Y1 17) Causes of Economic Growth (Short Run and Long Run)
Summary
TLDRThis 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
📈 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.
🚀 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.
Mindmap
Keywords
💡Economic Growth
💡Aggregate Demand (AD)
💡Real GDP
💡Short-run Growth
💡Long-run Growth
💡Productive Capacity
💡Aggregate Supply (AS)
💡Potential Output
💡Output Gap
💡Production Possibility Frontier (PPF)
💡Factors of Production
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
[Music]
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