Economics A Level Year 2 – Chapter 4
CONTENT
The macro economy
Economic growth, economic development
and sustainability
National Income statistics
Classification of countries
Employment/unemployment
Money supply (theory)
Keynesian and Monetarist schools
The demand for money and interest rate
determination
Policies towards developing economies;
policies of trade and aid
, Economic growth, economic development
and sustainability
Economic growth, economic development and sustainability
ECONOMIC GROWTH: Increase in a country’s real national output. This is
caused by increases in the quality or quantity of FOP, causing an outward shift
in the PPF.
ECONOMIC DEVELOPMENT: This refers to living standards, freedom (from
expression) and life expectancy. It covers a more moral side to economic
growth and is normative. Development is also concerned with how sustainable
the economy is and whether the needs of future generations can be met.
SUSTAINABILITY: A concept suggesting resources, such as the environment,
have to be used effectively and efficiently, so they can be maintained for future
generations.
Fast economic growth means that
It is sustainable when the rate natural resources, such as oil may
of economic growth can be deplete, which would create
maintained in the long run, so environmental problems for future
future generations can enjoy generations and mean future rate of
the same rate of growth. growth might be weak.
Unsustainable growth
GROWTH occurs around the boom
and bust sections of the
business cycle.
If growth is excessive,
there could be inflation There could be excessive
in the average price credit, which is
level, wages and assets. unsustainable in the long
run, and savings rate might
be low and falling.
,ACTUAL vs POTENTIAL GROWTH in national output; output
gap; business (trade) cycle
Short-run growth is the percentage increase in a country’s real GDP and it is
usually measured annually. It is caused by increases in AD.
Long-run economic growth is increasing and it refers to the trend rate of
growth of real national output in an economy over time. It is caused by
increases in AS.
POSITIVE AND NEGATIVE OUTPUT GAPS
Actual growth
Positive Output
gap
Potential
Growth
An output gap
occurs when there is
a difference
between the actual
Negative level of output and
Output gap is measured as a
percentage of
national output.
Time
Negative Output Gap: (Occurs when the actual level of
output is less than the potential level of output).
, o This puts downwards pressure on inflation.
o Unemployment of resources in an economy – so labour and capital are
not used to their full productive potential
o There is a lot of spare capacity in the economy
Positive Output Gap: (Occurs when the actual level of output is
greater than the potential level of output).
o Can be due to resources being used beyond the normal capacity, such as
if labour works overtime
o If productivity is growing, the output gaps becomes positive
o Puts upward pressure on inflation
o Countries, such as China and India, which have high rates of inflation du
to fast and increasing demand, are associated with ‘positive output
gaps’.
Business Cycle
This refers to the stage of economic growth that the economy is in. The
economy goes through periods of booms and busts.
Boom
Recession
GDP
Growth Time
CONTENT
The macro economy
Economic growth, economic development
and sustainability
National Income statistics
Classification of countries
Employment/unemployment
Money supply (theory)
Keynesian and Monetarist schools
The demand for money and interest rate
determination
Policies towards developing economies;
policies of trade and aid
, Economic growth, economic development
and sustainability
Economic growth, economic development and sustainability
ECONOMIC GROWTH: Increase in a country’s real national output. This is
caused by increases in the quality or quantity of FOP, causing an outward shift
in the PPF.
ECONOMIC DEVELOPMENT: This refers to living standards, freedom (from
expression) and life expectancy. It covers a more moral side to economic
growth and is normative. Development is also concerned with how sustainable
the economy is and whether the needs of future generations can be met.
SUSTAINABILITY: A concept suggesting resources, such as the environment,
have to be used effectively and efficiently, so they can be maintained for future
generations.
Fast economic growth means that
It is sustainable when the rate natural resources, such as oil may
of economic growth can be deplete, which would create
maintained in the long run, so environmental problems for future
future generations can enjoy generations and mean future rate of
the same rate of growth. growth might be weak.
Unsustainable growth
GROWTH occurs around the boom
and bust sections of the
business cycle.
If growth is excessive,
there could be inflation There could be excessive
in the average price credit, which is
level, wages and assets. unsustainable in the long
run, and savings rate might
be low and falling.
,ACTUAL vs POTENTIAL GROWTH in national output; output
gap; business (trade) cycle
Short-run growth is the percentage increase in a country’s real GDP and it is
usually measured annually. It is caused by increases in AD.
Long-run economic growth is increasing and it refers to the trend rate of
growth of real national output in an economy over time. It is caused by
increases in AS.
POSITIVE AND NEGATIVE OUTPUT GAPS
Actual growth
Positive Output
gap
Potential
Growth
An output gap
occurs when there is
a difference
between the actual
Negative level of output and
Output gap is measured as a
percentage of
national output.
Time
Negative Output Gap: (Occurs when the actual level of
output is less than the potential level of output).
, o This puts downwards pressure on inflation.
o Unemployment of resources in an economy – so labour and capital are
not used to their full productive potential
o There is a lot of spare capacity in the economy
Positive Output Gap: (Occurs when the actual level of output is
greater than the potential level of output).
o Can be due to resources being used beyond the normal capacity, such as
if labour works overtime
o If productivity is growing, the output gaps becomes positive
o Puts upward pressure on inflation
o Countries, such as China and India, which have high rates of inflation du
to fast and increasing demand, are associated with ‘positive output
gaps’.
Business Cycle
This refers to the stage of economic growth that the economy is in. The
economy goes through periods of booms and busts.
Boom
Recession
GDP
Growth Time
