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The Nature of Economic Growth AS 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 • A shift in PPB represents potential growth. Capital Goods • A move from point A to point B represents actual growth PPB2 PPB1 B A Consumer Goods 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 Downturn Recovery Recession 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 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. Trend Growth GDP Actual Growth A B Time 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. Trend Growth B GDP Actual Growth A Time A B C D E F G H • Unemployment begins to rise • Unemployment begins to fall • AD begins to rise • AD begins to fall • Consumer confidence is high and firms benefit from high profits from high demand. • Firms are suffering from a contraction in AD and making redundancies. • Government intervenes to stimulate AD. • Household incomes are increasing. I J K L M • Aggregate demand is exceeding aggregate supply, resulting in higher prices and inflationary pressure. • Consumer confidence is low, and instead of spending, consumers are saving, resulting in a contraction of AD. • Workers demand higher wage levels to keep up with inflation. • Interest rates are low in an attempt to boost consumer spending • The number of people claiming welfare benefits rises. Plenary • Is economic growth always a good thing?
