Economic Growth - 2021 Revision Update

In this revision resource we cover some of the key causes of economic growth and also look at how the pandemic has hit growth in the world economy.

What is economic growth?

Economic growth is defined as the increase in the real value of goods and services produced as measured by the annual percentage change in real Gross Domestic Product (GDP).

Economic growth is also defined as a long-run increase in a country’s productive capacity / potential national output.

SHORT TERM GROWTH

Short term causes of rapid real GDP growth can include:

1. Expansionary monetary policy including low interest rates
2. Expansionary fiscal policy including tax cuts and increased government spending and borrowing
3. Favourable exchange rate helping export sales
4. Strong growth of asset prices such as property and shares
5. Expanding employment and rising real incomes
6. Improved business confidence driving higher investment
7. Increased export sales from an economic boom in countries that are major trade partners

LONG TERM GROWTH

Long term causes of rapid real GDP growth include:

1. Impact of a rise in investment spending on a country’s productive capacity
2. Expanding population and growing active labour supply – perhaps due to strong net inward migration
3. Rise in factor productivity such as an increase in GDP per hour worked or GDP per person employed
4. Growth spillovers from invention and innovation
5. Growth benefits from increased government spending on public goods, merit goods and other essential infrastructure