This document defines key economic terms related to measuring national income and economic growth. It discusses actual versus potential economic growth and how the business cycle causes fluctuations in actual growth in the short-run. Potential growth is determined by the quantity and productivity of resources. Other factors like infrastructure, innovation, and stability also impact long-run growth rates between countries. While growth increases living standards, it may also worsen inequality and environmental issues.

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