Cyclical and structural budget deficits and surpluses
A budget deficit has two parts: one that shrinks automatically as the economy grows (cyclical), and one that persists even in good times (structural). Governments must tackle them differently.
Formula
Budget Deficit = Cyclical Deficit + Structural Deficit
Real World
During the COVID-19 recession in 2020, the UK deficit ballooned to over £300bn — much of this was cyclical (collapsing tax receipts, rising furlough payments) but economists warned a large structural portion remained even once growth returned.
Exam Focus
If asked why austerity alone cannot eliminate a deficit, use the cyclical/structural distinction — automatic stabilisers will shrink the cyclical part themselves.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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