Causes of Economic Growth

Recent Economic Growth in UK

economic growth

Economic growth is measured by the % change in real GDP

 

Demand Side Causes

In the short term, economic growth is caused by an increase in AD. If there is spare capacity in the economy then an increase in AD will cause a higher level of real GDP.

AD= C + I + G + X- M

Graph Showing Increase in AD

ad

AD can increase for the following reasons:

econ-growth

Base rates cut to 0.5% to try and stimulate economic growth.


2. Long Term Economic Growth.

This requires an increase in the Long Run Aggregate Supply as well as AD.

Diagram showing Long Term Economic Growth

asad

 

LRAS or potential growth can increase for the following reasons:

  1. Increased capital. E.g. investment in new factories or investment in infrastructure, such as roads and telephones.
  2. Increase in working population, e.g. through immigration, higher birth rate.
  3. Increase in Labour productivity, through better education and training or improved technology.
  4. Discovering new raw materials.
  5. Technological improvements to improve the productivity of capital and labour e.g. Microcomputers and the internet have both contributed to increased economic growth.

 

 Graph Showing Annual Growth in UK

In 2009, the sharp fall in Real GDP (negative economic growth) was caused by:

See also: Factors affecting Economic Growth in UK

Different Views on Economic Growth

Classical Economists argue that an increase in AD will only increase Real GDP in the short term. They argue that the LRAS is inelastic therefore higher AD only causes inflation. Classical economists stress the role of supply side policies in increasing economic growth.

This is disputed by Keynesians. They believe the LRAS can be elastic, e.g. in a recession.

Related

Essays and Revision Notes on Economic Growth