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Causes And Effects Of Economic Growth

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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 country in Africa, which has sustained rapid economic growth over an extended period. Over the past three decades, Botswana’s real per capita income grew by more than 7 percent per annum, which is comparable to rates of growth achieved by countries like Korea and Thailand. These two countries have both have widely known undergone “successful economic development during the past quarter of a century. Korea and Thailand are only two of four countries which constitute the most successful group of the world’s developing countries.” (

Amazingly the growth in Botswana that has caused it to become known for its successful economic growth which was facilitated by mineral wealth, has led to neither isolated enclaves or to extravagant spending. Growth continued to be high as a result of structural change within the economy as the growth in its mining and government sectors slackened. (Adapted from;

Causes of Economic Growth

Economic Growth is not caused by the level of aggregate demand but instead by the supply side of the economy. There are two main areas of potential output, these include;

• Increases in the quantity of resources available to an economy.

These are simply;

вЂ" Land

This includes the development of land for economic use.

вЂ" Labour

This includes the increases in the working population or the average working week.

вЂ" Raw materials

In addition to raw materials, the discovery and exploitation of new natural resources is included.

вЂ" Capital

The capital is the most vital contributor out of them all as it has the ability to increase the quantity of stock of capital goods. This is also known as �capital accumulation’. The production of new capital goods is known as an investment in the economy. This is then an important factor contributing to the rate the economy grows at.

• The productivity (or quality) of the above resources.

This is very similar to the above and includes the four factors of production;

вЂ" Land

This also includes natural resources.

вЂ" Labour

This is measured in the number of hours worked.

вЂ" Capital

This includes machinery and other productive assets which could increase the marginal productivity.

вЂ" Entrepreneurial skills

i.e. the business skills which the population has.

If the supply potential is to grow then one or both of the above bullet points must take place. For this growth to be sustained over the long-term there then must be an increase in potential output, i.e. the economy capacity to produce must increase.

A low stable inflation and steady growth in aggregate demand is required to produce the type of macroeconomic situation which encourages economic growth. This is the aim of the governing bodies that can control this. However, there are various effects of economic growth to economies. These can either be positive or negative.

Effects of Growth

Benefits of Growth

There are four main benefits of growth to an economy. These are;

• Increased levels of consumption

A high level of consumption of goods and services is linked back to a higher real income per head. This in turn will happen if economic growth outstrips population growth. Overall, if human wellbeing is related to the level of consumption, then growth provides an obvious advantage to the society.

• It



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