The Nature of Economic Growth AS Economics Unit 2
Jan 19, 2018
The Nature of Economic GrowthAS 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
Capital Goods
Consumer Goods
• A shift in PPB represents potential growth.
• A move from point A to point B represents actual growth
A
B
PPB1
PPB2
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
RecessionRecovery
Downturn
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
Actual Growth
Trend GrowthGDP
TimeA B
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.
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.
Actual Growth
Trend GrowthGDP
Time
A
B
A •Unemployment begins to rise
B •Unemployment begins to fall
C •AD begins to rise
D •AD begins to fall
E •Consumer confidence is high and firms benefit from high profits from high demand.
F •Firms are suffering from a contraction in AD and making redundancies.
G •Government intervenes to stimulate AD.
H •Household incomes are increasing.
I •Aggregate demand is exceeding aggregate supply, resulting in higher prices and inflationary pressure.
J •Consumer confidence is low, and instead of spending, consumers are saving, resulting in a contraction of AD.
K •Workers demand higher wage levels to keep up with inflation.
L •Interest rates are low in an attempt to boost consumer spending
M •The number of people claiming welfare benefits rises.
Plenary
• Is economic growth always a good thing?