IBECO - 3.3 Economic Growth

Define economic growth

• an increase in real GDP or the real quantity of goods and services produced over a period of time (typically a year), and is usually expressed as a percentage change in real GDP or GDP/capita over a period of time

• refers to the natural rate of unemployment, or unemployment of labour that prevails when the economy is producing potential output, or real GDP, determined by the position of the LRAS curve (long run equilibrium)

• refer to the maximum output of combination of two goods that can be produced in an economy with fixed resources and technology, provided there is full or maximum employment of resource and efficiency in production, implying zero unemployment

• levels of income, wealth and consumption of goods and services, including healthcare and education

Define full employment level of output

• an increase in real GDP or the real quantity of goods and services produced over a period of time (typically a year), and is usually expressed as a percentage change in real GDP or GDP/capita over a period of time

• refers to the natural rate of unemployment, or unemployment of labour that prevails when the economy is producing potential output, or real GDP, determined by the position of the LRAS curve (long run equilibrium)

• refer to the maximum output of combination of two goods that can be produced in an economy with fixed resources and technology, provided there is full or maximum employment of resource and efficiency in production, implying zero unemployment

• levels of income, wealth and consumption of goods and services, including healthcare and education

Define maximum output

• an increase in real GDP or the real quantity of goods and services produced over a period of time (typically a year), and is usually expressed as a percentage change in real GDP or GDP/capita over a period of time

• refers to the natural rate of unemployment, or unemployment of labour that prevails when the economy is producing potential output, or real GDP, determined by the position of the LRAS curve (long run equilibrium)

• refer to the maximum output of combination of two goods that can be produced in an economy with fixed resources and technology, provided there is full or maximum employment of resource and efficiency in production, implying zero unemployment

• levels of income, wealth and consumption of goods and services, including healthcare and education

Define livings standards

• an increase in real GDP or the real quantity of goods and services produced over a period of time (typically a year), and is usually expressed as a percentage change in real GDP or GDP/capita over a period of time

• refers to the natural rate of unemployment, or unemployment of labour that prevails when the economy is producing potential output, or real GDP, determined by the position of the LRAS curve (long run equilibrium)

• refer to the maximum output of combination of two goods that can be produced in an economy with fixed resources and technology, provided there is full or maximum employment of resource and efficiency in production, implying zero unemployment

• levels of income, wealth and consumption of goods and services, including healthcare and education

Define actual growth

• in PPC model, refer to growth that occurs due to the reduction of unemployment or improvement in efficiency of resource use, resulting in movement from inside PPC to point closer to PPC

• in PPC model, refers to growth that occurs due to increase in quantity or quality of resources, resulting in shift to the right of PPC curve, also referred to as long-term growth

Define potential growth

• in PPC model, refer to growth that occurs due to the reduction of unemployment or improvement in efficiency of resource use, resulting in movement from inside PPC to point closer to PPC

• in PPC model, refers to growth that occurs due to increase in quantity or quality of resources, resulting in shift to the right of PPC curve, also referred to as long-term growth

What is the difference between actual and potential growth?

• Time - actual occurs in short whilst potential usually requires longer periods of time

• Factors of Production - actual growth involves using the same FOP more efficiently or productively, whilst potential growth is due to an increase in quantity or quality of FOP

• GDP - actual growth increases GDP whilst potential only affects GDP/capital

• Determinants - potential growth involves an increase in AD, whilst actual growth is focused on AS

• Shifts - actual growth results in increase in AD or SRAS or movement towards PPC, whilst potential growth shifts LRAS or shifts of the PPC curve

The following is a diagram of _____

• Actual growth - caused by increased in AD

• Potential growth - caused by increased in AD

• Actual growth - caused by increased in SRAS

• Potential growth - caused by increased in LRAS

What may causes an increase in SRAS?

• Fall in price of factors of production

• Increases in subsidies

• Positive supply shock

• Increase in government expenditure

• Increased investment

What factors lead to potential growth?

• Technological change

• Improvement in efficiency/ Institutional changes

• Lower unemployment

• Unused machinery being used productively

• Increases in quantity/improvements in quality of FOP