2.5 Economic Growth

Question 1

Actual growth

Answer 1

The increase in real GDP

Question 2

Potential growth

Answer 2

Shows how much the economy could produce if there was full employment of all resources in the economy. (Reflected in changes in LRAS)

Question 3

Causes of economic growth

Answer 3

For economic growth to occur, there need to be an increase in quality or quantity of one of the four factors of production, or these being used more efficiently.

• Discovery of new resources:
• Size of workforce: Changes in the size of workforce can come from immigration, demography (age profile) of the country or participation rates.
• Quality of the workforce: Can be done through education/training. Improved education will improve labour quality as it will mean that workers have all the skills they need and are more efficient, so output per worker increases. More skilled workers will be able to contribute to change i.e. new technology, business ideas, innovation etc.
• Increase in investment: caused by, for example, increased confidence, lower interest rates.
• Technological progress: Improved technologies mean that average cost of production is lower, whether this is because it is quicker to produce or less labour/equipment is needed. Also it creates new products for the market and this helps increase consumption.