• Economic growth can occur in the short-run or long-run and each is explained differently

Short-run Economic Growth

• Changes to any of the?components of aggregate demand?(AD) will cause?short-run economic growth?to occur
  • This is illustrated on an?AD/AS diagram?by a?rightward shift in AD
  • It can also be illustrated by using the?production possibilities frontier model?by moving from a?point inside?the curve to a?point closer to the curve

1. Short-run Economic Growth on AD/AS Diagram

A diagram illustrating short-run economic growth through a shift of aggregate demand from AD→AD1

Diagram Analysis

• An increase in consumption, investment, government spending or net exports has caused a shift in AD from?AD→AD1
• The current?real output has increased from Y1→Y2?which represents an increase in real GDP
  • An increase in real GDP = economic growth
• This?short-run growth?has led to an increase in?average prices from AP1→AP2

2. Short-run Economic Growth on Production Possibilities Frontier (PPF)

A diagram illustrating short-run economic growth on a production possibilities frontier (PPF) model

Diagram Analysis

• An increase in production has caused a shift in production combinations from?X→Y
• The current?real output has increased moving closer to the maximum possible output of the economy
  • ?This represents an increase in real GDP
  • An increase in real GDP = economic growth

Long-run Economic Growth

• Long-run economic growth is caused by any improvements to the?quality or quantity?of the?factors of production
  • These factors include all of the?determinants of long-run aggregate supply

A diagram illustrating long-run economic growth through an increase in the long-run aggregate supply (LRAS) of the economy

Diagram Analysis

• A change to the?quantity/quality?of the factors of production has increased potential output of the economy from YFE→YFE1
  • E.g. More?rigorous competition policy?creates a higher number of firms in each industry leading to?greater aggregate supply?in the economy
    • This shifts the long-run aggregate supply?curve to the right LRAS1→LRAS2?resulting in economic growth
• The final?impact on price levels?depends on the?shape of the long-run aggregate supply?curve (Keynesian or Classical)

• Actual economic growth?occurs when there is an increase in the?quantity of goods/services?produced in an economy in a given period of time
  • This is often measured by the?percentage change?in?real gross domestic product (GDP)
• Potential growth?is the increase in the?productive potential of an economy?as demonstrated by a shift outward of the?production possibilities frontier (PPF)?or the long-run aggregate supply (LRAS) curve
• At any given point in time, the?actual economic growth?may be less than the?potential growth?available to the economy

• International trade?is an important source of income for many countries
• Export-led economic growth?refers to growth that occurs as a result of?an increase?in the sale of goods/services to foreign countries
  • Net exports is a component of?aggregate demand (AD)
  • For many?developing countries, the exports represent a high percentage of the?annual AD and gross domestic product (GDP)
    • When the value of the exports rise, the real GDP rises significantly - and vice versa
• E.g. China experienced significant?export-led economic growth?from 1988 to the global financial crisis of 2008