Economic Terms

This is the average growth rate in real GDP over a period of time.

Below is an illustration of the theoretical growth rate for an economy in its economic cycle. This the level of GDP growth that a country should be achieveing if the peak and trough phases of the business cycle have been averaged out.

Between 1948 and 2012 the UK economy has achieved trend growth of 2.6% p.a. compound. The highest annual rate of growth was 7.4% in 1973 and the lowest was -5.2% in 2009.

This represents the difficult choice that all policymakers face when setting domestic policies. That is, many countries would consider it desirable to have a fixed exchange rate, capital mobility and monetary policy autonomy, butis it is only possible to achieve two of these objectives.

The diagram below illustrates the trilemma and the fact that policymakers face a trade-off between these policies and the optimal decision to make would be to sacrfice the least beneficial objective given their particular circumstances. The logic with the diagram is that the policy objective that a country decides to pick the opposite corner of the triangle to that objective mst be sacrificed whilst the two adjacent policies to this objective can be take on.

For instance if a country wanted to pursue a fixed exchange rate i.e. goal 1. Then they would have to sacrifice having a floating exchange rate whilst at the same time having to implement capital controls and losing their own monetary policy autonomy.

A sustained period of low economic growth which usually follows a recession and is usually associated with: