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a
a
a
a
a
a
a
a
a
a
Actual GDP>potential
GDP; there is an output
gap: unemployment
>natural rate of
unemployment
Unemployment
increases
Actual GDP<potential GDP; there is an
output gap: unemployment >natural rate
of unemployment
e
d
c
b
Or potential GDP= full unemployment
GDP; unemployment =natural rate of
unemployment . a, b, c
Test Your knowledge
In your groups, answer the following question
Explain, using BC diagram, that economies typically
tend to go through a cyclical pattern characterized by
the phases of the BC.
Post your answer on edmodo
2.1 Economic Activity
98
Possible causes of the
business cycle:
There are several theories regarding WHY countries
grow at such volatile rates over time.
Major innovations may trigger new investment and/or
consumption spending.
Changes in productivity may be a related cause.
2.1 Economic Activity
99
Most agree that the level of aggregate spending is
important, especially changes in the purchase of capital
goods and consumer durables.
Cyclical fluctuations:
Durable goods output is more unstable than non-durables
and services because spending on latter usually can not
be postponed.
2.1 Economic Activity
100
Decrease in GDP vs. a
decrease in GDP growth rate
2.1 Economic Activity
101
Decrease in GDP
Fall in the value of outputs produced in a given time
Decrease in GDP growth
Falling the rate of growth, though the rate of growth can
be positive
2.1 Economic Activity
102
Example
Year Real GDP R
e
a
l
G
D
P
g
r
o
w
t
h
2007 210.5 -
2008 215.5 2
.
6
%
i
n
c
r
e
a
s
e
i
n
G
D
P
2009 219.5 1
.
9
%
(
i
n
c
r
e
a
s
e
i
n
G
D
P
,
f
a
l
l
i
n
G
D
P
g
r
o
w
t
h
)
2010 223.1 1
.
6
%
(
i
n
c
r
e
a
s
e
i
n
G
D
P
,
f
a
l
l
i
n
G
D
P
g
r
o
w
t
h
)
2011 217 -
2
.
7
%
(
d
e
c
r
e
a
s
e
i
n
G
D
P
,
f
a
l
l
i
n
G
D
P
g
r
o
w
t
h
)
Year Real GDP
Billions
Real GDP Growth
2007 210 -
2008 215.5 2.6 % (increase GDP)
2009 219.5 1.9 % (increasing GDP, falling GDP Growth)
2010 223.1 1.6 % (increasing GDP, falling GDP Growth)
2011 217 -2.7 % (decreasing GDP, negative GDP Growth)
2.1 Economic Activity
103
BC and GDP vs. GDP growth
Again, the growth rate of an economy refers to the
percentage change in GDP between two periods of
time.
When an economy is approaching a peak in its
business cycle, the rate of growth has begun to fall.
When a recession begins, the actual output of an
economy decreases.
This means the growth rate has become negative.
2.1 Economic Activity
104
Test your knowledge
Distinguish, using examples, between a decrease in
GDP and GDP growth
2.1 Economic Activity
105
The Macroeconomic
Objectives
2.1 Economic Activity
106
In our study of macroeconomics, we will focus on how the
tools of macro can help policymakers achieve several
objectives,
all meant to make the lives of a nations people better over
time.
2.1 Economic Activity
107
The four Objectives of Macroeconomic Policy:
2.1 Economic Activity
108
Full employment:
This means most of the nations workers are able to find a job
and that the nations resources are being put towards the
production of goods and services
2.1 Economic Activity
109
Price-level/inflation
stability:
Inflation will be low, meaning households real incomes are
high. Unstable prices lead to uncertainty and unstable
livelihoods for the nations households
2.1 Economic Activity
110
Economic growth:
This is defined simply as an increase in output and income
over time. Economic growth is needed to sustain a growing
population and assure that the average person enjoys a
higher standard of living over time.
2.1 Economic Activity
111
Improved equality in the
distribution of income :
The free market tends to result in winners and losers. To
some extent, the government must look after the losers in
the market system,
and implement policies that improve equality of income
distribution so that there is less poverty in society.
2.1 Economic Activity
112
Looking again at our business cycle model, we can see the
effect of an economy which is successfully meeting its
macroeconomic objectives.
2.1 Economic Activity
113
The blue line represents a more stable, steadily growing
economy.
Recessions are less severe, peaks and troughs less extreme
Unemployment rises by less during recessions, and inflation
is lower during expansions.
2.1 Economic Activity
114
Remember!
An economy meeting its macroeconomic objectives will
achieve growth that is closer to the long-run trend line.
There will be less volatility and uncertainty in the
economy
2.1 Economic Activity
115
Test your knowledge
Watch the video and answer the following questions
http://www.econclassroom.com/?p=3159
What are the key macroeconomic objectives of
economies?
Use a business cycle diagram to illustrate what it
means to achieve these objectives
2.1 Economic Activity
116
You are a step closer to become an Economist!
2.1 Economic Activity
117
Resources
Economics for IB Diploma, Jason Welker, Pearson
IB Economics, Ellie Tragakes, Cambridge
www.Econclassroom.com
2.1 Economic Activity
118