Test Revision Flashcards
(21 cards)
How does higher gdp = lower not material SOL
Higher real gdp>more output produced>more greenhouse gases produced>more pollution>worsen health>lower non mat sol
Or
Higher real gdp > more output produced>longer working hours>less leisure >more stress>worsen health>lower non mat sol
Real GDP increase –> higher material. How?
What is actual growth(AD)
And
How to achieve actual growth
actual growth is the percentage annual increase in national output over a period of time short run increases in output due to greater utilisation of present capacity .
Lower I/r/ > rising C > higher AD > actual growth
Or
Consumers anticipating higher future income and promotions will tend to increase current consumption as they feel more confident about their future income > rise in C > rise in national output > actual growth.
Or
Higher demand for exports > rise in AD > actual growth

What is potential growth?
(productive capacity)
How is it achieved?
Potential growth is concerned with the increase in economies, potential output increase in the capacity of the economy to produce more goods and services
Outward shift in AS
1. Growth in quantity and quality of economy available resources
2. Improvement in state of technology.
Effects of negative economic growth.
Household income levels for and reduce the purchasing power coupled with a fall in savings. The household ability to consume good and services is reduced> fall in SOL
The economy is producing a lower level of output, the less goods and services available to satisfy population needs and wants> fall in SOL
 When firms produce lower level of output, derived demand for labour will fall raising unemployment within the economy. This would cause a fallen wages and reduce consumption of goods and services.> fall in SOL
Effects of low and slow growth
Income is still rising, assuming tax rates remains, unchanged government tax revenue will rise by a smaller extent.
During the economic slowdown, the government may increase spending biological extent to stimulate economy. Hence, since the rise in G is greater than the rise in T, government may face a budget deficit, which may worsen the governments debt
Effects of high and rapid growth
Rapid growth coincides with higher inflation rates rising A.D. along the vertical section of AS cause of living will rise as a general price level increases in the economy.
what are the benefits and consequences of economic growth
higher economic growth directly reflects higher Real GDP thus material benefits.
Consequences
- higher levels of pollution –> Impact on non material SOL
- greater levels of inequality due to structural unemployment.
types of unemployment
- frictional unemployment
- structural unemployment
- demand-deficient unemployment (cyclical)
what is frictional unemployment
Occurs due to the time lag when people change jobs, shifting between companies or move from one region to another
what is structural unemployment
occurs when an economy undergoes structural changes due to changing consumer demand and technology. Resulting in certain industries and skills becoming obsolete and at the same time such change create demand for other industries and skills
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what is demand-deficient unemployment.
when the economy is experiencing a recessionary phase of the trade cycle. It is caused by a decrease in aggregate demand.
Unemployment and its effects in a country
material aspect.
High unemployment > income falls > reduced purchasing power > less ability to consume goods and services > lower levels of material needs and wants > lower material aspect of SOL.
non-material aspect.
Higher unemployment > rising crime and increased social problems > worsening health and lower life expectancy > negatively affects non-mat SOL.
unemployment and its effects on the producers
When there is rising unemployment > less purchasing power > less demand for goods and services in an economy > business expectations are affected > firms would hold back from making investments > suffer from lower profits as they lose sales that could have been made at full employment. > investment decrease, production decreased also.
explain how does an increase in exports would result in demand pull inflation.
When X rises > AD rises > when the AD curve shifts right there would be more competition for scare resources > Higher prices for resources > higher prices of final goods and services. > DD-pull inflation.
when will demand pull inflation be good
when it is low and stable inflation, workers can factor in the effects of inflation into their wage agreements > real wage rises > higher purchasing power > higher SOL.
Higher Prices > signal to firms of rising demand > higher revenue > given costs rises at a slower rate > higher profits > higher investments by firms > higher economic growth and employment.
when will demand pull inflation be bad
high inflation affects the poor more than the rich.
why? because the rich can rely on past savings to maintain their SOL. Poor may not be able to access basic goods and services leading to a fall in material SOL
explain how wage change lead to cost push inflation
Assuming wages rise faster than productivity > unit labour cost rise > cost of production rises > AS curve shifts upward > GPL rises > higher cost push inflation.
How is high cost push inflation bad on trade and investment
change in X
If a country inflation rate is higher than other country > Prices of exports rise > assuming demand of good is price elastic > quantity demanded for exports falls more than proportionately > country’s X earnings fall
change in M
Locals will also spend more on relatively cheaper foreign imports. Hence country’s X-M fans worsening balance of trade.
change in I
high cost push inflation > reduce profits of firms and creates greater uncertainty > firms reduce investment > reduce growth and employment.
What are the limitations of an expansionary fiscal policy.
- problems of financing G
- if financed by borrowing > national debt increases > greater burden on future generations to pay back the debt through higher tax which decrease SOL of future generation. - crowding our effect
- When government borrows money from financial sector to spend > increased competition for limited funds > interests rates rise > higher cost of borrowing > lower C,I > lower extent of rise in AD of expansionary FP > lower effectiveness of expansionary FP. - size of multiplier
- if the size of multiplier is small > higher AD may not bring about large increase in National Income > reduced effectiveness of expansionary FP
