Use Edexcel IAL Economics 2.3.5.4c evidence to define a negative output gap and trace its effects on unemployment, inflation and government finances.
In Q1 2019 Brazil's output gap was estimated to be equal to -5.6% of GDP.
Explain one likely impact of a negative output gap on Brazil's economy.
Knowledge 1, Analysis 2, Application 1
Quantitative Skill assessed
QS2: Calculate, use and understand percentages, percentage
changes and percentage point changes
QS9: Interpret, apply and analyse information in written, graphical and tabular forms
Knowledge and Analysis 1 knowledge mark for understanding of a negative output gap, e.g.: when actual GDP is less than potential GDP (this may be shown via an accurately drawn/labelled diagram)
OR
1 knowledge mark for identification of one characteristic of a negative output gap (1)
Up to 2 analysis marks for development of the identified impact, e.g.:
- The government is likely to have a budget deficit (1) as government spending on means-tested/unemployment benefits is high (1) and tax revenue, e.g. income tax, is relatively low (1)
- There is likely to be unemployment (1) as some of the
labour factor of production is unemployed (1) leading to spare capacity (1)
- Low inflation/disinflation/deflation (1) as there is low cost- push inflationary pressure (1) because high levels of spare
labour reduce wage rates (1)
- Low inflation/disinflation/deflation (1) as there is less
demand-pull inflationary pressure (1) because AD is
Application
1 mark for appropriate reference to Brazil or another economy, e.g.:
- The size of Brazil's negative output gap was 5.6% of its GDP
in Q1 2019 (1)