Economic growth

2.5.1 Unit content: causes of growth and Unit content: output gaps Students should be able to: Distinguish between actual and potential growth Analyse factors which could cause growth Evaluate the importance of international trade for (export-led) economic growth Distinguish between actual growth rates and long- term trends in growth rates Define positive and negative output gaps and assess the difficulties of measurement Use an AD/AS diagram to illustrate an output gap (level of spare capacity) in an economy

2.5.1 Quick recap on GDP – take notes 1.What is GDP? 2.How do the figures compare for Greece, UK and the USA? 3.Why are the figures inaccurate? 4.How do GDP and GNP differ?

2.5.1 Numerical example If Real GDP was $100bn in 2013 and the economy grow by 3% in 2014 what was real GDP in 2014? What if the figure was 1% the following year? Real GDP in 2014 = In other words GDP was Remember that “real” =

2.5.1 Actual versus potential growth How much has the UK economy grown per year over the last 60 years (what %)? What is the actual growth of the economy? Growth in the quantity of goods and services produced (measured by the percentage change in _____) Why might the actual level differ from the productive potential?

2.5.1 What is economic growth? How can it be drawn? Economic growth refers to the

2.5.1 The distinction between actual and potential growth What are the problems with measuring economic growth using changes in GDP? GDP growth measures the ______ rate of change of output rather than the growth of the ______ output capacity of the economy. Changes in the level of GDP should be distinguished from changes in the rate of growth of GDP

2.5.1 What has happened to real GDP in the UK since the end of WW2? Real GDP has ________ since the end of the Second World War. The quantity of goods and services produced in the economy is now approximately ______ times larger than in 1948.

2.5.1 What factors cause economic growth?

2.5.1 Countries: Canada, China, Germany, India, UK and USA Country2012 (investment as % of GDP) 2013 Real GDP growth rate %

2.5.1 Why is international trade important for economic growth?

2.5.2 Actual growth rates and long-term trends The output gap is the difference between the ______ growth rate and the long-run trend in growth. It can’t be calculated as the difference between the actual GDP and the potential real GDP as it could be that the economy never reaches full capacity (hence potential capacity could never be measured). The difference between the trend and the actual is an estimate of the output gap and can show when the economy might be overheating (______ trend) and so running the risk of high inflation. Similarly when the economy is below trend there is spare capacity (_______ unemployment).

2.5.2 Graph comparing real and trend GDP in the UK

2.5.2 The UK’s annual growth rate GDP Annual Growth Rate in the United Kingdom averaged ____% from 1956 until 2015 It reached an all time high of _____% in the first quarter of _____ and a record low of _____% in the first quarter of ______ GDP Annual Growth Rate in the UK is reported by the _________

2.5.2 What happens if actual GDP is less than potential? There is a _________ output gap and __________ pressure on inflation Some factor resources such as labour and capital machinery are under-utilized and the main problem is likely to be A rising number of people out of work indicate an excess ______ of labour, which causes pressure on real wage rates. People in the labour market have to accept

2.5.2 Three diagrams showing a negative output gap

2.5.2 What happens if actual GDP is more than potential? There is a __________ output gap and ________ pressure on inflation. Some resources including labour are likely to be working beyond their normal capacity e.g. making extra use of shift work and ________ The main problem is an acceleration of demand-pull and cost-push __________ A positive output gap is associated with countries where an economy is over-heating because of fast and rising demand, e.g.

2.5.2 What is spare capacity? Spare capacity is where there are __________ resources in the economy. If an economy can increase output without significantly increasing _______ (AS curve is ____________) then there is spare capacity This means that there are _______ resources in the economy and hence _______________

2.5.3 Unit content: trade (business) cycle and Unit content: the impact of economic growth Students should be able to: Define the trade (business) cycle Assess the characteristics of a boom Assess the characteristics of a recession Evaluate the benefits of growth on consumers, firms, the government, current and future living standards Evaluate the costs of growth on consumers, firms, the government, current and future living standards Note – remember we looked at some of this in 2.1.1

2.5.3 Trade cycle definition The trade cycle refers to fluctuations in GDP over time. It is also known as the b_________ cycle or e__________ cycle The stages are A recession may be called a downturn or a slump

2.5.3 Diagram showing the trade cycle and the trend level of real GDP

2.5.4 What are the benefits of economic growth?

2.5.4 What are the costs of economic growth? EVALUATION Depends on initial state of the economy e.g. spare capacity (unemployment); causes of growth e.g. export led growth; government policy towards redistribution and the environment

2.5.4 What are the constraints on economic growth? i.e. what stops it happening?