Edexcel Economics 2.5

Factors which cause long run economic growth (4)

1. Investment

2. Research and supply

3. Innovation

4. Labour supply

Factors which could cause short run economic growth (4)

1. Changes in interest rates

2. Resource prices

3. Consumer and business confidence

4. Exchange rates

Export led growth

Where a significant part of the expansion of GDP flows from exporting of goods and services to other countries.

Accelerator effect

When higher investment increases a country’s productive capacity which then increases the potential for exports.

Advantages of export-led growth (3)

1. Exports is an injection in circular flow of income, leading to a rise in aggregate demand and an expansion of output.

2. Growing exports provide revenues for businesses which can lead to an increase in investment through the accelerator effect.

3. International trade can increase the amount of competition between domestic producers.

Disadvantages of export-led growth (4)

1. Focusing on exporting might lead to over-dependence of other countries ability to import.

2. Production capacity allocated to supply goods and services for export cannot be put to use meeting domestic needs and wants. A decrease in domestic living standards, unless they spend a lot of their revenue on imports.

3. It may lead to demand pull inflation and higher interest rates.

4. It may be unsustainable if the extraction of resources, compromises the future generations ability to use this resource.

Output gap

The difference between the actual level of GDP and its estimated potential level.

Negative being lots of spare capacity in the economy, and positive actual is greater than potential GDP.

Stages of the trade/business cycle (5)

1. Boom-A period when the rate of growth of real GDP is fast and higher than the long term trend.

2. Slowdown-A weakening of the rate of growth, real GDP is still rising but increases at a slower rate.

3. Recession-A period of at least 6 months when an economy suffers a fall in aggregate output.

4. Recovery-A phase after a recession or slowdown, during which real GDP starts to increase and unemployment begins to fall.

5. Depression-A prolonged downturn in the economy and where a nations GDP falls by at least 10%.

Characteristics of a boom (8)

1. Rising income

2. Rising household and business confidence

3. Fall in unemployment

4. Rising inflationary pressure

5. Rising business profits(unless they sell inferior goods)

6. Increasing use of scarce resources

7. Rising investment (accelerator effect)

8. Falling budget deficit

Characteristic of a recession (8)

1. Falling income

2. Falling household and business confidence

3. Rise in unemployment

4. Falling inflationary pressure(if caused by a lack of demand)

5. Falling business profits(unless they sell inferior goods)

6. Possibly less use of scarce resources and reduced environmental impact

7. Falling investment (accelerator effect)-more sharp fall

8. Rising budget deficit

Possible causes of a recession (4)

1. External events such as covid19 or a recession in trading partners.

2. Tightening of a macro policy - rise in taxation or cut in gov spending.

3. Fall in asset prices or supply of credit

4. A drop in business and consumer confidence(investment cut-loss of jobs)

Short term effects of a recession (4)

1. Fall in confidence

2. Cyclical unemployment

3. Lower rate of inflation

4. Growing fiscal deficit

Long term economic effects of a recession (2)

1. Rising structural unemployment

2. Cut in public services because of fiscal deficit and debts.

Long term social effects of a recession (2)

1. Falling real wages, decrease in living standard

2. Increase in income inequality, leading to poverty

Benefits of economic growth (4)

1. Higher living standards - decrease in extreme poverty.

2. Creation of jobs - decrease in unemployment.

3. Higher economic growth allows gov to spend more on public services.

4. Accelerator effect - rising growth stimulates new investment

Costs of economic growth (3)

1. Risks of higher inflation and higher interest rates.

2. Environmental effects (negative externalities such as pollution)

3. Inequalities of income and wealth.