Edexcel A-Level Economics A (9EC0) · Theme 2
Specification points
- Causes of growth: actual and potential growth; the output gap.
- The economic (business) cycle.
- The benefits and costs of growth.
Actual and potential growth
- Actual growth is the real increase in GDP — shown by a shift in AD within capacity, or an outward shift of LRAS.
- Potential growth is the increase in productive capacity — an outward shift of the PPF or LRAS, driven by more/better factors of production.
The output gap
The output gap is the difference between actual and potential (trend) output:
- A positive output gap — actual output above trend — signals an overheating economy and inflationary pressure.
- A negative output gap — actual output below trend — signals spare capacity and unemployment.
Key definitions
| Term | Definition |
|---|---|
| Actual growth | The real increase in output (GDP). |
| Potential growth | The increase in the economy's productive capacity. |
| Output gap | The difference between actual and trend output. |
| Business cycle | Fluctuations in output around the long-term trend. |
The economic cycle
The business cycle has four phases — boom, downturn, recession and recovery. In a boom, growth and inflation are high and unemployment low; in a recession, output falls and unemployment rises.
Benefits and costs of growth
| Benefits | Costs |
|---|---|
| Higher incomes and living standards | Demand-pull inflation |
| More employment | Environmental damage; resource depletion |
| More tax revenue for public services | Inequality may widen |
Growth raises incomes and jobs but can bring inflation, inequality and environmental costs.
Worked example
Sustained investment in skills and technology shifts LRAS right (potential growth), while strong consumer confidence raises AD (actual growth). If actual output rises faster than capacity, a positive output gap opens and inflation accelerates — so the *sustainability* of growth matters, not just its rate.
Common exam mistakes
- Confusing actual growth (AD within capacity) with potential growth (LRAS/PPF shift).
- Getting the output gap sign wrong.
- Listing benefits without costs.
Exam technique
Distinguish actual from potential growth with diagrams, use the output gap to judge inflationary pressure, and evaluate growth by its sustainability and distribution.
Quick revision
- Actual growth = AD within capacity; potential = LRAS/PPF shift.
- Positive output gap → inflation; negative → spare capacity.
- Cycle: boom, downturn, recession, recovery.