IB Economics 3.3.1 Economic Growth Notes

1. Economic growth refers to an increase in a country's real gross domestic product (GDP) over time.
2. The real output is the value of an economy's national output after it has been adjusted for inflation. It reflects the true value of goods and services produced in a given year.
3. Economic growth is usually expressed as the country's annual percentage change in the value of the country's real national output.

There are two types of economic growth:

1. Short-term economic growth happens when the economy uses more of its existing resources, so actual output rises toward the capacity it already has rather than that capacity growing.
2. Long-term economic growth happens when the economy's productive capacity itself expands over time, so the maximum it can produce rises even when all resources are already in use.

Short-term growth

1. Short-term economic growth occurs when an economy moves from operating below its capacity to producing more within its current resources.
2. This is represented as actual growth in the PPC model and by changes in aggregate demand (AD) in the AD/AS model.

Actual growth in the PPC model

1. The Production Possibility Curve (PPC) represents an economy's maximum potential output given its available resources.
2. Short-term growth happens when an economy moves closer to its PPC, meaning previously unused resources (unemployed labor or idle factories) are now being utilized.
3. This is often caused by increases in demand, investment, or improved efficiency in production.

Figure 1 above illustrates actual growth in the PPC model of an economy producing manufacturing goods and agricultural goods:

1. An increase in the use of available resources through (for example) efficiency gains, allows more of both goods to be produced.
2. This moves the economy's production closer to its PPC from Point A to Point B, demonstrating actual growth.

Role of AD in the AD/AS Model

Aggregate Demand (AD) consists of:

$$AD=C+I+G+(X−M)$$