2.5.1 Causes of growth Flashcards
Economic growth
Economic growth is defined as the expansion of the productive potential of the economy.
It can be depicted by an outward shift in PPF or an outward shift in a country’s LRAS curve. It is measured by the annual change in real GDP.
Factors which cause economic growth
Economic growth occurs due to an improvement in the quantity or quality of one of the factors of production, or an increase in the efficiency of the way they are used. For example:
o Improving the labour force,with a better quality due to higher education.
o A larger labour force. This may be due to migration, birth rates or improved participation rates.
o Improved technology, which is more productive. This means resources are used more efficiently.
o More investment, to fuel economic growth. More machinery can be bought, which will increase production.
o Discovering new resources, such as oil.
o Incentives for enterprise, such as tax breaks or subsidies.
Causes of growth synoptic point **
Decisions by individuals can affect economic growth, for example a firm’s decisions to increase investment can lead to growth. For this to happen, the decision must be undertaken by a number of individuals. One firms’ decision to invest is unlikely to have a significant impact, unless they are a very large firm undertaking vast investment.
Actual growth
The percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD.
Potential growth
The long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.
Importance of international trade for export led economic growth
Export led growth occurs when countries open up their economies to the international market. One of the most famous examples of this is China, which has had export led growth for many years.
- International trade is important for this. Countries can specialise where they have a comparative advantage, which increases world output and lowers average costs.
A country has comparative advantage when it can produce goods and services at a lower opportunity cost than another.
- It will initially increase AD, so will only bring about short term growth. However, it will encourage firms to invest and therefore bring about long term growth by improving the supply-side of the economy.
- It allows the government to bring about economic growth and high employment without seeing a current account deficit.
- Export led growth means the economy is unbalanced, since there is a surplus on the current account on the balance of payments. Whilst this means there are net injections into the economy, it is not necessarily sustainable. However, the growth in the economy may lead to an increase in imports which will balance the current account.
- Moreover, it means the country relies on the economic state of other countries, since these are the consumers of their goods and services. If there is a recession in a major export market, exports will fall and so will economic growth.
