Econ AS > 2.5 > Flashcards

2.5 Flashcards

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1
Q

What is economic growth?

A

Economic growth is a sustained rise in a country’s productive potential and real national output.

  • expansion of productive potential if an economy
  • can be depicted by outward shift of PPF or LRAS
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2
Q

what are the main drivers of long run economic growth?

A

higher productivity, gains from innovation and rising real incomes for households

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3
Q

Short-run economic growth

A

increase in real GDP i.e. an increase in actual output.

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4
Q

Economic growth and the production possibility frontier (PPF)

A

A rise in a country’s productive capacity causes the PPF to shift from PPF1 to PPF2. This then allows increased supply of consumer and capital goods

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5
Q

Factors which could cause economic growth (in the short run)

A
  • interest rate changes
  • fiscal policies
  • commodity prices such as oil, gas and food
  • currency changes
  • consumer and firm confidence
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6
Q

Factors which could cause economic growth (in the long run)

A
  • investment
  • productivity/ efficiency
  • quantity/ quality of factors of production
  • r&d
  • innovation
  • enterprise
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7
Q

Advantages of export-led growth

A
  1. exports are injection = rise in AD and expansion of output, raises per capita incomes and reduce extreme poverty
  2. growing exports sales = profits = higher capital investment = increases country’s productive capacity
  3. Allows government to bring economic growth and high employment without a current account deficit
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8
Q

Potential risks and drawbacks from export-led growth

A
  • over-dependence on economic cycles of trade countries
  • unsustainable depending on resources
  • rapid export led growth could lead to demand pull inflation and higher interest rates = make export industries less competitive in overseas markets
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9
Q

evaluation of export led growth

A

make sure that country is exporting a sufficiently diverse range of produces, and benefits from increased export and growth are widely dispersed across whole population
- means economy is unbalanced since there is a surplus on the current account on balance of payments, whilst this means there are net injections into the economy, it isn’t always sustainable. BUT, growth in economy could lead to increase in imports which can bring back balance.

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10
Q

What is the output gap?

A

The output gap is the difference between the actual level of GDP and its estimated potential level. It is usually expressed as a percentage of the level of potential output.

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11
Q

Positive and negative output gap

A
  1. Positive output gap – i.e. where actual GDP is above potential GDP – this is a sign of possible excess aggregate demand
  2. Negative output gap – i.e. where the economy has large margin of spare capacity of factor resources. Short run economic growth helps to reduce the amount of spare capacity and therefore reduce a negative output gap.
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12
Q

boom

A

A period when the rate of growth of real GDP is fast and higher than the (estimated) long-term trend.

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13
Q

Depression

A

A prolonged and persistent downturn and where a nation’s GDP falls by at least 10 per cent.

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14
Q

Recession

A

period of at least six months when an economy suffers a fall in aggregate output, employment, investment and a broader decline in business and household confidence. Real GDP contracts at least six months in a row

  • gov likely to spend more on welfare benefits
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15
Q

recovery

A

A phase after a recession, during which real GDP starts to increase from the low point (the trough) and unemployment eventually begins to fall.

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16
Q

slowdown

A

weakening of rate of growth, gap is still rising but increasing at a slower rate

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17
Q

Spare capacity during a boom and recession

A

boom - Increasing use of scarce resources – taking an economy closer to their production possibility frontier
recession - Possibly less use of scarce resources and reduced environmental damage e.g. a reduction in CO2 emissions

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18
Q

External (trade) balance during a boom and recession

A

Rising trade deficit as demand for imported goods and services expands
Falling trade deficit as demand for imports contracts

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19
Q

Identifying Possible Causes of a Recession

A

External events or “shocks”
tightening of monetary and fiscal policy ( higher interest rates, rise in taxation)
fall in asset prices or supply of credit
drop in business and consumer confidence (more precautionary saving, less capital investment)

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20
Q

Recession caused by an inward shift of AS

A

recession can be caused by a supply shock = inward shift of SRAS
eg, higher import prices can lead to rise in GPL
- possibly could lead to a period of stagflation

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21
Q

Uncertainty is best described as

A

he lack of certainty, a state of limited knowledge where it is impossible to exactly describe the existing state, a future outcome, or more than one possible outcome.

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22
Q

what uncertainty do households have?

A
  • job and income insecurity
  • real value of savings
  • future of house prices
  • access to credit
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23
Q

effects of uncertainty on households

A
  • low household confidence
  • increase in precautionary saving
  • fall in consumption
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24
Q

what uncertainty do businesses have?

A
  • Highly uncertain revenue streams – will demand / sales recover?
  • Uncertain access to finance from banks and investors
  • Supply chain disruptions e.g. reliability of supply of raw materials
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25
effects of uncertainty on businesses
- uncertain revenues - low confidence - cancelled/ postponed investment
26
what uncertainty do government have?
* Impact of the recession on unemployment and tax revenues * Highly uncertain scale of government borrowing in 2020 & beyond * Uncertainties over negotiations over final Brexit arrangements
27
Possible benefits from a fall in average UK property prices
- more affordable houses - less mortgage debt = more disposable income - improves geographical mobility of labour - reduced demand pull and cost push inflationary risk
28
Macroeconomic risks from lower house prices
- fall in household net wealth - decline in new housebuilding - fewer new homes will be built - older housing
29
Possible Short-Term Effects of a Recession
- fall in confidence - cyclical unemployment - lower rate of inflation - growing fiscal deficit
30
impact of recession on business profits and capital investment
Falling demand can cause more businesses to fail and the profits of those who remain to fall. o Planned investment declines – hitting industries down the supply chain that make capital goods
31
impact of recession on unemployment
o A steep decline in aggregate demand causes a fall in the aggregate demand for labour. o This causes a contraction in employment and a rise in cyclical unemployment. o The rise in unemployment then has a negative effect on household incomes and living standards.
32
impact of recession on government finances
o Recession causes a decline in direct & indirect tax revenues and more welfare spending. o The result is usually an increase in the budget (fiscal) deficit and a rising national debt. o The government might then opt to bring in a period of fiscal austerity designed to cut the deficit.
33
impact of recession on inflation
o Many business offer price discounts to off-load excess unsold stocks when demand is falling. o A deep recession risks causing a period of sustained priced deflation (negative inflation).
34
Long Term Economic Effects of a recession
o Rising structural long-term unemployment and the risk of regional economic decline. o Low rates of investment can reduce the size of the capital stock. o Ageing capital inputs might then have a negative impact on the growth of labour productivity.
35
long term social effects of a recession:
o Falling real wages hits average living standards and reduces aggregate demand. o Widening inequality of income and wealth leading to rising relative poverty and social deprivation. o Increases in stress-related chronic illnesses puts extra pressure on the National Health Service. o Social costs such as a loss of social cohesion and threats to democratic institutions.
36
Hysteresis
o When an economy is disabled by recession there is a big risk of a permanent loss of national output. o Loss of productive capacity due to low capital investment + many business closures. o High rates of structural unemployment may cause a shrinking labour force perhaps through outward migration of labour e.g. as younger people move in search of work.
37
The Great Depression in the United States
* Duration of depression: 43 months * Fall in real GDP from peak to trough: - 26.5% * Industrial production fell by 46% * Stock (share) prices fell by more than 80% * Increase in unemployment (% of labour force): 24.6%
38
What can cause an economic recession to become a depression?
- sudden stop - collapse in employment - negative multiplier effects - businesses cut investment - growing business failures
39
depression =
results in a collapse in private sector, ie consumption investment and exports, = sharp fall in employment = drop in household income and spending power
40
Benefits of economic growth
- Higher living standards – i.e. Real GNI per capita = less poverty (hdi up) - Employment effects - creates new jobs - fiscal dividend - higher economic growth = more tax paid - accelerator effect - rising growth stimulates new investment and it provides profits for businesses that fund research and innovation which can improve dynamic efficiency and help address environmental challenges
41
Costs / drawbacks of rapid economic growth
1. Risks of higher inflation and higher interest rates 2. Environmental effects: 3. Inequalities of income and wealth:
42
Risks of higher inflation and higher interest rates
a. Fast GDP growth can lead to a rise in both demand-pull and cost-push inflationary pressures due to a positive output gap. Higher prices erode our real standard of living. b. A central bank may then decide to raise monetary policy interest rates to control inflation. c. Rising consumer spending on imports might lead to an increasing trade deficit as imports expand
43
2. Environmental effects:
a. Negative externalities in production & consumption e.g. increased pollution, congestion and waste. b. Risk of unsustainable extraction of finite resources (including deforestation) – causing long-run depletion of natural resources. This can threaten the sustainability of economic growth for a country. c. The Kuznets Curve is one way of expressing the links between growth & the environment
44
3. Inequalities of income and wealth:
a. Rapid growth can lead to a higher level of inequality and social divisions, the distribution of gains from growth are unequal with some sectors & regions enjoying the fruits of growth more than others. b. Many of the gains from growth may go to only a few people; growth might also be at the expense of hours worked and increased stress which leads to a worsening work-life balance c. There is no guarantee that rapid economic growth will always leads to improved well-being
45
The Environmental Kuznets curve (EKC) demonstrates that
nitially the pollution and environmental degradation surpass the level of income per capita; however this trend reverses since at the higher income levels,
46
Why might growth lead to rapid increase in carbon and other emissions?
* Rapid industrialisation – heavy industries are often energy intensive * Increasing emissions from urbanization * Relatively weak environmental laws & pollution regulations * Many low-income countries have limited technology/infrastructure * Heavy reliance on “dirtier fuels” such as coal
47
why does index of pollution drop when incomes are high?
when incomes are high, people are prepared to pay higher prices to avoid environmental degradation
48
De-coupling emissions growth from rising per capita incomes
* Innovation leads to emergence of and scaled application of cleaner production techniques * Tougher environmental laws e.g. emissions zones, clean air acts / greater awareness * Government policy interventions such as carbon taxes and carbon trading * Change in structure of GDP away from heavy industry towards services * Emergence of policies / capabilities to promote smart urbanization
49
between '85 and 2016, how much did GDP per capita rise (%) and how much did co2 emissions drop by (%)
Between 1985 and 2016, gross domestic product (GDP) per head grew by 70.7%, while CO2 emissions fell by 34.2%. climate change act 2008
50
What is export led growth?
When a country opens their economy to the international market (china)
51
When does a country have a comparative advantage?
When it can produce more goods and services at a lower opportunity cost than other countries
52
Export led growth will initially increase _, but long term will _
AD, but in the long term will encourage firms to invest, which brings about long term growth by improving supply side
53
Negative output gap means
Downward pressure on inflation, spare capacity, unemployment of resources
54
Positive output gap means
Over-employed resources, upwards pressure on inflation - like China or India
55
Difficulties with measuring the output gap
- difficult to estimate the trend in series of data - structure of the economy always changes, so estimates not always accurate - changes in exchange rate might offset some inflationary effects of a positive output gap - data not always reliable, esp. from emerging markets, extrapolating data from last trends might lead to uncertainty
56
How do Keynesian illustrate an output gap
(Picture shift from AD1 to AD2) - negative output gap between y1 and y2 - Keynesians believe that output gaps exist in both short run and long run
57
How do classical illustrate an output gap
- belief that markets clear in the long run, so there is full employment - believe in short run output gaps - negative output gap between ye and y1 - positive output gap between ye and y2
58
Characteristics of a boom
High rates of economic growth, near full capacity/ positive output gaps, near full employment, demand pull inflation, higher consumer and firm confidence, higher government budgets
59
Characteristics of a recession
Negative economic growth, spare capacity, negative output gap, demand deficient unemployment, low inflation, less tax, less confidence
60
Benefits of economic growth on consumers
- average consumer income increases as more people in employment and wages increase - consumers will feel more confident in the economy - more consumption = higher living standards
61
Costs of economic growth on consumers
- economic growth will not benefit everyone equally, high inflation means people on fixed or low incomes are worse off - likely to be higher demand pull inflation, as more consumer spending - benefits of higher consumption might be lost due to law of diminishing marginal returns - shoe leather costs
62
Benefits of economic growth on firms
- more profits = more investment, because more business confidence - higher levels of investment could develop new technology to improve productivity - as firms grow, they can take advantage of benefits of economies of scale - higher economic growth due to exports, mean more competition faced by firms, so more productive + efficient
63
Costs of economic growth on firms
More menu costs due to higher inflation, keep changing prices to meet inflation
64
Benefits of economic growth on governments
- government budget will improve as less costs for welfare benefits and more tax revenue
65
Costs of economic growth on governments
Government might increase spending on healthcare if consumption of demerit goods increase
66
Benefits of economic growth on current and future living standards
- higher incomes mean you can afford more/ higher quality goods and services - public services improve since government have more tax revenues, could improve life expectancy and education
67
Costs of economic growth on current and future living standards
- high levels of growth could lead to damage to the environment in the LR, due to the increase in negative externalities from consumption/ production of some goods and services
68
Causes of economic growth
- land - labour: size of workforce, quality of workforce - capital - enterprise - tech progress - efficiency All increase LRAS
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