What is trend growth?

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

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

What are some of the main 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