Economic performance
Economic growth and the economic cycle
Short run growth
● % increase in real GDP annually
● Caused by increases in AD.
Long run growth
● Productive capacity is increasing and real national output grows over time
● Caused by increases in AS
Positive and negative output gaps:
Output gap
Difference between the actual level of output + potential output. It is
measured as a % of national output.
Negative output gap
Actual level of output is less than the potential output. This puts downward
pressure on inflation. Unemployment of resources means there is spare
capacity in the economy.
Positive output gap
, Actual level of output is greater than the potential output. Resources are
used beyond normal capacity e.g. overtime or productivity increases. It
puts upwards pressure on inflation.
Illustrating an output gap:
Classical economists believe markets clear in the long run, so there is full
employment. They believe there are output gaps in the short run. A negative
output gap is between Ye and Y1, and a positive output gap is between Ye
and Y2.
The business cycle:
The stage of economic growth that the economy is in. The economy goes
through periods of booms + busts.
Economic growth and the economic cycle
Short run growth
● % increase in real GDP annually
● Caused by increases in AD.
Long run growth
● Productive capacity is increasing and real national output grows over time
● Caused by increases in AS
Positive and negative output gaps:
Output gap
Difference between the actual level of output + potential output. It is
measured as a % of national output.
Negative output gap
Actual level of output is less than the potential output. This puts downward
pressure on inflation. Unemployment of resources means there is spare
capacity in the economy.
Positive output gap
, Actual level of output is greater than the potential output. Resources are
used beyond normal capacity e.g. overtime or productivity increases. It
puts upwards pressure on inflation.
Illustrating an output gap:
Classical economists believe markets clear in the long run, so there is full
employment. They believe there are output gaps in the short run. A negative
output gap is between Ye and Y1, and a positive output gap is between Ye
and Y2.
The business cycle:
The stage of economic growth that the economy is in. The economy goes
through periods of booms + busts.
