How economic growth is affected by the business cycle and budget deficit.
Economic growth is the expansion or the outward shift of an economy’s production possibility frontier which leads to an up rise to the living standards and welfare of the economy,. economic growth is measured by real Gross Domestic Product (GDP), this being the value of total income earned by factors of production in an economy in a year / quarter. When all the factors of production of an economy are fully employed the value of the economy’s production is potential GDP, (Parkin et al, 2010: 442). Realistically real GDP fluctuates around the potential GDP in a business cycle and a business cycle is an unpredictable periodic yet uneven fluctuation of output in an economy. According to Lieberman and Hall (2009: 532) a business cycle is so due to the up and down movements of economic growth over time. Below is a typical illustration of a business cycle:
From the diagram the diagonal line illustrates potential GDP, As already mentioned and as can be seen on the above illustration real GDP fluctuates up and down along potential GDP. When real GDP is less than potential GDP this means there are resources that are lying idle i.e. unemployed labour and underutilised capital, in essence when GDP is greater than potential GDP this means resources are either over used or over utilised i.e. people are forced to work longer hours that they themselves are not willing to and capital is being used intensively, (Parkin et al, 2010: 442|). From the above illustration a trough is a turning point of expansion from a recession and a peak is a turning point to recession from expansion,). Recession being a period in which real GDP declines which therefore leads to a negative economic growth rate for the economy in question and the latter, expansion, is an increase in the total output (GDP) of an economy, which leads to a positive economic growth rate, (Parkin et al, 2010: 443). As already...
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