Y1 17) Causes of Economic Growth (Short Run and Long Run)

Summary

This script explores economic growth, distinguishing between short-run (actual) and long-run (potential) growth. Short-run growth, driven by increased aggregate demand, utilizes spare capacity to boost real GDP. Diagrams like the AD-AS and PPF illustrate this concept. Long-run growth, on the other hand, stems from an increase in productive capacity, shown by a rightward shift in the LRS curve or PPF. Factors like labor productivity, investment, infrastructure, competition, and resource discoveries contribute to this potential growth.

Takeaways

• 📈 Economic growth is defined as an increase in real GDP, which can be caused by an increase in aggregate demand (AD) or an increase in long-run aggregate supply (LRAS).
• 🔍 Short-run growth, or actual growth, occurs when there's an increase in AD, leading to the use of spare capacity in the economy to produce more goods and services.
• 📊 The AD-AS (Aggregate Demand-Aggregate Supply) diagram and the PPF (Production Possibility Frontier) diagram are two tools used to illustrate short-run growth.
• 🔑 Factors that can increase AD include lower interest rates, lower taxes, higher consumer or business confidence, higher government spending, and a weaker exchange rate.
• 🌱 Long-run growth, or potential growth, happens when there's an increase in LRAS, indicating an increase in the productive capacity of the economy.
• 🚀 The LRAS curve can shift to the right due to an increase in the quantity or quality of factors of production or an increase in productive efficiency.
• 🛠️ Investment in capital goods, infrastructure improvements, and increased competition can lead to a rightward shift in the LRAS curve, contributing to long-run growth.
• 🌐 New resource discoveries can also lead to an increase in LRAS by increasing the quantity of land, a factor of production.
• 🔄 The distinction between short-run and long-run growth is crucial for understanding the dynamics of economic expansion and the factors that drive it.
• 📚 Understanding the causes of both short-run and long-run growth is essential for policymakers and economists to make informed decisions and predictions about economic trends.

Q & A

What is economic growth?

Economic growth is an increase in real GDP in an economy within a year, caused by an increase in aggregate demand or an increase in the economy's productive capacity.

What are the two types of economic growth mentioned in the script?

The two types of economic growth are short-run growth (also known as actual growth) and long-run growth (also known as potential growth).

How is short-run growth represented in an AD-AS diagram?

Short-run growth is represented by a rightward shift of the aggregate demand curve, indicating the economy is using up spare capacity to increase output and real GDP, moving towards the full employment level of output (Y*).

What is the significance of a negative output gap in the context of short-run growth?

A negative output gap signifies that the economy is not operating at its full potential, and by increasing aggregate demand, the economy can use up spare capacity to produce more goods and services, leading to economic growth.

How can an increase in aggregate demand lead to short-run growth?

An increase in aggregate demand can lead to short-run growth by boosting consumer spending, investment, government spending, or net exports, which in turn increases the production of goods and services and real GDP.

What does long-run growth signify about an economy?

Long-run growth signifies that an economy's productive capacity has increased, meaning it has the potential to grow at a faster rate. It does not necessarily mean the economy is currently growing faster, but its potential for growth has increased.

How is long-run growth depicted in an AD-AS diagram?

Long-run growth is depicted by a rightward shift of the long-run aggregate supply (LRAS) curve, indicating an increase in the economy's productive capacity and potential output.

What are the three factors that can cause an increase in the LRAS curve?

The three factors that can cause an increase in the LRAS curve are an increase in the quantity of factors of production, an increase in the quality of factors of production, and an increase in the productive efficiency of the economy.

How does investment contribute to long-run growth?

Investment contributes to long-run growth by potentially increasing the quantity and quality of capital, as well as reducing long-run costs of production for firms, which can shift the LRAS curve to the right.

What role does infrastructure play in economic growth?

Infrastructure improvements can reduce long-run costs of production for businesses by making transportation of goods and services more efficient and by providing better access to raw materials. Physical infrastructure like schools and hospitals can also increase the quantity of capital, contributing to long-run growth.

How can competition in the economy lead to long-run growth?

Increased competition in the economy can lead to long-run growth by forcing firms to reduce their long-run costs of production to remain competitive, which can increase productive efficiency and shift the LRAS curve to the right.

Outlines

00:00

📈 Understanding Economic Growth

This paragraph explains the concept of economic growth, which is an increase in real GDP due to an increase in aggregate demand or productive capacity. It distinguishes between short-run growth, driven by aggregate demand, and long-run growth, driven by increases in productive capacity. The paragraph also introduces the use of diagrams such as the AD-AS and PPF to illustrate these concepts. Short-run growth is associated with using spare capacity in the economy, while long-run growth represents an increase in the economy's productive potential.

05:01

🚀 Factors Influencing Short-Run and Long-Run Growth

The second paragraph delves into the specific factors that can cause short-run and long-run growth. Short-run growth is influenced by changes in consumer spending, investment, government spending, and net exports, which are components of aggregate demand. Factors such as lower interest rates, tax reductions, and increased confidence can boost short-run growth. Long-run growth, on the other hand, is driven by increases in the quantity or quality of factors of production or improvements in productive efficiency. This can be due to higher labor productivity, workforce expansion, investment in capital goods, infrastructure improvements, increased competition, and the discovery of new resources. The paragraph emphasizes the importance of understanding these factors to predict and potentially influence economic growth.

Keywords

💡Economic Growth

Economic growth refers to an increase in real GDP over a year, signifying a rise in the production of goods and services within an economy. In the video, economic growth is central as it explains the two types of growth: short-run (actual) and long-run (potential). The script uses economic growth to discuss how an increase in aggregate demand or an increase in productive capacity can lead to higher GDP.

💡Aggregate Demand (AD)

Aggregate Demand is the total demand for all goods and services in an economy at a given time. It is a key driver of short-run economic growth as mentioned in the script. An increase in AD can lead to a higher real GDP, indicating that the economy is utilizing spare capacity to produce more goods and services, thus growing. The video explains how a shift in AD to the right on an AD-AS (Aggregate Supply) diagram illustrates this growth.

💡Real GDP

Real GDP is a measure of economic output that adjusts for inflation, providing a more accurate reflection of economic growth. The video emphasizes that an increase in real GDP is indicative of economic growth, as it shows the economy's ability to produce more goods and services without the distortion of price changes.

💡Short-run Growth

Short-run growth, also known as actual growth, occurs when there is an increase in aggregate demand, leading to the use of spare capacity in the economy to produce more goods and services. The video script explains this concept by discussing how a shift in AD can move the economy from a negative output gap towards the full employment level of output (Y*), thus increasing real GDP.

💡Long-run Growth

Long-run growth, or potential growth, is the increase in an economy's productive capacity, allowing it to grow at a faster rate. The video discusses how this is different from short-run growth, as it involves an increase in the productive potential of the economy, not just the utilization of existing capacity. Long-run growth is illustrated by a rightward shift in the long-run aggregate supply (LRAS) curve.

💡Productive Capacity

Productive capacity refers to the maximum output an economy can produce given its resources and technology. The video explains that long-run growth is associated with an increase in this capacity, which can be due to various factors such as increases in labor productivity, investment, or technological advancements.

💡Aggregate Supply (AS)

Aggregate Supply is the total amount of goods and services that firms in an economy are willing and able to produce at each price level. The video uses the concept of AS to explain how the economy's potential output can change over the long run, with a rightward shift in the LRAS curve indicating an increase in productive capacity.

💡Potential Output

Potential output is the maximum level of output that an economy can produce with its current stock of resources and technology without causing inflation. The video discusses how potential output is related to long-run growth, as an increase in potential output indicates an increase in the economy's productive capacity.

💡Output Gap

The output gap is the difference between the actual output of an economy and its potential output. In the video, a negative output gap is mentioned, which indicates that the economy is not producing at its full potential. Short-run growth can occur as the economy moves from inside the production possibility frontier (PPF) towards it, closing the output gap.

💡Production Possibility Frontier (PPF)

The PPF is a graphical representation that shows the maximum combinations of goods and services that an economy can produce with its resources and technology. The video uses the PPF to illustrate short-run growth, showing how an economy can move from inside the PPF towards it, indicating an increase in output as it uses up spare capacity.

💡Factors of Production

Factors of production are the inputs used in the production of goods and services, typically categorized as land, labor, capital, and entrepreneurship. The video discusses how an increase in the quantity or quality of these factors, or an improvement in their productive efficiency, can lead to long-run growth by shifting the LRAS curve to the right.

Highlights

Economic growth is defined as an increase in real GDP caused by an increase in aggregate demand or productive capacity.

Growth can be short-run (actual growth) or long-run (potential growth), depending on the cause.

Short-run growth is depicted as a shift in the aggregate demand (AD) to the right, utilizing spare capacity.

The PPF (Production Possibility Frontier) diagram can also illustrate short-run growth by showing a movement towards the frontier.

Factors influencing short-run growth include lower interest rates, tax policies, consumer and business confidence, and government spending.

Long-run growth, or potential growth, occurs with an increase in the economy's productive capacity.

An increase in the long-run aggregate supply (LRAS) can be shown on an AD-AS diagram as a rightward shift.

The PPF diagram can represent long-run growth by showing an outward shift of the production possibility curve.

Long-run growth can be caused by an increase in the quantity or quality of factors of production, or an increase in productive efficiency.

Labor productivity, workforce size, and investment in capital goods are specific factors that can shift the LRAS curve to the right.

Infrastructure improvements can reduce long-run costs of production and increase the quantity of capital.

Increased competition in the economy can lead to a reduction in long-run costs and boost productive efficiency.

New resource discoveries can increase the quantity of land, leading to a rightward shift in the LRAS curve.

Understanding the distinction between actual and potential growth is crucial for economic analysis.

The video provides a comprehensive guide to illustrating economic growth on various economic diagrams.

The specific causes of long-run growth are detailed, offering insight into the factors that can enhance an economy's productive potential.

Transcripts

hi everyone economic growth is an

increase in real GDP in an economy in a

year caused by an increase in aggregate

demand or an increase in el Ras that

definition is brilliant because it does

two things it tells us what growth is

it's an increase in real GDP and that

makes a lot of sense because we know

real GDP is our measure of economic

growth so real GDP goes up that means

the economy is growing but also this

definition gives us the two different

types of economic growth the two

different causes an increase in ad or an

increase in el Ras right let's take an

increase in ad first that is known as

short-run growth also known as actual

growth whenever there is an increase in

aggregate demand and when that's going

on the economy is using up spare

capacity in order to increase the output

of goods and services in the economy in

order to increase real GDP and we can

show that on two different diagrams we

can use an ATS diagram very easy but we

can also use the PPF let's go to the a

das diagram first I've used the

Keynesian version doesn't matter what

diagram you prefer but a basic shift of

aggregate demand to the right shows that

the economy is using up spare capacity

so we have a negative output gap we are

closing that negative output gap by

moving towards Y Fe and as we close that

gap

naturally the economy is producing more

goods and services using up spare

capacity to do so

so shifted ad from 81 to 82 shows the

increase in economic growth from y1 to

y2 moving towards Y Fe using up spare

capacity to produce more goods and

services so we can use that diagram but

we can also use the PPF diagram to show

short-run growth again we need to show a

negative output gap on a macro PPF and

that's a point X just bear in mind the

labeling on the axis though guys when

we're drawing a macro PPF we've got to

have goods and services on the axis that

means macro economy all we can have

capital goods and consumer goods on the

axes which implies a macro economy but

if we are inside the boundary which

basically means we are inside our

productive potential our point X then we

have a negative output gap so what we

want to show is a movement from inside

the PPF towards the PPF because that

means the akan

he's using up spare capacity to produce

more of both goods and services in this

case so on this diagram from X to Y is

an increase in economic growth short-run

economic growth that is basically a

booster babyish shift of eighty to the

right think of PPF the actual curve is

the long-run aggregate supply curve so

aggregate demand is moving towards that

LRE s curve just like this diagram shows

but now let's look at specific causes of

short-run growth or actual growth well

we need our ad equation again to remind

ourselves that ad is equal to C plus I

plus G Plus X minus M consumer spending

plus investment plus government spending

plus net exports so we need to look up

factors that can increase one or more of

these variables in the ad equations such

as lower interest rates we know lower

interest rates makes it cheaper for

consumers to borrow but also cheaper for

businesses to borrow to invest so see

and I will increase but also lower

interest rates can weaken the exchange

rate which can boost X minus M lower

income tax or lower corporation tax

lower income tax means more disposable

income for households more consumer

spending lower corporation tax means

more retained profit for furs which they

can use to invest higher consumer or

business confidence that will increase C

and I respectively higher government

spending of course increases G and a

weaker exchange rate can boost X minus M

so these are these are the specific

reasons why ad could increase and

therefore short-run growth can occur and

we know how to draw on diagrams let's

now look at long-run growth long-run

growth also known as potential growth

occurs anytime there is an increase in

El Ras and when that happens it means

there is an increase in the productive

capacity of the economy so the economy

has the potential to grow at a faster

rate it doesn't mean the economy's

actually growing at a faster rate

necessarily that's all dependent on ad

as we've just learned it just means that

the potential for economic growth in the

economy is now at a higher rate and like

we say it occurs when El Ras increases

so we can show that on an ad in a s

diagram very easily a via an LRS shift

to the right but we can also use the PPF

let's go to that AAS an ad diagram so

I've used now the classical

interpretation doesn't matter again

which version you prefer but as shifted

LRS to the right and we can see that the

full employment level of output the

maximum growth rate in the economy is

increased from

if you want to why fe2 there is your

long-term growth there is your potential

growth done but we can also use a PPF

diagram to show exactly the same thing

and that is simply by showing a shift of

the curve remember what I said before

that the PPF curve the boundary itself

essentially is your LR es curve so if

that curve shifts outwards to PPF - in

this case we are showing basically an

increase in LR s we are showing long-run

growth we are showing potential growth

so two ways you can illustrate it but

now what are the specific causes of

long-run growth what could happen in the

economy for LR es to increase will

remember why the LRE ESCO shifts there

are three reasons why this curve can

shift to the right

could be an increase in the quantity of

factors of production it could be an

increase in the quality of factors of

production in an economy or it could be

an increase in the productive efficiency

of the economy meaning a reduction in

long-run cost of production for firms in

the economy so three ways in which this

curve can shift to the right what are

the specific factors then that can shift

this curve well here they are in red we

need to link what's here in red - then

what's in green I did that in my

aggregate supply video but we'll do it

again here just to make sure that we are

fully clocked in so an increase in labor

productivity if labor productivity goes

up that's an increase in the quality of

labor and therefore LRS will shift to

the right maybe there is an increase in

the workforce size via an increase in

immigration of working people well if

that's the case that's going to increase

the quantity of labour and therefore LRS

is going to shift to the right

maybe it's investment remember what

investment is the spending on capital by

firms so in firms spend money on capital

goods capital goods for example new

machinery maybe they're upgrading their

machinery maybe it's new technology

maybe it's innovation and research and

development maybe it's expanding their

Factory maybe its buying in new vehicles

these are all examples of investment so

investment is a quite a vague term we

need to be specific by giving these good

examples but if investment occurs that

it's going to increase potentially the

quantity of capital if there's new

capital coming in it could be the

quality of capital that we're talking

about upgrades in new technology and

also it's going to reduce long run costs

of production for firms so all three

will increase

firms are spending on capital goods we

have infrastructure improvements we can

look at that in two ways we can look at

transport infrastructure reducing

long-run cost of production for

businesses as it becomes cheaper and

easier to transport their goods and

services but also cheaper and easier to

access raw materials so long-run costs

of production will fall but if

infrastructure improvements are physical

capital infrastructure like schools and

new hospitals being built we could argue

it's an increase in the quantity of

capital if competition increases in the

economy it means firms in the economy

have to reduce their long-run cost of

production in order to be competitive so

competition improvements will boost

productive efficiency in the economy and

shift LRS to the right and new resource

discoveries new resources or resources

in economics we call that land as a

factor of production so new resources

are discovered that's an increase in the

quantity of land LRS is going to shift

to the right so these are your specific

factors which can lead to an LRS shift

to the right and therefore can lead to

long-run growth or potential growth that

means now you understand both actual

growth short-run growth and potential

growth long-run growth you can

illustrate it on diagrams and you know

this specific causes important stuff

thank you for watching I'll see you in

the next video where we look at the

economic cycle

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