Economic Performance

• Short run growth is the percentage increase in a country’s real GDP and is usually measured annually, caused by increases in aggregate demand.
• Long run growth occurs when the productive capacity of the economy is increasing and refers to the trend rate of growth of real national output in an economy over time, caused by increases in aggregate supply.
• The trend rate of growth of an economy depends on resources, investment in people, technology, capital goods, savings, and government policies.
• Resources are a crucial factor in economic growth, as more resources and better use of resources can lead to more growth.
• Investment in people is also important for economic growth, as better training and better research may lead to future growth.
• Technology improvements can enable countries to use their existing resources more productively, contributing to economic growth.
• Investment in capital goods increases productivity and leads to future growth.
• Saving enables investment by providing the funds for firms to invest, contributing to economic growth.
• The government can contribute to economic growth by promoting saving, research and development, education, mobility of factors of production between industries, and supply side policies.
• Economic growth can create income inequality as low skilled workers may find it hard to get the higher wages that other workers are benefitting from.
• Higher wages for employees are often linked to an increase in their responsibilities at work, which can increase stress and reduce productivity.
• Economic growth can cause demand-pull inflation because it causes demand to increase faster than supply.
• Structural unemployment is longer term, and occurs when people are out of work because there’s a mismatch between their skills and the skills required.
• The pattern of demand and supply can alter the structure of the economy, leading to structural unemployment.
• The unemployment continues because of the geographical and occupational immobility of labour.
• Occupational immobility occurs when some occupations may decline over time, but the workers in these occupations don’t have the skills required to be able to do the jobs that are available.
• Geographical immobility is when workers are unable to leave a region which has high unemployment to go to another region where there are jobs.
• Technological unemployment is when the introduction of new technology causes the number of jobs to fall, or the skills required to be different.
• Regional unemployment is when an industry that is based in a particular area declines.
• International unemployment arises when demand for a particular product from the UK is replaced by demand for the same product from abroad, for example, buying steel from Malaysia and Brazil has led to a decline in jobs in the steel industry in South Wales.
• Cyclical unemployment, also known as demand deficiency, occurs when there’s a lack of aggregate demand (AD), with a downturn in economic activity leading to a rise in unemployment, particularly in a recession.
• If AD grows more slowly than the increase in the productive potential of the economy, some resources will be unemployed.
• Keynesians believed that deficient AD was the main cause of mass unemployment.
• A deficit in the balance of payments can be created because people on higher incomes buy more imports.
• Industrial expansion created by economic growth may bring negative externalities.
• Finite resources may be used up in the creation of economic growth.
• The government can use reflationary fiscal policies, such as decreasing taxes, or expansionary monetary policies, such as lowering of interest rates, to shift AD outwards.
• A lack of information about the size of an economy’s output gap may lead to overspending when trying to boost AD, causing the economy to overshoot and leading to inflation.
• A lack of information about the size of the multiplier can lead to an increase in government spending if the multiplier in a country is larger than the government expects.
• Supply side policies can reduce the natural rate of unemployment by making the labour market more flexible, and reducing frictional and structural unemployment.
• To improve labour market flexibility, the government will need to focus on improving labour mobility, wage flexibility and flexibility of working arrangements.
• Governments can improve wage flexibility by scrapping the national minimum wage and limiting trade union power and the flexibility of working arrangements could be improved if the government passed laws that made it easier for firms to hire workers on short-term or zero-hour contracts.
• Frictional unemployment will be reduced by policies which encourage people to find a job and speed up this process.
• Reducing benefits will give unemployed people a greater incentive to find a job, cutting income tax will also give unemployed people a greater incentive to find a job and increased information about jobs will help workers find the right job for themselves more quickly.
• Structural unemployment will be reduced by policies which tackle geographical and occupational immobility.
• Governments can improve occupational immobility by investing in training schemes that help workers to improve their skills, geographical immobility can be improved by giving workers subsidies to move to different areas or by building affordable houses in areas that need workers.
• Economic growth will increase demand for labour, leading to a fall in unemployment and higher incomes for individuals.
• House price rising, this will increase consumer spending.
• If a country’s major trading partners go into a recession, this may significantly reduce the demand for the country’s exports.
• Supply side shocks are shocks which affect aggregate supply, examples include a poor harvest reducing the supply of food, increasing its price, and reducing the economy’s capacity, or the discovery of a major new source of raw material greatly reducing its price and increasing its supply, increasing the capacity of the economy.