Contents:

  1. Learning Outcomes
  2. Definitions
  3. Actual growth versus potential growth in national output
  4. Business Cycle
  5. Business cycle and role of automatic stabilizer
  6. Policies to promote economic growth and their effectiveness
  7. Inclusive economic growth

Candidates should be able to:

Definitions

Real GDP GDP assuming constant prices, taking account of changing prices through time
Nominal Value The value of an economic variable based on current prices, not taking account of changing prices through time
Real Value The value of an economic variable, taking account of changing prices through time.
Full employment level of output The level of output at which the economy is operating at full potential capacity
Actual economic growth An increase in measured Real GDP over a period of time
Human capital The stock of skills and expertise that contribute to a worker’s productivity; it can be increased through education and training
Privatisation Privatization is the process of transferring an enterprise or industry from the public sector to the private sector.
Diversification Diversification is a strategy that mixes a wide variety of investments within a portfolio in an attempt to reduce portfolio risk
National output National output is the total market value of all final goods and services produced and sold during a particular year in a country or region

9.1 Actual growth versus potential growth in national output

Potential GDP is the level of real GDP that the economy would produce if it were at full employment. When real GDP falls short of potential GDP, the economy is not at full employment, and when the two are equal the economy is at full employment. Real GDP can exceed potential GDP only temporarily as it approaches and then recedes from a business cycle peak.

In the PPC diagram below, point a is when the economy is not operating at full employment and the real GDP will be less than the potential GDP, and vice versa for point b.