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.