What this lesson teaches
I can explain the causes of economic growth and weigh its advantages and disadvantages.
Syllabus K343, 4.5.3. Causes and consequences of economic growth: 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
Make a guess
Can an economy grow if its population stays exactly the same?
- Yes, through more capital, better skills or technology.
- No. Growth needs more workers.
- No, because the PPC cannot move without more people.
Show the answer
Yes, through more capital, better skills or technology.
Growth comes from more or better resources, not only more workers. Each worker can produce more with better tools and training.
Growth comes from more total demand when there are idle resources, or from more and better resources.
An increase in total demand can cause growth when the economy has unemployed resources. Spending by households, firms, the government or foreign buyers rises. Firms produce more and hire idle workers, so output rises towards the PPC.
An increase in the quantity of resources raises what the economy can produce. Examples are more workers through immigration, more capital through investment, or new land through reclamation.
An increase in the quality of resources does the same. Better education and training, healthier workers and better technology all raise output per worker.
Growth from more demand moves the economy towards its PPC. Growth from more or better resources shifts the PPC outwards. Lasting growth needs the second kind.
- Demand-led growth
- More spending puts idle resources to work.
- Supply-led growth
- More or better resources shift the PPC outwards.
- Quality of resources
- Education, health, technology.
Worked example: Explaining growth in an exam answer
A question asks how investment causes economic growth.
- Short run: firms buy machines and build factories, which is spending, so total demand rises.
- Long run: the new machines add to the quantity and quality of capital.
- Each worker can produce more, so the economy can produce more.
- On a PPC, the curve shifts outwards.
Watch out for this
Economic growth can only happen if the population grows.
More workers is only one cause. Growth also comes from more capital, better skills, better technology, and using idle resources.
Check your understanding
A country invests heavily in new technology. How is this likely to cause growth?
- It moves the economy from inside its PPC to a point on it, using idle resources.
- It reduces total demand, because firms spend on machines instead of workers.
- It raises the quality of capital, shifting the PPC outwards.
Show the answer
It raises the quality of capital, shifting the PPC outwards.
Right. Better technology raises what the economy can produce.
Check your understanding
Which change would raise an economy's productive capacity?
- Firms invest in new, faster machines
- The government cuts interest rates
- Households spend more in the shops
- Prices rise across the economy
Show the answer
Firms invest in new, faster machines
Right. More and better capital lets the economy produce more in future.