteristics of a recession
- Negative growth (for at least two consecutive quarters)
- Rising/ high unemployment
- Deflation
- Lower imports
- Current account surplus
Economic cycle - negative output gaps
Negative output gaps exist when actual output is lower than trend output
Economic cycle - positive output gap
Positive output gaps exist when actual output is greater than trend output
Causes of changes in the phases of the economic cycle (principle explanations)
- Fluctuations in aggregate demand (changes in consumption)
- Supply side factors (increasing the supply of goods leads to economic growth)
Causes of changes in the phases of the economic cycle (other factors)
- The role of speculative bubbles
- The political business cycle theory
- Outside shocks hitting the economy
- Changes in inventories
- The Marxist explanation
- The multiplier/ accelerator interaction
- Climatic cycles
Negative and positive output gaps
Benefits of economic growth
- Higher employment -> increased consumption + better SOL
- Higher average incomes -> increased consumption
- Provides new and more environmentally friendly technologies
- Higher life expectancy and reduced disease
- Produces fiscal dividend
- Create a virtuous cycle of greater confidence, increased investment and even more growth
- More civilised communities (low unemployment + SOL + treat people fairly)
Fiscal dividend
Fiscal dividend – higher economic growth will raise tax revenues and reduce government spending on unemployment & poverty related welfare benefits
Costs of economic growth
- Uses finite resources
- Leads to pollution and other forms of environmental degradation
- Widens income inequalities
- Leads to population increases which the food supply may not be able to keep up with
Benefits - Higher living standards
Higher living standards – i.e. Real GNI per capita – helps to lift people out of extreme poverty and improve development outcomes (e.g. rising HDI)
Benefits - Employment effects
Employment effects – sustained growth stimulates jobs and contributes to lower unemployment rates which is turn helps to reduce income inequality.
Benefits - accelerator effect
Accelerator effect - rising growth stimulates new investment e.g. in low-carbon technologies. Better growth may attract foreign direct investment projects
Costs - inflation
Risks of higher inflation and higher interest rates
- Fast-growing demand can lead to demand-pull and cost-push inflation – this leads to a conflict between macro objectives
-The central bank may decide to raise interest rates to control inflation
Costs - environmental effects
Environmental effects
- More negative externalities such as pollution & waste
- Risk of unsustainable extraction of finite resources – i.e. fast growing countries may cause a long-run depletion of natural resources
Costs - Inequalities of wealth
Inequalities of income and wealth
- Rapid increases in real national income can lead to a higher level of inequality and social divisions
- Many of the gains from growth may go to only a few people
Economic shocks
Economic shocks are sudden and unexpected events hitting the economy (often negative)
- They can disturb aggregate demand or aggregate supply
- Demand shocks often hit consumer and business confidence
- Supply shocks often hit the supply and prices of commodities (such as oil)
Economic growth - example 9 marker
