2.5.1 Causes of growth

How does economic growth occur?

Economic growth occurs due to an improvement in the quantity or quality of one of factors of production, or an increase in the efficiency of the way they are used.

Factors which cause economic growth

Improving the labour force, with a better quality due to higher education. A larger labour force. This may due to migration, birth rates, or improved participation rates. Improved technology, which is more productive. Means resources are used more efficiently.

The distinction between actual and potential growth

Actual growth is the percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD.

Potential growth is the long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed

The importance of international trade for (export-led) economic growth

Many economists argue that AD can affect economic growth, through export-led growth: a rise in AD through increased exports. This has been effective in countries such as Germany, Japan and china and prevents the poor balance of payments that tend to occur as a result of economic growth.