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

1. 2.3 AS90796: Describe economic growth and its causes and effects using economic models

2. 2.3 Growth:

3. 2.3 Growth: 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 P/P Frontier k • T • F • U C

4. k k k • B • B • A • A • B • A C C C 2.3 Growth: 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.

5. incomes direct taxes indirect taxes Households Government Firms transfer payments subsidies Government spending import payments consumption expenditure export receipts savings investment Financial Sector Overseas Sector 2.3 Growth: Circular Flow Model: showing inter-relationships in the economy • The model provides the basis for • the expenditure approach: C + I + G + (X – M) • the incomes approach (the top flow) 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.

6. Price Level MarketforG & S AS Pe AD RGDP Qe 2.3 Growth: 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. • 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.

7. 2.3 Growth: 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 P/P Frontier k • T • F • U C

8. k k k • B • B • A • A • B • A C C C 2.3 Growth: 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.

9. incomes direct taxes indirect taxes Households Government Firms transfer payments subsidies Government spending import payments consumption expenditure export receipts savings investment Financial Sector Overseas Sector 2.3 Growth: Circular Flow Model: showing inter-relationships in the economy • The model provides the basis for • the expenditure approach: C + I + G + (X – M) • the incomes approach (the top flow) 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.

10. Price Level MarketforG & S AS Pe AD RGDP Qe 2.3 Growth: 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. • 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.