Economic Growth Essay

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ECONOMIC GROWTH: Definition: Economic growth is when there is a sustained increase in a countries productive capacity measured by increase percentage GDP over a period of time. Explain why is economic growth important to an economy? It is the key objective of government policy as it creates jobs, raises standards of living and makes it possible to satisfy more material wants. Outline the main factors that influence consumption and investment levels in the economy. Consumption is influenced by: ­ Consumer expectations on the future state of the economy ­ Level of interest rates – effects the amount consumers can borrow because of return they have to pay. This therefore effects what they can spend. ­ Distribution of income on the economy. The more equitable the lower the average propensity to consume due to having enough to save. If less equitable in income distribution, the APC will be higher for those with low incomes as they spend most of there income on essential goods and services ­ Income levels and consumer preferences – degree of MPS and MPC Investment is influenced by: ­ The cost of capital equipment - This depends on interest rate levels/changes, government policy changes to investment allowances/tax deductions, the price and productivity of labour. ­ Business expectations – expected product demand, general economic outlook, whether new innovative technology has hit the market and inflation levels in the economy. State the leakages and injections equation: S + T + M = I + G + X Where S, T and M are leakages and I, G and X are injections Explain the effect on the level of economic activity when a) total leakage>total injections → decrease in economic growth as there is less money in the economy b) Total

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