Economics explained
Category:
Economic growth
Potential economic growth
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Potential economic growth is the rate at which the economy would grow if all resources (eg people and machinery) were utilised.
The causes of growth in potential output are the determinants of the capacity of the economy (the supply side) rather than actual spending (the demand side), and are as follows.
There may be increases in the amount of resources available.
For example, new natural resources are continually may be discovered or the size of the working population may increase.
Increases in the productivity of resources may result from technological progress or changed labour practices, for example.
Potential economic growth can be shown using both a production possibility curve and an AD/AS diagram.
Both diagrams illustrate an increase in the maximum output the economy is capable of producing. For potential economic growth to lead to higher output, the rise in productive potential must be utilised.