Economic Growth & Economic Cycle - Macro Flashcards
What is short run economic growth?
Brings idle resources into production and takes up the slack in the economy
What is long run economic growth?
When the productive capacity of an economy increases
The trend rate of ‘growth of real national output in an economy’
What is an output gap?
The difference between the actual level of output and the potential level of output
What are the effects of a negative output gap?
- puts downward pressure on inflation
- causes a lot of spare capacity
What are the causes of a positive output gap?
- resources being used beyond the normal capacity (e.g. labour working overtime)
- an increase in productivity (this puts an upward pressure on inflation)
What is the economic cycle
The process that economies forever go through of boom, slowdown, recession and recovery
What is recovery?
When an economy is progressing past a recession and beginning to expand again
What is boom?
When the level of real output becomes greater than the trend level of output
What is slowdown?
The phase before a recession when an economy experiences very little growth
What is a recession?
Negative colonic growth over two consecutive quarters
It is the lowest point within an economic growth cycle
What does the government usually do during a recession?
- increase spending to try and stimulate the economy (e.g. more welfare payments, cutting taxes)
What is a wealth effect?
When consumer confidence and spending increase
How is economic growth measured?
By the percentage annual change in GDP
What is the trend growth rate?
The rate at which output can grow, on a sustained basis, without putting an upward or downward pressure on inflation
What is a depression?
A severe recession lasting longer than 2 years
What type of fluctuations occur in an economy?
Seasonal fluctuations
Cyclical fluctuations
What are seasonal fluctuations?
Fluctuations in the economy that are largely caused by changes in the weather e.g. seasonal employment in travel and tourism
How frequently does the economic cycle occur?
Approx. Every 4-12 years
What causes economic cycles?
Fluctuations in aggregate demand
What is aggregate demand
The total demand for goods and services in a particular market
Why does aggregate demand fluctuate?
Consumer and business confidence giving way to pessimism
What is an output gap/
When the level of actual real output is greater/lower than the trend output level
What is a hysteresis?
The effect of a disturbance on the course of the economy
What are the benefits of economic growth?
- Increases living standards
- Can lead to more civilised communities who take action to improve the environment
- Produces a fiscal dividend
What is a fiscal dividend?
An increase in tax revenue that growth generates
Why are fiscal dividends useful in an economy?
- Can be used to provide infrastructure
- Can be used to promote the means of reducing disease (e.g. better healthcare, more accessible appointments for people to be treated)- this therefore increases peoples life expectancies and overall welfare
What are the costs of economic growth?
- Uses up finite resources
- Leads to urbanisation
- Leads to a rapid growth in population
Why is the use of finite resources a consequence?
contributes to pollution (and other forms of environmental degradation)
Why is urbanisation a consequence of economic growth
It swallows up good agricultural land
Why is a rapid growth in population a consequence of economic growth?
- more mouths to feed
- wider inequalities in the distribution of income
- higher poverty rates
What are the four macroeconomic objectives?
- (High and sustainable) economic growth
- (To achieve and maintain) full employment
- Price stability
- (Equilibrium of) the balance of payments
What is a policy objective?
A target/ goal that a government wishes to achieve
What is GDP?
The sum of all goods and services produced in an economy in one year
What is real GDP?
A measure of all the goods and services produced in an economy, adjusted for inflation, in one year
What is nominal GDP?
GDP that hasn’t been adjusted for inflation
What is inflation?
A general rise in the average price levels across the economy
What is inflation?
A general rise in the average price levels across the economy
What is absolute price stability?
A zero annual rate of inflation
What is the optimal inflation rate the government wishes to achieve?
2%
What is deflation?
When the average price level of goods and services falls
What is disinflation?
When the rate of inflation is falling but still positive
What two measures are used to calculate consumer price inflation?
CPI (consumer price index) and RPI (retail price index)
What is consumer price index?
The average price increase of a basket of 700 ‘commonly’ bought goods and services
What is retail price index?
The CPI including housing costs such as mortgage costs and council tax
What is gdp per capita?
The average economic output per person
How is gdp per capita calculated?
GDP / population
What is HDI?
Human development index
What indicators does HDI take into consideration?
Life expectancy
Education
Per capita income
What is real wage growth?
When nominal wages rise faster than the rate of inflation
