Causes of Economic Growth
Booms / dips in economic growth can occur due to a number of reasons:
1. Increase in aggregate demand caused by:
- An increase in consumption – this may be caused by: a rise in income levels, an decrease in interest rates, house price inflation
- A rise in the level of government spending
- A balance of payments surplus
2. Labour shortages
- If there are shortages of workers in specific areas it means that the economy will not be able to utilise its resources efficiently and therefore economic growth will slow
3. Increase in demand for imports
- This will worsen the balance of payments deficit
Demand & Supply Side Shocks
Supply side and demand side shocks can lead to instability in the economy. Shocks are unexpected events that influence the demand / supply in an economy. As the UK operates in a global market their economy is open to shocks from across the world.
Demand Side Shocks
These can include:
- A significant rise or fall in exchange rates in short term
- Changes in the rate of economic growth for countries that you trade a lot with
- Changes in aggregate demand
- A boom in capital expenditure e.g. in construction or ICT
Supply Side Shocks
These affect the costs and prices of supply
These can include:
- Technology
- Natural disasters which impact the supply of particular goods e.g. crops
- Political situations that influence the supply of particular products e.g. oil
Trend rates in Economic Growth
The trend rate of economic growth shows the rate of economic growth is the average rate of economic growth over a period of time
The trend rate of economic growth is influenced by a number of factors of supply side including:
- Investment
- Education
- Training
- Technological change
Investment
Investment influences the trend rate of economic growth as higher levels of investment increase AD and expenditure within the economy
In addition investment expenditure means there are more capital goods for workers to use to produce consumer goods therefore increasing the level of output in the economy
Education & Training
Education and training can increase the growth rate of the labour force in the economy
These can both increase the trend rate of growth in labour productivity in the UK therefore driving the level of economic growth
Technology
Changes in technology can reduce the costs of goods in the economy
If the costs of supplying products decreases then production possibility frontier will shift outward
