2.5 economic growth

Economic growth

An increase in real GDP over time

Short-run economic growth

Increase in AD causing higher output within existing capacity

Long-run economic growth

Increase in productive capacity (LRAS shifts right)

Measure of growth

Percentage change in real GDP

Actual growth

Growth in current output (movement towards PPC)

Potential growth

Increase in maximum possible output (shift of PPC)

Output gap

Difference between actual and potential GDP

Positive output gap

Actual GDP > potential GDP (inflationary pressure)

Negative output gap

Actual GDP < potential GDP (spare capacity)

Causes of short-run growth

Increase in AD (C, I, G, X-M)

Causes of long-run growth

Increases in factors of production (land, labour, capital, enterprise)

Role of investment

Increases capital stock → boosts productivity and LRAS

Role of education and training

Improves human capital → increases productivity

Role of technology

Increases efficiency and productive capacity

Labour force growth

Increases productive potential of the economy

Productivity

Output per worker per hour

Why productivity matters

Higher productivity → higher economic growth

Benefits of economic growth

Higher living standards, more jobs, higher tax revenue

Economic growth and unemployment

Growth increases demand for labour → reduces unemployment

Economic growth and inflation

Fast growth may cause demand-pull inflation

Costs of economic growth

Environmental damage and resource depletion

Inequality and growth

Growth may not be evenly distributed

Sustainability

Meeting present needs without compromising future generations

Sustainable growth

Growth that does not cause environmental damage

Limits to growth

Lack of skills, low investment, poor infrastructure

Government policies to promote growth

Education, infrastructure, incentives for investment

Evaluation of growth

GDP may rise but living standards may not improve