Macro 12 - Causes/consequences of economic growth Flashcards
Show using a diagram how, in the short run, an economy with spare capacity can experience economic growth by increasing AS
Show using a diagram how, in the short run, an economy with spare capacity can experience economic growth by increasing AD.
What are the 6 benefits of economic growth?
- Better living standards
- Less unemployment
- Increased government spending
- Investment
- Environmental protection
- Reduced government debt
How does economic growth result in better living standards?
Economic growth,
More income,
greater purchasing power,
Access to normal luxuries,
Such as healthcare and education
Why might economic growth not result in better living standards?
Income may not be fairly distributed
Inflation may mean that purchasing power doesn’t increase
How does economic growth result in less unemployment?
Economic growth,
More income,
More spending,
More consumption,
AD increases as consumption is 60% if AD
Firms experience more demand,
Firms hire labour as labour is derived demand
Why might economic growth not result in less unemployment?
Wages may increase, meaning firms have higher costs of production and may not hire more labour
People may save instead of spend
How does economic growth result in increased government spending?
Economic growth,
More income,
More income tax gathered by government,
Government spending could increase,
on capital and healthcare etc,
AD increases,
Multiplier effect as there is further economic growth
Why might economic growth not result in increased government spending?
- Regional inequality
- If government uses money to invest in short term projects, like increasing teacher’s wages, then AD will increase
- However, economists are in the view that longterm projects such as building roads and airports are more beneficial, which encourage investment.
How does economic growth result in increased investment?
Economic growth,
increased income,
Spending increases,
Consumption increases,
Animal spirits are high so there is more investment,
thus there is more capital available,
meaning firms can produce more as profit is main incentive,
Accelerator effect occurs
Why might economic growth not result in increased investment?
If growth is not sustained, then animal spirits may decrease. This is likely to happen as Uk has productivity puzzle due to lack of investment.
Investment may only go to the south such as London, causing regional inequality
How does economic growth result in environmental protection?
Deindustrialisation
Why might economic growth not cause more environmental protection?
Renewable energy is expensive
Problem gets shifted to developing countries
How does economic growth result in reduced government debt?
Income tax is the largest source of tax revenue for UK government,
Government get more tax revenue,
Government choose to pay off debt
What are the 4 costs of economic growth?
- Inflation
- Current account deficit
- inequality
- Pollution
How does economic growth result in inflation?
Economic growth,
AD increases faster than AS,
Firms struggle to keep up with demand,
this results in excess demand,
this is shown by the diagram as the economy grows closer to full capacity, resulting in demand-pull inflation
Evaluate why economic growth results in inflation.
Depends what stage the economy is operating in,
In a boom inflation could be high,
In a recession inflation will remain low
Inflation is likely to be made worse by UK’s current situation on inflation compared to other developing countries
Why does economic growth result in a greater current account deficit?
Economic growth,
Income increases,
Spending on Imports increases,
Net exports decreases,
Trade deficit becomes wider,
Why might economic growth not result in a greater current account deficit?
Exports may limit current account widening
How does economic growth result in increased inequality?
Economic growth,
there is a positive relationship between rates of economic growth and levels of inequality,
For example, India and China have seen increased rates of inequality,
The top 10% of households income increases faster than everyone else
Why might economic growth not mean increased inequality
Increased tax revenue can be used to invest in capital, improving living standards
Could still reduce poverty
How does economic growth lead into increased pollution?
Economic growth,
increased consumption,
Firms increase output,
Firms invest into capital such as factories,
pollution increases
Why might economic growth not lead to pollution?
As economy increases, deindustrialisation can reduce pollution and firms and governments can spend on renewable energy
Whether or not growth is beneficial to an economy depends on:
- Whether growth creates inflation
- Whether growth is long term - (Investment in capital such as cross-railing, which increases connects central London to the outskirts of London, creating jobs.)
- If growth is short term, ( shift in AD due to wage increase)
- Balance of growth - too much dependence on consumption could lead to a recession if consumption falls.
Recession definition
2 consecutive quarters of economic downturn
How does a recession affect the government?
Lower tax revenue
Increased government spending
National insurance revenue decreases
How does a recession affect firms?
Firms which supply normal luxuries with high income elasticity will see a fall in revenue
Firms who sell inferior goods will see an increase in revenue
