2. Key terms
Gross Domestic Product
Gross National Product
Nominal national
income
Real national income
Actual economic growth
Potential economic
growth
Business Cycle
Upturn
Expansion
Peaking out
Slowdown / recession /
slump
3. Measuring national income
NOTICE:
The difference between
Gross Domestic Product (GDP) – eg everything
produced INSIDE the UK (it does not matter who
owns it – UK or overseas company)
Gross National Product (GNP) = GDP plus net
profits = GNP
[net profits from UK companies which are overseas]
4. Measuring national income
NOTICE:
The difference between nominal (money)
income - and - real national income (inflation-
adjusted)
So – if nominal GDP = 5.4%
and inflation = 3.7%
What is real GDP = 1.7%
5. Economic Growth and the
Business Cycle
Two types of economic growth
Actual Growth
Potential Growth
6. Actual Economic Growth
percentage increase in national output (real GDP)
from one period to another
7. Potential Economic Growth
The percentage annual increase in the capacity of the
economy to produce
It measures what the economy could produce when all
resources are employed at normal rates of
utilisation
Allows a degree of spare capacity so is below full
capacity
8. The Output Gap
The difference between the actual level of national
output and its potential level
If actual > potential then output gap positive
If actual < potential then output gap negative
NB ‘potential’
The highest level of sustainable, long-term output
9. Two economic growth timeframes
In the short-run, ensure actual output is as close as
possible to potential output
In the long-run, consider the determinants of the rate
of potential economic growth
10. O
Growth and the production possibility curve
GoodX
Good Y
a
b
Growth in
actual output
11. O
Growth and the production possibility curve
GoodX
Good Y
a
b
I II
Growth in
actual output
Growth in
potential
output
12. Actual Growth
and the Business Cycle
Business Cycle
The short-run alternation between economic
downturns, known as recessions,
and economic upturns, known as expansions
13. Actual Growth
and the Business Cycle
The phases of the business cycle
Upturn
Rapid expansion
Peaking out
Slowdown or recession
Length and magnitude of phases
15. Why does actual growth fluctuate
in the short-run?
Aggregate demand (largely)
A speedy increase in AD leads to shortages, which then
lead to increased output (increased utilisation of
resources – seen in a boom)
A decrease in AD leads to surpluses, which then lead to
stocks of unsold goods – seen in a bust
16. What determines actual growth in
the long-run?
Two determinants
The growth in aggregate demand (this determines
whether potential growth will be realised)
The growth in potential output
17. O
Growth and the production possibility curve
GoodX
Good Y
a
b
I II
18. Potential Growth
Two main determinants
The quantity of resources available
The productivity of those resources
19. Increases in the amount of
resources available
Increases in the quantity of factors
Capital
Labour
Land and raw materials?
Note the problem of diminishing returns
20. Increases in the productivity of
resources
Main determinants
Land?
Capital
Labour
21. Other determinants of growth
Other determinants
Economic and political stability
Strong export performance
Willingness to change/innovate
Effectiveness of capital markets
Quality of infrastructure
22. Benefits of Growth
Increased standard of living
Potential for work-leisure choice
Capacity to reduce poverty
Increased economic status and power (including
political)
23. Costs of Growth
Income and wealth inequality?
Happiness deficit?
Environment may suffer more damage – pollution /
depletion of non-renewable resources
Work pressures
24. Discussion
For what possible reasons may one country experience a
persistently faster rate of economic growth than
another? (remember that potential growth depends on
the country’s resources, technology, and productivity)
25. Extension discussion
Are worries about the consequences of economic
growth a ‘luxury’ that only rich countries can afford?
26. Extension discussion
Is it possible to find a middle road; that is, pursue
economic growth but set constraints to growth.
consider costs and benefits
types of constraints
