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 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 Recession Recovery 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 Growth GDP 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 Growth GDP 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?