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Economics > 11.1 - economic growth and the economic cycle > Flashcards

11.1 - economic growth and the economic cycle Flashcards

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1
Q

What is economic growth?

A

an increase in the potential level of real output the economy can produce over a period of time

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2
Q

What is the measurement of economic growth?

A

measuring % annual change in real GDP or real GDP per capita

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3
Q

Where on a PPF is short run growth?

A

movement from inside to on the PPF curve

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4
Q

Where is long run economic growth (true economic growth)?

A

a shift of one PPF to another PPF

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5
Q

What is demand side determinant of short run growth?

A

relates to the impact of changes in AD on the economy

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6
Q

What is the equation for AD?

A

AD = C + I + G + (X - M)

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7
Q

what is X - M known as?

A

net trade

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8
Q

What is the supply side determinant of short run growth?

A

relates to changes in the potential output of the economy, which is affected by the available factors of production (changes in size/productivity of labour force)

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9
Q

What is the relationship between SRAS and inflation?

A

as demand increases, the curved nature of the SRAS means that there will be high inflation as AD shifts to AD4

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10
Q

What causes supply-side short run economic growth?

A

anything that shifts the SRAS to the right, fall in wage rates/costs of production, fall in tax, increased subsidies

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11
Q

What is trend growth rate?

A

the rate at which output can grow, on a sustained basis, without putting upward or downward pressure in inflationW

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12
Q

What does the trend growth rate reflect?

A

annual average percentage increase in the productive capacity of the economy

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13
Q

What is the trend growth rate also known as?

A

long run growth rate

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14
Q

What was the UK’s trend growth before the economic crisis in 2008?

A

2.5% a year

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15
Q

When do UK living standards double?

A

every generation

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16
Q

What does it mean by being economically inactive?

A

being working age but choosing not to work or seek work

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17
Q

What has happened to the number of people that are economically inactive?

A

increased a lot recently due to Covid-19 pandemic

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18
Q

What are the causes of long run economic growth?

A

improved technology (technical progress), size of labour force, improved productivity, mobility of factors of production

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19
Q

What are the causes of short run economic growth?

A

increase in AD which makes use of spare capacity and puts the economy onto its PPF

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20
Q

What side is long run economic growth caused by?

A

supply side

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21
Q

How can aggregate demand improve long run economic growth?

A

because firms will only produce more goods and services if there is sufficient demand in the economy to absorb the output
AD must increase to cause an increase in AS.

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22
Q

What is neoclassical growth theory?

A

argues that investment increases economy’s growth rate, temporarily.

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23
Q

how does investment increase economic growth in neoclassical growth theory?

A

ratio of capital to labour goes up, marginal product of capital declines and economy grows

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24
Q

What is the rate at which labour productivity increases determined by? (neoclassical)

A

technical progress

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25
What is the weakness of the neoclassical growth theory?
does not account for where the technical progress comes from, assumes it occurs outside the model
26
What does exogenous mean?
'outside' (the theory) you would say: technical progress is exogenous to the model
27
What is the new growth theory?
where the determinants of technical progress are brought about inside the theory
28
What is new growth theory also known as?
endogenous growth theory
29
What are the three main sources of technical progress in classical growth theory?
- profit seeking research - openness to foreign ideas - accumulation of human capital
30
What is over fishing (in terms of research)?
discovery of new ideas makes it harder to find further new ideas
31
What is the standing on the shoulders effect? (in research)
where discovering new ideas makes it easier to find further ideas - Paul Romer
32
What type of research does new growth theory stand on?
profit seeking research held up by the 'standing on shoulders effect'
33
How does openness to foreign ideas increase economic growth in new growth theory?
economic growth derives from domestic innovation or technological transfer technology develops domestically first and then uses some technology from other countries
34
What is technology transfer?
rate at which technology can be adopted from abroad
35
How does the accumulation of human capital increase economic growth in new/endogenous growth theory?
human capital is accumulated through education and training a skilled workforce
36
What are the supply side conditions that increase growth? (endogenous growth)
- conditions that encourage profit-seeking research - externalities/external economics provided by state - patent legalisation and judicial system that enforces law
37
What are the costs of economic growth?
- uses finite resources that cannot be replaced (link to climate change) - pollution - destroy cultures and communities, widen inequalities - rapid growth in population --> increased poverty - countries in low growth have low business confidence and leads to negative multiplier - inflation
38
What are the benefits of economic growth?
- increased standards of living - increased life expectancy - fiscal dividend - tax revenues increase - virtuous cycle - greater business confidence, increased investment...
39
What is the impact of economic growth on the economy?
increased international competitiveness of the economy, less competitive economies will suffer from rapid growth
40
What was the impact of the oil crisis in 1973?
lead to prices of oil almost doubling. British people became more aware of the environment
41
What is the oil crisis diagram?
oil curve up and depletion of world oil reserves go down
42
What is the economic cycle?
upswing and downswing in aggregate economic activity taking place over 4-12 years
43
what is the economic cycle also known as?
business cycle or trade cycle
44
How do fluctuations in economic activity occur?
- seasonal fluctuations - cyclical fluctuations
45
What is the diagram for economic cycles?
trend output straight line and economic cycle like a sine wave
46
What is actual output?
level or real output produced in the economy in a particular year
47
What is trend level of output?
what the economy is capable of producing when working at full capacity
48
What are output gaps?
where actual output differs from the trend growth
49
On the diagram, what is a peak?
a boom
50
on the diagram, what is a trough?
a recession
51
When does a boom end (on diagram)?
when the upswing of economic growth gives way to the downswing
52
What causes a change in the phase of the economic cycle?
- fluctuations in AD - supply side factors - speculative bubbles - political business theory - outside shocks hitting economy - changes in inventories - marxist explanation - multiplier/accelerator interact - climatic cycles
53
how do fluctuations in AD affect the economic cycle?
Keynes thought that recessions are caused by fluctuations in AD caused by business and consumer confidence
54
How do supply side factors affect economic cycle?
'real business cycle' theory changes in technology on supply side is as important as a change in AD
55
What are the role of speculative bubbles in the economic cycle?
rapid growth leads to a speculative bubble in asset prices (houses). When the asset price has risen above asset values - people sell (asset selling above buying) which causes bubble to burst and this destroys consumer and business confidence, people stop spending and the economy falls into a recession
56
What is political business cycle theory?
in democratic countries, some governments may try to engineer a pre-election boom to gain votes. After the election, the party deflates aggregate demand changing the cycle
57
What are output gaps?
shows the level of actual real output in the economy is greater than the trend output level
58
What is a negative output gap?
level of actual real output in the economy is greater then the trend output in the economy
59
What does a negative or positive output gap look like on a regular aggregate demand and aggregate supply diagram?
the difference between Y and Y1 is a negative gap (as it tends closer to zero) and the positive gap is between Y and Y2 (as it goes further from zero)
60
What type of gap was before the financial crash?
there was a positive output gap between 2000 and 2008 that was accompanied by a booming economy which was quickly stopped after the 2008-9 recession

Economics (24 decks)

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