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

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

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 Tips and Tricks

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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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.