Macro 6 - Economic growth - measurement, causes and consequences Flashcards
What are the two types of economic growth?
- Actual economic growth
- Potential economic growth
Define the term economic growth
Economic growth is an increase in the productive potential of an economy
Define the term actual economic growth
Actual economic growth is an increase in real GDP. It is measured by the percentage change in real GDP
What is actual economic growth?
Actual economic growth is an increase real GDP. It is measured by the percentage change in real GDP
What is potential economic growth?
Potential economic growth is an increase in the capacity or the productive potential of the economy
What are the two main causes of actual economic growth?
- Increases in aggregate demand known as demand-led growth
- Increases in aggregate supply known as supply-led growth
What are the different types of demand-led growth causing actual economic growth?
- Growth due to rising net exports
- Growth due to higher consumer spending
- Growth due to higher government spending
- Growth due to higher investment
Why is economic growth due to higher investment highly desirable?
It causes actual and potential economic growth
What is the type of supply-led growth causing actual economic growth?
An increase in short run aggregate supply due to lower costs of production
Draw a diagram where an increase in aggregate demand does not increase actual economic growth
See page 5 in pack 6
Draw a diagram where an increase in aggregate supply does not increase actual economic growth
See page 5 in pack 6
How can potential economic growth be shown on a diagram?
A shift right in long run aggregate supply
What is the main cause of potential economic growth?
An increase in the quality/quantity of the factors of production
What is the trade cycle also commonly known as?
The economic cycle
What is the trade cycle / economic cycle?
The trade cycle demonstrates the fluctuations and recurring trends in economic growth rates in an economy.
Draw a diagram showing a typical trade cycle labelling both periods of economic growth and output gaps
See page 7 in pack 6
See page 145 in the revision guide
How is an economic boom shown on a trade cycle diagram?
An economic boom is a period of time when the actual growth rate exceeds the potential growth rate
What is an economic boom associated with in terms of aggregate demand and inflation?
During an economic boom there is a rise in aggregate demand and inflation
What is a recession?
A recession is a period of negative economic growth. Usually a recession occurs when there is negative economic growth for at least two consecutive quarters
What is the trend rate of growth on a trade cycle diagram?
The trend rate of growth is the average rate of economic growth over a period of both economic booms and slumps
When will a negative output gap occur?
A negative output gap will occur during a recession
When will a positive output gap occur?
A positive output gap will occur during a boom
How can actual economic growth be shown on a PPF?
Actual growth can be shown on a PPF by a shift in production from a point inside the PPF to a point on the PPF
How can potential economic growth be shown on a PPF?
Potential economic growth can be shown on a PPF by a shift outwards of the PPF
How can a negative output gap be shown on a PPF?
A negative output gap can be shown on a PPF by a point inside the PPF
How can a positive output gap be shown on a PPF?
A positive output gap can be shown on a PPF by a point outside the PPF
What are some of the benefits of economic growth?
1- Economic growth will increase demand for labour leading to a fall in unemployment and higher incomes for individuals due to higher GDP per capita
2- Economic growth usually means that firms are succeeding so employees may get higher wages which will result in a higher standard of living if prices don’t rise as much as the increase in wages
3- Due to higher profits firms may invest more in more technology and hire more employees increase the economy’s productive potential
4- Firms are likely to produce more improving a country’s balance of payments as it will sell more exports
5- Tax revenue will rise reducing money spent on unemployment benefits
6- Economic growth may improve a government’s fiscal position as it receives more tax revenue and spends less on benefits reducing the need for the government to borrow money
7- There may be environmental benefits if the government uses the extra tax revenue to protect the environment
What are some of the drawbacks of economic growth?
1- Rising incomes is likely to mean more spending on imported goods and services which can worsen the balance of trade on the current account
2- It can create income inequality as low-skilled workers may find it hard to get the higher wages other workers are getting
3- Economic growth can cause demand-pull inflation as it causes demand to increase faster than supply. It can also cause cost-push inflation as economic growth increases the demand for resources pushing up their prices
4- There will be a deficit in the balance of payments as people on higher incomes buy more imports and firms may also import more resources to increase production to meet demand
5- Industrial expansion may cause negative externalities such as pollution
6- Finite and non-renewable resources may be used constraining future growth and living standards
What are some of the advantages of a recession?
1- Businesses such as discount retailers may attract more customers as people are feeling less confident about their economic prospects
2- Recessions can force firms to face up to their inefficiencies. Firms may cut costs to survive in a recession which can benefit firms in the long run if it emerges from the recession more efficient than it was before
What are some of the disadvantages of a recession?
1- Firms close down causing many people to lose their jobs increasing unemployment
2- Firms often stop hiring new employees
3- Government spending tends to increases due to more unemployment benefits which leads to more government borrowing and a budget deficit
4- Investment falls which can have consequences about the productive potential of an economy
Define the term gross domestic product (GDP)
Gross domestic product is the total market value of all goods and services produced over a period of time (usually one year)
Define the term gross national income (GNI)
Gross national income is the value of the goods and services produced by a country over a period of time (GDP) plus net overseas interest payments and dividends
What is nominal GDP?
Nominal GDP is GDP which has not been adjusted for inflation
What is real GDP?
Real GDP is GDP which has been adjusted for inflation
What is the formula used to turn nominal GDP into real GDP?
Nominal value * base year price index / current year price index
What is GDP per capita?
GDP per capita is GDP per individual in a population
What is the formula used to calculate GDP per capita?
GDP per capita = GDP / Population
What are purchasing power parities (PPPs)?
Purchasing power parities allow comparisons to be made between countries taking into account different costs of living. It refers to the rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country
Why are purchasing power parities useful?
Purchasing power parities make international comparisons more useful because where the cost of living is high it would be expected that the purchasing power parity value of the GDP would be lower compared to the purchasing power parity value of GDP in a country where the cost of living is low
What are the limitations of using GDP figures to compare living standards between countries?
- They ignore improvements in the quality of products
- They do not account for home produced goods/services (the hidden economy)
- They do not account for illegal economic activity
- They do not show inequality in incomes
- They do not show the nature of government spending such as spending on ‘regrettables’
What are the different ways of measuring economic growth?
- Gross domestic product (GDP)
- GDP per capita
- Gross national income (GNI)
What is always the index number for the base year?
100
What is the base year?
The base year is the first year
