Economic growth

What is economic growth?

A long term expansion of a country’s productive potential

How is short term growth measured?

By the annual % change in real national output

What causes a change in real national output?

• The level of aggregate demand

• Shifts in SRAS

How is long term growth shown?

By the increase in trend or potential GDP

How is a change in long term growth illustrated?

An outward shift in a country’s long term aggregate supply curve (LRAS)

How is an increase in long run aggregate supply illustrated?

An outward shift in the PPF

What does a PPF show?

The maximum output combinations of two goods and services in an economy can achieve when all its resources are fully/efficiently employed

How does a rise in a nations productive capacity effect the PPF?

Causes the PPF to shift outward, allowing increased supply of consumer and capital goods

What are the main driver of economic growth?

• Growth in the quality of labour (human capital)

• Rising demand for goods and services - led by domestic demand/external trade

• Growth in the size of the active labour force available for production

• Tech progress and innovation driving productivity improvements i.e. higher GDP per hour worked

• Growth in physical capital stock- leading to a rise in capital per employee (capital deepening)

Advantages of economic growth

1) Higher living standards

i.e. an increase in real income per head of the population

2) Employment effects

Growth stimulates jobs to help new people as they enter the labour market

3) Fiscal dividend

Sustained GDP growth boosts tax revenues and provides the government with extra money to improve public services such as education and healthcare

4) Investment - the accelerator effect

Rising demand and output encourages investment

5) Consumer and business confidence

Growth has a positive impact on business profits and confidence, a stronger economy will help to persuade consumers to make major purchases

6) Help protect the environment

Such as low carbon-investment, innovation and research and development, resulting in a more efficient production process to reduce costs

Circle of economic growth

• HIgher output

• Increased investment

• Higher productivity

• Increased wages

• Rising consumer demand

Benefits from growth driven by tech change

1) Productivity growth

• Increase in GDP per worker

• Lower unit costs

• Higher wages

• Higher profits

2) New goods and services

• Lower real prices

• Consumer welfare gains

• Improved living standards

3) Improved health

• Healthy life expectancy rises

• Labour force expands

• Increased productivity

Disadvantages of economic growth

1) Inflation risk

If demand races ahead of aggregate supply = higher prices

2) Working hours

Fears a fast growing economy places increasing demand on the hours that people work

3) Environmental concerns

Fast growth can create negative externalities, leads to a huge increase in household and industrial waste which causes external costs for society

What is a consequence of growth that lead to environmental damage?

Lower the sustainable rate of growth