National Income, economic growth and the economic cycle

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National Income

  • The main purpose of the economic activity is to improve economic welfare and people's standards of living. This requires increased levels of consumption of material goods and services. In turn this requires the economy to produce higher levels of output or national income

- National captial stock - the stock of natural resources and captial goods accumluate from previous production
- Stock of human capital - the skills of the working population

National income is the flow of new output produced in a particular period by combining the economy's stocks of physical and human capital
This flow of output can be measured by:

  • National output
  • National income
  • National expenditure
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Economic growth

  • The increase in the potential level of real output the economy can produce over a period of time, such as a year
  • this is the long-run economic growth- increases total productive capacity
  • whereas short-run - makes use of spare capacity and takes up the slack in the economy
  • Economic growth requires the stock of physical capital to grow in size and for its quality to improve

Causes of economic growth

  • investment in both physical and human capital
  • techinal progress
  • growth of the working population

Net investment enlages the stocks of capital, while techinal progress leads to better quality capital replacing capital goods that have become obsolete or out of date.
This also leads to higher labour productivity which is another feature of growth.

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Actual growth and the economic cycle

  • distinguishing between long-run and short-run economic growth

Output gaps and the economic cycle (diagram)

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