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?