Economic Growth Flashcards
Actual Vs Potential Growth
Actual Growth
- △In R.GDP
–> add all incomes (or) spending (or) output of country
Potential Growth
- How much an economy could produce if there was full employment of all resources
–> reflected in LRAS movement
–> determined by potential size of labour force, capital stock, natural resources + productivity
–> Difference between potential and Actual is an output gap
What is an output Gap?
- Difference between Actual growth (GDP) and Potential growth (GDP)
What two factors can cause Economic Growth?
- Change in AD
- Change in LRAS
–> both result in new equilibrium R.GDP
What can cause a △in AD?
- △Consumption –> e.g. higher wages, cuts in tax, or wealth effect cause ↑Consumption
- △Investment –> e.g. Increase confidence, lower interest rates cause ↑Investment
- △Gov. Expenditure –> e.g. Political priorities
- △Net Exports –> Depreciation of currency cause ↑Net. Exports
–> All cause ↑AD
–> AD = C+I+G+(X-M)
What can cause a △in LRAS?
- △Investment –>e.g. more infrastructure cause ↑Investment –> ↑LRAS
- New Technology –> e.g. AI or robots cause ↑LRAS
- △Net Migration –> e.g. making it easier for people to migrate to country cause ↑Migration –> ↑LRAS
- Supply Side policies –> can increase productivity –> ↑LRAS
What factors would reduce Economic Growth?
- Corrupt Government
- Protectionism limiting free trade
- Lack of Access to funds for investment
Why is International Trade Important for Economic Growth?
- ↑Exports causes ↑AD, with Multiplier effects
- Export-led growth can improve balance of Payments
How can you stimulate Exports? (Increase Exports)
- Depreciation in Exchange rates
–> by cutting interest rates, makes Exports relatively cheap + Imports expensive - Improve productivity and efficiency in export markets
–> Provide incentive for investment in new tech
Difference between Actual Growth rate and Long-term trend rate of Growth?
- Actual = Rate R.GDP changes from one year to another
- Long-term trend = Average rate of growth over several years
When does a Negative output Gap occur? + draw graph
- Occurs when Actual Growth rate are below potential growth rates
- Keynesian’s believe this can occur in LR
- When Y1 (R.GDP) is below Yfe (Full employment)
–> AD curve is below Yfe AD curve
When does a Positive Output Gap occur? + Draw Graph
- When growth rates are higher than Economy can sustain
Classical = temporary, as market self correcting
Why is measuring output gap’s hard?
- hard to measure level of potential output
–> it depends on spare capacity and hard to estimate - Resources available could not be suited to needs of economy
Draw + label the trade (business) cycle
Solid / stable upwards sloping line labeled growth trend
around that is a less stable line, going up and down
- Troughs of this are slumps, followed by recovery, with peak labeled boom, then recession and back to Slump
- Boom = when rate of growth is higher than long-term trend, rapid economic growth
- Slump = negative economic growth, can result in recession if occurs for 2 consecutive quarters
What are the Characteristics of a Boom + Recession?
- Low unemployment
- Low underemployment
- ↑Standard of Living
- ↑Investment
- ↑Inflation caused by ↑AD (↑PL)
- ↑Income Inequality - due to rising asset prices
–> Recession is opposite, apart from Inequality
- ↑Unemployment
- ↑Underemployment
- Low Standard of Living
- Low Investment
- Low Inflation as AD↓
- ↑Income Inequality - due to high unemployment
Impact of Economic Growth on Consumers
Benefits of Growth
- ↑R. Incomes –> Afford more Goods + services –> ↑Standard of Living e.g. life expectancy
- ↑R. Incomes –>↑ Subjective happiness
Negatives of Growth
- ↑Rates of Inflation –> R.Income falls
- ↑Working hours –> ↑stress
- Limit to how much Incomes effect happiness after certain point
- ↑Obesity + Diabetics due to more food
