LS10 - Economic Growth Flashcards
Economic growth
Sustained growth in GDP, AD, improvements in productive potential of an economy
An increase in LRAS will increase the productive potential of an economy, increasing it output - this is achieved by improving the quality and quantity of FaoPr
Land
A more efficient and increased use of land and the natural resources in it can lead to increase in LRAS, and hence, Econ growth
Labour
Increase in quantity and quality of labour force can increase Econ growth - can be caused by rise in birth rates, increase in immigration, better training and education, participation rates
Capital and technological processes
The stock of capital needs to be increased to improve productivity and output, meaning there needs to be sustained investment into capital
But investment doesn’t always mean more growth
Improvements in technology - cuts cost of production and time taken for production; produces new products for the market
Efficiency
Increased efficiency leads to better productivity and hence more growth
Competition can lead to better efficiency - firms compete against each other, due to the profit motive, trying to meet consumer demands, and trying to lower costs - increases productivity
Economic cycles
Fluctuation in the economy’s growth over time - measured in GDP
Boom -> Downturn -> Recession -> Recovery -> Boom …
Boom
- economic growth (gdp high)
- economy working beyond full employment
- consumption, investment and expenditure is high
- wages rising
- tax revenues high
- can lead to overheating (no spare capacity, leads to downturn)
Downturn
- unemployment begins to increase
- output and incomes start to fall - net exports fall
- consumption and investment drops
- tax revenues falls, gov expenditure on benefits rises, budget deficit increases
- inflation falls
- economic growth starts to fall
Recession
- bottom of cycle, economic activity at a low, economic decline
- high unemployment, disposable income is low
- consumption and investment falls
- deflation possible
Recovery
- output/income starts to increase
- unemployment begins to fall
- consumption, investment, imports start to rise
- inflationary pressures start to rise
- rate of growth starts to increase
Output gaps
Gap between actual and potential output
Positive OG - GDP is above productive potential - BOOM
Negative OG - GDP is below productive potential - lot of spare capacity - RECESSION
Benefits of economic growth
Life expectancy
More employment
Housing standards increases
Quality of education rises
Drawbacks of economic growth
Growth is not sustainable - if the economy keeps growing forever, our finite resources will not have enough time to replenish, as they will always be in use - they will run out as they will be used unsustainably
Increases in production and output can lead to more pollution, from factories, etc. - contributes to climate change/global warming
Evaluate drawbacks of economic growth
As demand for resources rises, price also increases - rationing function kicks in - makes it so that only the people that can afford the higher prices can purchase the goods - decreases demand, lowering the rate of use
This means that the exploration of alternative resources rises - demand drawn away from traditional resources, more substitutes - better for environment
Govt regulations and incentives can be used ot reduce impacts of pollution, and stop overuse of finite resources
Impact of economic growth on consumers, gov, firms and environment
Consumers - rising household income, more consumption. Most households won’t see any gain as most of rewards from EG go to wealthiest
Gov - rising tax revenue, increased spending in public sector - improving facilities like schools roads etc. possible reduction in tax rates
Firms - increased revenue as consumers have more disposable income, more comp and new technology can lead to some firms falling behind
Environment - rich countries (cleaner environment, less pollution, gov more likely to spend more on money on technologies, more exploration of alternative energy sources). Developing countries is the opposite
Evaluate GDP/GNI
If GDP grows at a constant rate and is higher than of other countries, we assume that it is a good country with a strong economy - but this may not always be true due to factors such as
* GNI/GDP statistics may not always be true
* Doesn’t accurately reflect living standards in countries
* Many other factors to observe to determine if a country has a strong economy
Inaccuracies in GDP stats
Doesnt include output in parallel/undergound markets
Doesn’t include non marketed output
Differing price levels in different countries - varying purchasing power in different countries
GDP/GNI and standards of living
No distinction between composition of the output - capital goods, consumer goods, military goods, merit goods all recorded as output, no specifics - cant see how output can improve standards of living
No indicator in how income is distributed - even if GDP is high, income inequality being high suggests a weak country
Cant observe standards of education, healthcare, and life expectancy
Doesnt take into account increased leisure
Doesnt measure quality of life factors
Doesn take into account the impact of negative externalities
Doesnt measure delpletion of non renewable resources
Doesnt show improvements in quality of goods and services
Macroeconomic objectives
Econ growth
Low unemployment
Low and stable rate of inflation
Current account equilibrium
Balanced budget
Reduced inequality
Environmental sustainability
