economic growth

economic growth

measurement of changes in the value of an economy’s GDP over a set time period

GDP

total value of output in an economy over a set time period (quarter)

Recession

negative GDP for 2 quarters

Negative output gap

Nominal GDP

the value of all final G+S produced in a country in a given year, using the prices of that year

Real GDP

the value of all final G+S produced in a country in a given year, using the prices of a base year (adjusted for inflation)

(Nominal GDP/Price index) x100

Potential output

Max amount of G+S an economy can produce when it is most efficient (producing at full capacity)

Actual output

the quantity of FoP being employed at a specific time (GDP)

Potential output on diagram

Yfe and on PPF curve

Actual output on diagram

AD=LRAS, under PPF

Output gap

an economic measure of the diff between actual output and potential output

Positive output gap

Actual growth >potential growth, AD is rising fast and FoP are utilised above their most efficient capacity, unsustainable growth

Negative output gap

Actual<potential, there is spare capacity due to weak demand. An output gap suggests the economy is working inefficiently

What diagram can output gap be shown most clearly on?

Business/economic cycle diagram

What can change economic growth rates?

Supply-side policies (infrastructure, education programmes, apprenticeships)

Monetary policy (contractionary)

Fiscal policy (tax changes, current spending)

Boom

Positive output gap

What will happen to prices during a boom?

If output gap is positive, over time prices will begin to rise in response to demand pressure in factor markets

What will happen to prices during a recession?

If output gap is negative, over time prices will begin to fall in response to weak demand pressure in factor markets

govt target for growth per annum?

2.5%

growth effects/impacts

improved living standards

lower poverty rates

lower inequality

reduced unemployment

more FDI

growth negative effects

environmental damage

corruption

exploitation

inequality

inflation

classical theory of economic growth

the economy is self-correcting, any output gaps are only short-term in nature. LR will always see full employment

keynesian theory of economic growth

there are LR negative output gaps so govt demand-side policy is vital for macroeconomic recovery and growth

Keynesian evaluation of classical

Sticky wages

In the LR we are all dead

Non-transferrable skills

NMW/Living wage

Increase in AD Classical diagram

Fall in AD Classical diagram