Booklet 4 - National economy AD and AS Analysis

• SRAS- shows total planned output when prices in the economy can change but the prices and productivity of all factor inputs (wage rates and technology) remain constant
• LRAS- shows the total planned output when both prices and average wage rates can change. Measure of a country’s potential output and is linked to the production possibility frontier
• • Shifts in SRAS are due to:
  • change in unit labour cost
  • Raw material (commodity) prices
  • exchange rates
  • government taxation and subsidies
• Causes shift in LRAS:

  • state of production technology
  • productivity of factor inputs
  • stock of a countrys resource
• The Accelerator effect explains changes in investment, and can be directly linked to the rate of gdp growth
• The accelerator effect shows the demand for capital goods(investment) fluctuates more than the demand for consumer good.
• A sustained recovery is a period of economic growth following a recession.
• Investment is where forms borrow money from government to spend on Capital to increase volume of output from production
• In a recovery :

  • rise of incomes
  • increase in levels of employment
  • As GDP is increasing the accelerator effect will occur hence causing there to be injections as government have more money to inject into them
• The Keynesian view there is only one AS curve as you can economic growth with rising inflation

  
• When there is a NEGATIVE OUTPUT GAP :

  • inflation decreases (p1 to p2)
  • economic growth decreases (p1 to p2)
  • unemployment rises (y1 to y2)
• When there is a POSITIVE OUTPUT GAP:

  • Inflation increases (p1 to p2)
  • economic growth increases (p1 to p2)
  • unemployment decreases (y1 to y2)
• A POSITIVE output gap can be closed by:

  • Increasing taxes to encourage saving
  • reduce government spending
  • appreciating national currency
  • increased labour cost
• To Close off a NEGATIVE output gap:

  • Increase government spending
  • Invest in human capital. e.g education
  • subsidies
  • labour costs will decrease
• Multiplier effect- when an injection into economy leads to a longer than proportionate increase in national income
• Multiplier principle reinforces any change in investment - if investment increases then GDP will rise more than proportionately, if it falls, then GDP falls more than the fall in investmen.
• Limitations in investment:

  • expected amount of sales
  • amount of capacity
  • workers efficiency levels
  • time lag between investment plans
  • amount of retained profit
  • cost of technology
  • subsidies/ taxes
• The relationship between investment and GDP is called the Accelerator Principle and along with multiplier changes in investment cause dramatic changes in GDP