4.4 Economic Growth Flashcards
What is economic growth?
An increase in real gdp in an economy in a year caused by an increase in AD or an increase in LRAS.
What is short-run economic growth?
The increase in AD over a certain period of time. The economy is using up spare capacity in order to increase output.
Can be shown through movement of a point on a ppc or a keynes LRAS diagram with a shift in AD
What is long-run economic growth?
The expansion of the economy’s capacity to produce goods and services.
Shift to the right of the PPF
Shift right of LRAS
How can you measure economic performance?
Unemployment figure
Rate of inflation
Rate of economic growth
What is real GDP?
The value of goods and services using base prices
It is adjusted for inflation
What is nominal GDP?
the value of goods and services measured using current prices with no adjustment for inflation
What is the price index formula?
(Nominal GDP/Real GDP) x 100
What is GDP?
GDP is the total output of a country in a given time period
When is economic growth likely to occur?
If there is an increase in the quantity or quality of labour (workers)
How do technological processes increases economic growth?
It cuts the average cost of production for a product.
It creates new products for the market.
Without new products, consumers would be less likely to spend increases in their income.
Without extra spending, there would be less economic growth as there would not be an increase in AD
What can cause short run growth?
Any increase in AD
Lower interest rates
Lower income/corporation tax
Higher consumer/business confidence
Higher gov spending
Weaker exchange rate
Any increase in SRAS
What can cause long run growth?
Increase in the quality and quantity of the factors of production, causes positive economic growth
Increase in productive efficiency in an economy
Increase in labour productivity
Increase in workforce size by immigration
Investment - spending on capital goods by firms
Infrastructure improvements. Transport etc
Increase in competition. Firms have to reduce long run cost of production to be competitive
New resources being discovered
Increase in LRAS
Increase in PPF
Costs and benefits of economic growth and evaluation
Benefits:
More disposable income for households. Maybe through promotions or more productivity. Allows household for better living standards. Better access to education health public transport etc.
Higher employment. More demand for a countries oods or services and since labour is a derived demand employment increases
firms making more profits. They can reinvest in captal which means continuing profits over time which can trigger the accelerator effect
Gov likes growth as they receive a fiscal dividend. Increase in tax revenues through income corporation and VAT. Tariff rev as imports from abroad. The can fund their spending more easily
Costs:
If growth is rampant, major side effect is major demand pull inflation. Especially if there is a positive output gap. It will erode purchasing power and higher living standards won’t be as effective
Can lead to higher income inequality. If growth comes from one dominant sector, high incomes won’t be spread across the economy. What if growth comes from capital intensive production instead of labour intensive?
Destruction to the environment. Resource depletion and degradation.
Creating a current account deficit. When incomes rise there will be a sucking in of imports effect.
Evaluation?
We want sustainable and inclusive and balanced growth. Not from one dominant sector or variable in the AD equation
There is a role for the private sector to pay workers well look after environment and be investing. Strong role for gov to ensure tax revenues are being used correctly and ensure you don’t get caught up in inflation and lots of policies in place etc
