Chapter 17

Economic Growth and the Economic Cycle

Key Terms

Stocks and Flows - stocks are compiled, flows are measured over time. Wealth is a stock, while income is a flow

Gross and Net -gross is before you subtract, net is after

Nominal and Real -Nominal is measured in monetary terms, objects are real. The real number x the money value = nominal value. Economic growth is always measured in real rather than nominal terms. Real national output is the total of all the goods and services produced by an economy over a period.

National Output and Economic Growth

National Income and national output are used interchangeably to mean the flow of new output produced by the economy in a time period.

The national wealth comprises al physical assets owned by the nations residents that have value. Part of the national income wears out in the course of producing a years income, known as capital consumption. To maintain the size of the capital stock so that the stock can create the same amount of income in the next years, there must be a replacement investment. If not, there will be negative economic growth.

In order for positive economic growth to occur though, investment above the replacement investment must occur. Gross investment comprises these two investments, so the investment that is not replacement investment is known as net investment. This increases the size of capital stock, facilitating long run economic growth.

Economic Growth- an increase in the economy's potential level of real output and an outward movement of the economy's PPF

Economic Growth vs Economic Development

Economic growth measures changes in the physical quantity of goods and services an economy actually produces but does not necessarily improve the economic welfare of people living there.

Economic development includes the quantity and QUALITY of the growth, and is measured by:

  • improvement in living standards
  • access to resources such as food
  • greater access to opportunities such as education and training
  • environmental stability and reduction of resource degredation and depletion

The Economic Cycle

The Economic Cycle is the fluctuation of real output above and below the trend line of economic growth.