Chapter 7: Economic growth Flashcards
(78 cards)
1
Q
define eco growth
A
eco growth can be defined as an increase in the volume of G&S that an eco produces over a period of time (ie an increase in real GDP)
2
Q
how is eco growth measured
A
measured by the annual rate of change in
real GDP (the % increase in the value of goods and services produced over a year, adjusted for the rate of inflation)
3
Q
define real GDP
A
the % increase in the value of goods and services produced over a year, adjusted for the rate of inflation
4
Q
compare real GDP to nominal GDP
A
real GDP is adjusted for the rate of inflation whereas nominal GDP is not adjusted for price changes
5
Q
what is the formula for real GDP (aka GDP at constant prices)
A
nominal GDP x previous CPI on CPI
6
Q
what is the formula for Economic growth (or the rate of growth in real GDP)
A
current CPI - previous CPI on Previous CPI times 100
7
Q
What does economic growth lead to in an economy?
A
- An increase in productive capacity (shift in PPF outward)
- Higher real output = more goods/services produced
- Helps meet more needs and wants in society.
8
Q
what is a limitation of using EG or output to measure living standards
A
GDP is a gross measure - since it doesnt account for what is being produced (nature of production) or account for depreciation of capital and goods.
9
Q
how does ABS estimate the level of GDP in AUS
A
- HHs and bus income (Y)
- expenditure on G&S (E)
- production by firms (O)
10
Q
Why are Y, E, and O the same when the economy is in equilibrium?
A
- All production creates income
- All expenditure buys produced goods/services
- So: Income = Expenditure = Output
11
Q
What three main time periods does the ABS use to measure AUS’ rate of economic growth
A
- quarterly - measuring GDP over 3 months
- year-on-year growth - a less volatiel measure which compares grwoth in one quarter with same quarter form prev yr
- annually - each FY
12
Q
define aggregate demand and aggregate supply
A
- aggregate supply (AS) - total productive capacity of the economy, or potential output when all factors of production are fully utilised
- aggregate demand (AD) - total expenditure on (or total demand for) goods and services in the economy
13
Q
How did Keynes challenge classical views on growth?
A
Keynes argued aggregate demand (AD) is the key driver of output. Without enough demand, the economy can settle below full employment, requiring government intervention to boost AD
14
Q
What is Keynes’s concept of equilibrium income?
A
It is the income level where AD equals output and there’s no tendency for change. But this equilibrium may occur below full employment if demand is weak
15
Q
What determines equilibrium in a Keynesian model of the economy?
A
Equilibrium occurs where Aggregate Demand (AD) equals Aggregate Supply (AS):
- AD = total expenditure in the economy (from households, businesses, government, and overseas)
- AS = national income, since all production creates income
16
Q
what si the formula for AD
A
AD = C + I + G + (X - M)
17
Q
what si the formula for AS
A
Y = C + S + T
(consumer spending, savings and taxation)
18
Q
how do changes in leakages and injections influence the lvl of eco activity
A
- if injections > leakages the eco will grow
- if leakages > injections, economic growth will decrease and the economy may contract.
19
Q
How should government policy change depending on the state of the economy?
A
- If the economy is operating below capacity, increasing AD boosts output and growth
- If the economy is near full capacity, growth requires increasing AS by improving the quantity/quality of
productive resources.
20
Q
what types of policies should be used based on economic conditions?
A
- When AD is insufficient to generate full employment of productive resources, macro policies can be used to stimulate growth in the short- to medium-term by boosting demand.
- When the
economy is approaching full employment (most factors of production being utilised and the eco is producing near full potential), use microeconomic policies to improve efficiency of resource use and address structural issues on supply side for LT growth.
21
Q
what are the main factors that make up AD (total expenditure)
A
- HH consumption
- public investment
- gov spending
- bus investment
- housing
22
Q
what is the most important factor influencing the lvl of consumption
A
income
- economies with higher incomes tend to consume more –> can generalise that rising incomes within an economy will drive
higher consumption.
23
Q
what is the effect of high APC and high APS on the eco
A
- higher APC will promote higher EG through higher consumer spending
- higher APS will lead to lower output and grwoth due to weaker demand
24
Q
what are the three greatest influences on the APC (ie level of consumption)
A
- consumer confidence/expectations
- the level of interest rates
- the distribution of income
25
what influences a consumers’ decisions to spend or save their income
- Expectations about economic prospects
- future price rises and the general
availability of goods
- If consumers
expect a rise in their incomes or in inflation
- if they anticipate future shortages of goods
26
why might interest rate cuts become less effective in Australia over time?
- high HH debt, many HH take adv of interest rate cuts to make extra repayments to mortgages and loans instead of increasing consumption
27
How does income distribution affect overall consumption?
Lower-income households have a higher APC and spend more of their income, while high-income earners save more.
→ So, more even distribution = higher total consumption
28
which income policies are more effective at boosting growth?
Policies that increase disposable income for low- and middle-income earners (e.g. welfare increases) boost growth more than top tax cuts, due to higher MPC
29
what are the main factors influencing bus investment
cost of capital equipment and bus confidence/expectations
30
what are the three main factors influencing the cost or relative cost of capital equipment
- changes in interest rates
- a change in gov policies regarding bus investment
- a change in the price or productivity of labour or technological innovations
31
How do interest rates create opportunity costs for firms with cash reserves?
firms compare returns form svaing (ie lending to other buses thru bonds) to using it to purchase more capital equipment or stock (shares) in other firms
32
why might businesses not invest even when interest rates are low?
If firms do not expect strong demand for their products, they may not invest, even if borrowing is cheap.
33
why does a change in labour cost or technology affect capital investment?
- Labour is a substitute for capital in production
- If labour becomes more expensive or labour-saving technology improves, the relative cost of capital falls, encouraging greater capital investment
34
what are factors affecting bus confidence
- any change in expected demand for their products - if expected increase in D, more inclined to purchase new capital equipment to boost production and vice
- any chnage in the general eco outlook - if eco growth is expected to increase --> entrepreneurs invest in capital cos higher lvl of eco activity --> inprove returns on investemnt
- inflation - volatility in prices creates greater uncertainty about future prices and future production costs
35
How do government spending and taxation (fiscal policy) affect economic activity?
Governments use fiscal policy to manage growth:
- In downturns → increase spending, cut taxes to boost demand
- In booms → cut spending, raise taxes to slow demand
Also influenced by goals like debt sustainability and external stability.
36
What influences Australia’s export and import volumes?
- Overseas growth → increases AUS exports
- Domestic growth → increases AUS imports
- So, net exports are shaped by the relative growth rates of overseas and domestic economies.
37
besides growth, what else affects net exports?
- Exchange rate
- International competitiveness (influenced by inflation, wages, productivity, policies)
- Protectionism in other countries
- Consumer preferences and tastes
38
what is the multiplier effect
The multiplier effect refers to the
greater-than-proportional increase in national income resulting from an increase in AD, and is calculated using the multiplier (k)
39
What causes changes in leakages and injections in the five-sector model?
Shocks like:
- Changes in consumer/business confidence
- Interest rates
- Government policy
- Global economic conditions
40
How does an increase in government spending affect income?
It increases expenditure (E) → increase bus investment → boosts output (O) → raises income (Y) → increases consumption (C) → Leads to more investment and further increases in Y → the initial increase in gov spending will have a multiplied effect on national income (ie multiplier effect)
41
Why doesn’t the multiplier effect continue forever?
Because with each round, some income is:
- Saved (S)
- Taxed (T)
- Spent on imports (M)
→ These are leakages, which reduce the final impact.
42
what is the multiplier?
The multiplier is the amount by which the final increase in national income (Y) exceeds the initial increase in spending (E) that caused it.
43
what is MPC
the proportion of each extra dollar of income that is spent on consumption (can be for individuals, but in this case refers to the average of the economy as a whole)
44
what si MPS
the proportion of each extra dollar of income that is saved (again, in this context for the economy as a whole)
45
why is MPS+MPC=1
since each extra dollar of income must either be spent (C) or saved (S)
46
example of multiplier
- for each extra dollar of income in an economy, consumers spend 60% or 60c (MPC = 0.6) and save 40% or 40c (MPS = 0.4)
- investment in this economy increases by $10,000, representing an injection into the circular flow or an initial $10,000 increase in AD
- the economy was previously in equilibrium, so firms will increase output (or AS) to match the increase in AD and national income (Y) will increase by an initial $10,000
- of that increase in Y, $6,000 will be spent (MPC = 0.6) while $4,000 will be saved
- firms will expand O again and Y will increase by $6,000, $3,600 of which will be spent and $2,400 will be saved
- O and Y will increase by a further $3,600, of which 60% will be spent and 40% will be saved, and so on
47
how can gov implement fiscal stimulus to avoid contractions in eco
- need to estimate size of k (therfore MPS and MPC) to determine amt of gov spending req'd to counteract the anticipated downturn
48
What role does Aggregate Supply play in long-term economic growth?
in the long run, AS determines the productive capacity of the economy.
→ More/higher quality factors of production = more output = higher sustainable growth.
49
What does an economy’s ‘potential’ refer to?
It refers to long-run Aggregate Supply (LRAS) – the maximum sustainable output the economy can produce with its current resources and technology.
50
What’s the difference between moving along the AS curve and shifting it?
- Movement along AS: Caused by changes in the price level (short-run change in quantity supplied)
- Shift in AS: Caused by an increase in the quantity or quality of resources (long-run change in productive capacity).
51
What causes a rightward shift in the AS curve, and what does it show?
It’s caused by improved quantity or quality of resources, leading to:
- Increased total output
- Lower inflation
- Stronger, more sustainable growth
52
what changes can result in an increase in AS (ie increase in the quanitty or quality of factors of production
- population growth - increased birth rates or immigration --> mroe workers
- discovery of new resources - eg new mineral and metal depostits
- increasing the skill lvl of the workforce - improved edu and training
- increased capital - increases productive capacity
- measures to improve efficiency - adopting management and work practices of leading companies
- gov policies - increase competitive pressures within industries
53
what are caapcity constraints
Capacity constraints are limitations on an economy’s ability to achieve further economic growth due to productive resources being fully utilised, and begin to occur as an economy approaches full employment
54
What happens if AD increases when the economy is near full capacity?
Further increases in AD lead to inflation, not growth, because firms compete for scarce resources and pass higher costs on to consumers
55
how should macro and micro policies work together?
- Microeconomic policies have long transmission lags (take years to show impact)
- Macroeconomic policies work in the short to medium term
- Use macroeconomic policy to manage AD and support short-term growth, while allowing time for micro reforms to boost AS and avoid capacity constraints
56
list some egs of micro policies
- reducing protective trade barriers
- changes to the structure and rates of taxation
- competition policy reforms, and reforms in particular market
- changes in tech
57
why is real GDP per capita a better measure of living standards than real GDP?
Because it accounts for population growth.
Even if GDP is growing, if the population grows faster, GDP per capita (and living standards) can fall
58
What are the key drivers of GDP per capita growth?
mainly labour productivity, which affects output per worker and living standards.
59
What are the main influences on labour productivity?
- Technological advances
- Improvements in labour skills
- Better management practices and work arrangements
60
Long run AS curves are vertical, however, reflecting two key points:
- LRAS represents an eco's potential GDP based on its available productive resources, which do not vary with price lvl
- increases in AD alone cannot lead to eco growth indefinitely - increases in productive capacity (or LRAS) are necessay to sustain eco growth in the LT
61
what is the effect of an increase in productive capaity of eco on the PPF
shift to the right
62
why is the basic upward-sloping AS curve unrealistic and what does a realistic short-run AS curve look like?
- It ignores capacity constraints. It wrongly suggests that output can increase indefinitely as AD increases.
- It becomes steeper as output increases and eventually turns vertical when the economy reaches its productive capacity (LRAS).
63
what are the effects of an increase in AS?
- More output is produced
- Prices fall
- Leads to economic growth without inflation
64
What are the effects of a decrease in AS (with AD unchanged)?
- Lower output
- Higher price level
→ This is known as cost-push inflation.
65
What are the effects of a decrease in AD (with AS unchanged)?
- Lower output
- Lower price level
→ This results in economic contraction with deflation
66
what happens if AD and AS both increase or both decrease?
- increase in both: eco growth
- decrease in both: contraction
- greater increase (or decrease) in AD than AS --> higher (lower) price lvl
- greater increase (or decrease in AS will lead to a lower (higher) price
level
67
what is an output gap
the difference between actual GDP and potential GDP
68
what is a positive output gap and some characteristics and how do we achieve EG when with a posiitve output gap
- A positive
output gap means that an economy is exceeding its productive capacity.
- only sustainable for short period of time
- full employment --> low UE, rising inflation
- since at full employment, in order to sustain EG, an eco would need to increase AS thru effective micro policies
69
what is a negtaive output gap, characteristics and how to increase EG despite it
- A negative output gap means that an economy is falling short
of its productive capacity, with unutilised resources (spare capacity)
- high UE and falling inflation
- to increase EG and close gap, eco wiuld need to stimulate AD using macro policies
70
How can EG cause inflation?
Higher levels of economic growth can result in price increases and larger wage claims, contributing to a
rise in the level of inflation
- esp when eco at full capacity and growth in AS cannot keep pace with growth in AD
71
what is the sustainable rate of EG
major aim of macro policy is to keep growth at a lvl that is not so high that it prompts a surge in inflation
72
What were the main causes of Australia’s high inflation (2022–2024)?
- Surge in AD (pandemic savings + stimulus from gov)
- Supply-side constraints:
Labour shortages, Global supply chain disruptions, Soaring energy prices
→ Result: AS couldn’t keep up, leading to high inflation
73
What happens to imports and exports during strong economic growth?
- Higher incomes lead to more spending, especially on imports.
- If exports don’t grow as fast as imports, the BOGS worsens, contributing to a larger CAD.
74
How does sustained economic growth support external stability?
It ensures the economy can service foreign liabilities (e.g. pay interest on debt) and helps keep those liabilities sustainable as a % of GDP.
- EG must match or exceed grwoth in foreign liabilities to prevent those liabilities from becoming unmanageable
75
Why might high growth increase income inequality?
Stronger growth should reduce inequality by lowering UE, but the beenfits of grwoth go mostly to skilled workers or business owners
- it decreases absolute poverty but increases relative poverty and widens the income gap
76
What determines the impact of growth on inequality?
Government policy—policies that promote fair income distribution can reduce inequality, while regressive or neutral policies may allow inequality to rise
77
What is ecologically sustainable development?
It’s a growth strategy that aims to avoid irreparable environmental damage while still allowing for economic development.
78
Can economic growth occur without harming the environment?
Yes. Growth can occur with cleaner technologies and renewable energy, which can create new industries, jobs, and exports while reducing emissions.
