Study notes

Economic Growth - An Introduction

Economic growth is a long-term expansion of the productive potential of the economy

Trend growth refers to the smooth path of long run national output

Measuring the trend rate of growth requires a long-run series of data perhaps of 20-30 years or more in order to calculate average growth rates from peak to peak across different economic cycles

The table below tracks the growth rates achieved in the world economy for three recent years and also for developing countries excluding China and India.

Real GDP growth (annual % change) 2010 2011 2012
World Economy 4.1 2.7 2.5
Developing countries excluding China and India 5.6 4.4 3.6
What is economic growth?

What determines the rate of economic growth?

  • Every country is different, each factor will vary in importance for a country at a given point in time
  • Remember too that in our inter-connected globalising world, growth does not happen in isolation. Events in one country and region can have a significant effect on growth prospects in another

Growth Drivers

Here are some of the main determinants of economic growth – they apply for both developing and developed countries although the relative weighting that we might attach to each will depend on the individual circumstances facing each country or region.

  • Growth in physical capital stock - leading to a rise in capital per employee (capital deepening)
  • Growth in the size of the active labour force available for production
  • Growth in the quality of labour (human capital)
  • Technological progress and innovation driving productivity improvements i.e. higher GDP per hour worked
  • Institutions - including maintaining the rule of law, stable demcracy, macro-economic stability
  • Rising demand for goods and services - either led by domestic demand or from external trade

Key exam point:

  • Economic growth is not the same as economic development!
  • Growth can support development but the two are distinct – an important point to make in any A2 macro essay or data response question
PPF and economic growth
Key drivers of economic growth
Fastest growing countries in 2014

Threats / Challenges to Economic Growth

  • Changes in the real exchange rate affecting competitiveness
  • Cyclical fluctuations in national output and external trade
  • Financial instability e.g. unsustainable credit boom and fall in savings
  • Volatility in world prices for essential imports and key exports
  • Political instability / military conflicts
  • Natural disasters and other external supply shocks
  • Unexpected breakthroughs in the state of technology
3 Perspectives on Growth

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