Extract 1 Flashcards
Recent Macroeconomic performance of UK: (3)
- GDP increasing slowly, just beginning to recover after recession
- unemployment falling as recovery takes place
- inflation is falling as well
Output gap definition
Difference between actual and potential GDP
Short Run economic growth
an increase in AD
Long Run economic growth
Increase in LRAS of economy/ increase in productive capacity of economy
Negative output gap
Actual GDP is below potential, aren’t utilising resources. Growth can occur without raising the price level
Positive output gap
Actual GDP exceeds potential GDP. No spare capacity, growth likely to generate inflationary pressures
Stages of economic cycle: Boom
Rate of economic growth exceeds the rate of growth of potential GDP so the output gap is narrowed
Stages of economic cycle: slowdown
when the rate of economic growth begins to fall and approach zero
Stages of economic cycle: Recession
When rate of economic growth becomes negative and real GDP actually falls
Stages of economic cycle: Recovery
when economic growth becomes positive after a recession
Causes of Short Run economic growth
SREG can be driven by changes any component in domestic demand (C + I + G) or international demand (X-M). E.g
- Increased wages
- increased G
- Increased consumer confidence
Causes of Long Run economic growth
anything which increased productive capacity. Anything which changes the size or quality of Factors of Production (or makes economy more efficient. E.g
- Increase in capital
- Increase in working population
- Increase in labour productivity
- improvements in technology
Causes of changes in Short Run Aggregate Supply (Firms cannot respond to changes in macro economy)
- Changes in labour costs
- Changes in input prices (raw materials, capital)
- Changes in Taxes and regulation
Consequences of Economic Growth: Inflation
if Growth is a result of increases in AD that is not matched by increased in AS, inflation is likely to occur (depending on position of AD curve
(because resources become scarce)
Consequences of Economic Growth: Employment
D for labour is a derived demand, increased in real GDP tend to lead to increases in demand for labour.
In long run, employment would also rise (LRAS curve shifts downwards)
However, firms may choose to employ workers abroad , depends on nature of growth and nature of unemployment (structural, etc)
Consequences of Economic Growth: Balance of Payments
Increase in C affects balance of payments negatively as demand for/ volume of imports increases. However if growth is export led, BoP likely to improve or remain constant. LR economic growth less likely to worsen BoP as productivity increases
Consequences of Economic Growth: Government’s fiscal position
Public sector net cash requirement (difference between gotv’t expenditure and revenue). Due to workings of automatic stabilisers, economic growth in SR is likely to improve PSNCR as taxation receipts increase and gov’t spending falls as in high rates of growth unemployment is likely to be lower. PSNCR will vary over economic cycle.
Define long term unemployment
A period of being out of work and actively seeking employment for over 1 year
Define unemployment rate
% of total labour force unemployed but willing, able and seeking a job
Difference between actual and potential growth
Actual- increase in real GDP
Potential- increase long run expansion of an economy’s productive potential
What is the complete definition of economic growth?
Economic growth is an increase in an economy’s AD in the short run, but an increase in productive potential in the long run.
