Economic growth and sustainability
Growth and the output gap
- actual growth = the real rise in output; potential growth = a rise in capacity.
- the output gap = actual output − potential output:
- positive gap (actual above potential) → tends to cause inflation,
- negative gap (actual below potential) → spare capacity and unemployment.
Practice
A positive output gap (actual output above potential) tends to cause:
When the economy runs above capacity, demand pressure pushes prices up (inflation).
Practice
A negative output gap means there is spare capacity and unemployment.
Actual output below potential leaves resources idle — spare capacity and unemployment.
Sustainability
- Sustainable growth meets today's needs without harming future generations.
- Fast growth can use up non-renewable resources and cause pollution.
- So a country must weigh growth today against the environment and resources of tomorrow.
Practice
Sustainable growth means meeting today's needs without:
Sustainability balances current growth against the environment and future resources.
You've got it
Key idea
- actual vs potential growth; the output gap = the difference
- a positive gap → inflation; a negative gap → spare capacity + unemployment
- sustainable growth balances today's needs with the future's