LS10- Economic Growth Flashcards
Economic growth
Sustained growth in GDP, AD, improvements in productive potential of an economy.
An increase in LRAS will increase the productive potential of an economy, increasing its output- this is achieved by improving the quality and quantity of FaoPr.
Land
A more efficient and increased use of land and the natural resources in it can lead to increased LRAS, and hence, economic growth.
Labour
Increase in the quantity and quality of the labour force can increase economic growth- can be caused by rise in birth rates, increase in immigration, better training and education, participation rates.
Capital and technological processes
The stock of capital needs to be increased to improve productivity and output, meaning there needs to be sustained investment into capital. However, investment does not always leads to growth. Some investment is not growth related e.g. it’s often argued that investment in new housing does not lead to future increases in real GDP. Investment can also be wasted if it takes place in industries in projects which fail to be commercially successful.
Improvements in technology- cut costs of production and time taken for production; produces new products for the market which raises consumer spending.
Efficiency
Increased efficiency leads to better productivity and hence more growth. Competition can lead to better efficiency- firms compete against each other, due to the profit motive, trying to meet consumer demands, and trying to lower costs- increases productivity.
Economic cycles
Fluctuation in the economy’s growth over time- measured in GDP
Boom-> Downturn-> Recession-> Recovery-> Boom…
Boom
- Economic growth- GDP/GNI is high
- Economy working beyond full employment
- Consumption (more imports), investment, expenditure is high
- Wages will be increasing
- Inflation will be increasing
- Tax revenues high
- Can lead to overheating- no spare capacity, leads to DOWNTURN
Downturn
- Unemployment begins to increase
- Output and income start to fall- net exports fall
- Consumption and investment
- Tax revenue falls- govt expenditure on benefits rises- budget deficit increases
- Inflation falls
- Economic growth starts to fall
Recession
- Bottom of the cycle- economic activity is at a low, economic growth decline
- High unemployment- disposable income is low
- Consumption and investment falls
- Deflation possible
Recovery
- Output/income starts to increase
- Unemployment begins to fall
- Consumption, investment imports start to rise
- Inflationary pressures start to rise
- Rate of growth starts to increase
Output gaps
Gaps between actual and potential output.
Positive OG- GDP is above productive potential- BOOM
Negative OG- GDP is below productive potential- lot of spare capacity- RECESSION
Benefits of economic growth
- Life expectancy, healthcare improves
- More employment, more income
- Housing standards increase
- Quality of education rises
Drawbacks of economic growth
- Growth is not sustainable- if the economy keeps growing forever, our finite resources will not have enough time to replenish, as they will always be in use- they will run out as they will be used unsustainably
- Increases in production and output can lead to more pollution, from factories, etc- contributes to climate change/global warming
Evaluation of drawbacks of economic growth
- As demand for resources rises, price also increases, rationing function kicks in- makes it so that only the people that can afford the higher prices can purchase the goods- decreases demand, lowering the rate of use.
- This means that the exploration of alternative resources rises- demand drawn away from traditional resources, more substitutes- better for environment
- Govt regulations and incentives can be used to reduce the impacts of pollution, and stop overuse of finite resources
Impact of economic growth on consumers
- Rising household income- more consumption
- But, most households may not see any gain, as most of the rewards of economic growth go to the wealthiest, who tend to hold assets
