Economic performance

• An output gap occurs when there is a difference between the actual level of output and the potential level of output. It is measured as a percentage of national output.

  
• Negative output gap within the ppf

  • occurs when the actual level of output is less than the potential level of output. This puts downward pressure on inflation. It usually means there is the unemployment of resources in an economy, so labour and capital are not used to their full productive potential. This means there is a lot of spare capacity in the economy.
• Positive output gap outside the ppf

  • occurs when the actual level of output is greater than the potential level of output. It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation.
• Short run growth is the percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD.

  
• long run economic growth- occurs when the productive capacity of the economy is increasing and it refers to the trend rate of growth of real national output in an economy over time. Caused by an increase in LRAS

  
• Characteristics of a boom in the economy

  • High rates of economic growth
  • Near full capacity or positive output gaps
  • (Near) full employment
  • Demand-pull inflation
  • Consumers and firms have a lot of confidence, which leads to high rates of investment
  • Government budgets improve, due to higher tax revenues and less spending on welfare payments

  
• Characteristics of a recession-negative economic growth over two consecutive quarters

  • Negative economic growth
  • Lots of spare capacity and negative output gaps
  • Demand-deficient unemployment
  • Low inflation rates
  • Government budgets worsen due to more spending on welfare payments and lower tax revenues
  • Less confidence amongst consumers and firms, which leads to less spending and investment

  
• Costs and benefits of economic growth to consumers

  Costs:

  • Economic growth does not benefit everyone equally. Those on low and fixed incomes might feel worse off if there is high inflation and inequality could increase
  • .There is likely to be higher demand-pull inflation,due to higher levels of consumer spending.
  • Benefits:
  • The average consumer income increases as more people are in employment and wages increase.
  • Consumers feel more confident in the economy, which increases consumption and leads to higher living standards.
• Costs and benefits of economic growth to firms

  Costs:

  • Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation.

  Benefits:

  • Firms might make more profits, which might in turn increase investment. This is also driven by higher levels of business confidence.
  • Higher levels of investment could develop new technologies to improve productivity and lower average costs in the long run.
• Costs and benefits of economic growth to the government

  Costs:

  • Governments might increase their spending on healthcare if the consumption of demerit goods increases.

  Benefits:

  • The government budget might improve, since fewer people require welfare payments and more people will be paying tax.
• Costs and benefits of economic growth to current and future living standards Costs:

  • Uses up finite resources such as oils and minerals that cannot be replaced
  • High levels of growth could lead to damage to the environment in the long run, due to increase negative externalities from the consumption and production of some goods and services.

  Benefits:

  • Higher average wages mean consumers can enjoy more goods and services of a higher quality.
  • Public services improve, since governments have higher tax revenues, so they can afford to spend on improving services. Life expectancy may increase
• Causes of changes in phases of economic cycle

  • Excessive growth in credit and levels of debt- High levels of borrowing might be hard to pay back
  • Asset price bubbles- Rapid increase in asset prices, prices increase above intrinsic value. Bubble then bursts results in loss of confidence and economic depression
• Causes of changes in the economic cycle

  • Animal spirits- investment prices rise or fall based on human emotions rather than intrinsic value
  • Herding- individuals mimic the actions of others assuming that a collective decision is more rational than an individual one
• Involuntary unemployment-occurs when workers are willing to work at the current market wage rates but there are no jobs available
• Voluntary employment-when workers choose to remain unemployed and reduce job offers at current market wages
• Seasonal unemployment- occurs as certain seasons come to an end and labour is not required until the next season

  Eg fruit pickers
• Frictional unemployment occurs when workers are between jobs usually short term unemployment

  for example graduating university and finding a job
• structural unemployment- decline in a single industry occurs when there is a mismatch between jobs and skills in the economy

  This is worsened by geographic and occupational immobility likely to remain unemployed in the long run
• Cyclical or demand deficient unemployment- caused by a fall in AD in an economy typically happens during a recession .

  The demand for labour is a derived demand stems from demand for goods and services

  
• Demand side unemploymenT- caused by a lack of aggregate demand in the economy

  Supply side unemployment- caused by factors affecting the supply side of the economy
• Government response to the types of unemployment (supply side)

  Structural unemploymenT:

  • Retrain workers for needed employment areas
  • Enhancing unemployed individuals characteristics for improved employability

  Frictional unemployment

  • Implement retraining schemes for workers aim for a better match of workers skills with employers
  • Reduce workers search periods between jobs
  • Shown in rightward shift of LRAS

  
• Government response to the types of unemployment (demand side)

  Seasonal unemployment:

  • Extend operational seasons
  • Government could subsidise innovation in industries

  Cyclical unemployment:

  • take measures to stimulate aggregate demand
  • Monetary and fiscal policy to counteract unemployment
  • Increase government spending
  • Affects Ad curve

  
• Real wage unemployment occurs when wages are inflexible at a point higher than the free market equilibrium wage the supply of labour exceeds demand
• The effects of unemployment on firms and individuals

  Individuals

  • Loss of income
  • Stress increases
  • Health issues

  firms

  • Loss of sales revenue
  • Loss of production
  • Changes the skill level in the economy
• The effects of unemployment on the government and the economy GovernmenT:

  • Increased spending on benefits
  • Less tax revenue
  • Increased spending on retraining

  Economy:

  • increased crime
  • Increased Homelessness
  • Vandalism
• Inflation : the sustained rise in the general price level over time. This means that the cost of living increases and the purchasing power of money decreases
• Deflation:where the average price level in the economy falls. There

  is a negative inflation rate.
• Disinflation: when the average price level increases but at a decreasing rate
• Demand pull inflation

  • Caused by excess demand in the economy
  • A reduction in cyclical unemployment
  • When demand curve has shifted upwards and increase in price and GDP

  
• Cost push inflation

  • Caused by increase in the costs of production in the economy
  • Costs of production increase or if there is a fall in productivity
  • SRAS shifts left a decrease in supply
  • Leads to stagflation - high unemployment high interest rates

  
• The quantity theory of money

  • An increase in the money supply can lead to inflation
  • A decrease in the money supply can lead to deflation
  • Predicts that An x% increase in the money supply will cause an x% increase nominal GDP
• Fishers equation of exchange

  MV=PQ

  • M- the money supply amount of money in the economy
  • V- the speed or velocity at which money is spent
  • P- the price level reflects the average price in the basket of goods
  • Q- the real GDP
• Expectations and changes in the price level

  • If consumers expect prices to fall they will delay their purchases in hope of purchasing goods at lower prices
  • If consumers expect prices to rise they will rush to purchase goods/services at lower prices before they rise
• Effects of inflation on firms And consumers

  Firms:

  • Rapid price change create uncertainty and delay investment
  • Price changes forces firms to change their menu prices
  • With high inflation, interest rates are likely to be higher, so the cost of investing will be higher and firms are less likely to invest.

  consumers:

  • Decrease in purchasing power
  • Decrease in the real value of savings
  • Inflation is more harmful to low income households
• Effects of inflation on the government and workers

  Government

  • Economic growth may slow due to a fall in exports and a possible fall in consumption
  • Trade offs reducing inflation may increase unemployment

  workers

  • Demand higher wages because of there reduced purchasing power
  • If wage increase is not equal to the inflation motivation or productivity may fall
• Demand side deflation - malign deflation

  • Caused by a fall in AD
  • Demand curve shifts downwards
  • A decrease in the general price Level

  
• Supply side deflation- benign deflation

  • Caused by an increase in the productive capacity of the economy
  • Increase in the quality and quantity of fop
  • Gdp increases

  
• Consequences of demand side deflation

  • Unemployment increases as there is a decrease in output
  • Firms lose confidence so invest less reducing GdP
  • Could lead To firms going bankrupt
  • Household May choose to save instead of spend
• Consequences of supply side deflation

  • More workers are required so unemployment falls
  • Households become more confident and consumption increases
  • Firms gain confidence and start increasing investment
  • All this leads to an increase in GDP
• Economics trade offs positive output gap

  • A positive output gap is associated with higher levels of GDP in the economy, firms operate near or at full capacity
  • The demand for labour is high, leading to lower unemployment rates
  • In a positive output gap scenario, there is upward pressure on prices and wages. Inflation