Causes of Growth (Edexcel A Level Economics A)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Causes of Economic Growth
Economic growth can occur in the short-run or long-run and each is explained differently
Short-run economic growth
Changes to any of the components of aggregate demand (AD) will cause short-run economic growth to occur
This is illustrated on an AD/AS diagram by a rightward shift in AD
It can also be illustrated by using the production possibilities frontier model by moving from a point inside the curve to a point closer to the curve
1. Short-run economic growth on AD/AS diagram
Diagram analysis
An increase in consumption, investment, government spending or net exports has caused a shift in AD from AD→AD1
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-run growth has led to an increase in average prices from AP1→AP2
2. Short-run economic growth on Production Possibilities Frontier (PPF)
Diagram analysis
An increase in production 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
Long-run or potential economic growth
Long-run economic growth is caused by any improvements to the quality or quantity of the factors of production
These factors include all of the determinants of long-run aggregate supply
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)
Actual & Potential Growth
Actual economic growth occurs when there is an increase in the quantity of goods/services produced in an economy in a given period of time
This is often measured by the percentage change in real gross domestic product (GDP)
Potential growth is the increase in the productive potential of an economy as demonstrated by a shift outward of the production possibilities frontier (PPF) or the long-run aggregate supply (LRAS) curve
At any given point in time, the actual economic growth may be less than the potential growth available to the economy
International Trade & Export-led Economic Growth
International trade is an important source of income for many countries
Export-led economic growth refers to growth that occurs as a result of an increase in the sale of goods/services to foreign countries
Net exports (X-M) is a component of aggregate demand (AD)
For many developing countries, the exports represent a high percentage of the annual AD and gross domestic product (GDP)
When the value of the exports rise, the real GDP rises significantly - and vice versa
E.g. China experienced significant export-led economic growth from 1988 to the global financial crisis of 2008
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