Micro-Economics

Economic Growth

Growing economies provide the means for people to enjoy better living standards and for more of us to find work. But what is economic growth and how best can a country achieve it?

Defining economic growth

Economic growth is best defined as a long-term expansion of the productive potential of the economy. Sustained economic growth should lead higher real living standards and rising employment. Short term growth is measured by the annual % change in real GDP.

Growth and the Production Possibility Frontier

An increase in long run aggregate supply is illustrated by an outward shift in the PPF.

Advantages of Economic Growth

Sustained economic growth is a major objective of government policy – not least because of the benefits that flow from a growing economy.

Higher Living Standards – for example measured by an increase in real national income per head of population – see the evidence shown in the chart below

Employment effects: Growth stimulates higher employment. The British economy has been growing since autumn 1992 and we have seen a large fall in unemployment and a rise in the number of people employed.

Fiscal Dividend: Growth has a positive effect on government finances - boosting tax revenues and providing the government with extra money to finance spending projects

The Investment Accelerator Effect: Rising demand and output encourages investment in new capital machinery – this helps to sustain the growth in the economy by increasing long run aggregate supply.

Growth and Business Confidence: Economic growth normally has a positive impact on company profits & business confidence – good news for the stock market and also for the growth of small and large businesses alike

Rising national income boosts living standards

And an expanding economy provides the impetus for a rising level of employment and a falling rate of unemployment. This has certainly been the case for the British economy over the last decade....