Economic growth

• Causes of growth


  The expansion of the productive potential of the economy
• Causes of growth


  • Depicted by an outward shift in the PPF or an ourward shift in a LRAS curve
  • Measured by annual change in real GDP
• Factors causing growth


  • Improvement in the quantity or quality of one of the factors of production
  • Increase in the efficiency of the way they are used
  • Improving the labour force with better quality due to higher education
  • Larger labour force - this may be due to migration, birth rates ot improves participation rates
  • Improved technology which is more productive - resources are used more efficiently
  • More investment to fuel economic growth - more machinery can be bought - increase production
  • Discovering new resources such as oil
  • Incentives for enterprise such as tax breaks or subsidies
• Export led growth


  Occurs when countries open up their economies to the international market
• Export led growth


  • CHINA which has had export led growth for many years
• Importance of international trade

  Countries can specialise where they have a comparative advantage - increases world output and lowers average costs
• Comparative advantage


  Country can produce goods and services at a lower opportunity cost than another
• Increase in AD


  Only brings short term growth
• Export led growth


  Encourages firms to invest and therefore brings long term growth by improving the supply side of an economy
• Export led growth


  Allows government to bring about economic growth and high employment without seeing a current account deficit
• Actual growth


  Percentage change in a country's real GDP, usually measured annually, caused by increase in AD
• Potential growth


  Long run expansion of the productive potential of an economy, caused by increase in AS, potential output of an economy is what the economy could produce if resources were fully employed
• Output gaps


  Difference between actual growth and long term growth rates
• Actual growth


  Percentage increase in a country's real GDP - measured annually - caused increased in AD
• Long term trend in growth rates

  Long run expansion of the productive potential of an economy - caused by increase in AS
• Potential output of an economy

  What the economy could produce if resources were fully employed
• Types of output gaps

  • Negative output gap
  • Positive output gap
• Negative output gap


  Occurs when actual level of output is less than potential level - Puts downward pressure on inflation - Means there is the unemployment of resources in an economy - Labour and capital are not used to their full productive potential - Means there's lost of spare capacity in the economy
• Positive output gap


  Occurs when actual level is greater than the potential level of output - Could be due to resources being used beyond the normal capacity such as if labour works overtimes - If productivity is growing the output gap becomes positive - Puts upwards pressure on inflation
• Output gap


  Difference between the actual level of output and the potential level of output - Measured as percentage of national output
• Countries such as China and India have high rates of inflation due to fast and increasing demand - associated with positive output gaps
• Difficulties with measuring output gap

  • Difficult to estimate the trend in a series of data
  • Structure of the economy changes - means estimates may not always be accurate
  • Immediately after a recession the level of spare capacity might fall below anticipated level since some workers might become economically inactive - firms might close and some banks might be unwilling to lend
  • Changes in the exchange rate might offset some inflationary effects of a positive output gap
  • Data is not always reliable especially from emerging markets - and extrapolating data from past trends might lead to uncertainties
• Keynesian economists


  Believe that output gaps exist in both the short and long run
• Classical economists


  Believe markets clear in the long run - there is full employment - Believe there are output gaps in the short run
• Negative output gap


  Between Ye and Y1
• Positive output gap


  Between Ye and Y2
• Trade cycle


  Stages of economic growth - goes through booms and busts
• Business cycle


  Refers to stages of economic growth - goes through booms and busts
• Stages of economic growth

  1. Real output increases when there is economic growth - recovery stage

  2. Boom is when economic growth is fast - inflationary or unsustainable

  3. During recession: Real output in economy falls - negative economic growth

  4. During recession: government might increase spending to try and stimulate the economy

  5. During periods of economic growth - governments may receive more tax revenue since consumers will be spending more and earning more
• Characteristics of a boom

  • High rates of economic growth
  • Near full capacity of positive output gap
  • Full (near) employment
  • Demand pull inflation
  • Consumers and firms have a lot of confidence - leads to high rates of investment
  • Government budgets improve - higher tax revenues and less spending on welfare payments
• Recession


  Negative economic growth over two consecutive quarters
• Characteristics of a recession

  • Negative economic growth
  • Lots of spare capacity and negative output gaps
  • Demand-deficient unemployment
  • Low inflation rates
  • Government budgets worsen due to spending on welfare payments and lower tax revenues
  • Less confidence amongst consumer and firms which leads to less spending and investment
• Impacts of economic growth


  • Consumers
  • Firms
  • The government
  • Current and future living standards
• Consumers


  • Costs: Does not always benefit everyone equally - low/fixed income might feel worse off is there is high inflation and inequality could increase
  • Costs: Higher demand pull inflation - due to higher levels of consumer spending
  • Costs: Face more shoe leather costs - means they have to spend more time and effort finding best deals while prices rise
  • Costs: Benefits of more consumption might not last after the first few units due to law of diminishing returns - states that the utility consumers derive from consuming a good diminishes as more of the goods in consumed
  • Benefits: Average consumer income increases as more ppl in employment and wages increase
  • Benefits: Consumer confidence rises - increases consumption and leads to higher standrad fo living
• Firms


  • Costs: Face more Menu costs as result of high inflation - means they have to keep changing their prices to meet inflation
  • Benefits: Firms might make more profit - increase investments - driven by higher levels of business confidence
  • Benefits: High levels of investment develops into new technologies to imporve productivity and lower costs in long run
  • Benefits: Economic growth in export markets might face more competition - make then more productive and effcient - give them more sales and opportunity
• The government


  • Costs: Might increase spending on healthcare is consumption of demerit goods increases
  • Benefits: Government budget might improve since fewer people require welfare payments and more ppl will be paying tax
• Current and future living standards

  • Costs: High levels of growth could lead to damage to environment in long run - increase in negative externalities from consumption and production of some goods and services
  • Benefits: Consumer incomes increases - some ppl might show more concern about environment
  • Benefits: Economic growth could lead to development of technology to rpoduce goods and services more greenly
  • Benefits: High wages mean comsumer can enjoy goods and services of higher quality
  • Benefits: Public services improve since gov have higher tax revenues - can afford to spend on improving services - increase life expectancy and education levels