Causes & Consequences of Economic Growth (Cambridge International IGCSE Economics)

Causes of economic growth

Spec point — "how economic growth may be caused by an increase in total demand, an increase in the quantity of resources or an increase in the quality of resources • advantages and disadvantages of economic growth"

Causes of economic growth

• Economic growth is the increase in the output of goods and services in an economy over time, usually measured by the rise in real gross domestic product (GDP)
• Growth can be short-term (from better use of existing resources) or long-term (from an increase in productive capacity)

1. A change in total demand

• Actual economic growth occurs when there is an increase in the quantity of goods and services produced in an economy in a given period of time - using existing resources

  • If any component of real GDP increases (consumption, investment, government spending, net exports), there will be an increase in total demand
  • This type of growth is short-run — it uses up idle resources but does not expand capacity permanently

  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. An increase in the quantity of resources

• More resources allow the economy to produce more goods and services in the long run

• Some factors that lead to an increase in resources include:

  • More workers from population growth or immigration
  • The discovery of new raw materials
  • Increased capital stock from business investment
  • More land brought into production for example through land reclamation such as that carried out in The Netherlands

• This type of long-term growth expands the productive potential of the economy, shifting the production possibility frontier (PPF) outward

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 B
  • More consumer goods and more capital goods can now be produced using all of the available resources

3. An increase in the quality of resources

• Higher-quality resources mean greater efficiency and productivity

• Some factors that lead to an increase in the quality of resources include:

  • Better education and training improving workforce skills
  • Investment in advanced technology
  • Improved infrastructure such as transport, communications and energy
  • Health improvements increasing worker efficiency

• These lead to sustainable long-term growth without inflationary pressure

• This type of long-term growth expands the productive potential of the economy, shifting the production possibility frontier (PPF) outward

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 or quality of the factors of production (supply-side growth) moves the entire PPC curve outwards

The consequences of economic growth

Spec point — "how economic growth may be caused by an increase in total demand, an increase in the quantity of resources or an increase in the quality of resources • advantages and disadvantages of economic growth"

The consequences of economic growth

• 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

The advantages and disadvantages of economic growth