Causes & Consequences of Economic Growth (Cambridge (CIE) IGCSE Economics): Revision Note

Causes of economic growth

• Economic growth is the increase in the output of goods and services in an economy over time, usually measured by the rise in real gross domestic product (GDP)

• Growth can be short-term (from better use of existing resources) or long-term (from an increase in productive capacity)

1. A change in total demand 

• Actual economic growth occurs when there is an increase in the quantity of goods and services produced in an economy in a given period of time - using existing resources

  • If any component of real GDP increases (consumption, investment, government spending, net exports), there will be an increase in total demand

  • This type of growth is short-run — it uses up idle resources but does not expand capacity permanently
       

    

Diagram explanation

• Previously unused factors of production are now being employed

• This is demonstrated by a shift from inside the production possibilities curve (PPC) such as Point E, towards the boundary of the PPC

• At any given point in time, the actual economic growth may be less than the potential growth available to the economy 

2. An increase in the quantity of resources

• More resources allow the economy to produce more goods and services in the long run

• Some factors that lead to an increase in resources include:

  • More workers from population growth or immigration

  • The discovery of new raw materials

  • Increased capital stock from business investment

  • More land brought into production for example through land reclamation such as that carried out in The Netherlands

• This type of long-term growth expands the productive potential of the economy, shifting the production possibility frontier (PPF) outward

Diagram explanation

• Economic growth occurs when there is an increase in the productive potential of an economy

  • This is demonstrated by an outward shift of the entire curve represented by B

  • More consumer goods and more capital goods can now be produced using all of the available resources

3. An increase in the quality of resources

• Higher-quality resources mean greater efficiency and productivity

• Some factors that lead to an increase in the quality of resources include:

  • Better education and training improving workforce skills

  • Investment in advanced technology

  • Improved infrastructure such as transport, communications and energy

  • Health improvements increasing worker efficiency

• These lead to sustainable long-term growth without inflationary pressure

• This type of long-term growth expands the productive potential of the economy, shifting the production possibility frontier (PPF) outward

The consequences of economic growth

• Economic growth is considered to be the main contributor to an improvement in the standards of living

• Due to the negative aspects of economic growth, there is much controversy about maintaining it as a central macroeconomic aim

  • Instead, arguments for a focus on societal well-being are gaining traction

The advantages and disadvantages of economic growth