Economic Growth & Economic Cycle

Question 1

Difference Between SR & LR Growth

Answer 1

• Short Run Growth: % increase in country’s RGDP, measured annually
• Caused by increases in AD
• Long Run Economic Growth: Occurs when productive capacity of economy is increasing
• Refers to trend rate of growth of real national output in economy over time
• Caused by increases in AS
• Potential output of an economy is what economy could produce if resources were fully employed

Question 2

Positive & Negative Output Gaps

Answer 2

Output Gap: Occurs when there is difference between actual level of output & potential level of output
- Measured as a percentage of national output

Negative Output Gap: Occurs when the actual level of output less than potential level of output
- Puts downward pressure on inflation, usually means unemployment of resources, labour & capital not used to full productive potential
- Lot of spare capacity in economy

Positive Output Gap: Occurs when actual level of output is greater than potential level of output
- Could be due to resources being used beyond the normal capacity (e.g labour works overtime)
- If productivity is growing, output gap becomes positive
- Puts upwards pressure on inflation
- E.g China & India, high rates of inflation due to fast & increasing demand, positive output gaps