Unit 3.3(1) Macroeconomic objectives: economic growth

Economic growth

Increase in the country’s real GDP over a given time period

What is short run economic growth ?

Short run economic growth is an increase in actual output by better utilising existing resources moving the economy from a point inside the ppc closer to the curve

What do9es the PPC represent ?

Shows the maximum possible output combination of two goods an economy can produce using all available resources efficiently

What does the point inside the PPC represent ?

It represents inefficient use of resources or underutilisation of the economy’s capacity

What limits short-run economic growth ?

It is limited by fixed resources and technology the economy cannot produce beyond its current capacity in the short-run

How can short-run economic growth occur through AD?

An increase in AD causes firms to produce more and increasing real GDP or actual output

How does an increase in SRAS relate to short-run economic growth ?

When firms experience lower production costs, SRAS increases allowing firms to produce more at each price level which further raises actual output

What happened to resource utilisation during short-run economic growth ?

Firms use more of their available resources moving the underutilisation toward full employment of resources

What causes the PPC to shift outward (long run economic growth)

Improvement in technology increases in capital, labour force growth, or better skills cause an outward shift representing increased productive capacity

Long-run economic growth

Period in which price level in the economy and the cost of factors of production can change. In the long run economic growth occurs because of an increase in potential output

→ increase in economy’s capacity to produce

Actual output vs potential output

Actual : current real production level which can be below or above potential output

Potential: the economy’s maximum sustainable output at full employment and efficient resource use - resources are fully employed (in reality cannot achieve fully)

Long run output increase closer to PPC

The first PPC represents the current maximum potential output with existing resources and technology

The second PPC shows the increased productive capacity after long run growth

What causes long run economic growth ?

1. Increase in labour force

2. Improvements in skills education

3. More capital investment

4. Technology advancements

5. Better resource availability

How does long run economic growth differ from short run economic growth ?

Short run economic growth is an increase in actual output using existing resources better (movement inside PPC) while long run growth increases the economy’s capacity itself (PPC shifts outwards)

PPC and resource allocation

Ties buy showing the best possible ways to distribute limited resources between two types of production highlighting trade offs and efficiency

Benefits of economic growth

1. Household income

→ rising real GDP means increase in household income

2. Reduced levels of poverty

→ reduced levels of poverty when incomes start rising

3. Great availability of goods and services

→ economic growth means more is produced so more available to buy

4. Improved public services

→ firms and households earn more income and pay more direct taxes they also spend more and pay more indirect taxes (more gov revenue ) - public…

5. Greater employment

→ business output increases which means more jobs created

Costs of economic growth

1. Sustainability

→ can increase negative consumption and production externalities (negative for welfare of future generations )

2. Inflation

→ increase in real GDP that occurs because of an increase in aggregate demand will lead to an increase in the average price level in an economy. This may lead to an inflationary gap and demand-pull inflation when the economy is operating close to or at full employment.

3. Balance of payments current account deficit

→ rising household incomes, people will buy more goods and services, and a proportion of them will be imported