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Causes and Effects of Economic Growth

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Causes and Effects of Economic Growth

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  • March 2008
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Discuss the causes and effects of Economic Growth

Economic Growth

Before discussing the causes and effects of economic growth, I will define what economic growth actually is and distinguish between the two types of growth in the economy; actual and potential. On the whole, economic growth may be defined as ‘a long-run increase in an economy’s productive capacity and trend output’. The long-run output growth trend an economy achieves is indicated by the path of trend Gross Domestic Profit (GDP) and is usually calculated as a percentage average annual output growth over a large number of years. This is because, given long enough, the phases of the business cycle averages out so that increases in the economy’s real GDP are largely due to the growth of productive capacity. The graph below shows the Actual GDP and the Trend GDP. From this graph it is clear that when the Actual GDP evens out to show the underlying Trend GDP, there is still an increase in the Real Gross Domestic Profit.

As I have already previously mentioned, there are two types of Economic Growth, these are actual and potential. Actual Growth is ‘the percentage annual increase in national output actually produced’ (Sloman, 2004). National Output can also be referred to as GDP, when statistics on GDP growth rates are published, it is actual growth which is referred to. Potential Growth is ‘the percentage annual increase in the capacity of the economy to produce’ (Sloman, 2004). Put simply, potential growth is the speed at which the economy could grow. It is the percentage annual increase in the economy’s capacity to produce, in other words, the rate of growth in Potential Output. This is the output that could be produced in the economy if there were full employment of resources (including labour) (Sloman 2004). Example of Economic Growth

A good example of Economic Growth is in the country Botswana. It is one of a small group of countries in the modern day, virtually the only...

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