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Economics explained


Economic growth

Actual economic growth

Actual economic growth

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Actual economic growth is the annual percentage increase in national output, which typically fluctuates in accordance with the trade cycle.

Actual growth in the long run is determined by two factors. :

The growth in potential output (in other words the aggregate supply)

The growth in aggregate demand (AD)

A production possibility curve (PPC) diagram can be used to show economic growth resulting from greater use of existing resources.

The economy is initially producing at point X. Then the production point increases to point Y and more goods and services are produced. (see diagram below) Actual economic growth can also be shown using an AD/AS diagram.

The figure below shows an increase in aggregate demand in an economy with spare capacity.

The increase in aggregate demand brings into use previously unemployed resources and output (measured by real GDP) increases from Y to Y1.

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