Economic Growth / Stability Flashcards
Govt. Objectives for Economic Growth
Strong, Sustained and Sustainable
Short-Run Growth
An increase in aggregate demand to reduce spare capacity within the economy (ie. fixed FoP) and increase rGDP.
Actual Growth
Long-Run Growth
An increase in LRAS, increasing the productive potential of the economy, (ie. variable FoP)
Potential Growth
Demand-Side Causes of Growth (SR)
AD = C + I + G + (X-M) // Increase
Lower Interest Rates
Increased Wages / Increased NMW - disposable income
Increased Govt. Spending
Devaluation of currency
Increased confidence
Tax Cuts
Increased house prices - Wealth Effect
Financial Stability - banks willing to lend
Wealth Effect
A change in personal wealth influences consumer spending and economic growth. Rising wealth has a positive impact on consumer spending.
Supply-Side Causes of Growth (LR)
LRAS Increase
Increased Labour Productivity
Increased workforce size (immigration)
Investment // FDI
Infrastructure Spending
Increased competition
New resource discovery
Benefits of Economic Growth
Increased demand for Labour - Reduced unemployment and higher incomes
Higher wages as firms are doing well // pay rises
Dynamic Efficiency from greater profits
Improvements in BoP
Improve budget position - increace Tax Rev. / reduced welfare payments
Potential for environmentally friendly investment
Costs of Economic Growth
Income Inequality may worsen
Demand-pull / Cost-push Inflation
Worsening BoP position // Increased Imports
Negative Externalities in prod. - Environment, Health
Finite resources may be used up
Instability Causes
Demand-Side Shocks
Supply-Side Shocks
Animal Spirits
Finite resources
Inflexible labourforce
Examples of Demand-Side Shocks
Excessive Confidence - eg. rising house prices
Trading partners enter recession - reduced demand for UK exports
Examples of Supply-Side Shocks
Poor Harvests - reduced supply
Discovery of new resources
Weather events
Animal Spirits (definition)
Human behaviour is guided by instincts and emotions rather than economic realities - Keynes
Animal Spirits (examples)
Cheap Credit - Consumers spend more and acculumate debt - Increased AD // Demand-Pull Inflation.
Speculation - Assumption that prices will continue to rise - leading to Asset Bubbles.
Speculation
When people buy assets and hope to sell them for profit later
Asset Bubbles
When prices increase beyond the true value, often caused by speculators.
