11.1- Economic Growth

Define short run economic growth

What can cause SR economic growth

An increase in the amount of goods and services produced stemming from something other than more FOP

Could occur from SRAS increasing (Reduction in costs or Increase in productivity)

Could occur from an AD increase

Define long run economic growth

An increase in an economies productive capacity after increased FOP

This is can be also explained by LRAS increasing

Will economic growth always cause an increase in living standards`

No - if population increases faster living standard will fall

No - If there is a large income/ wealth inequality then living standards will not increase

What will cause supply side growth

Changes in SRAS or LRAS (costs falling, productivity improvements, better FOP (quality and quantity)

Non-inflationary

What will cause demand side growth

Factors of AD increasing (C + I + G + (X - M))

Will be inflationary unless economy is operating below full capacity before the growth

Name each section of the Business/ Economic cycle

Boom, Recession, Slump, Recovery

Describe what occurs in an recovery - 4 main details

Output and employment begin to increase

Consumption increases as consumers have more disposable income - Multiplier

Firms begin to use their spare capacity

Business confidence increases, increase investment - accelerator starts

3 Advantages of a boom

Business and consumer confidence is very high

Very high levels of demand

Increased levels and production and output

Investment is high due to high confidence in the economy

3 Drawbacks of a boom

Skilled workers already employed and so there is a lack of skilled workers in the labour market so to attract more firms increase wages - this leads to inflation

Goods and services are in higher demand and so become scarce - inflation

Interest rates are increased to keep down inflation - more saving less spending

Wage price spiral

UK goods are not competitive with alternatives

Purchasing power diminishes as imports increase - due to more income

What does it mean for a countries goods to be competitive

A countries ability to produce and sell goods and services in international markets

What can increase a countries competitiveness

Price competitiveness - lower inflation will increase competitiveness, Higher productivity lower costs per unit lower price, Better infrastructure lowers production and distribution costs - lower prices

Non-price competitiveness - Focuses on quality, brand reputation and innovation

Benefits of competitiveness

Higher Exports: Competitive goods are more likely to be exported

Increased standard of living - increased consumer choice, lower prices

Characteristics of a recession

Increased FoP costs from Boom eats into profit so firms invest less

Income and output starts to fall as firms can’t keep on employing expensive workers leads to high levels of spare capacity. Leads to businesses closing as costs too high or mergers/ takeovers

Confidence falls

Wealth falls - wealth effect further decreases consumption

Inflationary pressure falls as there is less demand and spending

Characteristics of a slump

Low production, so lots of spare capacity

Unemployment rises as firms close or cut back on workforce due to small demand

Low inflation - possibly deflation as goods and services are in low demand

Low interest rates to get spending going

As confidence is low, investment is low (Low demand for capital, capital price falls) however low price of capital will encourage investment due to potential for returns - brings around recovery

Prices falls so goods become price-competitive with foreign goods - higher demand, higher exports

What is an output gap

Where GDP differs from Capacity or trend level of GDP

Can be shown in classical by equilibrium being different to LRAS

What effects does a negative output gaps have on the economy

Downward pressure on inflation,