Causes & Consequences of Growth (Cambridge (CIE) O Level Economics)

Revision Note

Written by: Steve Vorster, Economics & Business Subject Lead

Reviewed by: Jenna Quinn, Head of New Subjects

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
  
  Any movement from Point E towards the PPC boundary represents actual economic growth and is caused by an increase in output (rGDP)

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

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

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

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

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.

Last updated: 27 June 2024

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