2.5 Flashcards
What is the primary cause of economic growth in the short-run
An increase in aggregate demand or aggregate supply leading to actual economic growth.
What causes economic growth in the long-run
An increase in the productive capacity. (increase in LRAS).
This leads to potential economic growth.
Trend rate of economic growth
The average rate of growth of GDP.
Shows the potential output of an economy.
The output gap
The difference between the trend rate and actual rate of economic growth.
A positive output gap
Occurs when the actual rate of economic growth is above the long-run trend.
What occurs when there is a positive output gap
- Low unemployment
- High inflation
- High economic growth
- The current account deficit will worsen as imports increase.
Is a positive output gap sustainable in the long-run.
No because pressure will be put onto factors of production such as workers on over time which is unsustainable in the long-run.
LRAS can shift out making that level of output on trend though.
A negative output gap
Occurs when the actual rate of economic growth is below the long-run trend rate.
What occurs during a negative output gap
- Low or negative economic growth.
- Deflationary pressure
- High unemployment.
- Current account deficit will improve as imports reduce
Why the output gap is difficult to measure
- Have to measure AD
- Have to measure AS
- Potential output is based on estimate
The trade cycle
Variations in the level of productive capacity of an economy over time
GDP
The value of goods and services produced in the economy over a period of time
The 4 stages in the trade cycle
- Boom / peak
- Recession
- Slump / trough
- Recovery
Characteristics of a boom / peak in the trade cycle
- High levels of economic activities
- High rate of economic growth
- High demand
- Low unemployment
- High inflation
- Labour skills shortages
- High confidence
- High capital investment.
Characteristics of a recession / slowdown
- Economic growth starts to fall
- Demand falls
- Unemployment begins to rise
- Some firms will go out of business
- Confidence in the economy is low
- Investment is reduced.
Recession definition
Two quarters of negative economic growth.
Slump / trough characteristics
- Low or negative growth
- Demand is low
- Inflation is low
- Unemployment is high
- Confidence is low
- High rate of bankruptcy
Characteristics of a recovery
- Economic growth rises
- Demand increases
- Unemployment falls
- Inflation rises
- Confidence in the economy rises
- Capital investment increases.
Benefits of growth to consumers
Increased standards of living through more jobs and higher incomes.
Benefits of growth to firms
Increased profits through higher demand.
Benefits of growth to the government
Improvements in the budget through more tax revenue as more people work and less people claim benefits.
