2.5 economic growth - definitions

Question 1

Trend growth

Answer 1

The long-term rate of growth. The potential rate of growth in the capacity of the economy.

Question 2

The business cycle

Answer 2

When actual economic growth (AD) fluctuates or moves up and down around the long-term trend rate of growth.

Question 3

Positive output gaps

Answer 3

When actual GDP growth (AD) is higher than the trend rate.

Question 4

Negative output gap

Answer 4

When actual GDP (AD) is growing more slowly than the trend rate. Usually connected with falling inflation rates and rising unemployment.

Question 5

Spare capacity

Answer 5

When there are spare resources in the economy – growth is running below trend / there is a negative output gap.

Question 6

Recession

Answer 6

GDP shrinks (gets smaller). In other words economic growth is negative. GDP must fall for 2 quarters or 6 months in a row