9.2 Economic growth and sustainability

Actual growth may occur without potential growth when idle machines and labour return to work. Potential growth may occur without immediate actual growth when capacity expands but AD is too weak to use it. At or near full employment, sustained real growth needs potential capacity to expand; extra AD alone is more likely to raise prices.

Reopening an idle production line moves output toward an unchanged PPC: actual growth. Building a more productive line or improving workforce skills shifts the PPC/LRAS outward: potential growth. One investment project can do both if construction raises AD now and the completed asset raises capacity later.

Potential output is not directly observed, so the gap is an estimate and can be revised. A negative gap often accompanies unemployment and weak inflation pressure; a positive gap may accompany bottlenecks and demand-pull inflation.

If actual GDP is 980 and potential GDP is 1,000, the output gap is −2% of potential. The number is not a precise count of unemployed people.

Automatic stabilisers reduce the multiplier and the size of output fluctuations; they do not prevent every recession or boom. Their strength depends on tax progressivity, benefit coverage/take-up, marginal propensities, informality, fiscal credibility and the size/cause of the shock. Discretionary policy may still be needed.

First diagnose actual versus potential growth. In a recession, demand support can move output toward existing capacity quickly. At full employment, extra AD mainly creates inflation unless labour, capital or productivity expand. Public infrastructure or human-capital spending can affect both AD now and LRAS later.

Judge effectiveness by the size and cause of the gap, multiplier/leakages, response elasticities, finance and debt, implementation quality, time horizon, policy interaction, political constraints, external balance, distribution and environmental/resource effects. Compare the policy with a feasible alternative or package, not with doing nothing in an unspecified economy.

An ageing economy with an immediate worker shortage may gain capacity faster from skilled immigration or higher participation than from birth-rate policy; automation can raise output per worker but may need skills and finance. A low-income economy with weak transport and skills may need infrastructure plus training rather than demand stimulus alone.

Equality asks how evenly outcomes such as income are distributed. Equity asks whether the distribution and opportunities are fair according to a stated criterion. Growth can reduce absolute poverty while relative inequality rises, so average real GDP per person is not enough to establish inclusion.

Assess changes in employment and participation, real disposable income by group, poverty, income/wealth distribution, access to health/education/infrastructure, regional and gender gaps, social mobility and who bears taxes, prices and environmental costs. Use both level and distribution evidence over time.

Conserve renewable resources by keeping use within regeneration where possible, and manage non-renewables by reducing waste, recycling, substituting renewable inputs and investing resource rents in reproducible/human capital. Sustainability is about the total stock of productive, human and natural assets, not never using a resource.

Judge net effects across the full life cycle, current versus future generations, actual versus potential growth, distribution, transition jobs/energy reliability, policy credibility, innovation response, leakage, enforcement and whether damage is reduced absolutely or only per unit of GDP. A policy package can combine a credible pollution price with targeted transition support and clean infrastructure.

Subsidising recycled inputs can raise output while reducing virgin-resource demand, but it is sustainable only if collection, processing energy and total material use also improve. A fish farm may relieve pressure on wild stocks, but feed, water pollution and ecosystem effects still need assessment.