Economic Growth Flashcards
(20 cards)
Define Economic Growth
An increase in Real GDP in a year caused by an increase in AD or LRAS
What is Short Run Economic Growth?
Actual Growth, caused by an increase in aggregate demand by using spare capacity to increase Real GDP and close a negative output gap - moving towards YFE
What are some causes of Short Run Economic Growth?
- Lower Interest rates [C + I + G + (X-M)]
- Lower taxation [C + I]
- Higher Consumer / Business Confidence [C + I]
- Higher Government Spending [G]
- Depreciation of Currency [(X-M)]
What is Long Run Economic Growth?
Potential Growth, caused by an increase in LRAS, which is an increase in the productive capacity of the economy
*potential is at a higher rate
What are the causes of Long Run Growth?
- Quantity of FoP
- Quality of FoP
- Productive Efficiency
What are the specific factors that connect with these reasons?
- Labour Productivity
- Increase in Workforce
- Investment in Capital Goods [imp]
- Improvement in Infrastructure
- Increase in Competition
- New Resource Discoveries
What is an Economic Cycle?
It shows the natural fluctuations in Economic Activity over a period of time due to expansions and contractions
What are the 4 phases of the Economic Cycle?
- Peak : Boom
- Fall : Recession
- Lowest : Trough
- Rise : Recovery
Recession : Two successive quarters of falling GDP
How do you show Output Gaps in a Economic Cycle?
Boom [Actual Growth > Potential Growth] : Positive Output
Trough [Actual Growth < Potential Growth] : Negative Output Gap
Explain the Boom in the Economic Cycle
- Growth is faster than trend
- High production activity
- Higher Profits
- Low Unemployment
- High Business / Consumer Confidence [More injections]
- High demand for imports
- Higher Tax Revenues
- Likely to be demand-pull inflation
Explain the Recession/Trough in a Economic Cycle
- Declining AD [Negative output gap]
- High unemployment
- Sharp fall in consumer/business confidence
- Destocking to maintain profits
- Low demand for imports
- Likely to be lower inflation and loose macro-policies
Explain Recovery in the Economic Cycle
- Rising Consumer Confidence
- Higher house prices
- Rising Business Confidence - Higher investment
- Loose macro-policy
Why are there fluctuations in Actual Growth?
- Demand-Side Shocks
- Supply-Side Shocks
What are some Demand-Side Shocks that could cause these fluctuations?
- Sudden cuts in Government Spending
- Sudden rises in Interest Rates
- Sudden Appreciation of Exchange Rate
- Sudden higher Taxation
What are some Supply-Side Shocks that could cause these fluctuations?
- Sudden increases in wages/raw materials
- Depreciation of Exchange Rate
- Wars or Natural Disasters
What are some Benefits of Economic Growth
- Higher disposable incomes [profits, wages, job access, productive - Material and Immaterial living standards]
- Higher Employment [Derived Demand]
- Higher Profits for Firms [Investment - Accelerator Effect]
- Fiscal Dividends [Income tax, Corporate Tax, VAT, Tariff Revenues]
What are some Costs of Economic Growth?
Rampant Growth
- Inflation [positive output gap] - erodes purchasing power
- Income inequality [Ex. Capital intensive production growth, Rural vs Urban - income divides - lack of income distrubution]
- Environmental Growth [Negative Externalities]
- Current Account Deficit [Sucking in of imports]
Evaluate Economic Growth
- Sustainable Growth
- Inclusive Growth
- Balanced Growth [not just one dominant sector]
- Role for private sector and government
What are some ways to ensure Sustainable Growth?
- Pigouvian Taxes on Polluting Firms
- Pollution Permits
- Subside cleaner energy
- Information Provision / Nudges
What are some ways to ensure Inclusive Growth?
- Redisturbution of Income policies
- Improvement in geographical / occupational mobility of labour
- Trade union legislations to protect workers
- Improved education access
