Economic Growth

Economic growth has two meanings:

1.  Firstly, and most commonly, growth is defined as an increase in the actual output that an economy produc-es over a period of time, the minimum being two consecutive quarters of a year.

2.  The second meaning of economic growth is an increase in what an economy can produce if it is using all its scarce resources. An increase in an economy’s productive potential can be shown by an outward shift in the economy’s production possibility frontier (PPF).

The simplest way to show growth using PPFs is to bundle all goods into two categories, consumer goods and capital goods.

What creates growth?

An outward shift of a PPF means that an econo-my has increased its capacity to produce. This can occur when the economy undertakes some of the following: 

Employs new technology

Investment in new technology increases potential output for all goods and services because new technology is inevitably more efficient than old technology. Widespread mechanisation in the 18th and 19th centuries enabled the UK to generate huge quantities of output from relatively few re-sources, and become the world’s first fully indus-trialised economy. In recent times, China’s rapid growth rate owes much to the application of new technology to the manufacturing process.

An economy will not be able to grow if an insufficient amount of resources are allocated to capital goods. Given that capital depreciates some resources must be allocated to capital goods for an economy to remain at its current size let alone for it to grow in potential terms.

Employs a division of labour, allowing specialisation

A division of labour refers to how production can be broken down into separate tasks, enabling specialised machinery to be developed to help production, and allowing labour to specialise on a small range of activities. Employing a division of labour, and specialising, can considerably improve productive capacity, and shift the PPF outwards.

Employs new production methods

New methods of production can increase potential output. For example, the introduction of team working to the production of motor vehicles in the 1980s reduced wastage and led to considerable efficiency improvements.  The widespread use of computer controlled production methods, such as robotics, has dramatically improved the productive potential of many manufacturing firms.

Increases its labour force

Growth in the size of the working population enables an economy to increase its potential output. This can be achieved through natural growth when the birth rate exceeds the death rate, or through net immigration (when immigration is greater than emigration).

Discovers new raw materials
Discoveries of key resources, such as oil, increase an economy’s capacity to produce.