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Section 8 - Economic growth and unemployment - Coggle Diagram
Section 8 - Economic growth and unemployment
Long run growth
Long run - increase in capacity/ poltential of the economy due to rise in the quality/ quanitty of inputs
Increase in long run growth are caused by an increase in AS
PPF
Short run growth is shown by a movement from a point within in the PPF to a point closer to the PPF or on it (PPF doesn't change)
Long run growth is shown by an outward shift of the PPF
Phases
Economic cycle - fluctuations in the actual growth of an economy
Boom - when economy is growing quickly, AD rises and unemployment falls. Inflation also rises
Recession is when there is negative economic growth for atleast two consecutive quarters, AD falls and unemployemnt rises. Price levels fall
Long run growth is shown by an increase in the trend rate of growth, the average rate of economic growth
Boom characteristics
High rate of economic growth
Near full capacity
Demand-pull inflation
High confidence
Recession characteristics
Negative economic growth
Lots of spare capacity
Low inflation rate
Low confidence
Output gaps
Negative output gap
Difference between the level of actual output and trend output when actual output is below trend output
Occurs during a recession when the economy is underperforming
Some resources are unused
Alot of spare capacity in the economy
Positive output gap
Difference between the actual output and the trend output when the actual output is above the trend output
Occurs during a boom when the economy is overheating and resources are being fully/ over used
Resources are used beyond their normal capacity
During a recovery, the output gap goes from negative to positive
Unemployment
Governments want full employment
Full employment - where everybody of working age who wants to work can find employment at current wage rates
If there is unemployment, it won't operate at full capacity, so it'll be represented by a point within the PPF curve
At full employment, economy can operate at fully capacity and is a point on the PPF curve
Underemployment is when someone has a job, but it's not a job that utilises that person's skills, experience or availability to the best effect, so the economy doesn't operate at full capacity
Time of year
Labour is a derived demand - employers demand for labour is derived from consumers' demand for goods/ services
Cyclical unemployment - when economy is in recession, AD falls and unemployment falls to
Seasonal unemployment - demand for labour in certain industries won't be the same all year round
Seasonal unemployment is regular and predictable
Cyclical unemployment can affect any industry, while seasonal only affect a certain few
Structural unemployment
Caused by a decline in a certain industry or occupation due to a change in consumer preference or technological advances
Labour immobility
Occupational - workers can't move from one occupation to another with ease, happens when occupations decline overtime and workers don't have the skills to do available jobs
Geographical immobility - workers aren't able to move to different locations to find the best jobs for themselves. They might not be able to afford moving or they have family ties
If a region is affected by structural unemployment, it could suffer from the negative multiplier effect, unemployment will lead to less spending and causing more unemployment
If another country starts producing goods at a low price, this could negatively impact the domestic industry
Frictional unemployment
Unemployment experienced by workers between leaving one job and starting another
Even at full employment there is still some frictional unemployment as people are always changing jobs
Factors affecting time searching
In a boom vacanies are much higher, so frictional unemployment is short term
In a slump, frictional unemployment could be much higher as there are less available jobs
Generous benefits give people less incentive to look for a new job
Quality of information provided is important, if people don't know where there is available work, then they won't find it
Migration
Increases the labour supply
In a strong economy, national income should increase due to mjigration, if the skills of migrants is different to those of native people
During a recession, unemployment among natives may increase if migration is high
Costs/ consequences
Unemployed have lower incomes and a lower standard of living so less spending and reduced firm profits
Less tax revenue and less consumer spending
Governments have to spend more on benefits
High unemployment areas can have high crime rates and reduced incomes can lead to health problems
Workers who are unemployed for a long time might find that theri skills are outdated, and are more likley to stay unemployed
Real wage unemployment
Real wages being pushed above equilibrium level
Caused by trade unions negotiating for higher wages or by the introduction of a national minimum wage
NMW above equilibrium causes labour supply to increase and demand to fall
Real wage flexibility - ability of real wages to change in response to changes in demand for and supply of labour
Real wage inflexibility can lead to increased unemployent
Benefits of economic growth
Increase labour demand - fall in unemployment
Employees get higher wages - rise in living standard
Firms get more profits - more investment which increases productivity
Government tax revenue rises, reduction in employment benefits
Costs of economic growth
Higher inequality
Lead to demand pull inflation, which reduce AD in the long run
Industrial explosion can lead to more pollution
Deficit of balance of payments as more imported goods
Short run economic growth
AD
Rise in AD can lead to short run economic growth
Lowering interest rates encourages investment and consumption
Increasing welfare benefits increases government spending and consumption
Higher MPC and bigger multiplied, cause a greater shift
Short run - % change in real national output (actual growth)
SRAS
Rise in SRAS creates short run economic growth, as the curve shifts to the right
Fall in production costs increase SRAS