Economic growth: Actual and potential growth, output gaps and the business cycle

Overview

Recall questions on Actual and potential growth, output gaps and the business cycle, Causes of economic growth.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What does economic growth mean in the technical sense used by economists?

   Model answer

   A lasting expansion in what the economy is able to produce — its productive potential — as distinct from a short-run rise in measured output.

2. 2

   Define actual growth.

   Model answer

   The realised increase in real national output over a period of time.

3. 3

   What is meant by potential growth?

   Model answer

   The increase in the productive capacity or trend rate of growth of the economy.

4. 4

   What is a positive output gap?

   Model answer

   When actual output exceeds potential output, meaning the economy is operating above its sustainable capacity.

5. 5

   Define a negative output gap.

   Model answer

   When actual output is below potential output, meaning the economy has spare capacity.

6. 6

   What does the business cycle describe?

   Model answer

   The short-term fluctuations in actual output around the long-term trend of potential output.

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