Topic 3.1 Economic Performance Flashcards
(18 cards)
Economic growth
an increase in real GDP in an economy in a year caused by an increase in AD or LRAS.
Short-run Economic Growth
Definition: when unemployed resources (spare capacity) are used to maximise factors of production and increase real GDP (on a PPF, where a point approaches the curve/AD shifts right/expansion along AD due to e.g. SRAS shifts right).
Causes: determinants of AD/SRAS
Long-run Economic Growth
Definition: an increase in the quantity/quality of the factors of production or an increase in productive efficiency (makes PPF curve shift outwards/makes LRAS shift to the right).
Causes: determinants of LRAS.
Economic cycle (definition/graph)
The economic cycle describes the growth in real GDP over time.
Straight line: Trend (potential) growth
Other line: Actual growth
x-axis: time
y-axis: RNO
4 Phases of Economic Growth (and OG)
- Boom
- Recession
- Trough
- Recovery
Positive output gap: actual growth > trend growth
Negative output gap: actual growth < trend growth
- Boom
Growth faster than trend
High consumer and business confidence
Low Unemployment
High Profits
Rising Tax Revenues
Inflation
High demand of imports
- Recession. 3. Trough
Recession: 2 successive quarters of negative economic growth.
Opposite of Boom. Unemployment in order for businesses to maintain profit margins - key indicator of negative economic growth
Fall in house prices.
Loose macro policy e.g lower interest rates, lower taxation in order to stimulate the economy.
- Recovery
Rising factors of 1. Boom
Why is actual growth not the same as trend growth
Due to either demand side or supply side economic shocks within the economy that no one expects to happen e.g. Covid-19.
Demand Side Shocks
Shocks to aggregate demand. For example a sudden rise in interest rates/sudden housing market crash which affects consumption. Higher income tax.
Supply Side Shocks
Shocks to SRAS and LRAS (shifting left). For example natural disasters shifting LRAS to the left. Or a sudden increase in the price of raw materials (increase in costs of production).
Benefits to Economic Growth
- Rise in living standards (because an increase in GDP = increase in national expenditure = increase in national income so increase living standards).
- Unemployment reduction (labour is derived demand).
- Positive impact on tax (more profits from firms = more corporation tax, more income = more tax revenues)
- Promotes investment therefore accelerator effect
Costs to Economic Growth
- Income inequality (income might not be distributed evenly within society) due to causes such as capital intensive growth.
- Higher rates of inflation - phillips curve
- Negative externalities (especially NPE - for example the current development of China causes lots of pollution).
Evaluation of Economic Growth
There should be sustainable growth: it shouldn’t be too high and uncontrolled (just from the demand side). They want a mixture of demand fuelled growth and long-run supply fuelled growth.
Policies to increase Short-run Growth
These are usually implemented during a recession.
1) Expansionary Fiscal Policy (increase in government spending and decrease in taxation)
2) Expansionary Monetary Policy (decrease in interest rates or increase in money supply through quantatative easing)
Policies to increase Long-run Growth
This is during an economic boom, wanting to operate as close to YFE
1) Supply Side Policies
- Interventionist
- Market-Based
Stagflation
This refers to the combination of:
- Stagnant (slow) economic growth
- Rising unemployment
- High and rising inflation
Very hard to treat
Stagnation
a more persistent condition of prolonged slow economic growth
