Economic Growth Flashcards
(12 cards)
What is potential growth
This measures what economic growth could be without a negative output gap. It is determined by growth of productive capacity
What is actual growth
This measures what economic growth actually is. For example, in a recession, output may be less than potential
Causes of economic growth in the short run (4)
Lower interest rates - reducing the cost of of borrowing and leading to higher investment and higher consumption (AD)
Rising house prices - leading to a positive wealth effect, encouraging consumer spending
Lower taxes - increasing disposable income
Rising exports - from higher growth in other countries
Factors that could increase LRAS (6)
Increased investment in productive capacity
Better education and training to increase labour productivity
Improvement in technology, leading to lower costs of production
Improvement in infrastructure, such as transport
Net migration causing a rise in the labour supply
Economic political stability, as it will encourage firms to invest
What is the definition of a recession
Two consecutive quarters of negative growth
What is an output gap
The difference between potential GDP and actual GDP
When does a positive output gap occur and what can it lead to
Occurs when AD increases faster than AS
Leading to inflation, lower unemployment, boom will be unsustainable
When does a negative output gap occur
Occurs when the economic growth is below the sustainable potential
What is the potential impact of of a negative output gap (5)
Resources wasted - unemployment
Low rates / negative rates of economic growth
Inflation falling below target
Fall in investment
Higher government borrowing due to falling tax revenues and higher spending on benefits
What could a negative output gap be caused by
Cutting government expenditure (austerity)
Falling house prices causing a fall in wealth and consumer spending
Rapid rise in interest rates, which increases the cost of borrowing
What are the benefits of economic growth
Higher incomes - enables higher real incomes and therefore consumers can enjoy more goods and services
Lower unemployment - with higher output, firms can employ more workers
Lower government borrowing - EG creates higher tax revenues
Improved public services - government can spend more on education and NHS
Investment
Protecting the environment - promoting recycling and renewable energy
What are the potential costs of economic growth (4)
Inflation
Boom and bust economic cycle - could cause recession
Current account deficit - higher consumption leads to more being spent on imports, leading to a deficit
Environmental costs - increased pollution and congestion, can lead to asthma, reducing quality of life
Inequality - mainly the rich benefit, but can be helped using a progressive tax
