2.5 economic growth

Actual growth

Increase level of gdp short run growth

Actual growth diagram

Shift in ad to the right

Causes of actual growth

Rise income, business confidence, ad components

Potential growth

Increase in productive potential of economy, long run growth

Potential growth diagram

Shift lras to the right

Causes of potential growth

CellQQ, education skills, immigration,

Positive output gap

When actual growth is greater than potential growth

positive output gap on diagram

Shift in y1 to y2

Negative output gap

When actual growth is below potential growth

Spare capacity

When total output hasn’t reached full potential output

What is a booom

A period of rapid economic growth/expansion

What is a recession

Period of significant economic decline, growth

Trade cycle of an economy diagram

Boom, positive output gap, recession, negative output gap, recovery

Actual growth- squiggly line

Potential growth- straight line

Axis, output y axis, time x axis

Characteristics of a boom

Low unemployment

Increased consumption

Decrease gov spend

Rise real incomes

Less spare capacity

Characteristics of a recession

Higher unemployment

Les consumption

More gov spending

Fall real incomes

Actual growth impact on consumers

Benefits- increased overall happiness, increased incomes, increased jo opportunites, increase demand for housing as consumers have more money to spend, increasing house prices and overall wealth. Positive wealth effect

Costs- ad growth will lead to higher prices

Structual unemployment

A future recession would eliminate any benefits

Impact of potential growth on consumers

Improved productive efficiency of labour, better technology and skills, leads to higher quality and quantity of goods and services

Costs- time lag- long term commitment to take full effect

Impact of actual growth on firms

Higher business confidence, businesses will increase investment, boosting ad higher demand and lower production costs lead to higher profits

Costs- firms who sell inferior pods may miss out

Ad based growth can lead to resource scarcity, and inflation

Impact of potential growth on firms

Improvement in technology, increase productive efficiency, lower production costs, creates further opportunities for

Cost- changes in technology leads to firms finding market disappearing

Define welfare gain and loss

Gain-increase in overall well being of society, benefits gained

Loss-a reduction in economic effiecny when market is not at equilibrium