Introducing 

Prezi AI.

Your new presentation assistant.

Refine, enhance, and tailor your content, source relevant images, and edit visuals quicker than ever before.

Loading content…
Transcript

Actual vs Potential Growth

Lesson Objectives:

1. To be able to identify trends in growth rates and their implications for the economy

2. Understand output gaps

Activity:

Starter:

Activity:

Analyse the following graph.

Read the BBC news article

You are going to play a game similar to the the circular flow game played previously.

What has happened to economic growth between these two points?

Half of you will be households possessing factors of production and half of you will be firms with money, looking to buy factors of production.

What has caused the rise in UK GDP growth?

The firms will then make products from a set of Land, Labour & Capital to make 1 Good or Service

They will then sell this Good or Service back to the households who will pay for it using the money earned earlier.

Enter the

Taxman...

And a relaxation of immigration laws

Twist:

However, due to cash flow issues, the firms will only get half of their money to start with and the other half after the first round.

There will be an injection AND/OR a withdrawal at some point...

A minimum wage has been imposed of $3 per factor input

What about these two?

What has been shown?

The increase in taxes acted as a withdrawal from the circular flow

The rise in immigration increased the capacity of the economy

Output Gaps

graphs with which you can show a negative output gap.

Have a look at this graph and then watch the video

Draw the

3

Is the UK recovery sustainable?

http://www.washingtonpost.com/wp-srv/business/the-output-gap/index.html

The nation’s economic woes boil down to this.

Compared with a healthy economy, about 7 million working-age people and 5 percent of the nation’s industrial capacity are sitting idle, not producing what they could.

The economy is growing again, but at a rate — less than 2 percent in recent months — that’s too slow to keep up with a population that keeps increasing and workers who keep getting more efficient.

This is the output gap, the divide between the amount the United States can produce and what it is actually producing.

The gap, currently $900 billion, explains why we feel so miserable more than a year into what is technically classified as an economic recovery.

Negative output gap – downward pressure on inflation

If actual GDP is less than potential GDP there is a negative output gap. Some factor resources such as labour and capital machinery are under-utilized and the main problem is likely to be higher than average unemployment and low wages.

Sustainable Growth

Sustainable economic growth means a rate of growth which can be maintained without creating other significant economic problems, especially for future generations

There is a TRADE-OFF between growth now and growth in future generations.

Positive output gap – upward pressure on inflation

Why?

Resource depletion

Environmental problems in the future

Global Warming

In terms of sustainability, it may be argued that growth based on short-term public debt, rather than long term productivity, is unsustainable.

• If actual GDP is greater than potential GDP then there is a positive output gap.

• Some resources including labour are likely to be working beyond their normal capacity e.g. making extra use of shift work and overtime.

• The main problem is likely to be an acceleration of demand-pull and cost-push inflation as wages rise.

Periods of growth are often triggered by increases in aggregate demand, such as a rise in consumer spending, but sustained growth must involve an increase in output.

If output does not increase, any extra demand will push up the price level.

capacity

For long-term growth to be achieved, the

of the economy must be increased.

How could you show this on a graph(s)?

Plenary:

1. Illustrate the effects of the increase in taxes and rise in immigration shown in the game using a graph

2. What would be the effects on the price level, output and unemployment?

Learn more about creating dynamic, engaging presentations with Prezi