3.1 Economic growth and cycle Flashcards
What is the economic cycle?
fluctuation of GDP around its long term growth trend
What two ways do fluctuations in the economy occur?
seasonal and cyclical fluctuations
What are seasonal fluctuations?
variation of economic activity resulting from seasonal changes in the economy
(weather)
What are cyclical fluctuations?
- upswing and downside in aggreagte economic activity taking place over 4 - 12 years.
- caused by supply and demand side shocks
What is short term economic growth?
measured in real GDP over a 12 month period and varies in differant phases of the economic cycle
What is long term economic growth?
refers to the expansion of the long term productive capacity of the economy
What is actual output?
level of real output produced in the economy
What is trend growth rate?
annual average percentage increase in the productive capacity of the economy
When does an output gap happen?
actual output differs from the trend level of output
When is there a positive output gap?
actual real output > trend level output
What are the four phases of the economic cycle?
- boom / expansion ( positive output gap)
- slowdown ( rate fo growth decelerates)
- recession ( real national output falling for 6 months or more )
- recovery ( real GDp begins to grow )
Explain the economic boom?
- fast growth of consumption: rising real incomes, strong confidence and rise in house and share prices
- higher demand for capital goods as businesses invest in capital goods
- more jobs, falling unemployment
- high demand for imports
- government tax revenues rising
Explain the economic recovery?
less spare capacity and rising AD leading to increase in real national output and fall in amount of spare capacity
What is a recession?
a fall ion real GDP for two consecutive quaters
Characteristics of a recession?
- falling demand
- rising unemployment
- some firms go out of business
- low confidence in economy
What is the differance between a recession and depression?
- depression is a prolonged slump where real GDP falls by more than 10% from peak to trough
What are the possible causes of a recession?
- external events
- tightening of macro policy
- fall in asset prices or supply of credit
- drop in business and consumer confidence
How can external events cause a recession
- sharp rise in global commodity proces (oil and gas)
- causes COP to increase and SRAS to decrease
How can the tightening of macropolicy cause a recession?
- higher interest rates cause loans to be more expensive
- rise in tax or cut in gov spending
How can a fall in asset prices or supply of credit cause a recession?
- steep decline in the level of share or house prices
- collapse in supply of credit
How can a drop in business confidence cause a recession?
- lower investment could lead to job losses
- less spending and more saving
What are four short term economic effects of a recession?
- business profits and capital investment
- unemployment
- government finances
- deflation
What are some long term economic effects of a recession?
- rising structural long term unemployment and regional decline
- low interest rates of investment can reduce the size of capital stock
- persistant budget deficits
What are some long term social effects of a recession?
- falling real wages hits average living standards and reduces demand
- widening inequality of income and wealth leading to rising poverty
- social costs such as loss of social cohesion
What are some alternative indicators if economic cycle?
- rate of inflation
- investment
- unemployment
What is the output gap?
actual GDP is greater than the estimated potential GDP
WHat is positive output gap?
actual GDp is greater than the estimated potential GDP
WHat is the main problem with a positive output gap?
rising demand- pull and cost push inflationary pressures
What is a negative output gap?
when the level of actaul GDP is less than potential GDP
What is the main problem with a negative utput gap?
likely to be higher unemployment and possible deflation risk
What are some problems with measuring the output gap?
- innacurate data on labour force ( difficulty measuring scale)
- problems with accuracy of measuring productivity (cannot directly observe)
- surveys of producers may be innacurate
- gaps in knowledge about how businesses are investing
What is short run economic growth?
the actual annual percentage change in real national output
What are the four auses of short run economic growth?
- changes in AD
- changes in SRAS
- changes in short term policy
- short term demand and supply side shocks
What are the six factors that causes economic growth?
- interest rates set by central bank
- fiscal policy
- commodity prices (oil and gas)
- exchange rates
- trading conditions in other countries
- confidence of businesses and households
When does long run economic growth occr?
when there is an increase in potential productive capacity of the economy
WHat must there be for long run economic growth to occur?
increase in LRAS
What 5 things can cause an increase in long run economic growth?
- potential output
- productivity of labour and capital
- technological progress and strength of enterprise
- changes in labour force
- investment rates
What are demand side shocks?
- refer to unexpected changes in the economy that directly impact aggregate demand
what are supply side shocks?
- unexpected changes in the economy that directly impact aggregate supply
What are the four benefits of economic growth?
- higher living standards (real GNI per capita, helps to lift people out of poverty)
- employment effects (stimulates jobs and contributes to lower unemployment)
- fiscal dividend ( raise tax revenues and reduce gov spending on unemployment)
- accelerator effect (stimulates new investment)
What ar the three perspectives on economic growth?
- balanced growth (sector balance)
- sustainable growth (meets demand of current generations)
- inclusive growth (benefits are widely spread)
What can high rates of gdp growth bring about?
undesireable economic and social costs
What are the problems with high GDP rates?
- risk of higher inflation and higher interest rates
- environmental effects
- inequalities of income and wealth
