Econ growth and the cycle


economic growth

  • econ growth increases the availability of g/s to the population
  • The 'BRIC' countries: Brazil, Russia, India and China have been working to achieve better economic growth
  • the UK economy is said to have a trend rate of 2.5% econ growth. At this rate, the economy would remain stable as the productive capacity increases by 2.5%. 
  • Factors that increase the country's productive capacity will allow the economy to to grow at a more rapid rate - these will mainly be supply-side factors.
  • However, for an economy to grow there needs to be adequate demand to meet supply. Increased AD encourages investment, increasing firms' productive capacities. 

short term growth:

  • any factors that shift the AD curve to the right, to its productive capacity, or shift the output to the PPB will restore the economy to its trend growth rate. These are the components of C + I+ G + (X-M) An increase in any of these will increase AD and shift the curve to create short-term growth. 
  • However, too large an increase can push the economy into a positive output gap - actual GDP is above the productive potential and inflation is rising. 
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Long-term growth

  • these factors are mainly supply-side policies that affect the LRAS of an economy by increasing their productive capacity. 
  • For an economy to grow, firms need to constantly invest in capital equipment and should be able to increase both capital and labour productivity. This may be through expanding markets, either domestically or overseas.
  • Higher govt. tax in some countries causes domestic firms to leave and relocate to lower tax countries and those unable to move may not invest further. 
  • To show long term growth, the LRAS curve shifts to the right, meaning that the economy will be more internationally competitve and will assist our balance of payments. In the long run, AS is independent of prices and is affected by:
    • an increase in quantity of factors of production: L, L and C
    • an increase in productivity of factors of production
    • advances in technology and investment in them. 
  • the UK has a small land mass relatively and other countries have high growth rates due to natural resource levels e.g. Russia: oil and natural gas
  • while importing labour from overseas can ease labour shortages, especially if demographic changes mean that the pop. is ageing and less young enter the workforce, making the best of available labour by increasing participation rates is good. 
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  • govts have been trying to increase the number of broadly educated individuals in the country, e.g. by increasing the age to be in education to 19 from 2015 and also trying to increase the number with at least 5 GCSEs including maths and english.
  • labour flexibility is also essential to increasing LRAS as workers are expected to be able to adapt to new tasks and working conditions.
  • the govt. is often criticised that it doesn't produce the type of labour that firms require, thus reducing potential movements of the LRAS curve to the right. 
  • Tech advances are important in reducing firms' costs. It also leads to new products that generate extra expenditure to increase econ growth. 
  • in the UK, take-up of new technology lags behind the US and Europe. 
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  • The economy produces capital and consumer goods. 
  • many economists stress that there are substantial costs to continuing growth and that increased growth will not necessarily increase standards of living. Costs like increasing pollution, growth of urban slums, depletion of natural resources and damage to the environment are concerning. 
  • There are also ethical issues in continuing rates of econ growth in that it is not a sustainable policy. There are fears that EITHER consumption rates will be lowered or the planet will no longer be able to sustain its growing population. 

***** unless stated otherwise, economic growth is always long-term determined by supply-side..

the AD/AS model:

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