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.
- Balanced growth – growth that is sustainable (avoiding booms and busts)
- Trade cycle – how economic growth can be cyclical – booms, busts, recovery.
- Long run trend rate of growth – average sustainable growth rate over a period of time
Causes of economic growth
Economic growth is caused by two main factors
- Increase in aggregate demand (AD=C+I+G+X-M)
- Increase in aggregate supply (increase in capital, investment, higher labour productivity)
- See more on causes of economic growth
Diagram showing Long Run Economic Growth
Policies to increase economic growth
- Supply Side Policies – government attempts to increase productivity and increase efficiency in the economy. The aim is to shift LRAS to the right.
- Monetary policy – Reducing interest rates to stimulate economic activity and increase AD.
- Fiscal policy – Higher government spending and / or cutting taxes to boost aggregate demand
Benefits of economic growth
- Higher incomes
- Increased tax revenue for government which can be spent on public services, e.g. education and health care
- Helps create employment
- See more at: Benefits of economic growth
Potential costs of economic growth
- Inflation. If growth is too fast, we could experience inflation.
- Current account deficit. If growth is unbalanced, we could see a growing current account deficit.
- Environmental costs. Economic growth leads to higher resource consumption and pollution.
- See more at: Costs of Economic Growth
Long run trend rate of economic growth
The average sustainable rate of growth over a period of time
A period of negative economic growth, where output falls for two consecutive quarters.
- The Great Depression 1929-1939
- Causes of Recessions
- Recession 1980-81
- Recession 1991-92
- Great recession 2008-13
Essays on economic growth