MACRO Economic Performance Flashcards
Economic Cycle Diagram
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Define actual growth rate
Real GDP/real output produced by an economy (backed by AD)
Define trend growth rate
Underlying rate of growth - potential growth/output capable by an economy if producing at full capacity
What is an output gap
• An output gap is when actual output (real output/real GDP) is higher or lower than it would be if the economy had grown at its trend rate
What is a positive output gap
•When actual output is greater than trend rate (potential level of output)
•The economy is working above its full capacity
What is a negative output gap
•When actual output is less than the trend rate
•the economy is working below its full capacity
Define a recovery
A recovery is a phase in the economic cycle following a recession. It is characterised by output starting to increase as AD starts to rise due to confidence beginning to return
EXPLAIN THE FEATURES OF A RECOVERY
•During a recovery, economic activity starts to increase and AD starts to rise. Business confidence increases which means banks may be more willing to lend to businesses who are more willing to invest.
This means they may employ more people as well because output is increased to meet this increased demand. This leads to more Yd for households, therefore consumer spending will increase and AD will rise further. So economic growth starts to occur in the short term. However, higher inflation is likely as prices are driven up as AD rises (demand pull).
BOP deficit may worsen because consumers have more Yd so their MPM increases therefore they buy more imports which worsen the BOP deficit
WHICH FACTOR IS MOST IMPORTANT AND WHY?
• In a recovery, I think that consumer confidence is probably the most important feature in causing the economy to move to a recovery from a recession in the short term. This is because without consumers feeling more confident, they will not spend even if they become employed again or have more Yd. It will depend on how much savings they may have had to use up during the recession. They may decide to replenish their savings before they start to spend. C is two-thirds of AD, therefore without increased C, AD is less likely to rise enough to move the economy into a recovery stage from a recession.
Therefore, in my opinion, consumer confidence is the most important factor in the short term.
a) Write a paragraph defining and explaining a boom
• economic activity peaks
• growth is high
• firms expanding (investment)
• new firms created
• full employment a Production/output reaches full capacity
• Confidence high
• Banks lending more money
~AD > AS
~economy overheats inflation high
~balance of payments deficits (imports > exports)
Write a paragraph defining and explaining a downturn
• downswing
• economic activity falls below trend
• firms cutback/bankrupt
• Investment falls
• production/output falls
• employment falls (creates spare capacity)
• exports uncompetitive
• confidence falls
• reduced spending and investment
• AD falls
• Less imports (BOP improves)
• Inflation falls
Write a paragraph defining and explaining a recession
A recession is when there is negative growth for 2 consecutive quarters
•emplovment falls further
•Production/output fall
• (some firms bankrupt)
• consumer spending falls
• firms investment falls
• govt spending falls
• bank lending falls
• Low AD
•Inflation may fall further-May be deflation
• BOP may improve
WHY DO CYCLES EXIST?
- Fluctuations in AD - confidence is key
- Supply-side factors-technology, skilled labour
- Speculative bubbles
- Political cycle
- External shocks
- D/S
- S/S
- Multiplier/accelerator interaction
Define economic growth
An increase in the real GDP/output of the whole economy ie an economy produces more goods and services over time
Define short run growth
Short run growth: an increase in RNO/Real
GDP by using up spare capacity until the productive potential (capacity) of an economy is reached
• It fluctuates around the trend rate of growth
Define long run growth
Long run growth; an increase in the productive capacity/potential of an economy
• An outward movement of the PPB curve or LRAS curve
True economic growth is growth that can be sustained in the long run
How DEMAND SIDE leads to growth
Any determinant of AD will cause a shift. An increase will incentivise firms to produce more so increasing real GDP in the short run. The effect on the price level depends on the slope of the AD curve and the slack in the economy and the potential to increase output in the long run
CAUSES OF SHORT TERM GROWTH-SUPPLY SIDE
• Increase in hours-overtime
a Decrease in raw material prices eg oil
• Decrease in wage rates
• Decrease in business rates
• Small productivity improvements
a Political stability.
Political stability can provide a positive shock to growth.
• Favourable Weather. Can lead to a positive shock
CAUSES OF LONG TERM GROWTH
•Increase the quantity of labour
-Increase labour participation
-More women return to work
-Part time to full time a Reduce JSA
-Reduce Trade Union power
-Immigration (EU)
•Increase the quality of labour to raise productivity
-Education-school, HE
-Apprenticeships (govt and private)
-Training (govt and private sector)
• Increase I on capital
-Expansion-more machinery
-Replacement- Update-new machinery
-Newer technology- modern machinery
DIFFERENCE BETWEEN THE SHORT
RUN AND LONG RUN
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Benefits of growth
•Increases standards of living
•Increases life expectancy and reduces diseases
•Route out of poverty-creates jobs
•Access to education and training increases
•More developed economies find newer technologies to improve environment and reduce depletion of scarce resources
•Fiscal dividend-more taxes
•Taxes pay for better public and merit goods
•Positive multiplier - more business confidence leads to more investment and even more growth
Costs of growth
- Uses up finite resources
- More pollution and environmental degradation
- Raises commodity prices
- Destroys local cultures and communities
- Widens inequality gap with income and wealth
- Urbanisation and spread of cities reduces agricultural land
- Encourages population growth - more mouths to feed
- Raises inflation (demand pull/cost push)
- Worsens BOP trade deficit
How is economic development measured
• General improvement in standard of living
• Access to resources like food and housing to satisfy basic needs
• Access to education and training to satisfy human development
• Sustainability and regeneration by reducing resource depletion and degradation
TREATS TO SUSTAINABLE GROWTH
Exhaustion of resources
• Minerals/oil/energy not in finite supply
Environmental damage
•Increase in industrial emissions
•Increase in waste
Global warming
•Increase in greenhouse gas emissions
•Increase in use of fossil fuel burning in
China and India
•Economic costs unclear
Increased world population
•Now 7.1 bn and rising
-China cancelled one child policy
