Economic Growth

Understanding Economic Growth

  • Economic growth is defined as a rise in the total amount of goods and services produced in an economy over time.
  • It is commonly measured by the annual rate of increase in a country’s Gross Domestic Product (GDP).
  • The boost in production tends to lead to an increase in the standard of living, as people have access to more goods and services.

Causes of Economic Growth

  • Investment in capital: More machinery, infrastructure and other forms of capital can improve output.
  • Increase in labour : This can result from population growth, immigration, higher participation rates or reductions in unemployment.
  • Improvements in technology: Advancements in machinery or digital technology contribute to efficiency and productivity.
  • Investment in education and training: A more educated and highly skilled population can enhance output and productivity.

Effects of Economic Growth

  • Employment increase : As businesses expand, more employees are generally required.
  • Higher average income : With growth, wages often rise, improving overall standard of living.
  • Improved public services : More tax revenue is available for government to spend.
  • Inflation: Rapid growth can lead to inflation and economic instability.
  • Negative environmental impact : Increased production can lead to more pollution and other environmental issues.

Ins and Outs of Economic Growth

  • Short-term growth is often influenced by aggregate demand, including changes in total spending by consumers, businesses, government and overseas buyers of UK exports.
  • Long-term growth, on the other hand, is associated with increases in aggregate supply, meaning the productive potential of an economy.
  • Sustainable economic growth refers to growth that can be maintained over the long term without creating other significant economic problems, often linked with the word “sustainability”.

Policies to Stimulate Economic Growth

  • Fiscal policy: Increased public spending or cutting taxes to stimulate demand.
  • Monetary policy: Lowering interest rates to encourage spending and investment.
  • Supply-side policies: Designed to increase the ability to produce, such as investment in training or infrastructure.