Macro - Economic Growth Flashcards
What is long run economic growth
Refers to the trend increase in real GDP.
Represents an increase in productive capacity.
What may long run economic growth indicate (causes)
An increase in factor availability over time ( an increase in the size of workforce or investment that increases the economy’s stock of capital goods).
An increase in the productivity of these factors of production.
How is short run economic growth measured?
Measured as annual changes in real GDP (% change)
How is long run economic growth measured?
By averaging annual growth rates over a large period of time.
What are 4 of the causes of long run economic growth?
- New natural resources
- New technology - increases productivity
- Increase in the quality of labour
- Innovation - research and development
What is a boom?
A period of very high levels of economic activity
Characteristics of a boom
- High rate of economic growth (+ve output gap)
- High demand (high household consumption)
- Low unemployment
- Inflationary pressure (“overheating”)
- High confidence in the economy
- Shortages of workers -> high wages
- High capital investment
- Increase in imports
Characteristics of a recession
- Fall in demand (decreased household consumption)
- Low inflation
- Rise in unemployment
- Low confidence in the economy
- Firms may go out of business
- Reduced investment from many firms
What is a slump?
The bottom of the economic cycle which represents a period of serious economic decline
Characteristics of a slump
- Low negative growth (-ve output gap)
- Low demand
- Low inflation
- High unemployment
- High rate of bankruptcy
What is a recovery?
A period in which GDP starts to rise again
Characteristics of a recovery
- Demand increases
- Unemployment falls
- Inflation starts to rise
- Confidence in the economy increases
- Capital investment increases.
Benefits of economic growth (9)
- Productive capacity increases -> increased C + I -> higher standards of living
- Increased employment opportunities
- Business confidence -> increased investment
- Increased trade competitiveness
- Increased tax and VAT revenue -> higher public spending > further economic growth
- Lower interest rates
- Reduces poverty
- Expansion of productive capacity which decreases risk of inflation due to overheating
- Political power
What is overheating?
Too much demand for available output
Costs of economic growth (4)
- Imperfect indicator of living standards
- Fails to take into account the externalities such as external environmental costs. -> exaggerated contribution to growth of living standards
- No indication of the distribution of rising income. It may be economic growth for a minority whilst many are still poor.
- ‘Consumer society’ gives rise to social problems. No taken into account by statistics