Economic Growth Short Run (actual) and Long Run (potential) A2 ECONOMICS
Lesson Objectives • Distinguish between SR and LR economic growth • Describe the economic cycle • Analyse output gaps • Evaluate the causes of economic growth • Explain the economic multiplier and its interaction with the economic cycle
Some questions • What is economic growth? • What causes it? • What are the best indicators of growth? • How and why does growth fluctuate? • What are the consequences of economic growth
Standard of Living • Economic growth may be defined as an increase in the real output of the economy. Long term growth rate of UK economy averaged 2.5% since WWII. China currently averages 8-10% p.a. • The result of this is an increase in Living standards.
Key measurement • Real GDP per capita • UK’s nominal GDP in 2007 was in excess of £1,000bn. Changes must take account of; • Population • Price Levels
Nominal v. Real • If GDP rose to £1,200bn what is increase in GDP? • Population and prices also rose by 10% in the same period. What is real change in GDP per capita?
Actual v. Potential • Short run economic growth • The actual annual % increase in an economy’s output. • Long run economic growth • The rate at which the economy’s potential output could grow as a result of changes in the economy’s capacity to produce G&S’
Economic Growth Definitions • Nominal Growth • Real Growth • Actual Growth • Potential Growth
Actual v. Real on the PPF Annual Output of Manufactured Goods An increase in the economy’s in productive capacity Annual Outputof Services
China Article • http://www.guardian.co.uk/business/2010/apr/15/chinese-economic-growth-surges-again
Output Gap • Difference between the actual level of output and the full potential level is known as Output gap. • Where would this be on the PPF? • Resources are wasted. • Labour unemployed.
US output Gap Article • http://www.washingtonpost.com/wp-srv/business/the-output-gap/index.html
Short run v. Long Run growth • SR growth occurs when more of an economy’s resources are being used. • LR growth occurs when an economy’s quantity or quality of resources improves. • Output gap Difference between actual and potential + Actual Output > Potential output (Short term) - Actual Output < Potential output • Spare capacity is when firms are capable of producing more output than they are actually producing.
Better education Fall in unemployment Factories at full capacity Businesses investing Immigration Increased Productivity improvements LR SR SR LR LR LR SR or LR growth?
Explain… • What are the implications of the output gap for inflationary pressure during economic growth. • When negative • When positive
‘72 Rule’ • Why is sustained Long Run growth is important? • Real GDP growth rate of 1% a year would double real GDP in 72 years.
Question • Divide 72 by China’s annual economic growth rate to find number of years Chinese real GDP will double. Explain the implications of this for Chinese citizens. • How long will UK economy take to double its real GDP? What does this mean for your standard of living?
No more boom and bust! Trend rate of economic growth • The long run average rate of economic growth measured over a period of time. • Economic cycle is the cyclical pattern of short term fluctuations in GDP from year to year. • The government aims to maximise long term growth rate whilst minimising short term fluctuations
Draw the trend growth rate on graph below as a straight line Growth (NY) Potential Growth Actual Growth Boom/Overheating Growth/Upturn Recession/Slump Decline/slowdown Time
Recap Lesson Objectives • Distinguish between SR and LR economic growth • Describe the economic cycle • Analyse output gaps • Evaluate the causes of economic growth • Explain the economic multiplier and its interaction with the economic cycle