Economic growth: Short run vs Long run

What is economic growth?

An increase in Real GDP in an economy in a year caused by an increase in AD or LRAS.

What is actual growth (short run)?

The annual percentage increase in an economy’s output.

What is real GDP?

The value of all goods and services produced in an economy within a specific time period.

What is actual growth represented by?

A rightward shift in the AD curve.

What are the causes of actual growth?

• Higher consumer spending

• Increased capital investment

• Rise in Gov spending

• Increased net exports

What is potential growth (Long run)?

The rate at which the economy’s potential output could grow as a result to changes in the economy’s capacity to produce goods and services.

What is potential growth represented by?

A rightward shift of the LRAS curve.

What are the causes of potential growth?

• Increased quantity of FOP, immigration/investment

• Investment in capital goods, subsidies

• Higher productivity, improvements in healthcare

What are the benefits of economic growth?

• Higher average living standards, growth of 3% doubles living standards in 24 years

• Economic development, higher tax rev

• Increase in capital investment, due to business confidence

What are the costs of economic growth?

• demand pull inflation, output gap will increase

• increased pollution, causing health problems

• increased wealth inequality

What demand side policies (actual growth) could the government introduce?

• Fiscal policy, cutting taxes

• Monetary policy, cutting interest rates

What supply side policies (Potential growth) could the government introduce?

• Privatisation

• Tax cuts

• improved education (interventionist)