Unit 11 Flashcards
Benefits of economic growth
Household income
Rising household incomes that result from rising real GDP mean people can afford to buy more goods and services and this increases their material standard of living. The circular flow of income model illustrates how a rise in real output will also lead to an increase in household incomes.
Reduced levels of poverty
Rising incomes for the poorest people in society may lead to a reduced level of poverty as people can afford the goods and services needed to satisfy their basic needs.
Great availability of goods and services
Economic growth means more goods are produced and are available for households to buy. The growth in the availability of televisions, mobile phones, washing machines cars and computers to people on average incomes shows how growth improves people’s material living standards.
Improved public services
Economic growth means firms and households earn more income and pay more direct tax and they also spend more and pay more indirect tax. The higher tax revenue earned by governments because of economic growth means there is more money for them to spend on public services like education, healthcare and infrastructure.
Greater employment
The output of businesses increases as the economy grows which means more jobs are created and this increases the level of employment in the economy.
Costs of economic growth
Sustainability
Economic growth can increase consumption and production negative externalities. Businesses increase output which increases industrial pollution and increased consumption of goods and services by households leads to consumption external costs. This means current economic growth can have a negative impact on the welfare of people in the future.
Income disparities
As economies grow income disparities often increase as higher-income households experience a rate of increase in income that is greater than the rate of increase in income of lower-income households. Without government intervention to correct inequalities through the tax and benefit system some of the richest countries in the world would have the widest income inequalities.
Inflation
An increase in real GDP that occurs because of an increase in aggregate demand will lead to an increase in the average price level in an economy. This may lead to an inflationary gap and demand-pull inflation when the economy is operating close to or at full employment.
Balance of payments current account deficit
Economic growth caused by rising aggregate demand can lead to a balance of payments deficit. As economic growth leads to rising household incomes people will buy more goods and services and a proportion of them will be imported. The rise in imports can lead to an increased the balance of payments current account deficit.
How to calculate economic growth
((final value real gdp - initial value of gdp)/initial value of gdp) x100
Explain Short-term Growth in the PPC Model
Recognize that short-term growth in the PPC model reflects an increase in actual output without an expansion in the economy’s potential output.
Acknowledge that short-term growth does not necessarily imply a move to a new production possibilities frontier; it represents a more efficient use of existing resources.
Explain short term growth using Ad/As diagram
increases in AD lead to short-term economic growth as seen by a rightward shift of the AD curve, increasing real GDP without a change in potential output
Understand that short-term growth influenced by AD is driven by changes in consumption, investment, government spending, and net exports, without affecting the economy’s capacity to produce.
What factors lead to outwards shift of the PPC (long term growth)
increases in the quantity of resources (factors of production) in the economy
improvements in the quality of resources (for example, through more educated labor, or improved physical capital through technological change).
What factors lead to long term growth in both PPC and Ad/Ds
increased resource quantity
improved resource quality
technological change
what factors lead to short term growth PPC
Reduction in unemployment
Improvement in efficiency
In the context of the Production Possibilities Curve (PPC) model, short-term growth is typically associated with a reduction in unemployment and an improvement in efficiency. When unemployed resources are utilized, they contribute to an increase in actual output, which is considered growth in the short term. This is shown by a move from inside the PPC to a point closer to the curve, indicating that resources are being used more efficiently without necessarily expanding the economy’s overall capacity or outward shifting the PPC
