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AS Economics > MACRO - LS10 - Economic Growth (Part 1) > Flashcards

MACRO - LS10 - Economic Growth (Part 1) Flashcards

1
Q

Economic Growth

A
  • increase in the real value of goods and services produced as measured by the annual percentage change in GDP
  • also defined as a long-run increase in a country’s productive capacity/potential output
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2
Q

sustainable growth

A

growth in the productive potential of an economy today which doesn’t lead to a fall in the productive potential of an economy for future generations

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3
Q

what can cause economic growth

A
  • increase in any component of AD
  • increase in LRAS - considers the following factors:
  • land
  • labour
  • capital
  • technical process
  • efficiency
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4
Q

Land

A
  • defined as all natural resources
  • countries like Saudi Arabia experience large growth rates due to it
  • UK only started to exploit oil & gas resources in the mid 1970’s
  • it’s unlikely to be a significant source of growth for developed economies, although more vital for developing economies
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5
Q

Labour

A
  • increase in quantity of workers or increase in quality of labours
    factors incl.:
  • changes in demography
  • changes in participation rates
  • immigration
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6
Q

changes in demography

A
  • today’s birth rate will effect economy in 20 yrs time
  • high birth rate –> increasing no. of workers e.g. African countries
  • relatively low in recent decades in Europe
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7
Q

Change in participation rates

A
  • it’s proportion of population in or seeking work
  • increase of people staying on in education decrease workforce
  • more workers can afford early retirement
  • but increase in state pension age is seeing men working past 65 & women 60
  • more women working due to higher wages & better childcare
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8
Q

immigration

A
  • large inflows of migrant labour from Eastern Europe in UK
  • may increase output but not economic welfare as work shared among more people so less income change
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9
Q

why is increase in human capital important?

A
  • need to be educated to cope with demands of the exisiting stock
  • workers need to be flexible - may have to change jobs/roles
  • need to be able to contribute to change
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10
Q

capital

A
  • needs to increase for sustainable growth so need sustained investment
  • however some investment e.g. housing doesn’t cause growth
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11
Q

technological progress

A
  • cuts average cost of production of products
  • creates new products - causes consumers to spend more
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12
Q

efficiency

A
  • increased efficiency of the use of resources will cause increase rises in output
  • in market economy, competition will lead to greater efficiency - drive less efficient firms out of market - gov polices can encourage competition
  • gov may also have to step in and reduce market failure
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13
Q

low and middle income countries

A
  • many features of functioning market economy may be missing
  • resources used inefficiently
  • corruption possible
  • laws may not protect property rights - less likely to invest
  • rural areas may not be able to access banks - can’t take out loans to expand buisnesses
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14
Q

economic/business cycle

A
  • Pattern of the level of economic activity which fluctuates over time
  • ## measured by GDP
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15
Q

Key characteristics of trade cycle

A
  • Peak/boom
  • Downturn
  • recession/depression
  • recovery/expansion
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16
Q

Peak/boom

A
  • high national income as well as consumption & investment
  • high tax revenue
  • increase in wages and profits
  • imports will be high and inflationary pressures
  • likely economy is working beyond full employment
  • high levels of economic growth
  • low levels of unemployment
17
Q

Downturn

A
  • output and income all - so does consumption & investment
  • tax revenues start to fall
  • gov expenditure also increases - more people on benefits
  • wage demands are moderate
  • unemployment rises
  • imports fall and inflationary pressures decreases
18
Q

Recession/depression

A
  • bottom of cycle
  • economic activity is low/negative growth
  • high unemployment
  • consumption, investment & imports may be low
  • few inflationary pressures, may be deflation
19
Q

Recovery/expansion

A
  • national income/output start to rise
  • unemployment falls
  • consumption, investment, imports begin to rise
  • workers feel more confident demanding wage increases
  • inflationary pressures began to mount
20
Q

Long run growth

A
  • increase in potential output
21
Q

Short run growth

A
  • increase in real GDP, driven by an increase in AD that draws unemployed resources into use
22
Q

Actual vs potential output

A
  • actual output - current level of production (real GDP) in an economy - some resources may be unemployed
  • potential output - economy’s productive capacity or the largest output that could be produced, given the prevailing output of technology and stock of available resources
23
Q

Recession definition

A

Where GDP falls in at least two successive quarters

24
Q

What are the two types of trade cycle

A
  • traditional cycle with peak/booms etc…
  • milder trade cycle
25
Q

Mild trade cycles

A
  • GDP doesn’t fall but economy fluctuates around its long-run real GDP
  • doesn’t show recession phase, GDP still rises even in downturn - may be relatively small rise
  • can draw trend line as straight line
26
Q

Why does short term growth rate fluctuate around long term rate

A

Due to demand-side shocks and supply-side shocks
Shocks can be positive and negative

27
Q

Demand side shocks

A
  • affects AD
  • housing market bubble bursts, prices rise too high causing a sudden collapse in housing demand and prices - decrease in consumer confidence
  • stock market crash - may be as prices are too high - causes decrease in wealth & AD
  • sharp interest rate rise due to inflation, reduce durable spending & investment - can lead to recession
  • sharp increase in tax/decrease in gov spending - to balance budget/due to inflation - decreases AD
  • world economy may go into recession, decreases exports, decreases AD
  • sharp rise in pound value, X decreases, M increases
28
Q

Supply side shocks

A
  • Affect Aggregate supply
  • large rise in world commodity prices - raise UK price level & imports if Inelastic, if import prices increase, it reduces AS, lower output
  • outbreak of trade union militancy - large wage increase, so then does price level, decreasing AS (real wage unemployment)
29
Q

Output gaps

A
  • difference between actual level of real GDP & estimated long term value at point in time
  • straight line - trend rate - associated with productive potential of economy
  • actual level of real GDP varies around trend rate - trade cycle
30
Q

Negative output gap

A
  • economy in recession, high unemployment & deflation
  • below trend line
  • has spare capacity in economy
  • actual GDP below productive potential of an economy
31
Q

Positive output gap

A
  • inflationary boom
  • actual GDP above trend line
  • actual GDP above productive potential of an economy
  • boom period
32
Q

How to show positive output gap

A
  • use AD/AS
  • vertical LRAS - equilibrium with AD at Y1
  • SRAS & AD equilibrium at Y2
  • +ve output gap at Y1Y2
  • to fix - long term economic growth - moves LRAS to Y2
  • or recession shifts AD down & SRAS up
33
Q

How to show negative output gap

A
  • use AD/AS
  • vertical LRAS - equilibrium with AD at Y2
  • SRAS & AD equilibrium at Y1
  • -ve output gap at Y1Y2
  • to fix AD rises faster then LRAS
  • shift in AD moves to equilibrium
34
Q

Size of output gaps

A
  • can be hard to gauge size of output gap - as don’t know exact position of LRAS curve
  • initial estimates of GDP showing where SRAS & AD meet are almost always inaccurate - GDP figures constantly revised

AS Economics (48 decks)

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