Causes of Economic Growth and Trade Cycle Part A Flashcards
What is economic growth?
Economic growth is the change in potential output of the economy. It is also an increase in the real value of goods and services produced measured by the annual percentage change in real GDP
What is the trade cycle?
The trade cycle is the fluctuation of economic activities around the trend rate of growth
What is a positive output gap?
A positive output gap exists when the economy is in boom and gap is above its long-term trend value
What is a negative output gap?
A negative output gap exists when the economy is in recession and GDP is below its long-term trend value
What is economic growth caused by?
Economic growth is caused by increases in the quality or quantity of land, labour, and capital and by technological progress which leads to a rise in LRAS
What is actual growth?
Actual growth is the change in the quantity of goods and services produced by an economy, which is measured by percentage change in GDP
What is potential growth?
Potential growth is the change in the productive capacity of the economy overtime, it is illustrated by a rightward shift in the PPF or LRAS
What does the economic cycle diagram show about growth rate?
Growth rate is often very volatile but the fluctuations can be reduced using automatic stabilisers
What is the state of the economy in a positive output gap/boom?
There are high levels of inflation due to lots of pressure on existing factors or production, caused by an economy operating past the level of full employment leading to low levels of unemployment
What is the state of the economy is a negative output gap/recession?
There would be low inflation due to little pressure on existing factors or production which is caused by the economy operating below full employment leading to spare capacity and high unemployment
What is the trend rate of growth?
This is the average sustainable rate of growth over a period of time
What distinguishes a slow down from a recession?
A recession is 2 or more consecutive quartiles where there is negative economic growth
What is a slowdown, recession, and recovery?
A slowdown is where an economy begins to have a negative output gap. The recession is the time after 2 or more quartiles where the economy is in negative economic growth. The recovery is where actual growth begins to increase again
Why are positive output gaps unsustainable?
Positive output gaps are unsustainable in the long run according to the classical economic model of AS/AD due to the fact that workers will revise up their wages in the long run causing SRAS to decrease and the economy to move back to full employment
Why is it difficult to estimate the size of the output gap of an economy?
Estimating the maximum potential output level requires many different variables that may be based on inaccurate data
What are the names for a positive output gap?
Peak/Boom
What is the name for when an economy experiences a fall in real output?
Downturn
What is the name for a negative output gap?
Recession/Depression/Trough/Slump
What is the name for when the economy experiences an increase in real output?
Recovery/Expansion
What is the state of an economy in a boom?
High National Income
Economy is beyond full employment
Overheating
High Tax Revenue
Rising Wages
High Inflationary Pressures
What is the state of an economy in a downturn?
Output and Income Fall
Government Expenditure on Benefits Rise
Unemployment Rises
Inflationary Pressures Ease
Low Tax Revenue
What is the state of an economy in recession?
Low Economic Activity
High Unemployment
Low consumption
Deflation
What is the state of an economy in a recovery?
Rising National Income and Output
Falling Unemployment
Inflationary Pressure Rises
How can trade cycles differ?
A traditional trade cycle is where GDP falls in the recession phase
Some trade cycles are milder, with GDP fluctuating around its long-run path but still rising, with growth being slower
What are the causes of the trade cycle?
Demand side shocks
Supply side shocks
What are demand/supply side shocks?
A sudden, dramatic change in a component of aggregate demand/supply
How can the negative output gap be shown on a supply demand curve?
LRAS and AD meet at a higher quantity than SRAS and AD
How can the positive output gap be shown on a supply demand curve/
LRAS and AD meet at a lower quantity than SRAS and AD
