Causes of Economic Growth

Economics: Edexcel A A Level, topic 3.5.1

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.

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.

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.

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.

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.

Which one of the following would NOT cause an increase in Long Run Economic Growth?
Which of the following cause an increase in Short Run Economic Growth?
Which of the following describes actual growth?