Growth and the business cycle

Question 1

What is actual output?

Answer 1

The actual, current level of GDP, it shows how the economy fluctuates, moving from periods of economic prosperity to turmoil. The gradient is the actual growth rate.

Question 2

What is trend output?

Answer 2

Long-term, non inflationary change in GDP caused by an increase in a country’s productive capacity, (the maximum output achievable when all resources are fully and efficiently utilised).

Question 3

What is a slowdown?

Answer 3

When actual output falls from the previous period, often resulting in actual output falling below potential.

Question 4

What is a recession?

Answer 4

A period of negative economic growth for 2+ financial quarters

Question 5

What is a boom?

Answer 5

A period of economic prosperity, it is not characterised by a time period, it just occurs when actual output peaks.

Question 6

What are output gaps?

Answer 6

The difference between actual and potential output.
These are demonstrated by the distance between the trend and actual growth lines.

Question 7

What are absolute poverty rates?

Answer 7

The proportion of people who don’t have enough income to sustain a basic standard of living.
During recessions, the rates are higher, since unemployment is higher.
During booms, the rates are lower, since unemployment is lower.