4.2.3- National and International Economy
Economic Growth
-The increase in the total output of an economy in a given period of time
-SREG- An increase in real GDP through using more of an economy's existing resources
-LREG- An increase in the economy's productive potential to produce G and S
-Trend Rate- LR average increase in the productive potential measuring how fast an economy can grow
without inflationary pressures
SHORT RUN ECONOMIC GROWTH
Determinants: Anything that can cause AD or SRAS to increase
Evaluation: Depends on potential conflicts, size of the output gap, may require a shift of LRAS to be
sustainable
LONG RUN ECONOMIC GROWTH
Determinants:
-Capital investment
-Factor productivity
-Growth of labour supply
-R&D
-Innovation and Risk Taking
BENEFITS OF ECONOMIC GROWTH
Living standards higher
Infrastructure funding increased
Poverty reduced
Tax revenue for government increases
Investment increase due to higher profits
Employment increase due to derived demand
RISKS OF ECONOMIC GROWTH
Social problems may arise
Cost (Opportunity) of alternatives to increased capital investment
Inflation (D-Pull)
Factor resources may be over-exploited
Inequality increase
Environmental damage and costs
, Economic Cycle
-Periodic rises and falls in GDP over time
PEAK- High point of the economic cycle- Real GDP increasing faster than LT Trend
RECESSION- When the rate of growth of GDP has decelerated for at least two consecutive quarters
SLUMP- Low point of economic cycle at the minimum level of GDP
RECOVERY- Phase after a recession when real GDP begins to increase and unemployment begins to fall
NEGATIVE OUTPUT GAP- When actual growth is lower than potential growth- Unemployment of CELL
POSITIVE OUTPUT GAP- When actual growth exceeds potential growth- Inflationary pressures occur and
unsustainable
CAUSES OF CYCLICAL INSTABILITY
1) EXCESSIVE GROWTH IN CREDIT AND LEVELS OF DEBT
-When banks are too willing to lend money, including to those who are unreliable
-Consumption and investment should increase- AD should therefore increase
-SREG due to impact of multiplier and accelerator effect leading to virtuous cycle
-However, unreliability of borrowers could lead to banks collapsing, potentially placing economies into
recessions, e.g. Leamon Brothers
2) ASSET PRICE BUBBLES
-When the price of assets rise so sharply that they exceed valuations justified by fundamentals, making
a sudden collapse likely
-Generally occurs when people invest in so many shares that value of shares decrease
-e.g. Bitcoin
-Should increase consumption and AD when asset price rising but reduce when prices fall
3) ANIMAL SPIRITS
-Keynesian term for the collective feeling of consumers and business confidence which can affect
economic decisions
-When spirits are poor (bearish), individuals and firms may sell assets, postpone investment and save,
which can lead to lower economic growth
-People may act together as a herd by making independent but collective decisions, hence influencing
the level of spending
Economic Growth
-The increase in the total output of an economy in a given period of time
-SREG- An increase in real GDP through using more of an economy's existing resources
-LREG- An increase in the economy's productive potential to produce G and S
-Trend Rate- LR average increase in the productive potential measuring how fast an economy can grow
without inflationary pressures
SHORT RUN ECONOMIC GROWTH
Determinants: Anything that can cause AD or SRAS to increase
Evaluation: Depends on potential conflicts, size of the output gap, may require a shift of LRAS to be
sustainable
LONG RUN ECONOMIC GROWTH
Determinants:
-Capital investment
-Factor productivity
-Growth of labour supply
-R&D
-Innovation and Risk Taking
BENEFITS OF ECONOMIC GROWTH
Living standards higher
Infrastructure funding increased
Poverty reduced
Tax revenue for government increases
Investment increase due to higher profits
Employment increase due to derived demand
RISKS OF ECONOMIC GROWTH
Social problems may arise
Cost (Opportunity) of alternatives to increased capital investment
Inflation (D-Pull)
Factor resources may be over-exploited
Inequality increase
Environmental damage and costs
, Economic Cycle
-Periodic rises and falls in GDP over time
PEAK- High point of the economic cycle- Real GDP increasing faster than LT Trend
RECESSION- When the rate of growth of GDP has decelerated for at least two consecutive quarters
SLUMP- Low point of economic cycle at the minimum level of GDP
RECOVERY- Phase after a recession when real GDP begins to increase and unemployment begins to fall
NEGATIVE OUTPUT GAP- When actual growth is lower than potential growth- Unemployment of CELL
POSITIVE OUTPUT GAP- When actual growth exceeds potential growth- Inflationary pressures occur and
unsustainable
CAUSES OF CYCLICAL INSTABILITY
1) EXCESSIVE GROWTH IN CREDIT AND LEVELS OF DEBT
-When banks are too willing to lend money, including to those who are unreliable
-Consumption and investment should increase- AD should therefore increase
-SREG due to impact of multiplier and accelerator effect leading to virtuous cycle
-However, unreliability of borrowers could lead to banks collapsing, potentially placing economies into
recessions, e.g. Leamon Brothers
2) ASSET PRICE BUBBLES
-When the price of assets rise so sharply that they exceed valuations justified by fundamentals, making
a sudden collapse likely
-Generally occurs when people invest in so many shares that value of shares decrease
-e.g. Bitcoin
-Should increase consumption and AD when asset price rising but reduce when prices fall
3) ANIMAL SPIRITS
-Keynesian term for the collective feeling of consumers and business confidence which can affect
economic decisions
-When spirits are poor (bearish), individuals and firms may sell assets, postpone investment and save,
which can lead to lower economic growth
-People may act together as a herd by making independent but collective decisions, hence influencing
the level of spending
