Topic 2: Economic Growth and Economic Cycle
ECONOMIC GROWTH
Definition
Economic growth is an increase in the real GDP / NY /NO of the economy.
Economic growth rate formula :
[ (New growth rate – Old growth rate) / Old growth rate ] x 100
- Always expressed in percentage change.
Causes of economic growth
Types of economic growth:
● Short Run Economic Growth
- SR growth is the percentage increase in a country's real GDP and it is usually
measured annually. It is caused by increases in AD or SRAS.
An increase in AD will be caused by demand-side factors. For example:
- Lowering interest rates encourages investment and increases consumption.
- Increasing welfare benefits increases government spending and consumption.
Any factor which reduces production costs will cause an increase in SRAS. For example:
- A fall in the price of oil will reduce production costs and increase SRAS.
- A fall in wages will reduce production costs and increase SRAS.
How could you show SR economic growth on a graph?
Movement inside the PPC towards the PPC curve
Shift of AD or SRAS outwards (to the right)
, Graphs
● Long run Economic Growth
- LR growth occurs when the capacity of the economy is increasing and it refers to the
trend rate of growth/ growth in productive potential in an economy over time.
What is the cause ?
Increase in LRAS - due to a rise in the quality or quantity of the factors of production
For example:
- Increasing spending on education and training to improve human capital.
- Through innovation — e.g. new technology
- Investing in more modern machinery (i.e. improving capital stock).
- Raising agricultural output by using genetically modified (GM) crops.
- Increasing the population size, e.g. by encouraging immigration, to increase the size
of a country’s workforce.
How would you show LR economic growth on a PPC ?
Shift of the PPC
Graphs:
ECONOMIC GROWTH
Definition
Economic growth is an increase in the real GDP / NY /NO of the economy.
Economic growth rate formula :
[ (New growth rate – Old growth rate) / Old growth rate ] x 100
- Always expressed in percentage change.
Causes of economic growth
Types of economic growth:
● Short Run Economic Growth
- SR growth is the percentage increase in a country's real GDP and it is usually
measured annually. It is caused by increases in AD or SRAS.
An increase in AD will be caused by demand-side factors. For example:
- Lowering interest rates encourages investment and increases consumption.
- Increasing welfare benefits increases government spending and consumption.
Any factor which reduces production costs will cause an increase in SRAS. For example:
- A fall in the price of oil will reduce production costs and increase SRAS.
- A fall in wages will reduce production costs and increase SRAS.
How could you show SR economic growth on a graph?
Movement inside the PPC towards the PPC curve
Shift of AD or SRAS outwards (to the right)
, Graphs
● Long run Economic Growth
- LR growth occurs when the capacity of the economy is increasing and it refers to the
trend rate of growth/ growth in productive potential in an economy over time.
What is the cause ?
Increase in LRAS - due to a rise in the quality or quantity of the factors of production
For example:
- Increasing spending on education and training to improve human capital.
- Through innovation — e.g. new technology
- Investing in more modern machinery (i.e. improving capital stock).
- Raising agricultural output by using genetically modified (GM) crops.
- Increasing the population size, e.g. by encouraging immigration, to increase the size
of a country’s workforce.
How would you show LR economic growth on a PPC ?
Shift of the PPC
Graphs:
