LOs

Define and draw the Output Gap

Explain different stages in the business
cycle
Evaluate costs and benefits of economic
growth on different agents
Explain the constraints on growth

The business cycle

1 - recession
2 upturn
3 boom

National output

4 downturn / slump

3
2

3
4
2

Time

The business cycle

The output that could be

produced in the economy if there
were a full employment of
resources.

National output

Potential output

3
2

3
4
2

Time

4
Actual
output

The business cycle

National output

Trend
output

Positive
Output
Gap
Negative Output
Gap

Time

Actual
output

Output Gap

The output gap measures the deviation

between actual output and estimates of
long-run potential output

The idea is that in the short run, actual

output is determined by demand, while in
the long run it is determined by capacity
constraints by aggregate supply

Benefits of Economic Growth

Consumers
Increased standard of living
Greater choice of goods
Better quality goods
Increase in wealth i.e. stocks and shares
Increased job prospects
Firms
Increased profits
Greater investment
Innovation
Government
Increased tax revenue
Reduced unemployment benefits

Costs of Economic Growth

Negative externalities large pool of migrant workers

wandering from job to job, alienated from their family and
roots. Crime rates soar, divorce rates increase, stress
related illnesses become common place.

Growth is unsustainable growth in pollution and a

decline in the availability of scarce resources such as oil,
coal and timber

Environmental Problems growth leads to destruction

of land and agriculture.

Unfair distribution of income and wealth

Inflation demand pull

BOP disequilibrium

Constraints on growth

Absence of capital markets

Not

having ability to raise finance issue share

capital, finance business expansion
More credible in Asia than S America = faster
+ credit markets reluctance to offer credit, or at high
price

Government instability
Incompetent,

lack of transparency / political backing

less FDI
Fiscal deficit = less spending to encourage growth
More extreme when political tension, wars etc

Constraints on growth

Labour market problems

Shortages

of skilled labour
Low birth rates falling labour supply
Immigration
Brain drain

External constraints
Trade

tariffs / subsidies; recession; terrorism;

exchange rate volatility
Every 3% growth in world trade = 1% growth in
world GDP

Plenary: Hot Seat

Define Economic Growth

Explain one demand side cause of growth
Explain one supply side cause of growth
Draw a diagram which shows economic growth
What does the output gap show?
Can you draw it?
Give a benefit of economic growth
Give a cost of economic growth
Explain one constraint on growth

Data Response Jan 2009 qu1

Evaluate the benefits of Economic Growth for

Britain
(30 marks)

Structure:
Define (2)
Diagram (4)
3 benefits (3 x 4)
3 costs (3 x 4)