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 K-wave Kuznets Building cycle Kitchin Inventory cycle Keynes Multiplier – accelerator Schumpeter Technology/innovation Friedman 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losses of human and physical capital Loss of skills – structural change Long term unemployed Cut backs in investment Outdated technology ‘potential’ falls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

1 DS end 2. Ss ex 3. Ds ex 4. Ds end 5. Ds ex 6. Ss ex

Ds ex Ss end Ss ex

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 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 General Price Level National Income AD1 SRAS Pe Ye LRAS Yfc AD2 Y2 P2 Caused by? Effect on? PPF Unemployment GDP Inflation

A positive demand side shock Finish it off Cause? Impact upon GDP PPF Inflation Unemployment

A positive demand side shock General Price Level LRAS = potential GDP SRAS1 P2 P1 AD2 AD1 Y1 Yfc Y2 National Income

Show the effect on an ADAS diagram of the following 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 National Income AD SRAS1 P1 Y1 LRAS Yfc SRAS2 P2 Y2 SRAS3 Y3

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? Disadvantages 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