Gerald .M Magembe
JF-Expert Member
- Jul 17, 2013
- 2,496
- 1,797
For a very long time, you guys who operate our economy have failed to follow these basic economic laws either deliberately or for lack of knowledge on how best the economy ought to have been substantially endured.
Long-run Equilibrium
Long-run aggregate supply represents the maximum output an economy can produce. Thus, if it reaches long-run equilibrium, the economy operates at potential output (full employment). All resources are fully utilized so that actual real GDP will equal potential GDP.
Real GDP rarely matches potential GDP because aggregate demand and short-run aggregate supply are continually changing. That causes the short-run equilibrium to fluctuate around the long-run aggregate supply curve (potential GDP). The deviation of actual real GDP from potential GDP (known as the output gap) forms the business cycle phase.
Two possible output gaps are a positive output gap and a negative output gap.
First, the positive output gap is also called the expansionary gap. In the business cycle, it usually occurs during the last phase of expansion.
In the curve, the positive output gap occurs when the short-run equilibrium point is to the right of the long-run aggregate supply curve. At that time, actual real GDP exceeds potential GDP.
A positive output gap shows you that aggregate demand exceeds long-run aggregate supply. In other words, the economy’s maximum capacity is insufficient to meet aggregate demand. It generates upward pressure on the price level.
To cover aggregate demand, the economy imports goods from abroad. Therefore, during this period, the trade balance will tend to be in deficit due to the high demand for imports.
Second, the negative output gap is also called the deflationary gap. Sometimes, economists call it the recessionary gap. As the name suggests, this usually occurs during a contraction or recession where there is downward pressure on the price level.
A negative gap means that actual real GDP is lower than potential GDP. The economy operates below its potential level. Some resources are idle, generating downward pressure on the price level in the economy. During this period, you will see the unemployment rate increase.
Also, the inflation rate slows down (disinflation) or may lead to negative (deflation). As a note to you. Although we call this period the deflationary gap, it does not always result in deflation. Downward pressure on the price level may result in a slower inflation rate (disinflation) than deflation.
Shifts in aggregate demand and aggregate supply
Aggregate demand will shift due to changes in:
Money supply
Tax
Government spending
Consumer and business confidence
Exchange rate
Global economic growth
Meanwhile, several factors shift the short-run aggregate supply, including:
Nominal wages
Raw material costs
Exchange rate
Business tax
Subsidy
Expectations of future prices and profits
Changes in the quantity and quality of production factors
Furthermore, long-run aggregate supply occurs to change only because of changes in production factors’ quantity and quality. It will increase when the amount of labour, natural resources, and capital increases. Also, the quality of human capital and technology contributes to increasing long-term aggregate supply by increasing economic productivity.
Lastly, Dr Mwigulu allows an open discussion on how best we can move from where we are today. We are interested factions since the economy is not doing well consequently our enterprises. This nation is for us all.
Long-run Equilibrium
Long-run aggregate supply represents the maximum output an economy can produce. Thus, if it reaches long-run equilibrium, the economy operates at potential output (full employment). All resources are fully utilized so that actual real GDP will equal potential GDP.
Real GDP rarely matches potential GDP because aggregate demand and short-run aggregate supply are continually changing. That causes the short-run equilibrium to fluctuate around the long-run aggregate supply curve (potential GDP). The deviation of actual real GDP from potential GDP (known as the output gap) forms the business cycle phase.
Two possible output gaps are a positive output gap and a negative output gap.
First, the positive output gap is also called the expansionary gap. In the business cycle, it usually occurs during the last phase of expansion.
In the curve, the positive output gap occurs when the short-run equilibrium point is to the right of the long-run aggregate supply curve. At that time, actual real GDP exceeds potential GDP.
A positive output gap shows you that aggregate demand exceeds long-run aggregate supply. In other words, the economy’s maximum capacity is insufficient to meet aggregate demand. It generates upward pressure on the price level.
To cover aggregate demand, the economy imports goods from abroad. Therefore, during this period, the trade balance will tend to be in deficit due to the high demand for imports.
Second, the negative output gap is also called the deflationary gap. Sometimes, economists call it the recessionary gap. As the name suggests, this usually occurs during a contraction or recession where there is downward pressure on the price level.
A negative gap means that actual real GDP is lower than potential GDP. The economy operates below its potential level. Some resources are idle, generating downward pressure on the price level in the economy. During this period, you will see the unemployment rate increase.
Also, the inflation rate slows down (disinflation) or may lead to negative (deflation). As a note to you. Although we call this period the deflationary gap, it does not always result in deflation. Downward pressure on the price level may result in a slower inflation rate (disinflation) than deflation.
Shifts in aggregate demand and aggregate supply
Aggregate demand will shift due to changes in:
Money supply
Tax
Government spending
Consumer and business confidence
Exchange rate
Global economic growth
Meanwhile, several factors shift the short-run aggregate supply, including:
Nominal wages
Raw material costs
Exchange rate
Business tax
Subsidy
Expectations of future prices and profits
Changes in the quantity and quality of production factors
Furthermore, long-run aggregate supply occurs to change only because of changes in production factors’ quantity and quality. It will increase when the amount of labour, natural resources, and capital increases. Also, the quality of human capital and technology contributes to increasing long-term aggregate supply by increasing economic productivity.
Lastly, Dr Mwigulu allows an open discussion on how best we can move from where we are today. We are interested factions since the economy is not doing well consequently our enterprises. This nation is for us all.
