3.3.1—Economic growth
- Syllabus
- First assessment 2022
- Objective
- 3.3.1
- Level
- SL
Economic growth can be current output or productive capacity
Economic growth is a sustained increase in real output, usually measured as real GDP or real GDP per person.
Short-run growth follows higher AD and moves the economy closer to its existing capacity. Long-run growth follows higher productivity or more factors of production and shifts the PPC/LRAS outward, raising potential output.
If real GDP rises from 500 to 515, the growth rate is (15 ÷ 500) × 100 = 3%. That is real growth only if inflation has been removed; if population rises faster, GDP per person may still fall.
Identify whether the change is AD-driven actual growth or capacity-driven potential growth before choosing an AD/AS or PPC explanation.
A higher nominal GDP is not automatically economic growth: price changes and population changes can reverse the conclusion.