Chapter 6 - Economic Growth Macro

k(the multiplier)=

1/MPW Any change in expenditure in the national economy will cause national income to be multiplied

The multiplier

Any change in the AD components leads to a greater and final change in the real GDP. When C rises the multiplier effect on the economy is worth more that the initial spend. the multiplier is determined by the size of leakages from the circular flow of income. the proportion of additional national income that goes to leakages is known as the MPW (marginal propensity to withdraw). Its made up of the MPS, MPM, MPT

Changes in AD

Economice growth in the short run can result from changes in the factors that affect the demand side of the economy. Growth in the short run can be driven by changes in he domestic economy or by changes in the international economy. AD=C+I+G(domestic demand) +(X-M) (net external demand

Causes of economic growth in the short run

Growth is much more variable in the short run than in the long run. Over short periods of time the GDP can vary by quite a large amount.

Accelerator

The theory of investment that states that the level of investment depends on the rate of change of national income. the key point is that investment depends on the rate of change of the national income and not on its level. As a result investment will tend to be a volatile component of AD. Investment can fall when the rate of growth of the economy slows down and this will tend to lower domestic demand.

Reason for investment

To replace capital stock that is wearing out To provide new capital stock to give additional productive capacity to meet rising demand

standard of living

a measure of the material well-being of a nation and its people

spare capacity

exists when firms in the economy are capable of producing more output that they are actually producing important when judging the impact of economic growth on the economy. but it's hard to measure the potential output of an economy accurately and the output gap can only ever be an estimate. this reduces the reliability of the output gap as a measure in judging inflationary pressures

PPC

illustrates the distinction between the short and long run. there is a shift in the PPC in the long run as the productive capacity of the country increases.

short run economic growth

the actual annual percentage increase in an economy's output, sometimes referred to as actual economic growth increase in an economy's output and is measured by an annual change in GDP, it's caused by a shift in AD curve the extent on the increase in real GDP depends on the size of the shift and the elasticity of the AS curve.

Trend rate of growth

the average rate of economic growth measured over a period of time, normally over the course of the economics cycle (from peak to peak or trough to trough)

Output gap

the difference between the actual and potential output of an economy. It is common practice to refer to a situation where actual output is below potential output as a negative output gap. A positive output gap occurs when in the short term actual output exceeds the economy's potential output. difference between the actual and potential output of the economy. if actual output is less than potential output then a negative output gap exists =spare capacity if actual output is more than potential output there is said to be a positive output gap (overtime workers)

SRAS

the nature and speed of the response of SRAS to a change in the AD dictates whether the impact of the chance falls on real GDP or the price level. The more elastic the SRAS the greater the impact on real GDP and growth. SRAS could be relatively inelastic due to a fixed factor in production (e.g.. football stadium-you can't just make more seats to meet demand) =factor immobility

MPS

the proportion of additional national income that is saved=change in S/change in Y where s is savings, y is national income

MPM

the proportion of additional national income that is spent on imports =change in m/change in y

MPT

the proportion of additional national income that is taxed=change in t/change in Y

Long run economic growth

the rate at which the economy's potential output could grown as a result of changes in the economy's capacity to produce goods and services, sometimes referred to as potential economic growth

What causes expenditure to change in the first place

this is explained by the relationship between the total level of investment to the rate of change of national income. The multiplier and accelerator interact to generate periods in which real GDP rises more and more rapidly

Aggregate demand

total planned spending on an economy's output at a given price level over a specified period of time