Theme 2.5 (Economic Growth)

Define economic growth

expansion of the productive potential of the economy

What can economic growth be represented as

-an outward shift in the PPF

-outward shift in a country's LRAS curve

What can economic growth be measured by

the annual change in real GDP

What causes economic growth

increase in:

-The quantity of the factors of production

-The quality of the factors of production

-There is a technological advance

What is long run growth

an increase in potential output

What is short run growth

an increase in real GDP, driven by an increase in AD that draws unemployed resources into use

What factors cause economic growth

-improving the labour force = better quality due to higher education

-a larger labour force = due to migration, birth rates or improved participation rates

-improved technology - means resources are used more efficiently

-incentives for enterprise, such as tax breaks or subsidies

What is actual growth

-the %increase in a country's real GDP and usually measured annually

-It is caused by increases in AD

What is potential growth

is the long run expansion of the productive potential of an economy

-It is caused by an increase in AS

-what the economy could produce if resources were fully employed

What is export-led growth

when countries open up their economies to the international market and increase the sale of goods/services to foreign countries

What is comparative advantage

when a country can produce goods and services at a lower opportunity cost than another

What is an example of export-led economic growth

China experienced significant export-led economic growth from 1988 to the global financial crisis of 2008

What is the long term trend in growth rates

the long run expansion of the productive potential of an economy

-It is caused by increases in AS

What is the potential output of an economy

The potential output of an economy is what the economy could produce if resources were fully employed

What is an output gap

when there is a difference between the actual level of output and potential level of output

What is a negative output gap

occurs when the actual level of output is less than the potential level of output

What is a positive output gap

occurs when the actual level of output is greater than the potential level of output

What causes a negative output gap

-unemployment of resources in an economy

-labour and capital not used to their full productive potential

-a lot of spare capacity in the economy

What does negative output gap result in

downward pressure on inflation

What causes a positive output gap

-resources being used beyond normal capacity e.g labour working over time

What does positive output gap result in

If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation

What is an example of countries with a positive output gap

China and India- have high rates of inflation due to fast and increasing demand, associated with positive output gaps

What are the difficulties of measuring output gaps

-difficult to estimate the trend in a series of data

-structure of economy often changes so estimates may not always be accurate

-changes in exchange rate might offset some inflationary effects of a positive output gap

-data not always reliable

What is a trade (business) cycle

refers to change in real GDP that occur in an economy over time

-such as economic booms and busts

What does real GDP fluctuate around

Real GDP fluctuates above and below the long-term trend rate of growth

What are the 4 points on a business cycle

1. Peak/boom

2. Slow down/ downturn

3. Recession

4. Recovery

Define a boom

a period of rapid economic expansion resulting in higher GDP, lower unemployment and rising asset prices

How can you identify a boom on trade (business) cycle

period when % rate of growth of real GDP is fast and higher than the long term trend

Define a recession

two or more consecutive quarters of negative economic growth

Define a slow down on a trade (business) cycle

a weakening of the rate of growth

What is a recovery

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

What are the characteristics of a boom (5)

- High rates of economic growth

-Near full capacity or positive output gaps (Near) full employment

- Demand-pull inflation

- Consumers and firms have a lot of confidence, which leads to high rates of investment

- Government budgets improve, due to higher tax revenues and less spending on welfare payments

What are the characteristics of a recession (6)

- Negative economic growth

- Lots of spare capacity and negative output gaps

- Demand-deficient unemployment

- Low inflation rates

- Government budgets worsen due to more spending on welfare payments and lower tax revenues

- Less confidence amongst consumers and firms, which leads to less spending and investment

What may Economic growth lead to (social aspect)

improvement in standards of living

What are the benefits of economic growth

- increased incomes lead to better standards of living

- decreased levels of absolute poverty

- improvement in the quality/quantity of environmentally friendly technologies

- higher sales revenues for firms and greater profits

- increased investment by firms increases the potential output of economy

- reduced expenditure by governments on benefits

- higher government tax revenue due to rising incomes and surging corporate profits

- increased employment resolves some of the negative social impacts of unemployment

What are the costs of economic growth

- rising aggregate demand leads to demand pull inflation (purchasing power of people on fixed incomes may fall)

- lack of equity in distribution of income (rich get richer , poor get poorer)

- environmental damage caused by negative externalities of production

- increased inflation can harm export sales

- decreased export sales may lead to a delay in investment by firms

- increased income usually leads to greater consumption of demerit goods

- greater output may requires more time from workers and can decrease leisure time and well-being