Topic 4.2.3 (Economic Performance)

• Economic Growth - an increase in the real value of goods and services produced within an economy over a period of time
• Short Run Economic Growth - when the economy fully employs spare capacity to increase real output
• Long Run Economic Growth - an increase in an economy’s productive capacity
• Causes of Short Run Econ Growth:

  • Changes in AD
  • Changes in SRAS
• Sustainable Growth - the growth of national output that meets the needs of the present without compromising the ability of future generations meeting their own needs
• Intergeneration Equity - the concept or idea of fairness / justice between generations
• Methods for the Govt to Promote Sustainable Econ Growth:

  • subsidies for Green investment
  • taxes on non-renewables / polluters
  • set targets
  • laws and regulations
• Characteristics of Booms:

  • Rising inflation
  • Short Run Econ Growth above trend rate
  • Budget Surplus
  • High consumer / business confidence so high consumption / investment
  • Low unemployment
  • Current Account Deficit due to high imports
• Characteristics of Downturns:

  • Short Run Econ Growth below trend rate
  • Inflation above average but stops rising
  • Budget moves towards deficit
  • Consumer / Business confidence low, consumption / investment falling
  • Unemployment stops falling
  • Current account balance becomes smaller deficit or surplus
• Characteristics of Recessions:

  • Negative Econ growth
  • Inflation falls
  • Budget Deficit at largest
  • Consumer / Business confidence at lowest, consumption / investment at its lowest
  • High unemployment
  • Current account surplus, low demand for imports
• Characteristics of Recovery:

  • Short Term Econ Growth resumes but below trend rate of growth
  • Low inflation
  • Budget deficit stops increasing
  • Consumer / Business confidence returns, interest rates lowered to encourage consumption / investment
  • Unemployment stops rising but remains high
  • Current Account stops moving to surplus
• Output Gap - the difference between the actual level of GDP and its trend potential level
• Positive Output Gap - when actual output is greater than potential output
• Negative Output Gap - when actual output is less than potential output
• Demand Pull Inflation - inflation caused by aggregate demand increasing faster than aggregate supply
• Causes of Changes in Econ Cycle:

  • Multiplier/Accelerator Model
  • Inventory Cycle
  • Asset Price Bubbles
  • Animal Spirits
  • Herding
  • Excessive Growth in Credit
  • Positive/Negative Economic Shocks
• Workforce - the number of people who are willing able and of age to work in an economy
• Unemployed - those who are willing, able and of age to work but aren't currently in work
• Rate of employment - the proportion of people who are working relative to the workforce of the economy
• Rate of Unemployment - the proportion of people who are not working relative to the work force of the economy
• Underemployment - a situation where an individual is working, but their job does not fully utilize their skills or abilities, and/or does not provide sufficient hours or pay to meet their needs
• Voluntary Unemployment - where workers could find work at the market wage (min wage) but choose not to accept employment (belief of Classical Economists)
• Involuntary Unemployment - when workers can't find employment at the market wage (belief of Keynesian economists)
• Frictional unemployment - short-term unemployment that occurs as individuals move between jobs due to factors such as training, education, relocation, or changing preferences.
• Structural Unemployment - occurs when there's a permanent decrease in demand for a specific type of labour
• Seasonal Unemployment - occurs when the demand for labour in certain industries decreases at certain times of the year
• Cyclical Unemployment - unemployment caused by a decrease in aggregate demand that pushes the economy below the full employment level of output
• Unemployment Rate = (unemployed / labour force) x 100
• Real Wage Unemployment:

  • increase in minimum wage
  • increase in supply of labour
  • decrease in demand for labour
  • excess supply of labour = real wage unemployment
• Causes of increased wages:

  • wage stickiness
  • activity of trade unions
  • minimum wages
• Demand Side causes of unemployment:

  • high interest rates
  • recession
  • negative multiplier
  • unexpected events
• Factors causes natural unemployment rate:

  • extent of labour mobility
  • inadequate labour market information
  • lack of training/suitable skills
  • activity of trade unions
• Derived Demand (labour) - demand for labour that depends on the demand for the product that the worker is producing
• Hysteresis - an event in the economy that persists even after the factors that caused the event are no longer present
• Cost push inflation - when there's a rise in prices due to a higher costs of production caused by a reduction in supply of resources
• Demand Pull Inflation - a sustained increase in average price level caused by an increase in aggregate demand
• Stagflation - when the economy is shrinking through decreased output but prices are still rising (cost push inflation)
• Quantity Theory of Money - the only cause of inflation is excessive growth in money supply
• MV = PQ

  • M - money supply - quantity of money in the economy
  • V - velocity of circulation - average number of times a unit of currency is used each year
  • P - average price level
  • Q - real value of output
• MV = PQ

  • both sides of the equation must be equal
  • if money supply increases, real output also should increase otherwise there would be inflation