Macroeconomics: Potential Output, Business Cycle, and More
Explain the concept of potential output and why actual output can differ from potential output?
(2 marks)
Potential output is the amount of output that an economy can produce when using its resources such as capital and labour, at normal rates.
Potential output is not a fixed number but grows over time, reflecting increases in both the amounts of available capital and labour and their productivity.
As capital and labour can be utilised at greater than normal rates, at least for a time, a country's actual output can exceed its potential output.
Identify two factors that might cause a change in the level of potential output. For each factor briefly explain why they can affect potential output.
(2 marks)
Unfavourable weather conditions, such as severe drought, could reduce potential output growth in an economy such as Australia's, or a decline in technological innovation might also reduce potential output. This would affect potential output as it reduces the availability of resources such as capital and labour. Under the assumption that the country is using its resources at normal rates, so that actual output equals potential output, a significant fall in potential output growth would tend to result in recession.
Similarly, new technologies, increased capital investment, or a surge in immigration that swells the labour force could produce unusually brisk growth in potential output, and hence an economic expansion or even a boom. This is so as availability of resources has increased.
- Growth in potential output itself may slow down or speed up, reflecting changes in the growth rates of available capital and labour and in the pace of technological progress.
Identify and briefly explain the main features of the business cycle.
(2 marks)
business cycles are usually thought of as being characterised by periods of transition from peak to trough (a contraction) and then from trough to peak (an expansion)
draw diagram
peak: the
(2 marks)
Potential output is the amount of output that an economy can produce when using its resources such as capital and labour, at normal rates.
Potential output is not a fixed number but grows over time, reflecting increases in both the amounts of available capital and labour and their productivity.
As capital and labour can be utilised at greater than normal rates, at least for a time, a country's actual output can exceed its potential output.
Identify two factors that might cause a change in the level of potential output. For each factor briefly explain why they can affect potential output.
(2 marks)
Unfavourable weather conditions, such as severe drought, could reduce potential output growth in an economy such as Australia's, or a decline in technological innovation might also reduce potential output. This would affect potential output as it reduces the availability of resources such as capital and labour. Under the assumption that the country is using its resources at normal rates, so that actual output equals potential output, a significant fall in potential output growth would tend to result in recession.
Similarly, new technologies, increased capital investment, or a surge in immigration that swells the labour force could produce unusually brisk growth in potential output, and hence an economic expansion or even a boom. This is so as availability of resources has increased.
- Growth in potential output itself may slow down or speed up, reflecting changes in the growth rates of available capital and labour and in the pace of technological progress.
Identify and briefly explain the main features of the business cycle.
(2 marks)
business cycles are usually thought of as being characterised by periods of transition from peak to trough (a contraction) and then from trough to peak (an expansion)
draw diagram
peak: the