business cycle slides

1. Economic Growth and the Business Cycle

2. Key terms
 Gross Domestic Product
 Gross National Product
 Nominal national
income
 Real national income
 Actual economic growth
 Potential economic
growth
 Business Cycle
 Upturn
 Expansion
 Peaking out
 Slowdown / recession /
slump

3. Measuring national income
 NOTICE:
 The difference between
 Gross Domestic Product (GDP) – eg everything
produced INSIDE the UK (it does not matter who
owns it – UK or overseas company)
 Gross National Product (GNP) = GDP plus net
profits = GNP
[net profits from UK companies which are overseas]

4. Measuring national income
 NOTICE:
 The difference between nominal (money)
income - and - real national income (inflation-
adjusted)
 So – if nominal GDP = 5.4%
and inflation = 3.7%
What is real GDP = 1.7%

5. Economic Growth and the
Business Cycle
 Two types of economic growth
 Actual Growth
 Potential Growth

6. Actual Economic Growth
 percentage increase in national output (real GDP)
from one period to another

7. Potential Economic Growth
 The percentage annual increase in the capacity of the
economy to produce
 It measures what the economy could produce when all
resources are employed at normal rates of
utilisation
 Allows a degree of spare capacity so is below full
capacity

8. The Output Gap
 The difference between the actual level of national
output and its potential level
 If actual > potential then output gap positive
 If actual < potential then output gap negative
 NB ‘potential’
 The highest level of sustainable, long-term output

9. Two economic growth timeframes
 In the short-run, ensure actual output is as close as
possible to potential output
 In the long-run, consider the determinants of the rate
of potential economic growth

10. O
Growth and the production possibility curve
GoodX
Good Y
a
b
Growth in
actual output

11. O
Growth and the production possibility curve
GoodX
Good Y
a
b
I II
Growth in
actual output
Growth in
potential
output

12. Actual Growth
and the Business Cycle
 Business Cycle
 The short-run alternation between economic
downturns, known as recessions,
and economic upturns, known as expansions

13. Actual Growth
and the Business Cycle
 The phases of the business cycle
 Upturn
 Rapid expansion
 Peaking out
 Slowdown or recession
 Length and magnitude of phases

14. O
Nationaloutput
Time
Actual
output
Trend
output
The business cycle
Full-capacity
output

15. Why does actual growth fluctuate
in the short-run?
 Aggregate demand (largely)
 A speedy increase in AD leads to shortages, which then
lead to increased output (increased utilisation of
resources – seen in a boom)
 A decrease in AD leads to surpluses, which then lead to
stocks of unsold goods – seen in a bust

16. What determines actual growth in
the long-run?
 Two determinants
 The growth in aggregate demand (this determines
whether potential growth will be realised)
 The growth in potential output

17. O
Growth and the production possibility curve
GoodX
Good Y
a
b
I II

18. Potential Growth
 Two main determinants
 The quantity of resources available
 The productivity of those resources

19. Increases in the amount of
resources available
 Increases in the quantity of factors
 Capital
 Labour
 Land and raw materials?
 Note the problem of diminishing returns

20. Increases in the productivity of
resources
 Main determinants
 Land?
 Capital
 Labour

21. Other determinants of growth
 Other determinants
 Economic and political stability
 Strong export performance
 Willingness to change/innovate
 Effectiveness of capital markets
 Quality of infrastructure

22. Benefits of Growth
 Increased standard of living
 Potential for work-leisure choice
 Capacity to reduce poverty
 Increased economic status and power (including
political)

23. Costs of Growth
 Income and wealth inequality?
 Happiness deficit?
 Environment may suffer more damage – pollution /
depletion of non-renewable resources
 Work pressures

24. Discussion
For what possible reasons may one country experience a
persistently faster rate of economic growth than
another? (remember that potential growth depends on
the country’s resources, technology, and productivity)

25. Extension discussion
 Are worries about the consequences of economic
growth a ‘luxury’ that only rich countries can afford?

26. Extension discussion
 Is it possible to find a middle road; that is, pursue
economic growth but set constraints to growth.
 consider costs and benefits
 types of constraints