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Economics Chapter 10 (What is a recession? (What problems come from…
Economics Chapter 10
What is a recession?
Economic Recession
Sustained period of negative growth
Technical Recession
Two consecutive quarters of negative growth
What problems come from recession?
Loss of output and welfare
Increased unemployment
Strain on Government budgets
Negative outlook and pessimism
May cause deflationary spiral
What is economic growth?
Increase in the real national output of a country over a period of time
Actual growth VS Potential Growth?
Actual Growth:
Percentage annual increase in national output actually produced: rate of growth in actual or real output
Potential Growth:
Rate of growth of potential output (full-employment output). The speed of which the economy could grow
What is sustainable growth?
Defined as the rate of growth that can be maintained in the long term without creating other significant economic problems (such as depleted resources and environmental problems), particularly for future generations. Implies positive and stable growth rate over an extended period of time
Relationship between Potential Growth rate and Actual Growth Rate
Actual Growth rate > Potential Growth Rate?
Amount of idle resources and unemployment is reduced
Inflationary pressures build up, mainly through higher wages
Excess labour demand leads to real wage growth outstripping productivity growth
Unit Labour costs increase, leading to an erosion of export competitiveness
GDP growth moderates towards potential growth
Potential Growth Rate > Actual Growth Rate?
Increase in spare capacity and increase in unemployment
Growing gap btw potential and actual output