Growth Flashcards
How do we measure growth
Measured by a percentage change in real GDP
What is the UK official target for growth
2.75%
But ONS have now said UK only capable of 1.7%
How is short run growth caused
Caused by an increase in aggregate demand / (Demand side policies)
When does short run growth occur (think diagrammatically)
When the economy is below full employment (YF)
Draw the diagram for short run growth
What is the trade off with, for short run growth
Inflation
What happens to inflation during short run growth
Increases
What is required for long run economic growth
Requires an increase in productive capacity of the economy
What causes long run growth
Supply side policies
Draw the diagram for long run growth
What are 3 benefits of economic growth (to consumers)
- More material well-being
- More ability to buy goods and services
- Higher standard of living
What are 4 benefits of economic growth (government aims)
- Increase in national income
- Employment
- Increase in gov. budget
- Increase in FDI
What are two benefits of an increase in the government budget
- More provision of public and merit goods
- More spending on SSPs
What is Foreign direct investment (FDI)
When abroad countries set up in the UK when the UK economy is performing well
What is the accelerator theory ?
An increase in income in the economy/GDP leads to a faster increase in the rate of investment
What are 3 costs of growth (to consumer)
- Rising inequality
- Poor work leisure balance
- Increase in cost of living (inflation)
How may growth lead to an increase in inequality
Due to the wealth effect - Value of assets rise (or are on the rise) which leads to an increase in spending (further investment)
What are 2 costs of economic growth (government)
- Can cause inflation if AD rises too quickly & there is no increase in LRAS
- May worsen the UK’s budfet deficit if financed through debt
Give a cost of growth leads to the question of whether growth is sustainable?
The environmental impact of growth: fossil fuels, combustion, plastics
What are the two types of demand side policies
Fiscal policy
Monetary policy
What does fiscal policy include
Use of gov. spending and tax
What does monetary policy include
Rise or fall of the interest rate
What happens to interest rates when there is high inflation
Interest rates rise
What happens to interest rates when there is low inflation
Interest rates fall
What is the equation for aggregate demand ( outline what each of the letters stand for)
AD = C + I + G + (X-M)
- C - Consumer spending
- I - Investment
- G - Government spending
- X - Exports
- M - Imports
What is the short run
Within a certain period, one factor of production is fixed
What is the long run
Within a certain period, all factors of production are variable
What is a recession
Two consecutive quarters of negative growth
What is a recovery period
A period of rising growth, yet still below the trend line
What is a negative output gap
Where the level of A.D in the economy is below the full employment level of aggregate supply
What are 3 causes of the economic cycle
Inventory cycle
Changes in Interest rate
Changes in asset prices
What is inventory cycle
Where some economists believe that luxury goods are bought in a cyclical fashion, leading to surges in AD (And SR growth)
What are the two types of monetary policy
Expansionary
Contractionary
What are asset price bubbles
Can occur due to the wealth effect, where the price of certain assets such as stocks and real estate rise dramatically above their intrinsic value (eventually leads to a drastic fall in AD)
What is an economic shock
An unexpected event which impacts the economy
What feature of the economy do supply side shocks affect?
Affects costs (and therefore prices)
What is the multiplier effect
Where increases in government spending lead to a greater increase in national income
What feature of the economy do demand side shocks affect
Affects confidence/spending power
What is an example of a demand side shock
Unexpected rise in interest rates
Give 5 real causes of short run growth
- Any of the factors from the AD equation causing AD to rise
- Lower interest rates
- A decrease in the value of the pound (increase in exports)
- Decrease in tax/Increase in gov spending
- Consumer/business confidence (NI on employers gone up so lower business confidence)
Give 5 real causes of Long run growth
- Better education/ training
- R &D
- Lower corporation tax
- Investment in capital stock
- Immigration
What is a common question which arises when measuring growth?
Is GDP a ‘good’ measure of growth
What is GDP?
A measure of value of all goods and services produced in an economy
What is a problem with using GDP per capita to measure growth?
It doesn’t say how GDP per capita is distributed (Even or Uneven)
How does the nature of goods produced affect the accuracy of GDP as a measure of success
If GDP is generated as a result of producing war materials (e.g. North Korea), as opposed to producing wind farms, then is it high GDP a good thing ?
Give 3 reasons Why not all GDP is recorded
- All transactions aren’t recorded
- Reciprocal agreements ( I do this you do that)
- Illegal transactions
What is the HDI
Human development index
A broader measure of economic welfare
What does HDI measure
Income levels
Education
Life expectancy
What are 2 limitations of the HDI
- HDI reflects long term changes
- Economic welfare/ quality of life depends on many other factors
What 4 factors influence quality of life and overall economic welfare which the HDI does not measure
- Freedoms (vote/gender equality)
- Fair judicial system
- Access to clean drinking water
- Peaceful society (threat of war)
- Pollution levels (EXAMPLE: Egypt & Mumbai)
What index attempts to measure happiness
Happiness index
What theory suggests a boost in short run growth may lead to long run growth. Draw the diagram
- Accelerator effect suggests that an increase in GDP(SR) from Y to Y1(diagram), leads to more business investment, therefore long run sustainable growth at Y2 (budget links) (but this depends on business confidence, certainty & support from gov)
How do we calculate real GDP per capita from index numbers
Give a real world example of a recent policy which aims to stimulate growth
Heathrow 3rd runway
Increase passenger capacity to over 130 million per year, supporting tourism and business travel.
Create up to 180,000 new jobs across the UK.
Add £61 billion to the UK economy over the next few decades through increased trade and investment.
How long is the Heathrow runway going to take and why
Will take up to 15 years to be complete, this is due to the government estimating it will take 10 years to overcome the strict UK planning permission laws and environmental lobbyists concerns
What statement did the government make about growth as a target
The government now believes that growth is the primary objective now, and ‘all other objectives are secondary’ (especially the environment)
Give an example of business confidence being affected leading to hindrance of short run growth
NI on employers gone up so lower business confidence
Give a real example of how growth may worsen government budget deficit
In the Autumn Budget 2024, the UK government projected public sector net borrowing to be £140 billion for the fiscal year 2024-25
