Notesale: Turn your study into money

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2
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● Potential economic growth = an increase in the productive capacity of a
country (e
...
if full employment goes up)
...

Causes of economic growth
● Actual economic growth occurs when there is an increase in one of the
components of AD (C + I + G + (X-M))
...
g
...
Government spending on health or education may
cause growth
...

● Actual economic growth may also occur due to an increase in AS
...

● HOWEVER
...
Similarly, if AS shifts out and
the AD curve is crossing the AS curve on its elastic part, then nothing will
change
...
The AS curve could shift
out because of changes in education/skills/relative productivity, demographic
changes, technological advances or reduced barriers to international trade
...

Problems/constraints on growth
● The absence of efficient capital markets (meaning that there’s a lack of credit
or credit is risky/has a very high interest rate attached)
...

● Labour market problems (including a shortage of skilled labour, brain drain,
low birth rates)
...

Positive and negative output gaps
● When the economy is growing faster than the trend, pressures on labour
markets, raw materials and wages will build
...
This is a positive
output gap
...

● It is hard to predict and difficult to measure how to reduce the negative output
gap and move towards full employment, because all unemployed resources
have different values and some resources are less useful when they are
employed (e
...
a rusty old machine or a person who’s been out of work for 10
years)
...
However, Classical economists believe that output gaps do not
persist in the long run because the long-run AS is vertical through YFE (full
employment)
...

● Booms are followed by economic slumps or slowdowns, which are normally
followed by recessions, before the economy moves into a recovery phase and
then back into a boom
...

● Over the course of the
trade cycle, real GDP will
fluctuate - e
...
during a
boom it is likely to rise
rapidly, whereas during a
recession real GDP falls for
at least 2 consecutive
quarters
...

Characteristics of a recession include:
High unemployment (particularly demand-deficient unemployment)
...

More government spending (and therefore a larger budget deficit)
...

Low business and consumer confidence
...

High rates of economic growth
Improving government budget balance (tax revenue rises and expenditure on
benefits falls)
...

High business and consumer confidence
...

➔ More employment opportunities - career progress
...

➔ Increased consumer confidence in jobs - likely to spend more on high
value goods like cars
...

➔ More likely to invest
...

➔ More competitive
...
They also have more coming in from income
tax/VAT/corporation tax
...

● Living standards:
➔ People feel better off
...

➔ The government may open more public spaces like libraries to increase
living standards
...

➔ Living standards are defined as your ability to buy imports
...
g
...

➔ Standards of living will increase as long as the cost of living doesn’t go
up at the same rate
...

➔ The rich get richer and the poor get poorer
...

● Social dislocation/stress:
➔ If people get promoted at work, this often comes with extra
responsibilities which can increase stress (and therefore cause health
problems too)
...

➔ Due to better job prospects people may move to urban areas - higher
air pollution and crime
...

➔ Increase in external costs of production and consumption
...

● Balance of payments (current account):
➔ Consumers buy more imports and there is less incentive for firms to
export (UNLESS growth is export-led)
...

➔ Unsustainable growth - the bubble will pop!
➔ Could lead to shoddy workmanship and bad planning
...
g
...

➔ Can also result in monopolies controlling markets
...


Intervention to promote economic growth
● Improving education and training, improving health and introducing
performance-related pay, improving infrastructure and implementing
regulation (interventionist supply-side policies)
...

● Quantitative easing and decreasing interest rates (monetary policy) may
help to encourage consumer spending and provide an injection into the
circular flow of income
...




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