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.
Characteristics of a Boom
AD increasing quicker than the trend rate
Reduced unemployment
Rising Inflation
High business + Consumer confidence
High demand for imports
Increasing Tax Rev.
Characteristics of Recession / trough
Decreasing AD - faster than the trend rate
High /Rising Unemployment
Falling Confidence / Investment
Falling House prices
Low inflation / potential deflation
Lower demand for Imports
Characteristics of Recovery
Increasing AD
Falling Unemployment
Increasing Confidence / Investment
Increasing House prices
Positive Output Gap
When the actual rate of growth exceeds the trend rate of growth - ie. an inflationary gap.
Occurs during a boom
Overheating // Exceeding Full Capacity
Negative Output Gap
When the actual rate of growth falls below the trend rate of growth.
Occurs during a recession
Under-used factors // Below Full Capacity
