Macro 2.5 Flashcards
What is required for economic growth to occur?
An increase in quality or quantity of one of the four factors of production: land, labour, capital, or enterprise, or these being used more efficiently.
What effect does an increase in LRAS have on an economy?
It will increase the potential level of output in an economy.
What is the role of land in economic growth?
The discovery of new resources, e.g., oil, will increase economic growth.
How do developing countries typically grow economically?
By exploiting new resources.
Why did Saudi Arabia experience large growth rates?
Almost purely because of their discovery of oil.
What impact does an increase in the quality or quantity of labour have?
It will improve economic growth.
What factors can change the size of the workforce?
Immigration, demography (age profile), or participation rates.
How does raising the retirement age affect economic growth?
It increases the population of working age.
What government action can encourage mothers to return to work?
Providing free childcare.
What is the importance of immigration for economic growth?
It can provide potential workers with the skills, knowledge, and desire to work.
What is more important for long-term economic growth: quality or quantity of labour?
Improving the quality of labour.
How does improved education affect the workforce?
It improves labour quality, making workers more efficient and increasing output per worker.
What is the consequence of having more skilled workers in an economy?
They are less likely to suffer from structural unemployment and can contribute to innovation.
How does sustained investment in capital affect a country?
It enables access to or development of new technology, improving productivity.
What is the effect of tax benefits and grants on enterprise?
They encourage the development of business, creating jobs and increasing economic growth.
What happens when there is too much wealth distribution?
There will be little incentive to work hard.
How does technological progress contribute to economic growth?
It lowers the average cost of production and creates new products for the market.
What is efficiency in the context of economic growth?
It means less resources are needed to produce each good, allowing for more goods to be produced.
What is actual growth?
The percentage change in GDP, indicating that the economy has produced more goods and services.
What is potential growth?
The change in productive potential of the economy over time.
What does an outward shift of the PPF indicate?
Economic growth.
What is an output gap?
The difference between the actual level of GDP and the estimated long-term value for GDP.
What characterizes a positive output gap?
When GDP is higher than estimated.
What characterizes a negative output gap?
When GDP is lower than estimated, indicating spare capacity in the economy.
Why is measuring output gaps difficult?
The exact position of the LRAS is unknown and initial estimates of real GDP are often inaccurate.
How can output gaps be illustrated?
Using AS and AD diagrams.
What is the long run trend rate of growth?
The average sustainable rate of economic growth over a period of time.
What is the relationship between actual growth and the business cycle?
Actual growth is the change in real GDP over time, which makes up the business cycle.
What does LRAS represent in economic output?
LRAS shows the full capacity output where all resources are being fully utilised.
What is indicated by an equilibrium to the right of the LRAS?
The economy working over capacity in the short term.
What does it mean when the equilibrium is to the left of the LRAS?
The economy is working under capacity.
At AD1, what type of output gap exists?
A negative output gap.
At AD2, what type of output gap exists?
A positive output gap.
According to classical economists, how can a positive output gap be filled?
Through long-run economic growth, a recession, or a rise in production costs.
What defines a business cycle?
Periodic but irregular up and down movements in economic activity, measured by fluctuations in real GDP.
List the four main phases of a business cycle.
- Boom
- Downturn
- Recession (slump)
- Recovery
What characterizes a boom phase in the trade cycle?
High national income, high consumption and investment, and inflationary pressure.
What happens during a downturn in the economy?
Output and income fall, leading to decreased consumption and investment.
Define a recession.
A period where the economy is at the bottom of the cycle, characterized by high unemployment and low consumption.
How does the UK government define a recession?
Where real GDP falls in at least two successive quarters.
What are the characteristics of a recession?
High unemployment, low consumption, investment, and imports; low inflationary pressure.
What occurs as the economy moves into a recovery phase?
National income and output begin to increase, with falling unemployment.
What is economic growth considered a policy goal for governments?
It aims to benefit consumers, firms, the government, and living standards.
How does economic growth affect consumers’ demand for housing?
Increases demand as people have more money to afford properties.
What is the positive wealth effect?
Increased value of shares and housing leading to greater consumer wealth.
What impact does economic growth have on firms?
Increased investment opportunities and improved business confidence.
What is the relationship between economic growth and tax revenues?
Tax revenues rise as more goods and services are bought.
What effect does economic growth have on living standards?
It can lower poverty levels and increase access to goods and services.
Fill in the blank: Economic growth can lead to increased __________ inequalities.
[economic]
What are potential environmental costs of economic growth?
- Depletion of non-renewable resources
- Increased pollution and waste
- Concerns about sustainability
True or False: Economic growth guarantees improved living standards for all.
False
