4.2.3.1 ECONOMIC GROWTH AND THE ECONOMIC CYCLE

Draw and label the economic cycle (positive and negative output gap)

What are the 5 stages of an economic cycle?

• boom

• slowdown

• recession

• recovery

• depression

What is a boom?

A period where the % rate of growth of real GDP is fast and higher than the long term trend

What is a slowdown?

A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate

What is a recession?

A period of at least 6 months when an economy suffers a fall in aggregate output, employment, investment and business/consumer confidence

What is a recovery?

A phase 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 nation's GDP falls by at least 10%

What are 2 significant point of the UK's economic cycle between 2000 and 2026?

Covid 19

2008 GFC

What does economic growth look like on a PPF?

An outwards shift of PPF (long run growth)

What's different between short run growth and long run growth on a PPF?

Short run growth - movement inside

Long run growth - outwards movements from PPF1 to PPF2

Define demand side

Related to the impact of changes in AD on the economy, associated with Keynesian economics

Define supply side

Related to the changes in the potential output of the economy, which is affected by the available factors of product (eg. changes in the size of the labor force and the productivity of labor)

Show demand side changes in the economy on a Keynesian diagram

Write a logical chain of argument for the cause of an economic recession

• business confidence drops

• firms cut back on production

• lay off some workers

• fill in incomes of those affected

• rise in savings

• retail spending drops

• firms revenue/profits decline

• firms cut back on investment

• AD falls

• real GDP falls

• the economy enters a recession

• widespread unemployment and confidence drops even further

What are 4 economic and social effects of a recession?

1. Fall in confidence - a drop in animal spirits

2. Rising cyclical unemployment

3. Lower rates of inflation - with risks of deflation

4. Rising fiscal deficit for the gove

Explain economic scarring (hysteresis)

The idea that a recession or economic show does not just cause temporary damage, but leaves permanent or long lasting negative marks on an economy's trend growth rate, output and employment

How can an economic recovery be showed on a diagram?

• shift from AD1 to AD2 (and then AD3)

• shifts the SRAS to the right

• shifts the LRAS to the right

Why does SRAS shift right?

A decrease in production costs or a. increase in labor productivity

Why does LRAS shift right?

Due to an expansion in the economy's potential capacity

Give 1 demand side shock that effects

AD, SRAS, LRAS

Global financial crisis

Give 1 supply side shock that effects

AD, SRAS, LRAS

Volatile world commodity prices

Give an example of a demand and supply side shock?

COVID pandemic

Illustrate an economic boom using AD-AS

What is the micro impact of an economic boom?

Effects households, workers, businesses

• higher income and employment

• rising costs of living

• wider inequality

• skilled labor shortages

• supernormal profits

What is the macro impact of an economic boom?

Causes a postive output gap and macroeconomic overheating

• falling cyclical unemployment

• increase investment

• increased confidence

• inflationary pressures

• widening inequality

What is the biggest factor that causes turning points in an economic cycle?

Consumer and business confidence (animal spirits)

Define trend rate of growth

The average sustainable rate of GDP growth that an economy can maintain over the long term without causing major economic problems like high inflation

Define economic cycle

Refers to the regular, recurring fluctuations in economic activity and real GDP growth around the long term trends line over a period of time (4/12 years)

How is the UK economy growing compared to the global economy?

The UK economy has generally grown at a slower average rate compared to the global economy

Explain the difference between the actual and potential growth

Actual growth is the real time increase in an economy's output, while potential growth is the maximum possible expansion an economy could achieve of all its resources were fully utilized

Give some short term economic growth key factors

• changes in interest rates set by the central bank

• fiscal policy

• commodity prices

• current changes affect demand for exports and imports

• confidence

• delivery from an external shock (COVID)

Summarise causes of long run economic growth

• productivity improvements

• labor supply growth

• technological change

• industry shifts

• human capital increases

• infrastructure advancements

What is neoclassical growth theory?

Economic growth is driven by accumulation of capital, labor and technological progress

• assumes diminishing returns - the economy reaches a steady state

What is new growth theory?

Driven by internal factors such as choices within the economy like investing in knowledge/innovation

Give 3 aspects of new growth theory

1. Profit seeking research

2. Openness to foreign ideas

3. 
   

Benefits of sustained economic growth

Higher living standards, lower unemployment, improved public services

Main costs of rapid economic growth

Risks of higher inflation/higher interest rates, environmental effects, wealth and income inequalities

What is the Kuxnets curve?

This explains the relationship between economic growth and environmental quality

What causes movements up the Kuznets curve

• rapid industrialization

• increasing emissions from urbanization

• weak environmental laws/regulations

• low income countries have limited technology

• heavy reliance on fuels (coal)

4 threats to sustainable growth

• waste from production/consumption

• pollution and increasing climate change risks

• depletion of natural capital

• loss of biodiversity

How economic growth can help?

• proceeds of growth invested in clean energy

• decline in heavy energy intensive industries

• increase awareness for sustainability

How much did pensioners get in the winter fuel allowance?

£500

Which government introduced a winter fuel allowance?

Conservatives

Why did the conservative government introduce a winter fuel allowance?

As elderly are conservative voters

Did every elderly person get £500?

Yes, it was universal

How does a winter fuel allowance affect AD?

• heating is an essential

• so people have more disposable income to spend on non-essentials

• MPC increased

• AD increases

What is the multiplier effect?

When an increase in government spending leads to an every bigger increase in real GDP

What does equitable mean?

Fair

If the gini coefficient is 1, what does this mean?

For instance, 10% of the population, own 10% of the wealth

If the gini coefficient is near 1, how does this affect economic growth?

Purchasing power increases, MPC increases, AD increases, (as shown by the Keynesian diagram), contributes to economic growth

What does means tested mean?

A determination of whether an individual or family is eligible for government assistance (