- Long-run economic growth is caused by any improvements to the determinants of long-run aggregate supply
- This is illustrated on an AD/AS diagram by a rightward shift in the LRAS
- This represents a change to the normal production output of an economy
Diagram: Long-run Economic Growth Using AD/AS
Long-run economic growth occurs through an increase in the long-run aggregate supply (LRAS) of the economy
Diagram analysis
- A change to the quantity/quality of the factors of production has increased potential output of the economy from YFE→YFE1
- E.g. More rigorous competition policy creates a higher number of firms in each industry, leading to greater aggregate supply in the economy
- This shifts the long-run aggregate supply curve to the right (LRAS1→LRAS2), resulting in economic growth
- The final impact on price levels depends on the shape of the long-run aggregate supply curve (Keynesian or Classical)
- Long-run economic growth can also be illustrated using the PPC model through a shift outwards of the entire curve
- The entire PPC of an economy can shift inward or outward, thereby changing its production possibilities
- An outward shift demonstrates long-term economic growth
Diagram: Long-term Economic Growth Using a PPC
Outward shifts of a PPC show long-run economic growth
Diagram analysis
- Economic growth occurs when there is an increase in the productive potential of an economy
- This is demonstrated by an outward shift of the entire curve
- More consumer goods and more capital goods can now be produced using all of the available resources
- This shift is caused by an increase in the quality or quantity of the available factors of production
- One example of how the quality of a factor of production can be improved is through the impact of training and education on labour. An educated workforce is a more productive workforce and the production possibilities increase
- One example of how the quantity of a factor of production can be increased is through a change in migration policies. If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase