Causes & Consequences of Growth (Cambridge (CIE) IGCSE Economics)

Revision Note

Causes of Economic Growth

1. Growth caused by a change in total demand 

  • 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)

    • If any component of real GDP increases (consumption, investment, government spending, net exports), there will be an increase in total demand
         

      Graph showing the Production Possibilities Frontier (PPF) with points A to F, where capital goods and consumer goods are on the vertical and horizontal axes, respectively.
      Any movement from Point E towards the PPC boundary represents actual economic growth and is caused by an increase in output (rGDP)

Diagram explanation

  • Previously unused factors of production are now being employed

  • This is demonstrated by a shift from inside the production possibilities curve (PPC) such as Point E, towards the boundary of the PPC

  • At any given point in time, the actual economic growth may be less than the potential growth available to the economy 

2. Growth caused by a change in the quantity/quality of factors of production 

  • Potential growth is the increase in the productive potential of an economy

  • This occurs when there is an increase in the quantity or quality of the factors of production available in an economy

    • 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

  • Investing in new capital machinery increases the quality of capital

  • Investing in new technology results in an improvement to productivity
       

Graph illustrating economic growth and decline with capital goods on the Y-axis and consumer goods on the X-axis. Arrow A shows decline, arrow B shows growth.
Outward shifts of a PPC show economic growth caused by changes to the quantity/quality of the FOP

Diagram explanation

  • 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 represented by A

    • More consumer goods and more capital goods can now be produced using all of the available resources 

The Consequences of Economic Growth

  • Economic growth is considered to be the main contributor to an improvement in the standards of living

  • Due to the negative aspects of economic growth, there is much controversy about maintaining it as a central macroeconomic aim

    • Instead, arguments for a focus on societal well-being are gaining traction

A Table Summarising the Benefits and Costs of Economic Growth

Benefits of Economic Growth

Costs of Economic Growth

  • Increased incomes lead to better standards of living

  • Rising total demand causes demand pull inflation and the purchasing power of people on fixed incomes may fall

  • Decreased levels of absolute poverty

  • Lack of equity in the distribution of income - the rich may get richer and the poor poorer

  • Improvement in the quality/quantity of environmentally friendly technologies

  • Environmental damage caused by negative externalities of production and consumption increases

  • Higher sales revenue for firms and greater profits

  • Increased inflation can harm export sales 

  • Increased investment by firms increases the potential output of the economy

  • The level of imports usually increases negatively impacting the current account

  • Reduced expenditure by governments on benefits

  • Increased income usually leads to greater consumption of demerit goods

  • Higher government tax revenue due to rising incomes and surging corporate profits

  • Greater output often requires more time from workers and can decrease leisure time and well-being

  • Increased employment resolves some of the negative social impacts of unemployment

  • Resources are depleted more rapidly 

Examiner Tip

Remember this distinction as MCQ often checks for this understanding:

Growth caused by a change in total demand is represented by a movement from within the existing PPC towards its boundary.

Growth caused by a change in the quantity/quality of the factors of production (supply-side growth) moves the entire PPC curve outwards.

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