Week 9 slides growth&business cycle [core]


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Week 9 slides growth&business cycle [core]

  1. 1. Economic Growth and the Business Cycle
  2. 2. Key terms Gross Domestic Product Gross National Product Nominal nationalincome Real national income Actual economic growth Potential economicgrowth Business Cycle Upturn Expansion Peaking out Slowdown / recession /slump
  3. 3. Measuring national income NOTICE: The difference between Gross Domestic Product (GDP) – eg everythingproduced INSIDE the UK (it does not matter whoowns it – UK or overseas company) Gross National Product (GNP) = GDP plus netprofits = GNP[net profits from UK companies which are overseas]
  4. 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. 5. Economic Growth and theBusiness Cycle Two types of economic growth Actual Growth Potential Growth
  6. 6. Actual Economic Growth percentage increase in national output (real GDP)from one period to another
  7. 7. Potential Economic Growth The percentage annual increase in the capacity of theeconomy to produce It measures what the economy could produce when allresources are employed at normal rates ofutilisation Allows a degree of spare capacity so is below fullcapacity
  8. 8. The Output Gap The difference between the actual level of nationaloutput 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. 9. Two economic growth timeframes In the short-run, ensure actual output is as close aspossible to potential output In the long-run, consider the determinants of the rateof potential economic growth
  10. 10. OGrowth and the production possibility curveGoodXGood YabGrowth inactual output
  11. 11. OGrowth and the production possibility curveGoodXGood YabI IIGrowth inactual outputGrowth inpotentialoutput
  12. 12. Actual Growthand the Business Cycle Business Cycle The short-run alternation between economicdownturns, known as recessions,and economic upturns, known as expansions
  13. 13. Actual Growthand the Business Cycle The phases of the business cycle Upturn Rapid expansion Peaking out Slowdown or recession Length and magnitude of phases
  14. 14. ONationaloutputTimeActualoutputTrendoutputThe business cycleFull-capacityoutput
  15. 15. Why does actual growth fluctuatein the short-run? Aggregate demand (largely) A speedy increase in AD leads to shortages, which thenlead to increased output (increased utilisation ofresources – seen in a boom) A decrease in AD leads to surpluses, which then lead tostocks of unsold goods – seen in a bust
  16. 16. What determines actual growth inthe long-run? Two determinants The growth in aggregate demand (this determineswhether potential growth will be realised) The growth in potential output
  17. 17. OGrowth and the production possibility curveGoodXGood YabI II
  18. 18. Potential Growth Two main determinants The quantity of resources available The productivity of those resources
  19. 19. Increases in the amount ofresources available Increases in the quantity of factors Capital Labour Land and raw materials? Note the problem of diminishing returns
  20. 20. Increases in the productivity ofresources Main determinants Land? Capital Labour
  21. 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. 22. Benefits of Growth Increased standard of living Potential for work-leisure choice Capacity to reduce poverty Increased economic status and power (includingpolitical)
  23. 23. Costs of Growth Income and wealth inequality? Happiness deficit? Environment may suffer more damage – pollution /depletion of non-renewable resources Work pressures
  24. 24. DiscussionFor what possible reasons may one country experience apersistently faster rate of economic growth thananother? (remember that potential growth depends onthe country’s resources, technology, and productivity)
  25. 25. Extension discussion Are worries about the consequences of economicgrowth a ‘luxury’ that only rich countries can afford?
  26. 26. Extension discussion Is it possible to find a middle road; that is, pursueeconomic growth but set constraints to growth. consider costs and benefits types of constraints