2.5: Economic Growth

• Economic growth


  Increase in national output measured as real GDP
• Types of economic growth


  Actual growth and Potential growth
• Actual growth


  Increase in the quantity of goods/services produced in an economy in a given period of time. Measured by a percent change in real GDP
• Potential growth


  Increase in the productive potential of an economy/ Demonstrated by a outwards shift in the LRAS curve or PPF
• What causes short-run economic growth?


  Changes to the determinants of Aggregate Demand.
• How can short-run economic growth be illustrated?

  On an AD/AS diagram: Rightward shift of AD. PPF: Moving from a point inside the curve to one closer to the curve.
• Why does long-run economic growth occur?

  Improvements to the quality or quantity of the factors of production and determinants of LRAS.
• What are the determinants of LRAS?

  Technological advances, changes in productivity, changes in education and skills, changes in gov regulations, and demographic changes.
• How can long-run economic growth be illustrated?

  Rightward shift of the PPF and LRAS curves
• What does the final impact of price in long-run economic growth depend on?

  The shape of the LRAS diagrams (Keynesian or Classical)
• What is export-led economic growth?

  Growth caused by an increase in the sales of goods/services to foreign countries
• What are the benefits of economic growth?

  Increased incomes = better standards of living, Decreased levels of absolute poverty, Improvement in the quality/quantity of environmentally friendly technologies, Higher sales revenue for firms and greater profits, Increased investment by firms = increased potential output, Reduced expenses by government, Higher gov tax revenue = rising incomes and corporate profits, and Increased employment = resolves negative social impacts.
• What are the costs of economic growth?

  Rising AD= Demand-pull inflation which decreases purchasing power, Lack of equity in the distribution of income, Environmental damage = negative externalities of production, Increased inflation, Decreased export sales = delay in investment by firms, Increased income = increased consumption of demerit goods, Greater output may decrease well-being from workers.
• What is an output gap?


  The difference between the actual level of output (real GDP) and the maximum potential level of output
• When does a positive output gap occur?


  When real GDP is greater than the potential real GDP
• When does a negative output gap occur?


  When the real GDP is less than the potential real GDP.

  There's spare capacity in the economy to produce more goods than are being produced.
• Why is it difficult to measure output gaps accurately?

  Its hard to know what the exact maximum productive potential is.
• What do rapidly rising prices indicate?

  A positive output gap developing
• What does rising unemployment and slowdown indicate?

  A negative output gap is increasing
• What does a trade cycle refer to?


  A trade cycle refers to the changes in real GDP that occur in an economy over time.
• What is meant by actual growth in the context of a trade cycle?


  Actual growth refers to the fluctuations of real GDP above and below the long-term trend rate of growth.
• How many recognisable points are there in the trade cycle?


  There are four recognisable points in the trade cycle.
• What are the four recognisable points in the trade cycle?


  • Peak/boom
  • Slowdown/downturn
  • Recession
  • Recovery
• What characterizes a recession in terms of economic growth?


  A recession is characterized by two consecutive quarters or more of negative economic growth.
• What is a sign of increasing unemployment during a recession?


  High unemployment is a sign during a recession.
• What happens to job vacancies during a recession?


  Job vacancies decrease during a recession.
• What is the effect of a recession on the output gap?


  There is an increasing negative output gap and spare production capacity during a recession.
• How does consumer confidence change during a recession?


  Confidence for firms and households is low during a recession.
• What is the inflation rate like during a recession?


  Inflation is low during a recession.
• What fiscal action might occur during a recession?


  An increase in government expenditure may lead to a greater budget deficit during a recession.
• What characterizes a boom in terms of economic growth?


  A boom is characterized by increasing rates of economic growth.
• What happens to unemployment during a boom?


  Unemployment decreases during a boom.
• What is the output gap like during a boom?


  There is a reduction of the negative output gap or creation of a positive output gap during a boom.
• How does consumer confidence change during a boom?


  Confidence is high and more risky decisions are taken during a boom.
• What is the inflation rate like during a boom?


  The rate of inflation increases during a boom.
• How does government revenue change during a boom?


  Government budget improves as tax revenues rise during a boom.