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Economic Growth - key terms

Terms in this set (35)

Economic structure
Is a term that describes the changing balance of output, trade, incomes and employment drawn from the different economic sectors
Forex
Foreign exchange market
Primary sector
Producing using natural resources including the extraction of raw materials and the growing of crops
Eg - coal mining industry, farming, fishing, forestry, oil companies
Secondary sector
The production of manufacturing goods
E.g- manufacturing, car manufacturers, textiles, processed food
Tertiary and quartenary sector
The production of the service sector. May include the quartenary sector which includes production based on IT and information products.
E.g services, teachers
Economic growth
Economic growth is the process by which real GDP increases over time
Long run economic growth
The expansion of the productive capacity of an economy
Short run economic growth
An increase in actual GDP/ output
The productive capacity of the economy (ie economic growth) can be increased by
1) increasing the amount of resources you have (FoP)
2) increase in the productivity of FoP
Actual and Potential output (PPC)
Actual output - increase in real GDP
Potential output- increase in productive capacity
Output gap- difference between potential output minus actual output
Causes of short run growth
Achieved by increases in aggregate demand:
1) increasing consumer spending - demand by consumers is rising
2) increases in spending by firms, i.e investment -e.g firms buying more machinery and building
3) increases in government spending- govt spending more on education, building roads etc
4) increases in exports - people abroad are buying more of our goods and services
5) decreases in imports- UK consumers are buying less goods from abroad
Achieved by increases in short run aggregate supply
1) a fall in average costs of production, e,g reduction in minimum wage
2) subsidies to firms
Causes of long run growth
Achieved by increases in the quality/quantity of resources
Increases in Quantity:
1) labour, e.g widen working age, inward migration of workers from abroad
2) land: e.g import more raw materials from abroad, find alternatives e.g synthetic substitutes
3) capital e.g import from abroad, improve technology
Increases in quality (productivity)
1) labour: e.g training and education
2) land: e.g improving technology
3) capital: improvements in technology
4) enterprise: increase number of management courses, business networking
Productivity
Measure of the efficiency of a factor or production
Labour productivity
Measure of output per worker, or output per hour worked
Capital productivity
Measure of the output per unit of capital
Total factor productivity
The average age of all factors measured as the total output dividend by the total amount of inputs used
Depreciation
The fall in value of physical capital equipment over time as it is subject to wear and tear
Net investment
Gross investment minus depreciation
Human capital
The stock of skills and expertise that contribute to a workers productivity; can be through education and training
Economic growth
1) is the expansion of an economy's productive capacity
2) this can be envisaged as a movement outwards of the ppc
3) it can be seen as the underlying trend rate of growth in real GDP
4) it can stem from an increase in the inputs of factors production, or from an improvement in their productivity, i.e the efficiency with which factors of production are utilised
5) investment contributes to growth by increasing the capital stock of an economy, although some investment is to compensate for depreciation
6) the contribution of capital is reinforced by the effects of technological progress
7) labour is another critical factor of production that can contribute to economic growth: for instance, education and training can improve labour productivity. This is a form of human capital formation
Measuring economic growth
GDP (nominal value) is a way of measuring the total output of an economy over a period of time
It provides an indicator of the quantity of resources available to citizens of a country
Real GDP is a measurement of total output in an economy that takes account of changing prices over time, so it is measured at constant prices
Calculating economic growth
(GDP figure x base year index)/ current year price index. Or real GDP rate = nominal growth rate - inflation
GDP per capita
The average level of GDP per head of population
Real GDP per capita
The average level of real GDP per head of population
Difficulties in measuring economic growth
1) population size
2) inflation
3) informal sector
4) in accuracy of the data
5) inequality in income distribution
6) exchange rate problems
7) social indicators
GDP deflator
An implicit price index showing the relationship between real and nominal measures of GDP, providing an alternative measure of the general level of prices in the economy
Price index = (GDP at current prices/GDP at current prices) x 100
Nominal value
Value of an economic variable based on current prices, taking no account of changing prices through time
Real value
Value of an economic variable taking account of changing prices through time
Easterlin Paradox
High incomes do correlate with happiness, but long term increased income does not correlate with increased happiness.
Sustainable development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs
Calculating PPP
1) A representative basket of goods and services is determined.
2) The total cost of this basket is calculated in each country
*It is designed to reflect the relative purchasing power of incomes in different economies more accurately
Benefits of economic growth
1) Increases standards of living (people can consume more and so have higher material standards of living)
2) Increased output in economy can reduced unemployment, increase average earnings and decrease poverty
3) Poverty can be reduced without redistribution of income (increased benefits etc)
4) A steady rate of economic growth = more beneficial than a fluctuating one (it is easier to plan and therefore likely to encourage investment
5) Output increases which increases tax revenue without an increase in tax
6) Increase in tax can be used to improve other areas of the economy (education, health, environment
7)By increasing GDP, a country can increase its status and power in international organisations (IMF)
8)Long run economic growth reduces inflationary pressure as productive capacity increases to cope with higher levels of AD
Costs of growth
1) the gap between the rich and poor could increase - uneven distribution of income
2) Possible expansion of heavy industries without regards to controls on pollution, for example, and this would lead to an increase in negative externalities
3) Depletion of non-renewable resources, therefore, future generations may not be able to benefit from the same rate of economic growth
4) Possible reduction in the quality of life (society working longer hours, more stress etc)
5) To increase country's productive capacity, some resources will have to be moved from producing consumer goods to production of capital goods. Therefore, current consumption of goods and services will have to be reduced in the long run
6) In the short run, economic growth can cause inflation as AD outweighs AS and especially if the economy is close to the full capacity.
Recession and its consequences
Occurs when the GDP is negative for 2 or more consecutive quarters. General consequences:
1) falling output
2) rising unemployment
3) fall in AD
National well-being programme
Measures lots of different areas of the country : - governance
- relationships
- the environment
- exercise
- education skills
- the economy
- health
- where we live
- finances
- measures of personal wellbeing
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