Economic Growth

Define economic growth

Economic growth is an increase in real GDP in an economy in a year caused by increases in GDP or LRAS

What is short run growth

Draw short run growth

An increase in AD (Using spare capacity to increase real GDP)

What is long run economic growth

An increase in LRAS (Increase in the productive capacity of the economy

Draw the economic cycle

What are the characteristics of a boom

Growth faster then trend (Positive output gap), High profits for firms, low unemployment, high confidence for businesses and consumers, high demand for imports, Rising tax revenue, inflation

What are the recession/ trough characteristics

Declining AD, high unemployment, Sharp falls in confidence/ investment, De-stocking, discounts on prices, fall in house prices and construction, lower inflation, loose macro (expansionary) policy, low demand for imports

What is the characteristics of a recovery

Rising consumer confidence, higher house prices, rising business confidence, higher investment, increase in construction, loose policy

Define demand side shock

Unexpected change which decreases AD

Define supply side shock

An unexpected change leading to SRAS changing

Benefits of economic growth

Higher disposable income - firms make higher profits could translate to higher wages but more notably employment rises with economic growth meaning more economic agents receive a wage

Higher employment - derived demand from higher output (Need a bigger workforce to produce more goods and services)

Higher profit for firms - Higher profits for firms as households are spending - accelerator effect? Increased investment?

Increases in tax revenue - higher profits for firm result in more tax, higher incomes leads to more tax collected

Drawbacks of economic growth

Higher demand pull inflation (Especially when an positive output gap exists)

Income inequality - One sector dominance (UK finance sector), More capital intensive (Less money given to poorer individuals through wages), Rural vs Urban, Poor quality jobs (low hours and pay?), Lack of welfare state supporting the poor

Environmental costs - Deforestation, Resources degradation, Air pollution

Current account deficit - Households spend more money on imports as incomes grow

What is balance of payments deficit

Imports> Exports

Evaluation / Judgement points

Sustainable growth - Growth without inflation and severe environment costs

Inclusive growth - Whole of society benefits from growth

Balanced growth - Growth not just from one variable or one sector but from everywhere

Role for private sector - Paying worker well, investing in new capital

Role of government - Tax is set correctly, environmental policies, redistribution policies, Supply side policies to keep inflation under control