T3 economic growth Flashcards
fundamental equation
GDP= C / I / G / (X-M)
household and firms:
(C) consumption expenditure= total payment for consumer goods and services
(I) inventories= The purchase of new plant, equipment and buildings and the additions to inventories.
government:
(G) Governments= buy goods and services from firms and their expenditure on goods and services is called government expenditure
rest of the world:
The value of exports (X) minus the value of imports (M) is called net exports (X – M).
GDP definition
> the market value of all final goods and services produced in a country in a given time period.
GDP measures the value of production, which also equals total expenditure on final goods and total income.
QUESTION: (table on moodle) what was the annual GDP per capita growth rate in (a) 2020 and (b) 2021
a) 2020-2021 /2020= 42,099 - 45102 / = 45102
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GDP=AE-AI
GDP= aggregate expenditure = aggregate income
Aggregate Expenditure: total expenditure on final goods and services, equals the value of output of final goods and services, which is GDP.
GDP = C + I + G + (X – M)
aggregate expenditure: Aggregate income equals the total amount paid for the use of factors of production: wages, interest, rent and profit.
- Firms pay out all their receipts from the sale of final goods, so income equals expenditure.
the basis of economic growth
Economic growth: Sustained expansion of production possibilities measured as the increase in real GDP over a given period.
Calculating Growth Rates:
> The economic growth rate: annual %change of real GDP per capita.
> tells us how rapidly the total economy is expanding.
> Real GDP per person grows only if real GDP grows faster than the population grows.
real GDP can increase for 2 distinct reasons
- The economy might be returning to full employment in an expansion phase of the business cycle (not economic growth)
- Potential GDP might be increasing (Economic Growth!)
- Economic growth occurs when real GDP increases.
- But a one-shot increase in real GDP or a recovery -from recession is not economic growth.
- Economic growth is the sustained, year-on-year increase in potential GDP
real GDP and unemployment over the business cycle
> Potential GDP: quantity of real GDP produced at full employment–> (unemployment rate at its a natural rate)
> Potential GDP corresponds to the capacity of the economy to produce output on a sustained basis.
> OUTPUT GAP: Real GDP minus potential GDP
> Over the business cycle, the output gap fluctuates and the unemployment rate fluctuates around the natural unemployment ratE.
EMPLOYMENT AND FULL EMPLOYMENT: output gap and fluctuations of the unemployment rate around the natural unemployment rate.
when the output gap is negative: the unemployment rate exceeds the natural unemployment rate
potential GDP
- The growth rate of potential GDP measures the pace of expansion of production possibilities and is smoother than the business cycle fluctuations in the growth rate of real GDP.
sustainable development goal (SDG) of the UN
> goals to serve humanity
e.g. no poverty, decent work and economic growth, gender equality…
all contribute to economic growth
the rule of 70 & sustained growth
the rule of 70: the number of years it takes for the level of a variable to double is approximately 70 divided by the annual percentage growth rate of the variable. (70/annual growth rate)
Figure shows the doubling time for growth rates.
A variable that grows at 2% a year doubles in 35 years. in approximately 35 years= GDP DOUBLES IF IT HAS GROWTH RATE OF 2%
A variable that grows at 7% a year doubles in 10 years. –> In aprox 10 years= GDP doubles if it has growth rate of 7%
what determines potential GDP?
Potential GDP is the quantity of real GDP produced when the quantity of labour employed is the full-employment quantity.
To determine potential GDP we use a model with two components:
> An aggregate production function
An aggregate labour market
aggregate production function
tells us how real GDP changes as the quantity of labour changes when all other influences on production remain the same.
> An increase in labour increases real GDP.
aggregate labour market
Labour market equilibrium occurs at a real wage rate of £24 an hour and 50 billion hours employed.
> At a real wage rate above £24 an hour, there is a surplus of labour and the real wage rate falls.
At a real wage rate below £24 an hour, there is a shortage of labour and the real wage rate rises.
At the labour market equilibrium, the economy is at full employment.
how potential GDP grows
> The quantity of real GDP produced when the economy is at full employment is potential GDP.
> The economy is at full-employment when 50 billion hours of labour are employed.
Potential GDP is £1.8 trillion.
