2.5.2, 2.5.3, 2.1.2, - Output gaps, Trade cycle, Inflation Flashcards
What is an output gap
the percentage difference between actual real GDP
and potential GDP
What is a negative output gap
When actual output/ real gdp is below productive potential
And Unemployment exists
What is positive output gap
Actual output is above productive potential
Workers work overtime
Why are output gaps difficult to measure
as potential gdp cannot be measured.
What are the characteristics of an economic boom
Real gdp ↑
Inflation ↑
Unemployment ↓
Confidence ↑
Output gap +
What are the characteristics of a recession
Real gdp↓
Inflation ↓ (Maybe deflation)
Unemployment ↑
Confidence ↓
Output gap -
What happens to the fiscal balance (gov budget) during a recession
Falling profits : Fall in income tax and corporation tax
Falling consumption: Fall in VAT revenue
Rising unemployment: rise in benefit payments
Hence, fiscal balance tends to deteriorate in a recession.
What is a techinal recession
When real gdp falls for at least two consecutvie quarters.
Why may a deep recession lead to lower trend growth
decreasein business investment causes ageing or decreased capital stock.
Long term unemployment causes loss of human capital.
What is inflation
persistent increase in the price level
What is deflation
Persistent decrease in the price level
What is disinflation
Price level increasing at a slower rate
What is stagflation
Inflation + Slow growth
What is hyperinflation
Extremely rapid inflation
What is cost push inflation
Cost-push inflation occurs when overall prices rise (inflation) due to increases in production costs such as wages and raw materials.
What is demand pull inflation
Demand-pull inflation occurs when demand for goods and services exceeds supply in the economy thus increasing price level.
What is the cpi
CPI - Consumer price index
What are the steps involved in creating the CPI (4)
Selection of the Basket of Goods and Services,
Determination of the weights based on spending patterns
Price data collection including retail and online prices
Calculation of a price index using weights
What is the CPIH
same as CPI + housing costs
What is the core cpi
a subset of the CPI that excludes certain items that tend to experience volatile price swings
Such as food and energy.
Provides more stable measure
What is the RPI
Retail price index - includes housing costs such as mortgage interest payments, council tax, and some other housing-related expenses
How do we calculate inflation using CPI
New CPI - old CPI / old CPI * 100
