Economic Growth Lecture Notes

Definition of Economic Growth

• Economic Growth: An increase in real GDP in an economy over a year.
• Causes: Increase in Aggregate Demand (AD) or Long-Run Aggregate Supply (LRAS).
• Types:
  • Short-run growth (Actual Growth): Increase in AD.
  • Long-run growth (Potential Growth): Increase in LRAS.

Short-Run Growth (Actual Growth)

• Caused by: Increase in Aggregate Demand (AD).
• Concept: Utilizes spare capacity to increase output of goods and services.
• Diagrams:
  • AD-AS Diagram: Shift of AD to the right reduces negative output gap, moving towards full employment (Y_FE).
  • PPF Diagram: Shows movement from inside the curve (Point X) to on the curve (Point Y), indicating use of spare capacity.

Factors Increasing AD

• AD Equation: AD = C + I + G + (X - M)
  • C: Consumer Spending
  • I: Investment
  • G: Government Spending
  • X - M: Net Exports
• Specific Factors:
  • Lower interest rates (increased C and I, weaker exchange rate boosting X - M).
  • Lower income and corporation taxes (increased C and I).
  • Higher consumer or business confidence (increases C and I).
  • Higher government spending (increases G).
  • Weaker exchange rate (boosts X - M).

Long-Run Growth (Potential Growth)

• Caused by: Increase in Long-Run Aggregate Supply (LRAS).
• Concept: Increase in the economy’s productive capacity; potential for faster growth.
• Diagrams:
  • AD-AS Diagram: Shift of LRAS to the right increases full employment output from Y_FE1 to Y_FE2.
  • PPF Diagram: Outward shift of the curve indicates increase in productive capacity.

Factors Increasing LRAS

• Reasons for LRAS Shift:
  • Increase in quantity of factors of production.
  • Increase in quality of factors.
  • Increase in productive efficiency.
• Specific Factors:
  • Increased labor productivity (quality of labor).
  • Increased workforce size (e.g., immigration).
  • Investment (e.g., new technology, machinery, R&D, infrastructure improvements).
  • Improved infrastructure (reduces long-run production costs, increases capital quantity).
  • Increased competition (boosts productive efficiency).
  • Discovery of new resources (increases land quantity).

Conclusion

• Understanding both actual and potential growth and their specific causes.
• Ability to illustrate growth using diagrams (AD-AS and PPF).

Next Topic: The Economic Cycle

The lecture concluded with a note to watch the next video for more on the economic cycle.