2.5 economic growth

define the term “Positive output gap”

when actual economic output exceeds the potential output of an economy, indicating that the economy is operating above its full capacity, often leading to inflationary pressures.

Define the term “Negative output gap”

occurs when actual economic output is below the economy's potential output, indicating underutilization of resources and often leading to higher unemployment and lower inflation.

what happens to an output gap if actual growth is slower than trend growth

the output gap becomes negative. This means the economy is operating below its potential, leading to underutilized resources, higher unemployment, and typically lower inflation.

characteristics of an economic boom

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Strong GDP Growth: Rapid increase in economic output.

Low Unemployment: High demand for labor as businesses expand.

Rising Consumer Spending: Increased consumer confidence and spending.

Higher Investment: Businesses invest in new projects, equipment, and expansion.

Inflationary Pressures: Rising demand can lead to higher prices.

list the characteristics of a recession

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Declining GDP: Negative growth in economic output over two consecutive quarters or more.

Rising Unemployment: Increased job losses as businesses cut back on production.

Decreased Consumer Spending: Reduced confidence leads to lower spending.

Lower Business Investment: Companies postpone or reduce investment due to economic uncertainty.

Deflationary or Low Inflation: Weak demand leads to downward pressure on prices.

recession

a period of declining economic activity marked by negative economic growth for two consecutive quarters or more

explain the benefits of actual growth on consumers

Increased income:leads to higher wages, improving consumer purchasing power.

More employment opportunities: Economic growth typically creates more job openings,

Better standards of living: As economies grow, consumers generally experience higher living standards, with better access to healthcare, education, and housing

Costs of actual economic growth on consumers

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Inflation: rising demand, causing inflation and higher prices

Income inequality: Growth may disproportionately benefit higher-income individuals, widening the gap between rich and poor.

Environmental: Increased production and consumption can lead to negative environmental impacts, affecting consumers' quality of life.

Resource depletion: Rapid economic growth may strain natural resources

Benefits of potential growth on consumers

Improved living standards: Sustained growth often results in long-term improvements in healthcare, education, and infrastructure, benefiting consumers.

More job opportunities: Potential growth can create future job prospects, reducing unemployment in the long run. and then higher income as the economy expands

Long-term price stability: With sustained growth, inflationary pressures may be controlled, leading to more stable prices

costs of potential growth on consumers

Long-term inflation risk: While growth can drive prosperity, it may eventually lead to inflationary pressures, increasing the cost of living.

Environmental impact: Potential growth can strain natural resources and increase pollution, negatively affecting consumers’ quality of life and health.

Impact of actual economic growth on firms

Increased Revenue: Growth often leads to higher sales and more demand for products or services.

Higher Profits: With growth, firms can scale operations, improve efficiency, and reduce costs, boosting profitability.

Enhanced Investment: Growth attracts investors,

Job Creation: Economic growth often leads to hiring more employees,

Cost for firms of actual economic growth

Increased Operating Costs: Growth often requires more resources, such as raw materials, energy, and labor, which can raise operational expenses.

Higher Labor Costs: Expanding a workforce can increase payroll expenses.

Capital Investment: Firms may need to invest in new equipment, facilities, or technology to, which involves significant upfront costs.

Benefits of potential growth on firms

Opportunity for Future Revenue: Potential growth can create opportunities for firms to tap into new markets or customer segments, boosting future sales.

Attracting Investment: Investors are often drawn to firms with strong growth potential,

Improved Market Positioning: Firms with high growth potential can position themselves as leaders in their industry

Costs of potential growth on firms

Uncertainty and Risk: Potential growth often comes with uncertainty, and firms may face risks if their growth plans don't materialize or if market conditions change unexpectedly.

Investment in Resources: invest in infrastructure, technology, and human resources which could strain finances.

Opportunity Cost: Focusing on growth potential may lead firms to overlook other business opportunities or market segments, leading to missed opportunities elsewhere.

Benefits of actual growth on the government

Increased Tax Revenue: Economic growth leads to higher business profits, higher wages, and more consumption, more tax income for the government.

Improved Public Services: With increased tax revenue, the government can fund services such as healthcare, education, and infrastructure

Lower Unemployment Rates: Economic growth creates more job opportunities, reducing unemployment which can reduce welfare costs.

Costs of actual growth on the government

Inflationary Pressures: Rapid economic growth can lead to inflation, which may require the government to implement monetary policies to stabilize the economy.

Income Inequality: Economic growth may disproportionately benefit certain sectors or income groups, exacerbating income inequality

Environmental Costs: Increased production and consumption can lead to environmental degradation ,

causes of short run growth

• Driven by increases in any component of Aggregate Demand (AD: C + I + G + (X–M)), shifting AD rightward in AD/AS diagrams

• Can also be shown on the PPF as movement from inside towards the curve

causes of long run growth

Caused by improvements in the quality or quantity of the factors of production:

• Land: new resource discoveries (e.g., oil) .

• Labour: larger or more skilled workforce (immigration, education, participation)

• Capital: higher investment in machinery, technology, infrastructure

Benefits on living standards actual growth

Higher Incomes: Actual economic growth often leads to increased wages and employment opportunities

Improved Public Services: With increased tax revenues generated from economic growth, governments can invest more in public services, "fiscal dividend"

actual VS potential growth

Actual Growth

An increase in real GDP, showing the economy is producing more goods and services.

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Potential Growth

An increase in the economy’s capacity to produce, from improvements like technology or more skilled workers.

Actual growth diagram

Potential growth diagram

Trade cycle diagram

PPF