Causes of Economic Growth Flashcards
Short run v long run growth
Long run growth: an increase in potential output
Short run growth: an increase in real GDP, driven by an increase in AD
that draws unemployed resources into use.
Factors which cause short run economic growth
Any event or policy that increase components of AD stimulates an extension in AS and uses up some unemployed resources; movement from a point inside the economy’s PPF to a point on the PPF
Factors which cause long run economic growth
The productive potential of the economy increases if there is an
increase in:
* The quantity of the factors of production
* The quality of the factors of production
* There is a technological advance
There is an outward shift of the economy’s PPF or LRAS shifts right.
Examples could be:
Land (natural resources): finding and mining a new cobalt find;
reclaiming land from the sea; fertilising agricultural land
Labour/enterprise (human resources): immigration to increase
quantity and quality (filling in skills gaps); education & training
Capital (man-made resources): investment increases quantity but
also quality as new technology is integrated
Factors that can constrain growth
Some examples are: economic shocks
(e.g. pandemic, Brexit, financial crisis), poor macroeconomic management, political
instability, poor productivity growth, lack of investment, inadequate infrastructure
(transport, energy and communication networks), small export base/primary product
dependency, shortage of human capital, brain drain, poor access to finance, high
food prices, weak financial and legal institutions etc.
International trade and export-led growth
Export led growth: a significant part of the expansion of real GDP, jobs and per capita
incomes flows from successful exporting of goods and services
Exports are an injection into the circular flow and may also stimulate more
investment, another injection. Industries supporting the increase in exports e.g.
logistics will also grow (an export and investment multiplier effect)
Balanced growth
Balanced growth: when output and the capital stock grow at the same rate. Also
refers to balanced expansion of components of aggregate demand and/or the
different sectors in an economy
