Economic Growth | A Level Economics Success
Economic Growth – Introduction
In this blog article we will be looking at types of growth potential economic growth actual economic growth and then it will be finishing off with a summary.
So what is growth? Well we can think about it very simplistically and say that the aim of society is to upkeep and improve the well-being of its citizens. This is a very basic idea of why we might want growth and in economics this idea of growth means that the resources in a country need to expand within time.
So if we consider that our economy is made up of a variety of different resources which all come together and lead to some sort of production within the economy, then if we see these resources increasing or expanding over time then we’ll say that our well-being is increasing.
If our resources are expanding then that means that we have more choice because that might mean new things are coming onto the market so that’s also going to increase our welfare. Remember the logic of having more choice in the market means that you have an alternative to do something better so the next choice that might be available might be a bit worse than the current decisions that you’re making.
However if there is a new choice then that means that it can either be just as good in terms of the fact that you can still keep doing the same thing you want or it could be better and therefore you are better off as a result. So having more choice in economics is always seen as a good thing and then also when we have more resources in the economy then there will be a better allocation of goods and services.
More Goods
This is because we have more goods of which we can distribute also if there’s more goods then this might lower the price so people can afford them. So for our resources to expand this is going to require the process of economic growth and economic growth is an increase in real GDP. Remember real GDP has the effects of inflation removed, so there are two types of economic growth that we have to consider.
The first is potential economic growth which could also be labelled as long-term growth or trend rates in growth and the other type of economic growth that we’ll consider is actual economic growth, which is the one that you’re probably most aware of when you see things in the news and this is known as short-term growth as well.
So let’s talk about potential economic growth and it’s a bit more conceptual than actual economic growth but still it’s very important that we understand it. With potential economic growth this is the expansion in the productive capacity of the economy in a period of time, so growth in its potential and not its potential for growth is what we are talking about.
Potential Economic Growth
With potential economic growth it’s the fact that it’s an expansion in the economy rather than an expansion as a result of growth so we’re thinking about the economy as a whole and potentially economic growth is how the economy is growing in itself not the fact that we are growing as an economy.
We will understand this in a bit more detail so in other words our expansion of the potential output of the economy where we are going to see our ability to increase our output heighten and a really good way to understand our potential economic growth is an increase in potential economic growth which is classified as an outward shift in the production possibility frontier.
This is an idea that we’ve seen before that we are experiencing economic growth by moving from ppf1 to ppf 2 and we are growing from one point of our ppf curve outwards so what we’re experiencing is our frontier, our maximum amount of production because that is what our ppf demonstrate is increasing.
This means that our potential economic growth enables society to produce more goods and services in a given time period due to the expansion of its resources so with potential economic growth we are simply saying that our economic growth is as a result of the fact that we are increasing our potential productive capacity. We are increasing our productive capacity which means that there is potential for economic growth so that’s what potential economic growth is.
It’s a little bit more difficult to measure because of our difficulty of being able to understand what our ppf curve for an economy looks like. Now let’s move on to actual economic growth which is another type of economic growth and the actual economic growth is the rate of growth of gdp in a period of time so this looks a little bit like a definition that we’ve seen before and it’s a little bit more numerical than the others.
Lets try and calculate our rate of growth of gdp, so let’s suppose that in 2013 our gdp was 1.42 trillion pounds and then in 2014 our gdp was 1.46 trillion pounds so if we say that all of these different calculations for our gdp is our real gdp because that’s what we’re interested in when it comes to actual economic growth, is our real gdp.
Let’s try and calculate the percentage economic growth change and we do that with our standard percentage change equation which is our new figure minus the old figure divided by the old figure and then times this by 100 is going to be equal to 2.82 and that is our gdp growth as a result of moving from 2013 to 2014.
So this means that actual economic growth differs from potential economic growth so let’s try and understand this. Potential economic growth is going to assume that the economy is operating at full capacity which is rarely ever the case so what does it mean that we’re operating at full capacity? Well it means that we’re going to be on this point so this is less likely that we’re ever going to be at this point so at point A for example this is where we are at productive capacity which is quite unlikely.
Another point to make is that point A could be anywhere along a curve so now let’s consider reality. Briefly and what really happens in our actual world is that we’ll see that the economy is operating below the ppf which sounds less optimal but that’s probably the case because remember our ppf is when all of our factors of production are employed and we’re operating at efficiency, so the economy is more likely going to be here and therefore our potential economic growth is more. It is going to be around point A when we’re expanding our ppf.
However when it comes to our actual economic growth we’re going to be looking at around points of say a point B and movement in point B.
So economics will tend to go through business cycles and a business cycle is known as the economic cycle and it is a phenomena where GDP fluctuates around its underlying trend following a regular pattern.
In future blogs we will go into what the business cycle is, but just briefly this is basically when GDP is going up and down and overall economists have noticed that there is an overall trend that keeps on repeating itself and therefore if there’s something that keeps on repeating itself if we’re scientists we’re going to be interested in.