2.5.1 Causes of growth

• Economic growth


  The expansion of the productive potential of the economy
• Economic growth


  • Can be depicted by an outward shift in the PPF or an outward shift in a country's LRAS curve
• Short term growth


  Calculated annually by the percentage change in real national output
• Long term growth


  A trend, which is a potential
• Factors which cause economic growth

  • Increase in AD, either from domestic demand or from trade
  • Improving the labour force, with a better quality and quantity to increase productivity. The larger the size of the labour force, the greater the productive potential of the economy
  • Improved technology, which is more productive
  • More investment, to fuel economic growth
  • Capital deepening which is an increase in the size of physical capital stock
• Actual growth


  The percentage increase in a country's real GDP and it is usually measured annually. It is caused by increases in AD.
• Potential growth


  The long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.
• Export led growth


  Occurs when countries open up their economies to the international market
• One of the most famous examples of export led growth is China, which has had export led growth for many years
• International trade


  • Countries can specialise where they have a comparative advantage, which increases world output and lowers average costs
  • A country has comparative advantage when it can produce goods and services at a lower opportunity cost than another
• Export led growth


  The economy is unbalanced, since there is a surplus on the current account on the balance of payments
• Export led growth


  The country relies on the economic state of other countries, since these are the consumers of their goods and services. If there is a recession in a major export market, exports will fall and so will economic growth