E2.5 - economic growth

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FACTORS THAT COULD CAUSE ECONOMIC GROWTH
AD INCREASE-any factor. business/consumer confidence. research and development. LRAS INCREASE-high quality of education/training. supportive government intervention. discovery of new resources. immigration of workers.
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ACTUAL GROWTH
increase in real incomes or increase in GDP. caused by increase in AD
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POTENTIAL GROWTH
increase in the productive capacity in the economy. caused by increase in LRAS/PPF
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INTERNATIONAL TRADE
increase in export led growth can shift AD to the right and cause economic growth as X is a direct component of AD and also an injection into the circular flow of income. worked for China - keeps BOP balance healthy as well.
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ACTUAL GROWTH RATES
measured by changes in real GDP over time. often very volatile and demonstrated by boost and busts on the business cycle.
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LONG TERM/TREND GROWTH RATES
the average sustainable rate of growth over a period of time. determined by changes in the productive capacity of the economy
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POSITIVE OUTPUT GAP
when the actual level of GDP is greater than the maximum potential level of real GDP. likely to have low unemployment and high inflation. unsustainable in the LR. automatic stabilisers
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NEGATIVE OUTPUT GAP
when the actual level of GDP is less than the maximum potential level of real GDP. likely to have high unemployment and low inflation/deflation.
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DIFFICULTIES OF MEASURING OUTPUT GAPS
need to estimate the economys maximum potential output level. many different variables and there is potential for these figures to be inaccurate and rough estimate due to knowledge gaps.
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TRADE/BUSINESS CYCLE
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CHARACTERISTICS OF A BOOM
HIGH GROWTH- increased C and I, ad shifts. LOW UNEMP- increased ad- derived demand for labour. DEMAND PULL INFLATION. HIGH CONFIDENCE-due to rising incomes, job stability. IMPROVING BALANCED BUDGET-less unemp-less benefits, tax.
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CHARACTERISTICS OF A RECESSION
NEGATIVE GROWTH- 2 quarters of negative growth, less C and I. HIGH UNEMP-less derived demand for labour. LOW INFLATION- ad decrease
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BENEFITS OF ECONOMIC GROWTH ON CONSUMERS
CONSUMER INCOME INCREASES-firms have less ppl to chose from, attract certain ppl w higher wages. REDUCED UNEMPLOYMENT-more jobs available due to derived demand. SOL INCREASES. ACCELERATOR EFFECT FOR RICH
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COSTS OF ECONOMIC GROWTH TO CONSUMERS
HIGH INFLATION/COST OF LIVING- ppp of money decreases. INCREASED INEQUALITY- accelerator effect makes rich richer
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BENEFITS OF ECONOMIC GROWTH TO FIRMS
INCREASED REVENUE/PROFITS- increased consumer spending. INCREASED INVESTMENT- more confidence, increased efficiency and production. ACCELERATOR EFFECT
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COSTS OF ECONOMIC GROWTH TO FIRMS
DECREASED LABOUR POOL- leads to increasing wages and hence COP, reducing profit. MENU COSTS- inflation means that firms have to adjust prices of products to account for inflation and increasing COP. POTENTIAL INCREASE IN INTEREST TO SOLVE INFLATION
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BENEFITS OF ECONOMIC GROWTH TO GOVERNMENTS
IMPROVEMENT IN BALANCED BUDGET- less benefits, more tax revenue. EXPORT LED GROWTH- further increase in AD and circular flow
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COSTS OF ECONOMIC GROWTH TO GOVERNMENTS
WORSENING BOP- as income increases, so will demand for imports depending on MPM. INSTABILITY- unstable inflation can cause volatility in business cycle. LESS INTERNATIONALLY COMPETITIVE- inflation reduces the amount of exports further decreasing BOP
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Card 2

Front

ACTUAL GROWTH

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increase in real incomes or increase in GDP. caused by increase in AD

Card 3

Front

POTENTIAL GROWTH

Back

Preview of the front of card 3

Card 4

Front

INTERNATIONAL TRADE

Back

Preview of the front of card 4

Card 5

Front

ACTUAL GROWTH RATES

Back

Preview of the front of card 5
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