2.5 MICRO

• Factors causing economic growth

  • Investment
  • Large labour force
  • Improved techonology
• Actual growth

  The increase in real GDP caused by increase in AD
• Potential growth

  What the economy could produce if all resources are fully employed
• difficulties of measuring the output gap

  • not reliable (hidden economies)
  • changes in exchange rate might offset inflation rates of a positive output gap
• what is the business cycle

  What stage of economic growth a country is on
• characteristics of negative output gap

  • spare capacity
  • unemployment of resources

  
• characteristics of positive output gap

  • Productivity
  • resources used beyond capacity (labour working overtime)
• Kenysian output gap

  
• classical output gap

  
• characteristic of a boom

  • high rate of economic growth
  • positive output gap
  • full employment
  • consumers and firms have high confidence
• characteristics of a recession

  • negative economic growth
  • spare capacity
  • low confidence
• output gap

  difference between actual and potential growth