Key Terms
Economic Growth: Increase in the productive potential of the economy.
Spare capacity: Factors of production (land, labour or capital) that are not utilised to the maximum level.
Spare capacity: Factors of production (land, labour or capital) that are not utilised to the maximum level.
Theory
What is Economic Growth?
Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth is measures by Gross Domestic Product (GDP) which allows economic growth to be compared between countries.
Achieving sustainable economic growth is on of the U.K's governments macro economic objectives.
Types of Economic Growth
Short-run Economic Growth
Short-run economic growth is achived by an increase in a component of aggregate demand (C+I+G+X-M). Growth will only arise if there is spare capacity in the economy. Short-run economic growth is measure by annual % change in real national output (GDP).
Long-run Economic Growth
Long-run economic growth is the more important form of economic growth and is achieved by increasing the quantity and quality of factors of production therefore increasing the productive potential of the economy. Long-run economic growth is measured by trend or potential GDP.
Key drivers of long-run economic growth include:
Advantages of Economic Growth
1) Reduced unemployment
Both short-run and long-run growth reduces unemployment. For example in the short-run an increase in aggregate demand causes firms to increase production. In order to meet their desired level of production, firms must employ more labour.
2) Government Revenue
As growth results in increased employment, this also mean's that more people are earning income. Therefore less people are dependent of government welfare and more people are available to pay tax.
Both short-run and long-run growth reduces unemployment. For example in the short-run an increase in aggregate demand causes firms to increase production. In order to meet their desired level of production, firms must employ more labour.
2) Government Revenue
As growth results in increased employment, this also mean's that more people are earning income. Therefore less people are dependent of government welfare and more people are available to pay tax.
Disadvantages of Economic Growth
1) Negative Externalities
When economics growth takes place, firms seek to increase production. Over exploitation of resources such as land in order to expand production can have serious long-term draw backs in the form of negative externalities such as pollution and degredation.
2) Inflation (Short-run)
In the short-run an increase in aggregate demand causes an increase in the price level (inflation). This is a problem if there is a lack of spare capacity in the economy. If the economy is at full capacity then any further increase in AD will only have inflationary consequences.
When economics growth takes place, firms seek to increase production. Over exploitation of resources such as land in order to expand production can have serious long-term draw backs in the form of negative externalities such as pollution and degredation.
2) Inflation (Short-run)
In the short-run an increase in aggregate demand causes an increase in the price level (inflation). This is a problem if there is a lack of spare capacity in the economy. If the economy is at full capacity then any further increase in AD will only have inflationary consequences.