Economic growth Flashcards
what is short run economic growth ?
Short-run growth is growth that occurs as a result of using existing resources more efficiently
Short-run growth is usually driven by changes in aggregate demand and is referred to as demand-side growth
Short-run growth can also be driven by changes in the factors that influence short-run aggregate supply, leading to supply-side growth
what is long run economic growth ?
Long-run growth occurs when there are sustained improvements in the quantity or quality of the factors of production, leading to an increase in the production of goods and services over a period of time
This growth is driven by factors such as technological advancements, investment in human capital, capital accumulation, institutional and policy factors, population growth, and research and development
what will cause short run demand side growth
Changes to any of the components of aggregate demand (AD) will cause short-run economic growth to occur
Demand-side growth can be illustrated by using the production possibilities curves model. Growth occurs when there is a movement from a point inside the curve to a point closer to the curve
Demand-side growth can also be illustrated on an AD/AS diagram through a rightward shift in AD
draw short run economic growth on a ppc
daigram analysis
Economic growth in the short run involves using more of the available resources (the factors of production)
As the economy is operating below full potential, there is spare capacity available
If the economy is operating inside the curve, there is room for growth without the need for additional resources
This is seen as movements within the Production Possibilities Frontier
An increase in output has caused a shift in production combinations from X→Y
The current real output has increased, moving closer to the maximum possible output of the economy
This represents an increase in real GDP
An increase in real GDP = economic growth
draw a diagram showing short run economic growth using AD/ AS
Diagram analysis
Diagram analysis
An increase in consumption, investment, government spending or net exports has caused a shift in AD from AD →A D1
The current real output has increased from Y1 → Y2 which represents an increase in real GDP
An increase in real GDP = economic growth
This short-term growth has led to an increase in average prices from AP1 → AP2
how is short run supply side growth caused ?
Short-run supply side growth is caused by anything that shifts the SRAS curve in an economy
E.g. A fall in the costs of production, a decrease in taxes, or an increase in the level of subsidies
It effectively creates a condition of excess supply in the economy
Average price levels fall
National output (rGDP) increases
short run supply side growth diagram
diagram analysis
Diagram analysis
The initial macroeconomic equilibrium is at AP Y
Any factor which causes an increase in the SRAS will result in the SRAS curve shifting right from SRAS → SRAS1
This shift causes a fall in average price levels from AP → AP1
The new macroeconomic equilibrium is now at AP1 Y1
Short-run supply-side growth has occurred
what are the causes of long run economic growth ?
Long-run economic growth is caused by any improvements to the determinants of long-run aggregate supply
This is illustrated on an AD/AS diagram by a rightward shift in the LRAS
This represents a change to the normal production output of an economy
long run economic growth using AD/AS
Diagram analysis
A change to the quantity/quality of the factors of production has increased potential output of the economy from YFE→YFE1
E.g. More rigorous competition policy creates a higher number of firms in each industry, leading to greater aggregate supply in the economy
This shifts the long-run aggregate supply curve to the right (LRAS1→LRAS2), resulting in economic growth
The final impact on price levels depends on the shape of the long-run aggregate supply curve (Keynesian or Classical)
Long-run economic growth can also be illustrated using the PPC model through a shift outwards of the entire curve
The entire PPC of an economy can shift inward or outward, thereby changing its production possibilities
An outward shift demonstrates long-term economic growth
long term economic growth using a ppc
digram analysis
Economic growth occurs when there is an increase in the productive potential of an economy
This is demonstrated by an outward shift of the entire curve
More consumer goods and more capital goods can now be produced using all of the available resources
This shift is caused by an increase in the quality or quantity of the available factors of production
One example of how the quality of a factor of production can be improved is through the impact of training and education on labour. An educated workforce is a more productive workforce and the production possibilities increase
One example of how the quantity of a factor of production can be increased is through a change in migration policies. If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase
