economic growth and sustainability

• Aims of government macroeconomic policies

  • Low unemployment
  • Low stable inflation
  • BOP equilibrium
  • Steady economic growth
  • Avoidance of exchange rate fluctuations
  • Sustainable economic growth
• PPC


  Shows the max amount of 2 goods that can be produced using all available resources
• Assume the economy is producing at point X
• This could be so because there is a lack of demand
• Moving from X to Y

  1. Using monetary policy

  2. Using fiscal policy

  3. Increase in GDP

  4. More is produced
• Actual economic growth has taken place
• The economy cannot produce beyond the curve
• This can only happen if the potential of the economy to grow takes place
• The curve would shift outwards
• Factors that can shift the curve outwards

  • Increase in the quantity of resources
  • Improvement in technology
• Actual economic growth can be shown using AD and AS analysis
• Actual economic growth has taken place since AD has shifted to the right and output has increased from Y to Y1
• For an economy to grow there must also be increases in potential economic growth
• The difference between actual and potential output is known as the output gap
• Negative output gap


  A situation where actual output is below potential output
• Actual level of output is Y
• Potential level of output is Yfe
• Negative output gap is from Y to Yfe
• When there is a negative output gap the economy will not be producing the full amount of output
• There will be spare resources
• Positive output gap


  A situation where actual output is above potential output
• Positive output gap is Yfe-Y
• Actually producing at Y
• Producing beyond our potential
• Not very sustainable in the very long run
• Consequences of a positive output gap

  • People are tired
  • Machines break down
• Upturn phase


  1. Economy growing at a faster rate

  2. Households and firms optimistic

  3. Consumption grows

  4. Firms invest and employment rises
• If the economy grows rapidly during this period, it can be described as an economy boom
• Peak is the top end of the business cycle
• During peak, the economy will be experiencing a positive output gap
• The high level of aggregate demand is likely to result in inflation and balance of payments difficulties
• Downturn phase


  1. Economic growth rate decreases

  2. Negative economic growth may occur

  3. Households and firms less optimistic

  4. Saving rises

  5. Net investment falls
• Trough is the lowest point of the trade cycle
• During trough, the economy experiences a lack of aggregate demand
• At this point, an economy may experience a recession or potentially a depression
• There will be a negative output gap
• Causes of the Business cycle

  • Increase in business confidence
  • Money supply increases faster than output
  • Government spending increases before an election
• Automatic stabilisers


  Offset fluctuations in economic activity
• Automatic stabilisers reduce the rise in GDP during an economic boom
• Automatic stabilisers reduce the fall in GDP during a recession