Economic Growth Economic growth is the percentage increase in real national output in a given time period or the increase in the productive potential of the economy. Countries grow at different rates, this is partly due to the fact that they are at different stages of their economic cycle. The economic growth for the I-J is at 0. 2%. The main measure of output is gross domestic product (GAP). GAP is the total value of goods and services produced in an economy during one year.
Recession is a period where economic growth starts to decline as GAP falls. Unemployment rises, confidence and investment are low. Slump is a period where economic growth is very low, high unemployment and almost no confidence and investment. Recovery s a time period where economic growth starts to slowly rise, unemployment falls, confidence and investment being to rise. An output gap occurs when there is a difference between an economies actual and potential output which could result in positive or negative output gaps.
A positive output gap occurs when the economy’s actual output is greater than the potential output whereas a negative output gap is when the economy’s actual is less than the potential. Armaments try to reduce boot gaps to maintain balance. Long run aggregate supple is determined by the quantity of resources available to et demand and also by the productivity of factors of production. DRAW GRAPH (LARS) An increase in the quantity and productivity of factors of production or technological advancements shift the LARS curve outwards.
The quantity of resources include increase the size of the labor force or discovery of natural resources where as the productivity of resources include increased efficiency due to technological advancements. DRAW GRAPH (LARS 2) If a firm is already operation near its potential output, then moving the AD curve outwards will only increase price is output will remain the same. Economic growth has many benefits, such as improving the standard of living. High economic growth means more employment and better investments.
However, economic growth has negative effects swell such as depletion of non-renewable resources, increased pollution, waste and congestion. It also increases the inequality in incomes, further widening the the gap between the rich and poor. To insure an increase in economic growth, governments introduce policies. The two most common types of practices policies are Keynesian, which focus on demand-side and monetarism, which focus on supply side. Keynesian believe that increasing the AD through demand side policies will give firm more confidence to increase LARS.
According to Keynes, Fiscal policy is the most important which includes taxation, government spending and interest rates. Keynesian believe that governments should reduce interest rates and taxes but increase government spending to increase AD in the economy. Monetarists argue that productive potential of an economy could only be increased using supply side policies. Monetarist policies include reducing direct taxes, reducing unemployment benefits, lowering the minimum wage and wakening he bargaining power of trade unions.
These policies help to decrease the wage rate which increases the quantity demanded for workers because firms will be more willing to create Jobs if they know they can pay them low wages, however, these policies also increase the exploitation of unskilled workers. Some competition policies can also be implemented such as appropriation and deregulation. Currently at El, the economy is operating close to full employment. These supply side policies will shift the LIARS outwards to LIARS. This will reduce the price level to UP which means inflation is undercurrent and the output increased from