3. Economic Performance - Economic Cycle Flashcards
What is the economic cycle and what does it tell us?
It’s a graph showing the way that growth fluctuates over time. It shows us the actual rate of growth in comparison to the trend rate of growth.
For the economic cycle graph what are the axes and what are the lines?
Y axes is is real GDPX axes is timeThe fluctuating line is actual growthThe steady line is the trend rate of growth
Why does the actual rate of growth fluctuates?
Demand-side and supply-side shocks.E.g. Sudden inc. in the price of oil
What is occurring at the peak an actual growth?
Boom
What is occurring at the trough or actual growth?
Recession
What is the recession?
Two successive quarters of negative economic growth.
What is occurring at the point between a boom and recession of actual growth?
A slowdown
What is occurring between a recession and a boom of the actual growth?
A recovery
What happens when actual growth is below the trend rate of growth?
We have what is called a negative output gap. You’re operating inside the PPF.
What happens when the actual rate of growth is above the trend rate of growth?
You have a positive output gap. This is not sustainable output. You’re producing outside your PPF but you cannot maintain this.
What economic indicators can we use to identify different stages of the economic cycle?
Positive Output Gap (Boom) - High economic growth, Low Unemployment, Higher demand pull inflation, Weaker BoPNegative Output Gap (Recession) - Low economic growth, High Unemployment, Low/No demand pull inflation, Stronger BoP
What are the causes of changes in the phases of the economic cycle?
Demand and Supply-side shocks. For instance, if oil prices rose the economy would slowdown as fewer goods wld be produced due to increased costs of production.
