economic performance

• economic growth is the increase in the value of goods and services produced in an economy over a period of time
• actual economic growth is caused by an increase in goods produced or consumed within an economy
• actual economic growth fluctuates over time
• long run growth is caused by an increase in the productive capacity of an economy
• the trend growth rate of an economy is the average of all peaks and troughs within the actual growth rate
• a recession will see unemployment increase and price level decrease
• a boom will see unemployment decrease and price level increase
• an output gap refers to the difference between the trend growth rate and the actual growth rate at any given time period
• a negative output gap occurs when the actual growth rate is lower than the trend growth rate
• a positive output gap occurs when the actual growth rate is higher than the trend growth rate
• characteristics of a negative output gap: underutilised resources, high unemployment, downward pressure on inflation, low confidence
• a positive output gap occurs when actual growth is greater than trend growth
• when a positive output gap occurs an economy will produce at a rate greater than its production possibility for a short time period
• characteristics of a positive output gap: over utilised resources, upward pressure on inflation, low unemployment rates, high confidence
• growth can be caused by an increase in AD (this looks lie an increase in any one of investment, consumption, government spending, or exports)
• growth can be caused by changes in costs of production: fall in the price of raw materials, fall in taxation, fall in wages, increased value of the pound
• long run growth can only be caused by an outward shift in the LRAS which is caused by: advancement in tech, increased size/skill of the labour force, increased investment in capitol
• the benefits of economic growth: increased living standards, better infrastructure, increased tax revenue to correct market failures, an improved balance of payemnts
• the negatives of economic growth: resources used up faster, loss of culture, potential trade deficit
• involuntary unemployment is when people who are willing to work at the market rate are unable to find work
• voluntary unemployment is when people choose not to work at the market rate
• frictional unemployment refers to the short term unemployment caused by people facing difficulties moving jobs
• structural unemployment is long term unemployment as a result of a decline in a given industry or the replacement of the labour force with technology
• cyclical unemployment is caused by a fall in aggregate demand which causes a fall in job supply which in turn leads to further falls in aggregate deamnd
• seasonal unemployment is temporary unemployment created in industries where labour is only demanded for certain months of the year
• real wage unemployment is caused by wages being pushed above market levels either due to trade unions or minimum wage legislation. this leads to there being an increase in demand for labour at the market rate and a decrease in the number of firms willing to supply labour at the market rate
• unemployment has a negative impact the individual, the community and the government
• demand pull inflation is caused by an increase in aggregate demand
• cost push inflation is caused by increased costs of production
• demand pull inflation causes: a sharp increase in consumer spending, a substantial increase in investment, an increase in government spending, a cut in income tax, increase demand for UK exports
• causes of cost push inflation: increase in wages, profit seeking firms taking advantage of market power and increasing price, increased taxation on producers
• the quantity of money theory states that inflation can be caused by persistent increases in money supply. this results in too much money chasing too few goods
• money supply x velocity of money = price level x quantity of output
• people with fixed incomes such as welfare recipients and pensioners will suffer the most from inflation
• inflation will result in a decrease in export competitiveness
• inflation disincentivises saving causing an increase in spending and further demand pull inflation
• inflation can increase uncertainty and decrease investment
• the short run Philips curve states that there is an inverse relationship between inflation an unemployment
• the long run Philips curve states that there is no trade off between inflation and unemployment