Macroeconomic performance Flashcards
Define economic growth
Economic growth is an increase in real GDP caused by an increase in AD or LRAS
Real GDP
Is the total value of all final goods and services in the economy at a given period of time in a year, adjusted to the inflation rate
What is an example of a national income statistic?
Real GDP
What are the 4 main benefits of using national income statistics
- Used as a report card for a country
- Governments use NIS to enact and inform policies
- Used as a benchmark to evaluate standards of living
- Used for building forecasting models
How are NIS used as a report card?
So the performance of an economy can be analysed overtime. Highly useful for politicians who need them to see whether their macroeconomic objectives of increased growth are being met
How are NIS used as a benchmark for living standards?
Rise in national income is interpreted as an increase in living standards for all and if this has been a long term trend then it is a clear indicator of economic prosperity.
Can also be used to compare a country’s statistics and compare the success of policies regarding the assessment of living standards
Use of NIS by governments
Use NIS to to evaluate the success of past economic policies in promoting economic growth. This allows the government to be aware of and use again policies that have increased real GDP or to be aware of past policies that have been less successful and failed so that alternatives can be used in the future.
Use of NIS as forecasting
Statistics used to by individuals, businesses and governments to build forecasting models to plan future investments and spending.
Why is forecasting using NIS important in a globalised economy
In a highly globalised world economy, growth forecasts are also significant for countries whose economic performance is interdependent on others
What are 2 limitations of using national income statistics as a measure of economic growth
Informal economy doesn’t contribute to the measure of real GDP. Results in figures that are actually lower
Large data is needed to be collected and can come from different sources so inevitably it leads to inaccuracies so final figures are not perfect when released
Why should real GDP not be used to measure living standards
Its a single measure of living standards only taking into account income when in fact there are a number of different factors that contribute to living standards including, healthcare and education, infrastructure, freedom and equality in determining living standards. Therefore other measures like HDI would be a more appropriate indicator of living standards.
impact of MNCs on GDP measures of standards of living
Profits are repatriated and not reinvested into the business or into job creation
Poor working conditions and poor pay for workers
Instead suing profits for improving the incomes of managers and shareholders.
MNCs cause increases in real GDP but without having noticeable effects on standards of living and if anything worsening living standards even when real GDP rises
What are short run growth (actual growth)
Is growth caused by an increase in AD
Diagram showing short run growth
Actual growth increases
Actual growth increases from Y1 to Y2. Tis is because as there is more demand in the economy then producers increase their output which closes the negative output gap, exhausting the spare capacity in the economy. Y2 is closer to the full employment level of output, this increase in output signifying the increase in real GDP (economic growth)
Causes of short run economic growth
A cut in interest rates
Governments reduce the level of corporation tax or income tax
Government spending increases
Weaker exchange rate
Impacts of a cut in interest rates
Reduce cost of borrowing for consumers
Reduce cost of borrowing for firms
Reduces the rate of return of savings
Reduce monthly payments for people with variable rate to tracked mortgages
How could governments increase short run growth? (tax)
Governments could reduce the marginal rate of income tax in lower income tax bands or increase the income tax free allowance for those on lower incomes
What is long run growth
Referred to as potential growth of the economy and is caused by an increase in LRAS
What does an increase in long run aggregate supply mean?
Means that there has been an increase in the productive capacity of the economy
Diagram showing Long run economic growth
Causes of long run growth
Government spending on education
Governments offering subsidies or lower tax allowances to firms to incentive investment
Reducing corporation tax
Deregulation and trade liberalisation
Why does LRAS shift
Changes in the quantity of FOP
Changes in the quality of FOP
Changes in the productive efficiency
Define productive efficiency
This is when there is a reduction in long run costs or a firm
Reinvestment impact on long run growth
Increases long run growth
Improvements in current capital and tech or buying new capital increases quality and quantity of FOP
Improved capital, lower long run costs so leads to productive efficiency
Lower corporation tax impacts on long run growth
Increased incentive for firms to reinvest
Greater levels of retained profits to finance investment
Investment improves both quality and increased quantity of FOP
As well as this then lowering long run costs so leads to productive efficiency gains
Deregulation effect on long run growth
Reduction in government imposed standards or laws
Reduction in costs for firms
Lower legal barriers to entry so increases competition.
Incentive to maximise efficiency to lower costs and charge lower rices than rivals.
Results in productive efficiency
What is trade liberalisation
Involves thew removal of trade barriers like tariffs or quotas to promote free trade and competition
Trade liberalisation diagram
Trade liberalisation on long run growth
Due to fierce and intense nature of the global market firms want to achieve profit maximisation objectives whilst being competitive as possible so there is an incentive to maximise efficiency where firms lower their costs of production, increasing productive efficiency increasing long run growth
2 Costs of Growth
Unrestrained growth can accelerate demand pull inflation if AD is increasing faster than AS, pressure on existing factors of production, increasing their costs to use, filtering through higher prices to consumers
Loss of international competitiveness
High AD leading to unsustainable growth where firms scrap sustainable slow ways of producing in order to meet demand, leads to negative externalities like resource depletion and degradation. Future incomes lost out, less goods and services made with those resources resulting in lower material living standards. Impacts future trade
3 benefits of growth
Greater fiscal dividend for the government
Higher profits for firms
Low unemployment
Explain fiscal dividend for gov
Increased economic growth
Increased tax revenues from taxes
More imports sucked in so increased tariff revenues also
More money to spend on public services
Fund welfare payments to those who need it
2 costs of LFS
Doesn’t account for disparities
Official data thinks the underemployed are fully employed
2 costs of unemployment
Worsening ion government finances
Lost output
2 benefits of unemployment
Makes it easier for firms to find workers
Can help keep inflation under control
cost of anticipated inflation
can create consumer driven price-spirals but also wage-price spirals
2 costs of inflation
Anticipated inflation creating inflation spirals
Reduced international competitiveness
2 benefits of inflation
Workers receive higher pay in line with inflation
Government finances improve
Cost of deflation
Can cause delayed spending so less AD
