Economic Growth

Definition

Economic growth refers to the sustained increase in the productive capacity of an economy over time, resulting in a rise in the real gross domestic product (GDP) per capita. It is a fundamental concept in macroeconomics that encompasses the expansion of a country's output, employment, and standard of living.

5 Must Know Facts For Your Next Test

1. Economic growth is a key macroeconomic objective, as it is associated with improvements in living standards, increased employment opportunities, and a higher tax base for governments.
2. Sustained economic growth is crucial for a country's long-term development and can be achieved through increases in labor productivity, capital investment, technological advancements, and efficient resource allocation.
3. The production possibilities frontier (PPF) model illustrates the trade-offs between the production of different goods and services, and economic growth is represented by an outward shift of the PPF.
4. Gross Domestic Product (GDP) is the most commonly used measure of economic growth, as it captures the total value of all final goods and services produced within a country's borders.
5. Comparing GDP per capita across countries is a way to assess and compare the standard of living and economic development of different economies.

Review Questions

• Explain how economic growth relates to the production possibilities frontier (PPF) and social choices.
  • The production possibilities frontier (PPF) model represents the maximum combination of two goods or services that an economy can produce given its available resources and technology. Economic growth is represented by an outward shift of the PPF, indicating an expansion of the economy's productive capacity. This shift allows the economy to produce more of both goods, or to produce a greater quantity of one good while maintaining the production of the other. The PPF illustrates the trade-offs and social choices involved in allocating resources to different sectors of the economy to achieve economic growth.
• Describe the role of labor productivity and technological progress in driving long-term economic growth.
  • Increases in labor productivity, through improvements in worker skills, education, and the adoption of new technologies, are a key driver of long-term economic growth. Technological advancements, such as innovations in production processes, automation, and the development of new products and services, can significantly boost an economy's output per worker. This, in turn, leads to higher incomes, greater consumption, and a higher standard of living. Sustained investment in human capital and research and development are crucial for maintaining high levels of labor productivity and technological progress, which are essential for achieving robust and sustained economic growth over time.
• Analyze how fiscal policy and government policies can influence economic growth in the long run.
  • Governments can use fiscal policy tools, such as taxation and government spending, to stimulate economic growth in the long run. Policies that encourage investment, promote innovation, and improve the quality of human capital (e.g., education and healthcare) can lead to higher productivity and, ultimately, stronger economic growth. Additionally, policies that support free trade, competition, and the efficient allocation of resources can create an environment conducive to long-term growth. Conversely, excessive government deficits and debt can crowd out private investment and slow down economic expansion. Policymakers must carefully balance the short-term and long-term implications of fiscal policy decisions to foster sustainable economic growth over time.

Related terms

Productivity:

The efficiency with which an economy transforms inputs (labor, capital, resources) into outputs (goods and services), measured as output per unit of input.

Gross Domestic Product (GDP):

The total monetary value of all the finished goods and services produced within a country's borders in a specific time period, typically a year.

Standard of Living: The level of wealth, comfort, material goods, and necessities available to a certain socioeconomic class or a certain geographic area.