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a theory or simplified representation that helps explain and predict economic behavior in the real world. Just the definition of economic vocabulary Learn with flashcards, games, and more — for free.
- Overview
- Lesson summary
- An increase in real GDP is not necessarily economic growth
- Sources of economic growth
- Government policies can impact economic growth
- Economic growth in the production possibilities curve (PPC) model
- Economic growth in the AD-AS model
- Common misperceptions
- Questions for review
In this lesson summary review and remind yourself of the key terms and concepts related to economic growth, including expansion of capital, technological change, and human capital.
Lesson summary
An economy grows when it has the capacity to produce more. Production is based on how much capital, labor, natural resources, and technology it has to produce. Policies that encourage the accumulation of any of these leads to economic growth.
We’ve already seen the capacity to produce represented in two models: the production possibilities curve and the long-run aggregate supply curve. Economic growth is a shift out of either of these curves.
Key Terms
Key Takeaways
An economy grows when it has the capacity to produce more. Production is based on how much capital, labor, natural resources, and technology it has to produce. Policies that encourage the accumulation of any of these leads to economic growth.
We’ve already seen the capacity to produce represented in two models: the production possibilities curve and the long-run aggregate supply curve. Economic growth is a shift out of either of these curves.
Economic growth means that an economy has increased its ability to produce more. When an economy is producing beyond potential output, it might have experienced an increase in real GDP, but that is not economic growth. Similarly, an economy that is recovering from a recession might experience an increase in real GDP, but that is not economic growth...
Economic growth is an increase in the capacity to produce. Therefore anything that increases that capacity is economic growth.
The ability to produce depends on:
•The stock of capital per worker: All else equal an economy with more physical capital can produce more than an economy with less physical capital. Because savings and investment add to the stock of capital, more investment in capital leads to more economic growth.
•The amount and quality of labor: As long as the capital per worker does not decrease, more labor leads to more production. For example, 4 people that each have a waffle maker make fewer waffles than 10 people that each have a waffle maker. Also, improvements in human capital, such as education and health, improve the productivity of that labor.
•The level of technology
•the know how to combine labor, capital, and natural resources to produce is an important aspect of production. Improvements in technology increase productivity.
Government policies play a big part in encouraging (or discouraging) economic growth. Some examples of economic policies that contribute to economic growth are:
•Investing in infrastructure: infrastructure, like highways or bridges, are physical capital that is available to everyone. By investing in infrastructure, governments add to the capital stock of a country. But infrastructure depreciates, just like any other capital. That means governments must replace depreciated infrastructure to maintain it.
•Policies that affect productivity and labor force participation
•Encouraging a higher labor force participation rate, such as tax incentives on labor for participation, can lead to more economic growth.
•Policies that encourage capital accumulation and technological change
•Policies that encourage savings, and therefore investment in capital, lead to higher economic growth. Similarly, policies that encourage technological change, such as tax credits for research and development, also lead to more economic growth.
The production possibilities curve illustrates the maximum combination of output of two goods that an economy can produce, such as capital goods and consumption goods. If that curve shifts out, the capacity to produce has increased.
Recall that the long-run aggregate supply curve (LRAS) is vertical at the full employment rate of output. That means that if the full employment output increases (in other words, moves to the right along the horizontal axis), then the LRAS curve shifts to the right:
•Economic growth is the long-run trend of an increase in output over time, not just a temporary fluctuation in output or using previously underutilized resources.
•Show the impact that an increase in the supply of loanable funds would have on the PPC of an economy. Explain.
•Show the impact that a decrease in the capital stock would have on the LRAS of an economy. Explain.
May 31, 2022 · Bioeconomics is a progressive branch of social science that seeks to integrate the disciplines of economics and biology for the sole purpose of creating theories that do a better job of...
4 days ago · An authoritative and comprehensive dictionary containing 2,500 key economic terms with clear, concise definitions. It covers all aspects of economics including economic theory, applied microeconomics and macroeconomics, labour economics, public economics and public finance, monetary economics, environmental economics, and many others.
We can understand these changes by graphing supply and demand curves and analyzing their properties. Toilet paper is an example of an elastic good. Image courtesy of Nic Stage on Flickr. Keywords: Elasticity; revenue; empirical economics; demand elasticity; supply elasticity.
