Transcript Macroeconomic Performance

The Nature of Economic Growth
AS Economics Unit 2
Aims and Objectives
Aim:
• To understand the nature of economic growth
Objectives:
• Define economic growth
• Explain the difference between actual and potential growth
• Analyse the UK economic cycle.
• Evaluate whether economic growth is always a good thing.
Economic Growth
• Economic Growth: an increase in the real output of the
economy.
• Real Gross Domestic Product (GDP) per capita: output of
the economy in a year, divided by the size of the population,
adjusted for inflation.
• Displayed on Business Cycle/Economic Cycle
Economic Growth
• Although the level of real output may be increasing each year,
that level will very probably be within the economy’s full
employment potential level of output.
• We must make a distinction between actual GDP growth and
potential GDP growth.
Actual and Potential Growth
• A shift in PPB
represents
potential growth.
Capital
Goods
• A move from point
A to point B
represents actual
growth
PPB2
PPB1
B
A
Consumer
Goods
Actual and Potential Growth
• It is possible for potential growth to occur without actual
growth taking place.
• For example, the labour force of a nation may increase due to
immigration, but if there is no demand for this factors, output
will not rise!
UK GDP
Economic
Boom
Downturn
Recovery
Recession
Task: Two significant
points of comparison.
UK GDP Growth Comparison
Task: Two significant
points of comparison.
UK GDP Growth Comparison
Task: Two significant
points of comparison.
Output Gaps
• The difference between the actual level of GDP and the
productive potential of the economy.
Output Gaps
Negative Output Gap:
where the economy is
producing less than it’s
trend output.
Positive Output Gap: when
actual GDP exceeds trend
GDP increasing inflationary
pressure.
Trend
Growth
GDP
Actual
Growth
A
B
Time
Output Gaps and Economic Cycle
• Draw out the economic cycle on your whiteboards.
• Write out the following statements and suggest with each
letter where each statement occurs on the economic cycle.
• E.g.
Trend
Growth
B
GDP
Actual
Growth
A
Time
A
B
C
D
E
F
G
H
• Unemployment begins to rise
• Unemployment begins to fall
• AD begins to rise
• AD begins to fall
• Consumer confidence is high and firms benefit from high profits from
high demand.
• Firms are suffering from a contraction in AD and making redundancies.
• Government intervenes to stimulate AD.
• Household incomes are increasing.
I
J
K
L
M
• Aggregate demand is exceeding aggregate supply,
resulting in higher prices and inflationary pressure.
• Consumer confidence is low, and instead of spending,
consumers are saving, resulting in a contraction of AD.
• Workers demand higher wage levels to keep up with
inflation.
• Interest rates are low in an attempt to boost consumer
spending
• The number of people claiming welfare benefits rises.
Plenary
• Is economic growth always a good
thing?