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Macroeconomic Indicators
The Economic Cycle and
Economic Growth
Cycles
•
•
•
•
Peak, boom, overheating
Downturn
Recession, depression, trough, slump
Recovery, expansion
Cycles
Business cycle/trade cycle/economic cycle
Kondratiev
Kuznets
Kitchin
Keynes
Schumpeter
Friedman
K-wave
Building cycle
Inventory cycle
Multiplier – accelerator
Technology/innovation
Monetary
Output Gaps
• The difference between actual growth
and the trend rate of growth
• Where would these be on your chart?
• Output lost in a recession is regained in
a boom but….
Hysteresis
• The trend rate of growth can shift
downwards if there is a deep recession
due to permanent losses of human and
physical capital
• Loss of skills – structural change
• Long term unemployed
• Cut backs in investment
• Outdated technology
• ‘potential’ falls
Hysteresis and Growth Trend
Business cycle models
Shocks – Demand or supply side
• Exogenous shocks
• Endogenous shocks
• Explain how a major world recession, an
exogenous shock to the UK economy,
could trigger a business cycle.
(10/15 marks)
Shocks and ADAS
• Key terms
–
–
–
–
Long-term growth rate
Actual growth
Potential growth
Trend rate of economic growth
Actual and Potential Growth
• AB to CD shows
potential growth
• A to C or A to B
shows actual growth
• You can have an
increase in potential
growth without
having actual growth
Task
Using a PPF diagram, show the following
1.
2.
3.
4.
An economy with full employment experiencing economic
growth
An economy initially with full employment experiencing a
recession, keeping its AS capacity constant
An economy in recession returning to full employment, with
its AS capacity constant
An economy which initially has a small and constant output
gap, experiencing economic growth
ADAS
A negative demand side shock
LRAS
General
Price
Level
Caused by?
Effect on?
• PPF
• Unemployment
• GDP
• Inflation
Pe
P2
SRAS
AD1
AD2
Y2
Ye
Yfc
National Income
A positive demand side shock
1. Finish it off
2. Cause?
3. Impact upon
a. GDP
b. PPF
c. Inflation
d. Unemployment
A positive demand side shock
General
Price
Level
LRAS = potential GDP
SRAS1
P2
P1
AD1
Y1 Yfc Y2
National
Income
AD2
Supply side shocks
• Show the effect on an ADAS diagram
of the following
– Increased rates of emigration
– A fall in international commodity prices
Supply side shocks
General
Price Level
LRAS
P2
P1
SRAS2
SRAS1
AD
SRAS3
Y2
Y1 Y3
Yfc
National Income
Causes of economic growth
• Economic stability and sound macroeconomic
policies
• Increased labour activity/participation
• Increased labour productivity
• Investment in physical capital
• Improved human capital
• Enterprise
Is growth good?
Debate
• Advantages
• Disadvantages
Is growth good?
• Advantages
• Improvements in living
standards: More jobs:
• The accelerator effect of
growth on capital investment:
• Greater business
confidence:
• The “fiscal dividend”:
• Potential environmental
benefits
• Benefits from growth driven
by technological change
• Disadvantages
• Inflation
• Environmental concerns
• Inequality
Kuznets curve - explain
What would the question be?
What would the question be?
Applied Economics
The Impact on the economy