3.3 Macroeconomic Objectives Flashcards
What is the definition of “economic growth”?
An increase in real GDP over a period of time. We use Real GDP because Economic growth measures an increase in actual output/productions in the economy.
What does the production possibilities curve show?
combinations of maximum output that can be produced in an economy with fixed resources and technology
Why is it highly unlikely an economy will produce on the PPC?
Because in the real world it’s near impossible to achieve maximum or full employment. Therefore a country is most likely to be producing at a point inside its PPC.
What kind of growth can be achieved in the short run?
Growth in ACTUAL output. This is because it can occur over short periods of time and is due to reductions in unemployment or inefficiency of production.
What kind of growth can be achieved in the long run?
Growth in POTENTIAL output. Potential growth, or growth in production possibilities is long-term growth, because it usually requires long periods of time and relies on increase in quantity or quality of factors of production.
How can more output be produced in the long run?
By shifting the PPC outwards
What factors cause the PPC to shift outwards
increases in QUALITY and/ or QUANTITY of resources
What happens if the potential output increases (PPC shift outwards), but the actual output remains the same?
Then the economy can produce more output than before, however currently it is still producing at the same level of output
What is the equation used to calculate economic growth?
% change in real GDP = (final value of real GDP - initial value of real GDP ) / initial value of real GDP
What happens if real GDP is growing slower than the population?
That means the real GDP per capita decreases
What is the equation that links % change in population and % change in real GDP?
% change in real GDP per capita = % change in real GDP - % change in population
What is “inflation”?
Price levels are rising at an increasing rate
“persistent rate of change in price of goods and services in an economy over a period of time. “
What is “deflation”?
Price levels are falling
What is “disinflation”?
Prices levels are rising at a falling rate
What is the difference between “disinflation” and “deflation”?
Deflation means that price levels are falling (so, below 0%), whilst disinflation means that price levels are still rising, however the rate is decreasing (eg. 3% –> 2%)
What are the two types of inflation?
- Cost-push inflation
- Demand-pull inflation
What is cost-push inflation?
It is caused due to a fall in aggregate supply in an economy. The possible reason for the fall in AS (increase in labour costs, increase in cost of resources or supply shocks). The AS shifts to the left which reduces the price and also reduces the real GDP the economy. This is not a desired method of increase in price levels - as this price increase comes at the cost of economic contraction
What is another term used to describe “cost-push” inflation?
STAGFLATION
- Stagnation + Inflation + Unemployment
What is demand-pull inflation?
This is caused due to an increase in aggregate demand in the economy. (A rise in any component of AD will shift the AD to the right and cause demand-pull inflation.
Is this considered ‘good’ or ‘bad’ deflation?
Bad deflation - Prices fall, but an economic contraction (fall in real GDP)
Is this considered ‘good’ or ‘bad’ deflation?
Good deflation - prices fall but economy expands (increase in real GDP)
What is the “CPI”?
[Consumer Price Index]
CPI is a measure of the cost of living for the typical household, and compares the value of a basket of goods and services one year, to the value of the basket of goods and services in the base year.
How do you calculate inflation/ deflation with the CPI?
[Price of the basket in given year / price of the basket in the base year] x 100 = Price Index
Price index - 100 = % inflation rate
What is going on when CPI = 100?
then that is base year and there is NO inflation/ deflation
