Economics Theme 2: Economic Growth/ Responses To Recessions

Front 1

Define Economic Growth

Back 1

The increase in the output (goods and services) of an economy over time. Sustained economic growth should lead to higher real living standards and greater employment

Front 2

What are the 5 main measures of economic growth?

Back 2

Nominal/Total GDP

GDP per capita

Real GDP

Potential GDP

GNI

Front 3

Define Nominal/Total GDP

Back 3

The total market value of all goods and services produced in the country in a given year. GDP can be measured by either adding up all the income early in a country or all of the expenditure. GDP does not include earnings while outside of the country.

Front 4

Define GDP per capita

Back 4

The average level of GDP per person

Front 5

Define Real GDP

Back 5

GDP adjusting for inflation. E.g. Total GDP may have risen by 4% but if inflation was 3% then Real GDP only rose by 1%

Front 6

Define Potential GDP

Back 6

The total potential output of an economy during a period of time

Front 7

Define GNI

Back 7

Gross National Income is the final value of income creates by a country’s factors of production whenever they are based. Calculated by GDP plus net income from abroad. (Net income is any income earned by a country on investments and other assets owned abroad minus any income earned by foreigners on investments domestically)

Front 8

Define GNP

Back 8

Gross National Product is the total output of citizens of a country where or lot they’re a resident in that country.

Front 9

What are the two methods of measuring national income/output?

Back 9

Value: where the value is calculated in (£billions) of all the goods and services produced in a year

OR

Volume: adding up the quantity of goods and services produced in a year.

Front 10

What will happen to Exports in a boom/recession?

Back 10

Boom: Exports will decrease (they’re more expensive)

Recession: Exports will increase

Front 11

What will happen to Imports in a boom/recession?

Back 11

Boom: Imports will increase (people have more money to spend on imports)

Recession: Imports will decrease

Front 12

What are the two ways to show the economic cycle on a diagram?

Back 12

Back (Definition)

Economic Growth against time (Trend is a straight line)

Real GDP against time (Trend is a diagonal)

Front 13

What will happen to Taxation Revenue in a boom/recession?

Back 13

Boom: Taxation Revenue will increase

Recession: Taxation Revenue will decrease

Front 14

What will happen to Interest Rates in a boom/recession?

Back 14

Boom: Interest Rates will increase

Recession: Interest Rates will decrease

Front 15

What is the government target for economic growth?

Back 15

2-3% of sustainable growth to avoid inflation.

Front 16

What are the four stages of the economic cycle?

Back 16

Boom

Slowdown

Recession

Recovery

Front 17

What are the two ways to show the economic cycle on a diagram?

What do the dotted lines show?

Back 17

Dotted lines show trend growth

Front 18

Define a recession

Back 18

Two consecutive negative quarters of economic growth

Front 19

What will happen to economic growth in a boom/recession?

Back 19

Boom: Economic Growth will increase

Recession: Economic Growth will decrease

Front 20

What will happen to consumption in a boom/recession?

Back 20

Boom: Consumption will increase

Recession: Consumption will decrease

Front 21

What will happen to investment in a boom/recession?

Back 21

Boom: Investment will increase

Recession: Investement will decrease

Front 22

What will happen to inflation in a boom/recession?

Back 22

Boom: Inflation will increase

Recession: Inflation will decrease

Front 23

What will happen to Unemployment in a boom/recession?

Back 23

Boom: Unemployment will decrease

Recession: Unemployment will increase

Front 24

What was the Great Depression?

Back 24

The Great Depression was a severe worldwide depression. set off by the ​Wall Street Crash of 1929 when there was a sharp fall in share prices on the New York Stock Exchange. Though it started in America it affected the whole world during the 1930s

Front 25

What are 4 possible causes of the Great Depression?

Back 25

●Loss of consumer and business confidence

●Banks over-lending leading to an unstable boom

● Protectionism which reduced world trade which decreased AD and lowered confidence.

● Gold Standard commitment affected the U.K. Left in 1914 rejoined in 1925 at 1914 rate. Though Pound had fallen in value, Gold Standard made it appreciate rapidly rapidly making exports expensive. Entered Depression with overvalued exchange rate.

Front 26

How did the UK respond to the Great Depression? (4 main areas)

Back 26

●Believed that balancing government budget was key to recovery. Borrowed money would prevent private sector. Emergency budget introduced which ​cut public sector wages and unemployment benefit ​by 10% and ​raised income tax from 22.5% to 25%. This reduced AD at a time when it needed to be increased.

● Needed to protect pound so they weren’t forced out of Gold Standard. A balanced budget meant the UK didn’t have to borrow from abroad, which helped the exchange rate as did the high interest rates used to defend the high exchange rate. However, the ​high interest​ ​rates​ also decreased demand.

● The UK was forced to ​leave the gold standard on 21​ September 1931 due tocontinued speculation against it. This caused the value of the pound to fall by 25% compared to other currencies and allowed the Bank of England to ​cut interest rates by 2.5%, both of which helped the increase AD by increasing exports or increasing consumption/investment.

● There was recovery in London and the South East but Wales, the north and Scotland did not reach full employment until 1941.

Front 27

How did the USA respond to the Great Depression?

Back 27

The US government originally had the same view over a balanced budget as the UK.

● However, Franklin Roosevelt was elected in 1932 with ​his New Deal which promised public sector investment, work schemes for the unemployed and fiscal stimulus.

● The USA reached full employment in 1943 (two years after joining the war- the same as Britain). Roosevelt’s New Deal is an example of ​Keynesian expansionary fiscal policy but can be argued it was not large enough to be successful, although it did have a large impact as the US unemployment figure was so high.

Front 28

What was the Global Financial Crisis?

Back 28

A severe worldwide crisis in 2008 also started in the US and spread across the world.

Front 29

What were the causes of the Global Financial Crisis?

Back 29

●Relatively poor people were encouraged to take out mortgages to buy their own homes. This was an example of moral hazard, as the bank workers saw higher bonuses for selling more mortgages. People could afford the low interest rates on the loan for the first few years, but many were no longer able to continue paying with the higher repayments. Houses were repossessed, demand fell, and prices fell meaning the value of the houses was now less than the mortgage of the house. This is known as negative equity.

● At the same time, banks had been ​grouping ‘prime’ mortgages (people who were likely to pay back their loans) ​and ‘sub-prime’ mortgages (those who weren’t) and selling packages to other banks and investors as if they were all prime mortgages. The aim was to reduce risk since it meant no bank was highly dependent on risky mortgages. However, it increased risk as many were now holding assets worth less than they had paid for them; it spread the effects of the housing crash and the unpaid loans.

● When this was revealed, there was a ​fall in confidence and banks stopped lending between each other, fearing that they would lose money if the other bank were to collapse. Similar events occurred in the UK, Ireland, Spain and Portugal. Northern Rock Building Society was the first affected in the UK in 2007 with too many loans not being repaid, and savers beginning to withdraw their money. In 2008, Lehman Brothers, an investment bank, was allowed to fail. This caused panic as people believed bank after bank would be allowed to collapse, leading to losses for savers.

Front 30

How did both the UK and the US respond to the global fincial crisis?

Back 30

Both governments were forced to ​nationalise banks and building societies and guarantee savers ​their money in order to prevent the chaos of a collapsed banking system. For example, the British government bought Northern Rock and most of Royal Bank of Scotland and Lloyds Bank.

● They used ​expansionary monetary policies with record low interest rates and quantitative easing. The Bank of England said the QE led to lower unemployment and higher growth than would otherwise have been the case.

● However, the USA government had a more ​expansionary fiscal policy and this is perhaps why it recovered faster. E.g. the Obama Recovery and Reinvestment Act. In 2010, the UK prioritised reducing ​National Debt over providing a fiscal stimulus, but the USA did not make this decision until 2013.

Front 31

What is an output gap?

Back 31

An output gap is the difference between the actual level of GDP and theestimated long-term value for GDP- this is shown on the trade cycle diagram whichdemonstrates how the actual GDP is not always on the trend.

Front 32

What's the difference between a positive and a negative output gap?

Back 32

A positive output gap is when GDP is higher than estimated whilst a negativeoutput gap is when GDP is lower than estimated. With a negative output gap, thereis spare capacity in the economy with factories, offices and workers not being utilisedto produce goods and services.

Positive Output gaps generally occur during a boom while negative output gaps occur during a recession.

Front 33

How can an output gap be shown on a Keysnian AD/AS diagram?

Back 33

Front 34

How can an output gap be shown on a Classical AD/AS diagram?

Back 34

Front 35

What is the issue with output gaps?

Back 35

They are very difficult to measure as the exact position of theLRAS is unknown and also because initial estimates of the real GDP are ofteninaccurate. Some economists believe they are so difficult to measure that they arenot a valid concept to use from the purpose of economic policy. It is notpossible to measure the productive potential of an economy as there is no singlemonetary value for the level of variables such as machinery, workers and technology.

Front 36

What are the implications of a positive output gap?

Back 36

Inflation would go up

Unemployment would go down

Consumption would go up

Investment would go up

Growth would go up

Current Account would go down

Front 37

What are the implications of a negative output gap?

Back 37

Inflation would go down

Unemployment would go up

Consumption would go down

Investment would go down

Growth would go down

Current Account would go up

Front 38

What are the causes of economic growth?

Provide some examples

Back 38

An increase in quality or quantity of oneof the four factors of production: land, labour, capital or enterprise, or these being usedmore efficiently. '

E.G.

Investment

Immigration

Education/Training

Healthcare

Participation Rate

Technology

Productivity

Population

Etc...

Front 39

What are the two types of growth?

Back 39

Actual Growth: is the percentage change in GDP. It is when the economy has actually produced more goods and services.

Potential Growth: the change inproductive potential of the economy over time, so the LRAS or PPF curve shifts.

Front 40

What would actual growth and potential growth look like on the PPF?

Back 40

.

Front 41

What's the difference in economic growth and economic recovery?

Back 41

An outward shift of the PPFis economic growth. If the economy moves from inside the PPF to on the PPF, thiswould be classed as economic recovery rather than economic growth.

Front 42

Define Productivity

Back 42

measure of the efficient use of the factors production

Front 43

Why is productivity important?

(Think about economic objectives)

Back 43

Lowers inflation, increases economic growth, reduces unemployment, improves current account

Front 44

How is labour productivity most commonly measured?

Back 44

output per hour worked

Front 45

What is the productivity gap? What are some examples?

Back 45

It is a way of comparing productivity and therefore growth with other countries. Labour productivity is 40% lower than that in the US. The producivity gap with Germany and France is around 20%. British workers would have to work an average 16% more hours to narrow the gap with France and Germany.

Front 46

What causes the productivity gap?

Back 46

more skilled labour, differences in technology, regulations, hard work, entrepeneurship

(I.E. Factors of production)

Front 47

How could an economy improve its productivity?

Back 47

Supply Side Policies

More Immigration

Front 48

What are some benefits of economic growth?

Back 48

Lowered Unemployment

Increased Living Standards

New Technology

Increased Budget Surplus

Front 49

What are some costs of economic growth?

Back 49

Inequality

Envrionmental Impact

Demand Pull Inflation

Leads to deeper recessions

Deficit in Balance of payments (People importing more)

Front 50

What is a common way to compare living standards between countries? And why is it used?

Back 50

Purchasing Power Parity (PPP) is used. This is because when using GDP per Captia, GNP or GNI per capita with countries that have different currencies, the exchange rate may not reflect their true value. PPP takes into account the cost of living.

Front 51

Explain how Purchasing Power Parity works.

Give an example of it being used

Back 51

Purchasing Power is the real value of an amount of money in terms of what you can buy with it. (E.g. You can buy more with $1 dollar in Nigeria than you can in Canada) So using PPP involves adjusting GDP per capita figures to take into account the differences in purchasing power.

Results are usually expressed in US Dollars'

E.G. Big Mac Index is used to compare the cost of the big mac throughout the world.

Front 52

What are 6 limitations to using GDP to make comparisons between countries? What is an alternative?

Back 52

An alternative is measuring the development of an economy or happiness as GDP doesn't take into account:

-Hidden Economy (Cash in hand work)

-Public Spending ( Some countries have more benefits than others)

-Extent of Income Inequality

-Envrionment

-Wellbeing/Health

-Can also be errors in calculating the inflation rate for real GDP/Transfer payments should be subtracted

Front 53

What ways are there to measure the development of an economy?

Back 53

HDI (Human Development Index)

GPI (Genuine Progress Indicator)

Number of mobile phones per thousnad of the population

Levels of disease/malnutrition

Access to clean water

Levels of political and social freedom

etc.

Front 54

What is HDI?

Back 54

Human Development Index was developed by the UN to measure and rank countries' levels of social and economic development.

It is a composite statistic of life expectancy, education and income indices. HDI is used to rank countries into four tiers, the higher the ranking the higher the over of development.

Front 55

What is GPI?

Back 55

Genuine Progress Indicator

attempts to improve GDP by including measures of the impact of economic growth on the environment as well as various social factors. (quality of life, crime, volunteer work, housework, parenting)

Front 56

How can happiness be measured?

Back 56

In terms of UK National Wellbeing, the "Measuring National Wellbeing "report was launched in 2010.

Contains 4 key questions about life satisfaction, anxiety, happiness andworthwhileness, where people answer on a scale of 0 “not at all” to 10 “completely”.The report is now updated on a quarterly basis, rather than annually

Front 57

What are the advantages and disadvantages of measuring happiness?

Back 57

Advantages:

Happiness is a fundamental goal for many

Takes more into account than income

Disadvantages:
Difficult to value/judge

Subjective Measure-difficult to compare scores

Unethical things can make people happy (Sadists)

Always subject to change

Front 58

What is the relationship between real income and subjective happiness?

Back 58

Diminishing Marginal Utility. At low levels of happiness, it increases with income, but at a certain level of income happiness becomes stagnant.

Front 59

What is the Easterlin Paradox?

Back 59

Anincrease in consumption of material goods will increase happiness if basic needsaren’t met (shelter and food), but once these needs are met, an increase inconsumption won’t increase long term happiness

Front 60

How can social status influence the relationship between income and happiness?

Back 60

If you are the richest out of everyone you associate yourself with, thenyou will be happier than someone who has the exact same income but is the poorestout of everyone they associate with. Income is linked to social status and highersocial status tends to make us happier.

Front 61

Define Trade Cycle

Back 61

The pattern of GDP upturns and downturns