Economomic Growth Flashcards
What is economic growth
Economic growth is an increase in the real gdp of a country arising from an increase in aggregate demand or increase in aggregate supply
What is short term growth caused by
An increase in aggregate demand which arises from using spare capacity to increase output
Draw short run growth
Increase in AD
What are some causes of increases in AD
- lower interest rates
- lower income and corporation tax
- higher consumer and business confidence
- increase in government spending
- weaker exchange rate
What is long run economic growth
Long run economic growth is caused by an increase in the long run aggregate supply which leads to an increase in the productive capacity. Of an econom6
Draw long run growth on a diagram
- increase in lras
-yfe 1 to yfe 2
What causes an increase in lras
- increase in the quality and quantity of FOP
- Increase in productive efficiency
What causes lras (list)
- increase in the size of labour force -> migration
- increased investment -> make workers more productive can increase quality and quantity and decrease in long run costs of production
- Imporvemnts in infrastructure -> more efficient which decreases long run costs and schooling which can increase quality
- competition
- new resources leads to an increase in quantity of land
Draw the trade cycle
- actual growth
- trend growth
- real gdp
- time
What are the 4 stages of trade cycle
- boom -> highest point
- recession -> coming down from hugest point fall in real gdp
- recovery -> rising in real gdp
- trough -> lowest point
What are the characteristics of a boom
- growth is faster than trend
- higher Ad, higher employment, high business and consumer confidence, high tax revenue
What are the characterises of a recession and trough
- falling ad, high unemployment, low business and consumer confidence, fall in house prices, heavy discounting, low inflation, low demand for imports
Recovery characterises
Rising AD, rising employment, increased confidence, house prices higher, higher investment
What is a negative output gap
A negative output gap si when actual output is below potential output
Draw a negative output gap
SRAS
Ad
Lras to the right of macroeconomic equilibrium
Gap between y1 and yfe is output gap
What is a positive output gap
A positive output gap is when actual output is greater than potential output
- demand is high and producers are producing above their efficient capabilities
- economic growth is unsustained
Draw a positive output gap
What causes fluctuations in the trade cycle
- demand side and supply side shocks
What si a demand side shock
A demand side shock refers to unpredictable events which cause a reduction in AD
Give examples of demand side shocks
- increase in interest rates
- lower government spending
Higher taxation
What are supply side shocks
Supply side shocks are unpredictable events which cause a shock decrease in SRAS and lras
What are some examples
- increases in cost of raw materials such as oil and fuel
- natural disaster
What are benefits of economic growth
- higher disposable income
- higher employment
- Higher profits for businesses
- increase fiscal dividend for government
How is higher disposable income caused by economic growth
- firms have higher profits which pass onto workers
- workers join the labour force
- some workers get promotion
