LOsDefine and draw the Output GapExplain different stages in the business cycleEvaluate costs and benefits of economic growth on different agentsExplain the constraints on growth

ONational outputTime1234The business cycle1 - recession2 upturn3 boom4 downturn / slump

ONational outputTime1234The business cycleThe output that could be produced in the economy if there were a full employment of resources.

ONational outputTimeActualoutputThe business cycleNegative Output GapPositive Output Gap

Output GapThe 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 GrowthConsumersIncreased standard of livingGreater choice of goodsBetter quality goodsIncrease in wealth i.e. stocks and sharesIncreased job prospectsFirmsIncreased profits Greater investmentInnovationGovernmentIncreased tax revenueReduced unemployment benefits

Costs of Economic GrowthNegative 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 wealthInflation demand pull BOP disequilibrium

Constraints on growthAbsence of capital marketsNot having ability to raise finance issue share capital, finance business expansionMore credible in Asia than S America = faster+ credit markets reluctance to offer credit, or at high price

Government instabilityIncompetent, lack of transparency / political backing less FDIFiscal deficit = less spending to encourage growthMore extreme when political tension, wars etc

Constraints on growthLabour market problemsShortages of skilled labourLow birth rates falling labour supplyImmigrationBrain drain

External constraintsTrade tariffs / subsidies; recession; terrorism; exchange rate volatilityEvery 3% growth in world trade = 1% growth in world GDP

Plenary: Hot SeatDefine Economic GrowthExplain one demand side cause of growthExplain one supply side cause of growthDraw a diagram which shows economic growthWhat does the output gap show?Can you draw it?Give a benefit of economic growthGive a cost of economic growthExplain one constraint on growth

Data Response Jan 2009 qu1Evaluate the benefits of Economic Growth for Britain(30 marks)

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

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