2.5 economic growth

why is economics growth an important objective

increase econ growth - increase GDP - increase income - increase living standards

main causes for economic growth

• AD - increase AD - increase Real GDP

• AS - increase AS - increase productive capacity

factors that would increase AD therefore cause econ growth

• Consumption

• Investment

• Govt expenditure

• Net exports

what can cause an increase in AS

• supply side policies

• technological advances

• relative productivity

• changes in education + skills

2 types of econ growth

• Short run growth (actual growth)

• Long run growth (potential growth)

actual growth

the year-on-year increase in a country's real Gross Domestic Product (GDP), which reflects the economy's actual performance

features of actual growth

• caused by increase in AD

• can also be caused by increase in SRAS

• can be achieved through changes in Govt policy

• measured by increases in Real GDP

potential growth

Growth caused by the expansion of the economy’s productive capacity - Long run growth

features of potential growth

• caused by increase in LRAS

• UK long run growth estimated between 2-2.5%

actual growth vs potential growth on a PPF

A-B - actual growth

B-C - potential growth

the importance of international trade for economic growth

• increase in exports - increase AD

• increase in net x(-m) - increase actual growth

• increase x - should help trade balance (current account)

• increase x - multiplier effect

output gaps

whene there is a difference between actual vs potential growth

positive output gap

• decreasing unemployment - increasing demand for resources

• increase costs - increase inflation

negative output gaps

occurs when actual growth< potential growth

• increasing unemployment - decreasing AD

• inflation likely to fall due to decrease AD (D.pull pressure) + decreasing costs

trade cycle

periodic fluctuations in economic activity, typically encompassing periods of expansion, followed by periods of contraction (recession), and then recovery

boom

the period where actual growth is above trend leading to a “peak”

recession

the period where actual growth falls (negative) for 2 successive quarters

characteristics of boom

• above trend of economic growth

• unemployment pull - low labour market - “skill shortages”

• inflation rises

• high business/consumer confidence

why are there skill shortages in a boom

low labour supply - where employers need certain skills but there is a low availbality of them

characteristics of a recession

• low/falling econ growth

• unemployment high

• inflation pull is low (possible deflation)

• low business and consumer confidence

benefits of econ growth

• increase income

• increase bus. confidence

• increase emplyment

• increase tax revenue

• increase tax and decrease Govt spending - improve fiscal situation for Govt

costs of econ growth

• increase negative externalities

• increase inflation - costs of living

• likely increase in wealth inequality

• increase resource depletion and degradation - increase external costs

• increase income - increase imports - worsen current account

impact of econ growth on consumers

• increase in prices of houses and shares - leads to a positive wealth effect

• improved technology could lead to lower prices or higher quality goods

• may lead to increased happiness

• could lead to increased externalities

• may lead to inflation

impact of econ growth on firms

• increase investment

• increase business confidence

• improved technology - lower costs

• higher profits

• firms that sell inferior goods may lose out

• changing technologies may cause some markets to disappear e.g. DVD rental stores