2 - Output Flashcards
(25 cards)
What is actual output?
The current level of production (real GDP) in an economy
- some resources may be unemployed
What is potential output?
Economy’s productive capacity/ largest output that could be produced
- given state of tech and stock of available resources
Negative output gap
Actual GDP is below potential GDP
- spare capacity
- resources not fully employed
- unemployment
- not enough demand for all resources to be fully utilised
Positive output gap
Actual GDP above potential
- resources under strain
- demand growth exceeds supply growth
- firms compete for resources
- upwards pressure on wages and costs, ay lead to inflation
- consumers buy more imports if suppliers can’t meet demand, increase trade deficit
What is the output gap influenced by?
Evolving factors
- tech changes
- demographic shifts
What’s the trade cycle?
Refers to the fluctuation of economic activity in an economy overtime
- alternating periods of expansion and contraction in real output,employment etc.
Key phases of trade cycle
- rapid expansion = boom
- slowdown
- peak
- recession
- trough
- economic recovery
What is a boom in the trade cycle?
Period when rate of growth of real GDP is fast and higher than LR trend
What is a slowdown in the trade cycle?
Weakening of rate of growth
- real GDP still rising but at slower rate
What’s a recession in the trade cycle?
Period of at least 6 months when economy suffers a fall in real GDP
What is recovery in the trade cycle?
Phase after recession when real GDP starts to rise and unemployment begins to fall
What is a depression in the trade cycle?
A prolonged downturn where real GDP falls by at least 10%
Causes of economic slowdown
- increased interest rates
- tighter fiscal policy
- slowdown in global growth; trade tensions
- global geopolitical events
Causes of recession
- lower confidence
- higher unemployment
- negative demand/supply-side economic shocks ; trade shock, sudden rise in energy prices
- poor choice of macro policy; keeping interest rates too high for too long
Causes of recovery
- cuts in interest rates (stimulate AD)
- fiscal stimulus; tax cuts, increase gov spending
- business and consumer confidence
- positive demand/supply-side shock; fall in energy prices
- more rapid global growth; boosts exports
Causes of boom
- overconfidence; animal spirits cause rapid increase in AD when little/no spare capacity
- loose fiscal and/or monetary; AD grows too fast
Features of recession
- falling real GDP
- rising unemployment
- disinflation
- reduced business investment
- risk to gov finances
What does economic scarring do?
Reduce medium/long run potential output of Econ
What does economic scarring cause?
- businesses scrap unused/obsolete capital
- workers who lose jobs also lose skills; reducing productivity
- increase in business failures
- fall in financial capacity to lend
Why is an economic depression worse than a recession?
- can persist for several years
- unemployment rates very high for long time
Examples of depressions: - severe banking and financial crises
- disruptions to financial system
Define economic shock
Unexpected and significant events that lead to a sudden and substantial impact on key indicators
Such as:
- GDP growth
- inflation
- unemployment
- interest rates
- exchange rates
Negative demand-side shocks
- unexpected tax increases/ cuts in welfare
- financial crisis causing credit crunch
- bigger than expected rise in unemployment
Negative supply-side shocks
- steep rise in energy and/or raw material prices
- pandemic
- natural disasters
- unexpected breakthroughs in production tech
Examples of shocks IRL
- global financial crisis 2007-2009
- covid pandemic
- climate change and extreme weather events
