Definition deflationary gap – This is the difference between the full employment level of output and actual output. For example, in a recession, the deflationary gap may be quite substantial, indicative of the high rates of unemployment and underused resources. A deflationary gap is also known as a negative output gap. Causes of deflationary gap Fall …
Readers Question: What is the relationship between inflation & economic growth? If economic growth is caused by aggregate demand (AD) increasing faster than productive capacity (LRAS) – if economic growth is above the ‘long-run trend rate‘ then economic growth is likely to cause inflation. If economic growth is caused by increased productivity (LRAS), then the …
A look at the advantages and benefits of free trade. Readers Question: Why isn’t trade among countries like a game with some winners and some losers? Often in the political world, trade is seen as a game of tit for tat. e.g. the US places tariffs on imports of Chinese chickens; China retaliates by placing …
Readers Question: Identify and explain clearly the determinants of a nation’s productive capacity. How does the concept of productive capacity differ from a nation’s actual GDP? A production possibility frontier shows potential output. Here an investment in capital goods enables the PPF curve to shift to the right. Factors that affect productive capacity A nation’s …
Readers Question: Is rise in prices a reflection of economic growth? A sustained rise in prices is known as inflation. A large rise in prices / higher inflation rate is often caused by economic growth. However, there are also occasions, when we can get inflation despite weak or negative economic growth. Inflation caused by economic …
Say’s law states that the production of goods creates its own demand. In 1803, John Baptiste Say explained his theory. “It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value.” (J. B. Say, 1803: …
Due to lack of space in the book, we have published full bibliography on this website. Bibliography Chapter 1 Is it OK to be selfish? Frank, R H (1988) Passions Within Reason: The Strategic Role of the Emotions, p. xi. New York: W W Norton & Co. Galbraith, J K (1982) “Recession economics”, The New …
Voluntary unemployment is defined as a situation where the unemployed choose not to accept a job at the going wage rate. Reasons for voluntary unemployment Generous unemployment benefits, which make accepting a job less attractive. High marginal tax rates, which reduce effective take home pay. Unemployed hoping to find a job more suited to skills/qualifications. …