Causes of Economic Growth
1. Growth Caused by a Change in Total Demand
- Actual economic growth occurs when there is an increase in the quantity of goods/services produced in an economy in a given period of time
- This is often measured by the percentage change in real gross domestic product (GDP)
- If any component of real GDP increases (consumption, investment, government spending, net exports), there will be an increase in total demand
Any movement from Point E towards the PPC boundary represents actual economic growth & is caused by an increase in output (rGDP)
Diagram Explanation
- Previously unused factors of production are now being employed
- This is demonstrated by a shift from inside the production possibilities curve (PPC) such as Point E, towards the boundary of the PPC
- At any given point in time, the actual economic growth may be less than the potential growth available to the economy
2. Growth Caused by a Change in the Quantity/Quality of Factors of Production
- Potential growth is the increase in the productive potential of an economy
- This occurs when there is an increase in the quantity or quality of the factors of production available in an economy
- 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
- Investing in new capital machinery increases the quality of capital
- Investing in new technology results in an improvement to productivity
Outward shifts of a PPC show economic growth caused by changes to the quantity/quality of the FOP
Diagram Explanation
- 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 represented by A
- More consumer goods & more capital goods can now be produced using all of the available resources