2.5 - Economic growth

Factors which effect economic growth

Better education

Larger labour force - migration

Improved technology

More investment

Actual growth

Percentage increase in a country’s real GDP caused by increases in AD

Potential growth

Long run expansion of productive potential in an economy caused by increases in AS

Causes of actual growth

Decreased interest rates

Decreased taxes

Increased gov spending

Depreciation

Increased incomes

Causes of potential growth

Supply side policies

Gov investment

Deregulation

Negative output gap

When actual growth is less than potential growth

Puts downward pressure on inflation

Lots of Spare capacity

Positive output gap

Actual growth is higher than potential growth

Resources being used over normal capacity

Upwards pressure on inflation

Difficulty measuring the output gap

Hard to measure trends

Structure of economy often changes

Negative output gap economic effects

Price levels fall

Falling incomes

High unemployment

Huge fall in demand

Consumers have a lower marginal propensity to consume

Negative output gap effect on output

Decreased unemployment

Growth in temporary or part time work

Decreased price levels make export goods more competitive

Evaluation of negative output gap

Current account may worsen as government need to import more goods

Employment may not fall significantly as export demand rises so firms still need workers

Positive output gap effect on price levels

Price levels are higher because there is excess demand

Increased consumption due to rising house prices - positive wealth effect

Output is higher than potential as economy is working well above the potential output

Fall on unemployment

Larger current account deficit because

Higher incomes - higher marginal propensity to import

Higher prices decreases export demand

Evaluation of positive output gap

Automatic stabilisers

Contractionary policies

Business cycle

Boom

Recession

Slump

Recovery

Characteristics of a boom

High economic growth

Near full capacity

Near full employment

Demand pull inflation

Characteristics of a recession

Negative economic growth

Lots of spare capacity

Low inflation

Worsen Gov budget deficit

Consumer effect on economic growth

Increased average consumer income

Increased consumer confidence - increased consumption and investment

Low income households will be worse off due to inflation

Higher demand pull inflation

Effect of economic growth on firms

Increased profit

Increased job creation increased investment

More competition so more productive output

Higher menu costs due to inflation

Economic growth effects on the government

Increased spending on healthcare

Improved government budget as less spending