2.4/2.5

Actual Growth-
Increase in the level of real GDP of an economy

unnamed

Causes of short run economic growth

Anything that effects AD=C+I+G+(X-M)

Potential Growth-
Increase in the productive potential of an economy

Causes of long run economic growth

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Immigration, more work participation – i.e. More labour

Better skills/education – i.e. Better labour

Greater levels of investment – i.e. More capital

Technological advance – i.e. Better capital

Discoveries of new resources – i.e. More land

Improved extraction techniques – i.e. Better land

National income is the total output of an economy

It also accounts for withdrawals that decrease the circular flow of income
Saving, taxation, imports

It accounts for injections that increase the circular flow of income
Investment, government spending, exports

Multiplier effect-An increase in one of the components of aggregate demand which leads to an even greater increase in national income

A drop in consumer or business spending may lead to a ‘negative multiplier effect’

Multiplier calculation= 1/1-MPC

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Marginal propensity to consume (MPC)

The proportion of extra income that is spent

Marginal propensity to save (MPS)

The proportion of extra income that is saved

Marginal propensity to tax (MPT)

The proportion of extra income that is taxed

Marginal propensity to import (MPM)

The proportion of extra income spent on imports

Marginal propensity to withdraw (MPW)

All withdrawals added together 🡪 MPS + MPT + MPM

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Positive output gap

Occurs when actual growth is greater than potential growth

Negative output gap

Occurs when actual growth is below potential growth