MACRO Economic Performance Flashcards
Economic Cycle Diagram
Go draw one rn or add it in
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
