hi everyone economic growth is an increase in real GDP in an economy in a year caused by an increase in aggregate demand or an increase in el Ras that definition is brilliant because it does two things it tells us what growth is it's an increase in real GDP and that makes a lot of sense because we know real GDP is our measure of economic growth so real GDP goes up that means the economy is growing but also this definition gives us the two different types of economic growth the two different causes an increase in ad or an increase in el Ras right let's take an increase in ad first that is known as short-run growth also known as actual growth whenever there is an increase in aggregate demand and when that's going on the economy is using up spare capacity in order to increase the output of goods and services in the economy in order to increase real GDP and we can show that on two different diagrams we can use an ATS diagram very easy but we can also use the PPF let's go to the a das diagram first I've used the Keynesian version doesn't matter what diagram you prefer but a basic shift of aggregate demand to the right shows that the economy is using up spare capacity so we have a negative output gap we are closing that negative output gap by moving towards Y Fe and as we close that gap naturally the economy is producing more goods and services using up spare capacity to do so so shifted ad from 81 to 82 shows the increase in economic growth from y1 to y2 moving towards Y Fe using up spare capacity to produce more goods and services so we can use that diagram but we can also use the PPF diagram to show short-run growth again we need to show a negative output gap on a macro PPF and that's a point X just bear in mind the labeling on the axis though guys when we're drawing a macro PPF we've got to have goods and services on the axis that means macro economy all we can have capital goods and consumer goods on the axes which implies a macro economy but if we are inside the boundary which basically means we are inside our productive potential our point X then we have a negative output gap so what we want to show is a movement from inside the PPF towards the PPF because that means the akan he's using up spare capacity to produce more of both goods and services in this case so on this diagram from X to Y is an increase in economic growth short-run economic growth that is basically a booster babyish shift of eighty to the right think of PPF the actual curve is the long-run aggregate supply curve so aggregate demand is moving towards that LRE s curve just like this diagram shows but now let's look at specific causes of short-run growth or actual growth well we need our ad equation again to remind ourselves that ad is equal to C plus I plus G Plus X minus M consumer spending plus investment plus government spending plus net exports so we need to look up factors that can increase one or more of these variables in the ad equations such as lower interest rates we know lower interest rates makes it cheaper for consumers to borrow but also cheaper for businesses to borrow to invest so see and I will increase but also lower interest rates can weaken the exchange rate which can boost X minus M lower income tax or lower corporation tax lower income tax means more disposable income for households more consumer spending lower corporation tax means more retained profit for furs which they can use to invest higher consumer or business confidence that will increase C and I respectively higher government spending of course increases G and a weaker exchange rate can boost X minus M so these are these are the specific reasons why ad could increase and therefore short-run growth can occur and we know how to draw on diagrams let's now look at long-run growth long-run growth also known as potential growth occurs anytime there is an increase in El Ras and when that happens it means there is an increase in the productive capacity of the economy so the economy has the potential to grow at a faster rate it doesn't mean the economy's actually growing at a faster rate necessarily that's all dependent on ad as we've just learned it just means that the potential for economic growth in the economy is now at a higher rate and like we say it occurs when El Ras increases so we can show that on an ad in a s diagram very easily a via an LRS shift to the right but we can also use the PPF let's go to that AAS an ad diagram so I've used now the classical interpretation doesn't matter again which version you prefer but as shifted LRS to the right and we can see that the full employment level of output the maximum growth rate in the economy is increased from if you want to why fe2 there is your long-term growth there is your potential growth done but we can also use a PPF diagram to show exactly the same thing and that is simply by showing a shift of the curve remember what I said before that the PPF curve the boundary itself essentially is your LR es curve so if that curve shifts outwards to PPF - in this case we are showing basically an increase in LR s we are showing long-run growth we are showing potential growth so two ways you can illustrate it but now what are the specific causes of long-run growth what could happen in the economy for LR es to increase will remember why the LRE ESCO shifts there are three reasons why this curve can shift to the right could be an increase in the quantity of factors of production it could be an increase in the quality of factors of production in an economy or it could be an increase in the productive efficiency of the economy meaning a reduction in long-run cost of production for firms in the economy so three ways in which this curve can shift to the right what are the specific factors then that can shift this curve well here they are in red we need to link what's here in red - then what's in green I did that in my aggregate supply video but we'll do it again here just to make sure that we are fully clocked in so an increase in labor productivity if labor productivity goes up that's an increase in the quality of labor and therefore LRS will shift to the right maybe there is an increase in the workforce size via an increase in immigration of working people well if that's the case that's going to increase the quantity of labour and therefore LRS is going to shift to the right maybe it's investment remember what investment is the spending on capital by firms so in firms spend money on capital goods capital goods for example new machinery maybe they're upgrading their machinery maybe it's new technology maybe it's innovation and research and development maybe it's expanding their Factory maybe its buying in new vehicles these are all examples of investment so investment is a quite a vague term we need to be specific by giving these good examples but if investment occurs that it's going to increase potentially the quantity of capital if there's new capital coming in it could be the quality of capital that we're talking about upgrades in new technology and also it's going to reduce long run costs of production for firms so all three will increase firms are spending on capital goods we have infrastructure improvements we can look at that in two ways we can look at transport infrastructure reducing long-run cost of production for businesses as it becomes cheaper and easier to transport their goods and services but also cheaper and easier to access raw materials so long-run costs of production will fall but if infrastructure improvements are physical capital infrastructure like schools and new hospitals being built we could argue it's an increase in the quantity of capital if competition increases in the economy it means firms in the economy have to reduce their long-run cost of production in order to be competitive so competition improvements will boost productive efficiency in the economy and shift LRS to the right and new resource discoveries new resources or resources in economics we call that land as a factor of production so new resources are discovered that's an increase in the quantity of land LRS is going to shift to the right so these are your specific factors which can lead to an LRS shift to the right and therefore can lead to long-run growth or potential growth that means now you understand both actual growth short-run growth and potential growth long-run growth you can illustrate it on diagrams and you know this specific causes important stuff thank you for watching I'll see you in the next video where we look at the economic cycle [Music]