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Y1 17) Causes of Economic Growth (Short Run and Long Run)

Y1 17) Causes of Economic Growth (Short Run and Long Run)

EconplusDal

8:02

Overview

This video explains the concept of economic growth, defined as an increase in real GDP within a year. It distinguishes between two types: short-run (actual) growth, caused by an increase in aggregate demand (AD), and long-run (potential) growth, driven by an increase in long-run aggregate supply (LRAS). Short-run growth involves utilizing spare capacity, moving the economy closer to its potential output, illustrated by shifts in AD on AD-AS or movements towards the PPF. Factors influencing short-run growth include changes in consumption, investment, government spending, and net exports, affected by interest rates, taxes, confidence, and exchange rates. Long-run growth expands the economy's productive capacity, shown by outward shifts of the LRAS curve or the PPF. Causes of long-run growth are improvements in the quantity or quality of factors of production, such as labor productivity, workforce size, capital investment, infrastructure, competition, and resource discovery.

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Chapters

  • •Economic growth is an increase in real GDP in a year.
  • •It is caused by an increase in aggregate demand (AD) or long-run aggregate supply (LRAS).
  • •The definition highlights both the measure (real GDP) and the causes of growth.
  • •Caused by an increase in aggregate demand (AD).
  • •Involves the economy using spare capacity to increase output.
  • •Can be shown on AD-AS diagrams as a rightward shift of AD, moving towards YFe.
  • •Can be illustrated on a PPF diagram as a movement from inside the curve towards the curve.
  • •Driven by factors that increase AD: C + I + G + (X-M).
  • •Lower interest rates encourage consumer spending (C) and investment (I).
  • •Lower income tax increases disposable income (C); lower corporation tax boosts retained profits (I).
  • •Higher consumer/business confidence boosts C and I.
  • •Higher government spending (G) and a weaker exchange rate (boosting X-M) also contribute.
  • •Occurs due to an increase in the economy's productive capacity (LRAS).
  • •Means the economy has the potential to grow at a faster rate.
  • •Shown on AD-AS diagrams as a rightward shift of LRAS.
  • •Illustrated on a PPF diagram as an outward shift of the entire curve.
  • •Caused by increases in the quantity or quality of factors of production, or improved productive efficiency.
  • •Increased labor productivity (quality of labor) shifts LRAS right.
  • •Increase in workforce size (quantity of labor, e.g., via immigration) shifts LRAS right.
  • •Investment in capital goods (machinery, technology) increases quantity/quality of capital and reduces costs.
  • •Infrastructure improvements (transport, schools) reduce costs or increase capital stock.
  • •Increased competition forces firms to reduce costs (improving efficiency).
  • •Discovery of new resources (land) increases the quantity of a factor of production.

Key Takeaways

  1. 1Economic growth is measured by the increase in real GDP.
  2. 2Short-run growth uses existing capacity; long-run growth expands capacity.
  3. 3Short-run growth is driven by increases in Aggregate Demand (AD).
  4. 4Long-run growth is driven by increases in Long-Run Aggregate Supply (LRAS).
  5. 5Factors like interest rates, taxes, and confidence influence short-run growth.
  6. 6Improvements in labor, capital, technology, and efficiency drive long-run growth.
  7. 7Both AD-AS and PPF diagrams can illustrate short-run and long-run growth.
  8. 8Understanding the distinction between actual and potential growth is crucial.
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