Growth

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.