3.5.1

Causes of Economic Growth

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What is Economic Growth?

Economic growth is a rise in the real value of goods and services being produced in a given period of time.

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Short-run economic growth

  • Short run economic growth can be measured by the annual percentage change in real GDP.
  • It can be shown on an AD/AS diagram by a rightwards shift of Aggregate Demand.
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Factors causing short-run growth

  • Short-run economic growth can be caused by a number of factors.
  • Anything that causes Aggregate Demand to rise (discussed in the AD section), will cause short-run economic growth.
  • The components are Consumption, Investment, Government Spending, Exports and Imports.
  • Apart from imports, if any of these components of aggregate demand rise, so will short-run economic growth.
  • Because imports are a leakage, and the money goes abroad, this component has to fall to raise Aggregate Demand.
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Long-run economic growth

  • Long-run economic growth can be caused by factors that serve to increase the Long Run Aggregate Supply:
    • An increase in the quantity of factors of production e.g. more labour from immigration.
    • An increase in capital for higher investment from firms e.g. because of lower corporation taxes.
    • An increase in the quality of the factors of production e.g. better training and education programmes, more investment in research and development, improvements in productivity of the factors of production.
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Actual vs. Potential

  • Economic growth can be measured through two measures:
  • Actual:
    • The % increase every year in GDP.
    • Driven by rising AD.
  • Potential:
    • How much the economy could grow.
    • National output if the economy was operating at full employment.
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Export Led Growth

  • Economic growth can be led by selling more exports to foreign countries.
    • This improves the net trade component of AD.
  • China is a very good example of an economy that has grown through exports.
  • Export-led growth is considered a good way for developing countries to establish themselves.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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