Macroeconomic Objectives Flashcards
What is the definition of economic growth?
An increase in the real level of national output
What is the trend rate of growth the economy is at what percent?
2.5%
What is the definition of trend rate of growth?
Rate that the economy can grow without exerting upward or downward pressure on inflation.
What is needed for their to be economic growth?
Adequate demand that encourages firms to invest in new capital equipment to expand their productive capacity.
What does it mean when the economy is operating below its trend rate of growth?
Actual GDP is below the countries productive potential leading to high unemployment.
What factors would shift aggregate demand back towards the economies potential growth rate?
An increase in:
- Investment
- Exports
- Consumption
- Government spending
What is the definition of long run economic growth?
Increasing the quantity and quality of the factors of production in the economy. Growth is determined by the capacity of the economy to increase output and this is determined by the rate of growth of productivity of both capital and labour.
What does an outward shift in the long run aggregate supply curve show?
An increase in potential output
What affects long run aggregate supply?
Migration, investment, lower school leaving age, anything increasing the factors of production.
What are the advantages of economic growth?
- Higher standards of living
- Rising employment
- Business confidence and profits
What are the disadvantages of economic growth?
- Inflation
- Environmental effects
- Inequality
What is the definition of productivity?
Measure of the efficiency of factors of production in the production process
- It measures the output from the total amount of factor inputs.
What does higher productivity lead to?
- Producing more goods at lower unit costs
- Increase in total output (outward shift in PPF)
- Achieving faster economic growth due to a rise in LRAS.
What is the formula for labour productivity?
Output divided by Number of workers
What is labour productivity?
Output per worker over a period of time
What’s a reason for the output per worker varying?
Amount of hours worked
What is a productivity gap?
Difference in measured output per worker between one country and another.
What are some reasons for productivity gap?
- Lower investment in research and development
E.g UK spent 1.7% of GDP on Research and development in 2019, compared to 2.9% in Germany and 4.6% in South Korea - Poor management practices
E.g. UK has higher proportion of low skilled managers than European countries - Low levels of investment in infrastructure
E.g UK is 36th in terms of infrastructure quality and investment is only 18% of UK GDP - Skill shortages in engineering and social care for example.
What are the benefits of higher productivity?
- Lower average costs
- Improved competitiveness
- Higher profits
- Higher real wages
- Long run economic growth
Why is lower average costs a benefit of higher productivity?
Businesses can produce for cheaper and this can be passed onto customers as lower prices may lead to more exports.
Why is improved competitiveness a benefit of higher productivity?
Businesses can develop or protect a competitive advantage in markets where there is intense price and non- price competition from overseas suppliers.
Why is higher profits a benefit of higher productivity?
Increased profits which then maybe reinvested by the business on research and development, capital equipment, and training staff.
Why is high real wages a benefit of higher productivity?
Long run there is a positive relationship between improvements in labour productivity and real wages (adjusted for inflation) this would further boost spending.
Why is long run economic growth a benefit of higher productivity?
UK’s capacity to produce goods and services depends on the stock of factor resources available e.g labour supply, stock of capital inputs, natural resources, and also the productivity of these factors. Therefore, if productivity increases then the trend rate of growth should also increase.
What are some possible ways to improve the productivity?
- Apprenticeship levy
- Skilled worker Visa programme (2022)
- Migration > combat labour shortages
- Point based systems
- Super deduction investment scheme (2021) > this is a tax incentive
- Less corporation tax
- Improving the micro foundations
- Encouraging competition in markets
