The Measurement of Macroeconomic Performance (9)

Economic Growth

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  • Created by: Dakota
  • Created on: 07-02-17 17:19

Short Run and Long Run Economic Growth

Short Run Economic Growth - Occurs through better use of factors of production

Long Run Economic Growth - Occurs because maximum output can increase (usually due to increased productivity)

Short Run vs Long Run

72 year rule - 1% increase in GDP per year = doubling size of economy in 72 years (Exponential relationship) 

Output Gap = Potential GDP (LR)  - Actual GDP (SR)

If actual exeeds potential, there's a positive output gap. (Little spare capacity)

If potential exeeds actual, there's a negative outut gap. (Room for growth and spare capacity)

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Economic Growth

Economic Growth occurs because:

  • Aggregate Demand - growth in total demand for goods and services at given price level in given time limit
  • Aggregate Supply - The economy needs to be able to increase the supply of products and services.

AD and AS both required for Economic Growth.

Aggregate Demand - Demand for whole country

Aggregate Demand = Domestic Demand + International Demand

Domestic demand - The demand within the country

International demand - The demand for all parts of the world

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Aggregate Demand

Aggregate Demand affected by:

  • The amount people spend on consuming products (C)
  • The amount of capital that is invested by companies into businesses (I)
  • The amount spent by the Government (G)

Domestic Demand = C + G + I

International Demand or Foreign Demand is affected by:

  • The value of products sold to foreign countires - Exports (X)
  • The value of products bought from other countries - Imports (M)

The difference between X and M (X-M) is called the Balance of Trade

If the balance of trade is negative, it is called a Balance of Trade deficit.

If the balance of trade is positive, it is called a Balance of Trade surplus.

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Aggregate Demand (Pt 2) and The UK Economy

International Demand or Foreign Demand = X - M

Aggregate Demand (AD) = Domestic Demand + International Demand

AD = C + G + I + ( X - M )

(Consumption + Government + Investment + (Exports - Imports)

The UK Economy

The UK is in debt and taxes are used to repay. The opportunity cost of repayment is huge.

Factors that affect consumption:

  • Level of earnings and available disposable income
  • Wealth - the value of what you already own
  • Confidence
  • Age
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Consumption and Investment

Factors that affect consumption (cont.):

  • Distibution of income in the economy
  • Prices
  • Ability to borrow money

The Government can change conditions to influence people to spend their money on consumption - therefore increasing AD

Increasing spending on consumption can happen quickly in the short term.

Increasing spending on consumption has the effect of increasing people's earnings and incomes, this can be shown in the Multiplier Effect Model.

Factors that affect Investment:    (The money directly invested in capital stock)

  • Businesses expectations about the future of the economy
  • The level of output in the economy
  • Taxes
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Investment cont.

Factors that affect Investment (cont.):

  • Advances in technology
  • Cost of technology

Factors affecting Government spending: (Amount of money government will spend on economy)

  • Government Policy
  • Current level of economic activity
  • Political events: elections/wars/global events
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