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

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
       

    

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
     

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