Causes & Consequences of Growth (Cambridge International IGCSE Economics)

Causes of Economic Growth

Spec point — 4.6.2 · How changes in total demand may increase the utilisation of resources and GDP – resulting in a movement from inside toward the PPC. How economic growth shifts the economy’s PPC to the right and is caused by changes in investment, technology, and the quantity and quality of the factors of production.

1. Growth caused by a change in total demand

• Actual economic growth occurs when there is an increase in the quantity of goods/services produced in an economy in a given period of time

  • This is often measured by the percentage change in real gross domestic product (GDP)
  • If any component of real GDP increases (consumption, investment, government spending, net exports), there will be an increase in total demand

  Any movement from Point E towards the PPC boundary represents actual economic growth and is caused by an increase in output (rGDP)

Diagram explanation

• Previously unused factors of production are now being employed
• This is demonstrated by a shift from inside the production possibilities curve (PPC) such as Point E, towards the boundary of the PPC
• At any given point in time, the actual economic growth may be less than the potential growth available to the economy

2. Growth caused by a change in the quantity/quality of factors of production

• Potential growth is the increase in the productive potential of an economy

• This occurs when there is an increase in the quantity or quality of the factors of production available in an economy

  • One example of how the quality of a factor of production can be improved is through the impact of training and education on labour. An educated workforce is a more productive workforce and the production possibilities increase
  • One example of how the quantity of a factor of production can be increased is through a change in migration policies. If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase

• Investing in new capital machinery increases the quality of capital

• Investing in new technology results in an improvement to productivity

Outward shifts of a PPC show economic growth caused by changes to the quantity/quality of the FOP

Diagram explanation

• Economic growth occurs when there is an increase in the productive potential of an economy

  • This is demonstrated by an outward shift of the entire curve represented by A
  • More consumer goods and more capital goods can now be produced using all of the available resources

The Consequences of Economic Growth

Spec point — 4.6.2 · The costs and benefits of economic growth in the context of different economies.

• Economic growth is considered to be the main contributor to an improvement in the standards of living

• Due to the negative aspects of economic growth, there is much controversy about maintaining it as a central macroeconomic aim

  • Instead, arguments for a focus on societal well-being are gaining traction

A Table Summarising the Benefits and Costs of Economic Growth

Exam Hint Remember this distinction as MCQ often checks for this understanding:

Growth caused by a change in total demand is represented by a movement from within the existing PPC towards its boundary.

Growth caused by a change in the quantity/quality of the factors of production (supply-side growth) moves the entire PPC curve outwards.