Syllabus points
- Define economic growth and distinguish actual from potential growth.
- Explain the causes of economic growth.
- Illustrate growth using PPC and AD–AS diagrams.
- Evaluate the consequences of economic growth.
Actual vs potential growth
- Actual growth is an increase in real GDP — using more of existing capacity. On a production possibility curve (PPC) it is a move from inside the curve toward the frontier; on an AD–AS diagram it is a rightward shift in AD.
- Potential growth is an increase in the economy's productive capacity. On a PPC it is an outward shift of the frontier; on an AD–AS diagram it is a rightward shift in LRAS.
Causes of economic growth
| Source | Explanation |
|---|---|
| Investment | More/better capital raises productivity |
| Labour | A larger or more skilled workforce (education, training) |
| Technology | Innovation raises output per worker |
| Institutions | Property rights, stability and infrastructure |
| Natural resources | Discovery or better use of resources |
Demand-side factors (rising C, I, G or net exports) drive actual growth; supply-side factors (productivity, capacity) drive potential growth.
Consequences of economic growth
- Benefits: higher incomes and living standards, more employment, higher tax revenue for public services, and reduced absolute poverty.
- Costs: environmental damage and resource depletion, possible rising inequality, and the risk of demand-pull inflation if growth outpaces capacity.
Growth is more sustainable when it is balanced — supported by rising potential output — rather than driven by AD alone, which risks inflation.
Worked example
If real GDP rises from $500bn to $520bn, growth is (520 − 500) ÷ 500 × 100 = 4%. If this came purely from higher AD near full capacity, much of the "growth" could show up as inflation rather than extra real output — highlighting why potential growth matters.
Common exam mistakes
- Confusing actual growth (using capacity) with potential growth (raising capacity).
- Assuming growth always raises living standards — consider distribution and the environment.
- Mixing up the PPC and AD–AS representations.
Exam technique
Show growth on the correct diagram, distinguish actual from potential, and evaluate benefits against environmental and equity costs.
Quick revision
- Actual growth = higher real GDP (AD shift / move to PPC frontier).
- Potential growth = higher capacity (LRAS shift / PPC shifts out).
- Causes: investment, labour, technology, institutions, resources.
- Benefits vs costs: living standards vs environment, inequality, inflation.