Lec 3 - Economic Growth Flashcards
Economic growth definition
A sustained expansion of production possibilities measured as the increase in real GDP over a given period; an outward movement of the production possibility frontier.
Real wage rate definition
The quantity of goods and services that an hour of labour earns.
GDP purpose
GDP measures the value of production, which also equals total expenditure on final goods and total income.
The equality of income and output shows the direct link between productivity and living standards.
Consumption expenditure definition
The total payment for consumer goods and services, by households.
Government expenditure definition
The expenditure of a government on goods and services from firms.
Governments finance their expenditure with taxes and pay financial transfers to households, such as unemployment benefits, and pay subsidies to firms.
These financial transfers are not part of the circular flow of expenditure and income.
Investment definition
The purchase of new plant, equipment and buildings and the additions to inventories.
Net exports definition
The value of exports minus the value of imports.
Positive net exports definition
The net flow of goods and services is from UK firms to the rest of the world.
Negative net exports definition
The net flow of goods and services is from the rest of the world to UK firms.
Circular flow purpose
What does circular flow demonstrate?
The circular flow demonstrates how GDP can be measured in two ways:
• Aggregate expenditure: total expenditure on final goods and services, equals the value of output of final goods and services, which is GDP.
GDP = C + I + G + (X – M)
• Aggregate income: the total amount paid for the use of factors of production (wages, interest, rent and profit); firms pay out all their receipts from the sale of final goods, so income equals expenditure.
Calculating growth rates
The economic growth rate is the annual percentage change of real GDP per capita, this provides information on standards of living.
The economic growth rate tells us how rapidly the total economy is expanding.
Real GDP per capita grows only if real GDP grows faster than the population grows.
Reasons for real GDP growth
- The return of the economy to full employment in an expansion phase of the business cycle - not economic growth
- Increase in potential GDP: economic growth occurs when real GDP increases; a one-shot increase in real GDP or a recovery from recession is not economic growth; economic growth is the sustained, year-on-year increase in potential GDP.
Output gap definition
Real GDP minus potential GDP.
Output gap and unemployment
When the output gap is negative, the unemployment rate exceeds the natural unemployment rate.
Potential GDP growth rate
What does it measure?
The growth rate of potential GDP measures the pace of expansion of production possibilities.
It is smoother than the business cycle fluctuations in the growth rate of real GDP.
