MACRO - 2. economic growth ✅ Flashcards
what is economic growth and how is it measured
the change in potential output of economy, and so PPF curve shifts to right and measured in change of real national output. can be actual or potential growth
GDP - quantity of goods/services produced, measures actual growth but this can be different from productive potential
what is involved with output gaps
POSITIVE output gap - when GDP exceeds long term trend, boom in economy
NEGATIVE output gap - when GDP falls shorter than long term trend, recession
how do factors of production influence economic growth
increase in quality/quantity can cause economic growth, as well as LRAS
they determine productive potential
what is the economic cycle and how does it influence growth
TRADE/BUSINESS/ECONOMIC CYCLE - regular fluctuations within economic activity level around economy’s productive potential (PP)
PP cant be measured so GDP is proxy measure
why is GDP not reliable?
fluctuates around long term growth path
what are the four phases of the cycle described
PEAK/BOOM - high income/tax revenues/consumption/investment expenditure, rising wages/profits, inflationary pressures as imports rise as higher incomes
DOWNTURN - output/income/consumption/investment/tax revenues/imports falls, government expenditure rises, inflationary pressures eased
RECESSION/DEPRESSION/SLUMP - low economic activity, high unemployment, low consumption/investment/imports, potential deflation (two successive negative quarters of growth)
RECOVERY - national income/output increases, falling unemployment, rising investment/consumption/imports
demand side shocks affecting AD
- housing market collapse (affects consumption, output, employment)
- stock market crash (reduced spending as less wealth reducing AD creates recession)
- increased interest rates/tax to combat inflation reduces consumer/investment spending
- world recession so UK recession
- rise in value of pound (reduces competitiveness so exports down and imports up = reduced AD)
supply side shocks of AS
- rise in commodity prices increase UK PL if these commodities are price inelastic there is rise in import costs so fall in AS and lower output
- trade unions = wage increases = PL increased = lower AS
explain an output gap and its two types
= difference between actual GDP and estimated long term value
NEGATIVE = spare capacity, occurs when recession, deflation, high U occurs so GDP under trend line
POSITIVE = above trend, in boom
why is output gap unreliable
exact position of LRAS is unknown and initial GDP estimate are almost always inaccurate
what is hysteresis
process where variable doesnt return to former value value when changed, can be used with recovery from recession
some economists argue possibility of return to previous growth after deep recession isnt possible = hysteresis
permanent human capital loss means economy may never fully recover
what is involved with economic recovery
movement to productive potential after moving below
- PPF used to help growth measurement as shows maximum economic output
- growth = outward PPF movement
- national income increase doesn’t always mean growth and main source growth = investment
how does labour as factor of production change to cause economic growth
- quantity/quality increase = economic growth
- quantity increase from birth rate, immigration, participation rates
how does capital influence economic growth
increase capital to sustain economic growth so sustained investment but not necessarily correlation between growth/investment
how does technological progress increase growth
- cuts average costs of production
- creates new products for market
how can efficiency influence growth
(ways in which factors of production put together)
- increased = input rises
- competition = efficiency rises
how does export led growth affect overall growth
- rise in exports = increase in AD and higher investment in equipment/labour to meet demand
- investment rise = productive potential rise impacting economic growth
- export led = higher competitiveness and more efficient = higher growth
four distinctions when measuring GDP:
- economic growth = rise in output (GDP) changes in REAL gdp not NOMINAL gdp
- real GDP = proxy measure of volume of output (quantity), volume = nominal GDP / PL
- total gdp = total amount of GDP
- decrease in growth doesnt equal drop in GDP , growth slowdown
benefits of economic growth on the population
- life expectancy link with income established
- housing standards improve
- literacy rates higher
- better health
what is sustainable growth
growth in productive potential of economy not leading to all of productive potential for future generations
can economic growth result in inequality
can be argued economic growth = increase in inequality in income/wealth
UK and USA income differences growing
demand pushes wages up and supply increase = stagnant wages
impacts of economic growth on consumers vs firms
CONSUMERS:
- incomes rise, increased disposable income = more goods/services bought
- Easterlin paradox correct (increase GDP doesnt equal happiness increase) no benefits of growth to consumers
FIRMS:
- increased sales as higher income
- new firms established but technological progress may dissipate some markets
what are the impacts of economic growth on the government
rising income = rising tax
rising private sector spending = decreased demand for public sector
impacts of economic growth on the environment
- richer countries = less pollution = cleaner environment bc of increased spending on technology
- developing countries pollution rises as heavy manufacturing industries
impact of economic growth on economy and current and future living standards
- GDP growth = larger economy
- job creation/destruction if higher productivity
- living standards improvement but if only rich receive benefits then majority remain unchanged
- developing countries everyone likely to benefit
