Economic Growth
- Economic growth is the increase in real GDP over time
- Growth can be represented using a PPC or an AD/AS diagram.
- In a PPC diagram it is shown as a point within the PPC curve moving closer to the edge of the PPC curve.
- In a neoclassical diagram, it is shown
- Short-term growth is an increase in actual output while long-term growth is an increase in potential output.
- An increase in potential output can be shown as:
- The PPC curve shifting outwards on a PPC diagram.
- The LRAS curve shifting to the right on a neoclassical AD/AS diagram.
- The AS curve shifting to the right on a Keynesian AD/AS diagram.
Economic Growth on a PPC Diagram
Short-Term Actual Growth
- A movement from a point inside the PPC curve to a point on the PPC curve represents actual growth.
- Actual growth is when growth or efficiency is achieved by making better use of existing resources.
Long-Term Potential Growth
- An increase in the maximum amount that can be produced is potential growth.
- Potential growth results in a shift of the PPC.
- A few things can cause the shift of the PPC curve.
- Shifters of the PPC curve are:
- Change in quantity or quality (productivity) of factors of production
- Improvements in technology
Economic Growth on an AD/AS Diagram
Short-Term Actual Growth
- A movement of the AD curve from a deflationary situation to an equilibrium along the LRAS curve.
- Alternatively SRAS could also move from a deflationary situation to an equilibrium along the LRAS curve, although this occurs less often.
Long-Term Potential Growth
- The LRAS curve shifts to the right, increasing the potential size of the economy.
- Ideally, AD or SRAS shift to meet up at the LRAS curve later on.
Affect on Inflation
- Long-term economic growth reduces the pressure on inflation.
- If LRAS shifts to the left, the new equilibrium with AD will be at a lower price level.
- This is called "good deflation" as there is still economic growth, and it can help somewhat offset inflation of prices in the long run.
Formulae
- Economic growth rate: (new RGDP - old RGDP)/old RGDP * 100%
- Economic growth rate is calculated the same way as inflation rate and is always compared to the previous year.
Consequences of Economic Growth
Impacts on Living Standards
Positive
- An increase in RGDP typically leads to an increase in people's income leading to better living standards.
- Advancements in areas such as medicine, household appliances, computers, transportation, entertainment and energy transition.
- Higher incomes resulting in higher tax revenues could lead to more merit goods and public goods and redistribution of income.
- These factors all help reduce reduction of income inequalities.
- Higher national income, higher levels of education and greater demands for freedom and democracy.
- An increase in RGDP is needed to support a growing population.
Negative
- As people might be working harder to earn a higher income, they might be sacrificing leisure time, and neglecting personal relationships.
- Preoccupation with greater material wants might make people less happy.
- International indicators of happiness and well-being are not always directly related to national income.
- Structural (sector) change in economy from agriculture to industry and services lead to structural unemployment.
- Skill mismatch and outsourcing to lower wage countries are the main factors leading to structural unemployment.
Environmental Impact
- If economic growth is the primary concern of a country, sustainability is typically pushed to the side.
Income Equality and Distribution
- Depending on the status of wealth and income quality in a country, economic growth may only help certain groups of individuals such as the wealthy and elite while actually harming low-income earners.