Economic Growth Flashcards
(17 cards)
Define economic growth
Increase in national output as measured by real GDP
What is the difference between actual and potential growth?
Actual economic growth occurs when there is an increase in the quantity of goods/services produced in an economy in a given period of time.
Potential growth is the increase in the productive potential of an economy as demonstrated by an outward shift of the PPF or the LRAS.
Actual Growth is usually < Potential Growth
How is actual growth caused?
An increase in the components of AD
- Consumption
- Investment
- Government Spending
- Net Exports
What is the importance of international trade for export-led growth?
International trade is an important source of income for many countries. For many developing countries, exports represent a high percentage of the annual AD and gross domestic product (GDP). When the value of the exports rise, the real GDP rises significantly - and vice versa.
What are the causes of potential growth?
- Domestic investment and foreign direct investment (FDI)
- Innovation
- Growth in size of labour force, including net migration
- The degree of competition
What is the importance of productivity for the rate of economic growth?
Higher productivity means more output from the same resources, driving real GDP growth, improving living standards, enabling higher wages, boosting profits, and encouraging more investment.
What are the possible benefits of economic growth?
- higher living standards
- lower unemployment
- increased profits for firms
- higher levels of investment
- increased tax revenues
- improved public services.
Suggest possible costs of growth.
- opportunity costs
- environmental costs
- balance of trade deficits
- increased inequality
- inflation.
What is the difference between actual growth and long-term trends in growth rates? How can it be used with respect to the impact of outliers in an economy?
A long-term growth trend is the underlying trend rate of economic growth over a longer period of time (determined by constant increase in the aggregate supply/productive capacity of an economy). Long-term growth trends reduce the impact of outliers in an economy.
Actual economic growth is when there is an increase in the quantity of goods/services produced in an economy over a given period of time.
What is an output gap?
The difference between actual output level (real GDP) and the maximum potential level of output
What’s a positive output gap?
real GDP > potential real GDP
What’s a negative output gap?
real GDP < potential real GDP
due to spare capacity in the economy to produce more goods/services than are being produced
Why is it difficult to measure output gaps accurately?
- Difficult to know what exactly the maximum productive potential of an economy is
- Rapidly rising prices indicate a positive gap is developing even if it’s not always the case
- Rising unemployment and slowdown in economic growth can indicate that a negative gap is increasing even if it’s not always the case (for example, more artificial intelligence may be used)
What is a trade (business) cycle?
The changes in real GDP that occur in an economy over time (the actual growth). It fluctuates above and below the long-term trend rate of growth.
What are the 4 recognizable points in the business cycle?
Boom, slowdown, recession and recovery
What are the characteristics of a recession?
- 6 months or more of negative economic growth
- High unemployment
- Increasing negative output gap and spare production capacity
- Low confidence for firms and households
- Low inflation
- Increase in government expenditure perhaps leading to a great budget deficit
What are the characteristics of a boom?
- Increasing/high rates of economic growth
- Decreasing unemployment and increasing job vacancies
- Reduction of negative output gap or creation of positive gap
-High confidence and more risky decisions taken - Increasing rate of inflation (usually demand-pull)
- Tax revenue rises, government expenditure falls
