Economic Growth- Theme 2 Flashcards
Define actual economic growth.
An increase in real GDP.
Define potential economic growth.
An increase in capacity in the economy.
What are some factors that could cause economic growth?
- increased consumption might occur because of increased consumer confidence or availability of credit.
- increased investment increases level of growth and itself dependent on level of growth.
- government spending on education/health cause growth.
- export-led growth added advantage of improving current account of the BofP.
Define export-led growth.
The economic growth caused by rises in net exports. It has the benign effect of stimulating the domestic economy while improving the trade balance.
Discuss the importance of international trade for (export-led) economic growth.
- export-led growth means balance of payments will improve as more goods and services sold abroad.
- main problem with export-led growth is it makes exporters vulnerable to changes in demand in other countries, or exchange rates, both of which are often outside of their control.
The distinction between actual growth rates and long term trends.
Difference between actual output and either the trend or potential output is called the output gap. If there’s output gap, country not growing at trend of the potential output.
What is a positive output gap?
- When economy growing faster than trend, pressures will grow on economy, such as tight labour markets, wage pressures and shortages of raw materials.
- sign that economy is overheating and inflationary pressures might persuade BofE monetary policy committee to raise interest rates.
What is a negative output gap?
- when economy growing below trend, likely to be spare capacity
- means that there’s scope for a cut in interest rates, which less likely to cause inflationary pressures.
Why is it difficult to measure the size of the output gap?
Because not all unemployed resources would have the same impact on the economy if they were eventually employed.
What is the trade (business) cycle.
Demonstrates recurring trends in economic growth rates. Booms tend to be followed by economic slumps , which tend to be followed by recession, before economy moves into recovery phase and then back into boom. Trend explained by animal spirits however, other reasons can explain trend such as effects of changing capital which exacerbate changes in output and role of expectations in the decision making of businesses.
Define recession.
Recession is negative economic growth
Give characteristics of a recession.
- Falling inflation due to reduction in consumer expenditure
- Rising unemployment due to less demand for workers caused by falling real output
Define a boom.
occurs when real national output is rising at a rate faster than the trend rate of growth. (Positive economic growth).
Give characteristics of a boom.
- fast growth of consumption helped by rising real incomes, strong confidence and a surge in house prices and share price
- More jobs created and falling unemployment and higher real wages
Describe the benefits of economic growth and the impact on consumers.
- incomes and wealth rise when there’s economic growth, means people can afford to save money for future consumption.
- people feel more confident about jobs when growth’s high so more willing to spend on consumer durables.
Describe the benefits of economic growth and the impact on firms.
- consumer spending usually rises which means firms sell more so revenues and profits rise.
- as revenue and profits rise, firms can take on more workers and are more likely to invest. Increases future growth prospects.
Describe the benefits of economic growth and the impact on the government.
- when incomes and assets rise in price, people pay more income tax, VAT and capital gains tax. Firms pay more corporation tax.
- governments have fewer demands to pay unemployment benefits and income support.
- so government likely to enjoy healthier fiscal position.
Describe the benefits of economic growth and the impact on current and future living standards.
- poverty rate fall as wages and employment rise.
- government may decide to spend more of its income on areas that’ll increase living standards.
- firms might use cleaner technology because they can afford to, motivated by improving their image for corporate social responsibility, thereby increasing benefits to themselves and living standards more widely.
Describe environmental problems as a cost of economic growth.
- depletion of natural resources and external costs such as carbon emissions and other forms of pollution likely to increase.
- government could use increased tax revenue to clean up environment ans enforce carbon control measures.
Describe the balance of payments problems on the current account as a cost of economic growth.
- With higher incomes, domestic consumers suck in more imports and there’s less incentive for firms to export.
- however, if growth were export-led, the current account would improve.
Describe problems of rapid growth as a cost of economic growth.
- rapid growth can cause short-term spikes in price, if country grows to quickly there might be bad planning, corner cutting and shoddy workmanship.
- however, rapid growth might just need time to settle down in terms of income distribution and a strong government, such as that in china,can ensure that growth is planned effectively.
