Economic Growth

Economic growth means an increase in real GDP. This increase in real GDP means there is an increase in the value of national output / national expenditure.

Economic growth is an important macro-economic objective because it enables increased living standards and helps create new jobs.

economic growth

Source: ONS

Definitions

Causes of economic growth

Economic growth is caused by two main factors

  1. Increase in aggregate demand (AD=C+I+G+X-M)
  2. Increase in aggregate supply (increase in capital, investment, higher labour productivity)
  3. See more on causes of economic growth

Diagram showing Long Run Economic Growth

asad

Policies to increase economic growth

  1. Supply Side Policies – government attempts to increase productivity and increase efficiency in the economy. The aim is to shift LRAS to the right.
  2. Monetary policy – Reducing interest rates to stimulate economic activity and increase AD.
  3. Fiscal policy – Higher government spending and / or cutting taxes to boost aggregate demand

 

Benefits of economic growth

  1. Higher incomes
  2. Increased tax revenue for government which can be spent on public services, e.g. education and health care
  3. Helps create employment
  4. See more at: Benefits of economic growth

 Potential costs of economic growth

  1. Inflation. If growth is too fast, we could experience inflation.
  2. Current account deficit. If growth is unbalanced, we could see a growing current account deficit.
  3. Environmental costs. Economic growth leads to higher resource consumption and pollution.
  4. See more at: Costs of Economic Growth

 

 

Long run trend rate of economic growth

real-gdp-trend-actual

The average sustainable rate of growth over a period of time

 

Recessions

A period of negative economic growth, where output falls for two consecutive quarters.

 Essays on economic growth