Economic Growth Cyclic Fluctuations

At this stage, it is useful for us to understand the difference between economic growth and cyclical fluctuations.

Economic Growth

Economic growth refers to the positive trend in the nations’ total real output or GDP over the long-run. It causes a gradual but continual rise in potential GDP. Every economy desires to accelerate the rate of economic growth because it means increase in real GDP is the main source of raising the stand of living of the people over the long-run.

LRAS cure, which is vertical, represents the potential GDP (Y*) where all the availed resources are fully utilized. Economic growth causes rightwards shift in the SRAS curve, indicating that the actual GDP which converges into potential GDP keeps on rising year by year. Hence the long-run is not a period in which everything settles down, because growth is a continuous process. The movement in LRAS cause a continuing movement in potential GDP (Y*)

Cyclical Fluctuations
 
Cyclical fluctuations or business fluctuations are the frequent changes in the level of business activates which repeat themselves after regular intervals. Cyclical fluctuations in GDP are caused by the demand and the supply shock which cause shifts in the AD and SRAS curves. As a result of the supply stocks, the actual GDP deviates temporarily from the potential GDP.

The demand shocks are caused by change in the private consumption spending, government expenditure and taxes, net export, etc. the supply shocks, on the other hand, are caused by changes in the input prices, including the wages of the workers and technological changes, which influence the productivity and efficiency of resources. The period of the cyclical fluctuations varies from one country to another and also from one year to another.  

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