EC GROWTH

• Factors of production


  Land, labour, capital, enterprise
• An increase in LRAS will increase the potential level of output in an economy
• Land


  • The discovery of new resources e.g. oil will increase economic growth
  • Developing countries tend to grow the most from exploiting new resources, whilst they do not have a significant effect in developed countries
• Labour


  • An increase in the quality or quantity of labour will improve economic growth
  • Changes in the size of the workforce can come from immigration, demography (age profile) of the country or participation rates
  • Improving the quality of labour through education is important for long-run growth
• Capital


  • Sustained investment enables access to new technology and more machines, improving productivity
  • Not all investment leads to increased GDP as some is unsuccessful or doesn't increase GDP due to its nature
• Enterprise


  • Tax benefits and grants encourage business development, creating jobs and increasing production
  • Too much wealth distribution reduces incentives to work and invest, preventing growth
• Technological progress


  • Improved technologies lower average production costs and create new products, increasing consumption and growth
• Efficiency


  • Efficiency means less resources are needed to produce each good, allowing more goods to be produced
  • Competition forces producers to improve efficiency
  • Lack of property rights protection and inefficient capital markets can prevent efficiency
• Actual growth


  Percentage change in GDP
• Potential growth


  Change in productive potential of the economy over time, shifting the LRAS or PPF curve
• The PPF shows the potential output of the economy, and an outward shift of the PPF is economic growth
• Export-led growth


  • A rise in AD through increased exports can affect economic growth
  • Sustained high exports encourage firms to invest and increase labour demand, leading to growth
  • Competing internationally forces firms to become more efficient
• Long run trend rate of growth

  The average sustainable rate of economic growth over a period of time
• Actual growth


  The actual change in real GDP over time, making up the business cycle
• Output gap


  The difference between the actual level of GDP and the estimated long-term value for GDP
• Output gaps are very difficult to measure accurately
• Positive output gap


  GDP is higher than estimated
• Negative output gap


  GDP is lower than estimated, indicating spare capacity in the economy
• Trade (business) cycle


  • Periodic but irregular up and down movements in economic activity, with phases of boom, downturn, recession, and recovery
• Boom


  • National income is high, the economy is likely working above PPF with a positive output gap, consumption and investment are high, tax revenues are high, wages are increasing, and there is inflationary pressure
• Downturn


  • Output and income fall, leading to falls in consumption, investment, and tax revenues, while unemployment rises and inflationary pressure eases
• Recession


  • High unemployment causes low consumption, investment, and imports, inflationary pressure is low or there may be deflation
• Recovery/expansion


  • National income and output begin to increase, unemployment falls, and consumption, investment, and imports increase, while inflationary pressure grows
• Governments aim to achieve economic growth as it has benefits for consumers, firms, the government, and current and future living standards
• Benefits for consumers


  • Increased wealth effect from rising house and share prices, potential for lower prices or higher quality goods, but also potential for increased inequality and inflation
• Benefits for firms


  • Increased investment, improved business confidence, technological advancement, and higher profits, but also potential loss of markets for firms selling inferior goods
• Benefits for government


  • Increased tax revenues allowing more spending on public services, potential to reduce budget deficit, but also increased public expectations
• Benefits for living standards

  • Lower poverty, more goods and services, improved housing and health, but potential for environmental damage and increased inequality