Study Notes
Economic growth involves an increase in an economy's output, measured by the annual percentage change in output. Real improvement in living standards requires growth that exceeds population increase.
- Economic Growth — an increase in an economy's output. Example: GDP per capita reflects output per person.
- Actual Economic Growth — occurs when output increases, often through greater utilization of existing resources. Example: Shown as a shift from point X to Y on a production possibility curve.
- Potential Economic Growth — the increase in the maximum output an economy can produce over time. Example: Illustrated by an expansion of the economy's capacity in both PPC and AD/AS diagrams.
- Spare Capacity — unused capacity in the economy that can be utilized to meet increased demand. Example: Higher consumer confidence leads to increased expenditure.
- Increase in Quantity of Resources — involves more labor, capital, or land. Example: Net immigration increases the labor supply.
Exam Tips
Key Definitions to Remember
- Economic Growth
- Actual Economic Growth
- Potential Economic Growth
- Spare Capacity
- Increase in Quantity of Resources
Common Confusions
- Confusing economic growth with economic development
- Misunderstanding the difference between actual and potential growth
Typical Exam Questions
- What may reduce economic growth in the short run but increase it in the long run? An increase in the savings ratio
- What cause of a fall in the price level is unlikely to result in a recession? Advances in technology
- Evaluate the intervention of the government to increase the rate of economic growth. Discuss government spending, tax policies, and interest rates
What Examiners Usually Test
- Understanding of actual vs. potential economic growth
- Ability to explain causes of economic growth
- Application of economic growth concepts to real-world scenarios