Topic 3 - Economic Performance Flashcards
What is Economic Growth?
Growth in the productive potential of the economy. Typically measured by growth in real GDP, although this is only a proxy measure as actual GDP can be above or below productive potential of economy at a point in time
What can Economic Growth come from?
Increase in Quality / Quantity of resources
Cuts in production costs
Creating new products for market
Increased efficiency
Increases in AD that stimulates increase in the quality/ quantity of factors of production
What is the trend growth rate?
Rate at which output can grow on a sustained basis without putting pressure on inflation. It reflects the annual average percentage increase in productive capacity of economy
What is the Economic Cycle?
Upswing and Downswing in aggregate economic activity taking place over 4-12 years
What is seasonal fluctuation?
Variation of economic activity resulting from seasonal change in the economy
What is meant by actual output?
Level of real output produced in a particular year, not to be confused with trend level. Actual output differs from trend level when there are output gaps.
Causes of change in the phases of the economic cycle
Fluctuations in AD
Supply - Side Factors
Role of speculative bubbles
Political business cycle theory
Outside shocks hitting the economy
Change in inventories
Marxist explanation
Multiplier/ accelerator interaction
What is meant by output gap?
The level of actual real output is greater than the trend output level
What is meant by a boom?
A period where the rate of growth of real GDP is fast and higher than the long - term trend
What is a business cycle?
Short run fluctuations of the national output (real GDP) around its long term trend
What is meant by National Income?
Everything produced, earned and spent in a county
What is a slowdown?
A weakening of the rate of growth, real GDP is still rising but at a slower rate.
What is a recession?
A period of at least 6 months when an economy suffers a fall in output.
What is a recovery?
A phase of the cycle, after a recession, during which real GDP starts to increase and unemployment begins to fall
What is a depression?
A prolonged downturn in the economy and where a nations GDP falls by at least 10%
Negative output gaps
When level of actual GDP is less than potential GDP
Some factor resources under utilised
Main problem is likely to be higher unemployment and possible deflation risk
Positive output gaps
Actual GDP is greater than estimated potential GDP
Some resources working beyond usual capacity
Main problem is rising demand - pull and cost - push inflationary pressures
Demand side shocks in output gaps
Economic downturn in trading partner
Unexpected tax increases
Financial crisis causing bank lending to fall
Bigger than expected rise in unemployment
Supply side shocks in output gaps
Steep rise in oil, gas and other commodities
Political turmoil/ strikes
Natural disasters causing fall in production
Unexpected breakthrough in production technology
Possible causes of a recession
External events
Tightening of macro policy
Fall in asset prices or supply of credit
Drop in business and consumer confidence
Short term economic effects of a recession
Business profits and capital investment falls
Unemployment
Government finances
Inflation
Long term economic effects of a recession
Rising structural long - term unemployment and regional decline
Low rates of investment reduce size of capital stock
Persistent budget deficits and rising national debts lead to austerity
Long term social effects of a recession
Falling real wages hits living standards
Widening inequality of income and wealth
Social costs
How is someone classed as unemployed?
Seeking employment (part of the labour market)
