AS90796: Describe economic growth and its causes and effects using economic models

2.3

DefinitionsCausesEffectsModels

DefinitionsCausesEffectsModels

Achievement Merit Excellence

Describe Explain Fully Explain

Growth:

GDP The value of all goods and services produced in a country in a year.

Nominal GDP The value of output at current prices.

Real GDP Nominal GDP adjusted for price changes relative to a base year.

Productive Capacity A measure of a country’s economic potential.

Real Income A measure of actual economic output of goods and services (RGDP).

Net Social Welfare includes economic and non-economic factors. eg: Human Dev’l Index (HDI).

2.3

Growth: 2.3

k

C

P/P Frontier

•U

•F

•T

The P/P frontier shows the potential of an economy that produces only two goods, given a fixed level of resources and technology.

U An output combination that has some resources under-utilised or unemployed

F An output combination that makes full use/employment of all resources

T An output combination that is beyond the present capabilities of the economy.

The Production Possiblity Frontier: to illustrate employment, unemployment, economic potential and output

Circular Flow Model: showing inter-relationships in the economy

AD/AS Model: impact of growth on the price level and employment

Growth: 2.3

k

C

k

C

k

C

•A

•B

•A•B

•A•B

Production Possibility Frontiers:All of these graphs show economic growth if the economy moves from point A to B.

Starting from a point of unemployment, more goods and services are produced by making better use of resources or technology.

With the introduction of new resources or technology that can be applied to the production of good C only, more goods and services can be produced by this economy.

With the introduction of new resources or technology that can be applied to the production of either good, more goods and services can be produced by this economy.

Limitations: no economy produces only two goods, resources and technology are never fixed, contribution by sectors cannot be examined and impact on other parts of the economy cannot be examined.

Growth: 2.3

Circular Flow Model: showing inter-relationships in the economy

Limitations: The model is a simplification and the real economy is far more complex ; the size, health or speed of the economy cannot be shown ; only market transactions are shown so not all economic activity is accounted for.

The model provides the basis for •the expenditure approach: C + I + G + (X – M)•the incomes approach (the top flow)

Financial Sector

Overseas Sector

Households Government Firms

incomes

consumption expenditure

transferpayments

direct taxes indirect taxes

subsidies

savings investment

export receipts

import payments

Governmentspending

Growth: 2.3

AD/AS Model:Aggregate Demand represents the demand for all goods and

services in the economy.Aggregate Supply represents the supply of goods and services

by all producers in the economy.PriceLevel

RGDP

AS

AD

Pe

Market for G & S

Qe

If a change in demand or supply results in an increase in equilibrium quantity, this is economic growth.

Economic growth may also have an impact on the price level:• increasing demand will raise

inflationary pressures• increasing supply is likely to reduce

inflationary pressures.

Limitations: the contribution of individual sectors cannot be identified.

Growth: 2.3

k

C

P/P Frontier

•U

•F

•T

The P/P frontier shows the potential of an economy that produces only two goods, given a fixed level of resources and technology.

U An output combination that has some resources under-utilised or unemployed

F An output combination that makes full use/employment of all resources

T An output combination that is beyond the present capabilities of the economy.

The Production Possiblity Frontier: to illustrate employment, unemployment, economic potential and output

Circular Flow Model: showing inter-relationships in the economy

AD/AS Model: impact of growth on the price level and employment

Growth: 2.3

k

C

k

C

k

C

•A

•B

•A•B

•A•B

Production Possibility Frontiers:All of these graphs show economic growth if the economy moves from point A to B.

Starting from a point of unemployment, more goods and services are produced by making better use of resources or technology.

With the introduction of new resources or technology that can be applied to the production of good C only, more goods and services can be produced by this economy.

With the introduction of new resources or technology that can be applied to the production of either good, more goods and services can be produced by this economy.

Limitations: no economy produces only two goods, resources and technology are never fixed, contribution by sectors cannot be examined and impact on other parts of the economy cannot be examined.

Growth: 2.3

Circular Flow Model: showing inter-relationships in the economy

Limitations: The model is a simplification and the real economy is far more complex ; the size, health or speed of the economy cannot be shown ; only market transactions are shown so not all economic activity is accounted for.

The model provides the basis for •the expenditure approach: C + I + G + (X – M)•the incomes approach (the top flow)

Financial Sector

Overseas Sector

Households Government Firms

incomes

consumption expenditure

transferpayments

direct taxes indirect taxes

subsidies

savings investment

export receipts

import payments

Governmentspending

Growth: 2.3

AD/AS Model:Aggregate Demand represents the demand for all goods and

services in the economy.Aggregate Supply represents the supply of goods and services

by all producers in the economy.PriceLevel

RGDP

AS

AD

Pe

Market for G & S

Qe

If a change in demand or supply results in an increase in equilibrium quantity, this is economic growth.

Economic growth may also have an impact on the price level:• increasing demand will raise

inflationary pressures• increasing supply is likely to reduce

inflationary pressures.

Limitations: the contribution of individual sectors cannot be identified.