Economic performance Flashcards
(124 cards)
What is Short run economic growth?
The percentage change in the real GDP of a country from one year to the next.
What is Long run economic growth?
occurs when the productive capacity of the economy is increasing
How is SR growth shown on a PPF diagram?
The PPF would remain constant, it is a movement from point A to B.
How is long run growth shown on a PPF diagram?
PPF would shift outwards
How does increased capital investment lead to economic growth?
- Economies of scale and better competitiveness
- Investment helps to sustain export-led growth
- Bigger capital stock can lift productivity/incomes
What is a positive output gap?
occurs when the actual level of output is greater than the potential level of output. ( usually means there is the unemployment of resources in an economy)
What is a negative output gap?
occurs when the actual level of output is less than the potential level of output. (It could be due to resources being used beyond the normal capacity)
How do you illustrate an output gap on a AD AND SRAS DIAGRAM?
A negative output gap is between Ye and Y1, and a positive output gap is between Ye and Y2.

What are some of the benefits of economic growth?
- Higher living standards, reducing absolute poverty e.g higher GNI per capitaL-
- Accelerator effect
What are some of the economic and social costs of economic growth?
- Risks of higher inflation and higher interest rates
- Environmental effects
What are the characteristics of a boom?
High rates of economic growth
- Near full capacity or positive output gaps
- (Near) full employment
What are the characteristics of a recession?
Negative economic growth
- Lots of spare capacity and negative output gaps
- Demand-deficient unemployment
What is a recession?
two consecutive quarters of negative GDP growth
What problems may a positive output gap cause?
Main problem is rising demand-pull and cost-push inflationary pressures
What are the possible effects of a negative output gap?
- unemployment
- less inflationary pressures
Why may growth not be sustainable?
Fast growth may deplete supplies of natural resources and create future environmental problems meaning future growth may be weak.
What are 3 methods of measuring national income?
Income method ( wage) = Expenditure method (consumption = Output method ( primary, secondary)
What is net investment?
Net investment is total capital expenditure minus depreciation of assets. Net investment gives an indication of how much the effective productive capacity of a firm is increasing
What does deprication mean?
A decline in value for example, if a machine breaks down and is no longer useable..
What is gross investment?
It is the total amount the economy spends on new capital goods.
When is net investment postitive?
Net investment can only be positive if capital accumulation is > depreciation and depreciation always occurs
Suppose, in the first year of business, a firm invested £2 million on new machines. In this first year, the gross investment (£2m) would be the same as the net investment (£2m) – because there is no depreciation.
However, in the second year, let us imagine one machine worth £0.5m breaks down.
In the second year, if the firm spends an extra £1.3 million on buying new machines. Then in the second year:
Gross investment = £1.3 million
Depreciation = £0.5 million (the machine that broke down)
Net investment = £0.8 million
At the end of the second year, the firm has machines with £2.8 million which are working.
If a firm has depreciation of £5 million, but only spends £3 million on capital expenditure, What is the net investment?
Then it is seeing negative net investment of £ -2million. The productive capacity of the firm will be declining which may affects its ability to produce goods in the future.
What are costs to a consumer of economic growth?
Consumers could face more shoe leather costs, which means they have to spend more time and effort finding the best deal while prices are rising.
The benefits of more consumption might not last after the first few units, due to the law of diminishing returns.


