5.6 Economic Growth

What Drives Long-Run Growth

Economic growth is a sustained increase in real GDP or potential output over time, shown as an outward shift of the production possibilities curve (PPC) or a rightward shift of the long-run aggregate supply (LRAS) curve. Growth comes from increases in the quantity and quality of resources: labor, physical capital, human capital, natural resources, and technology.

Investment and Productivity

Productivity (output per worker) rises when workers have more or better capital (physical or human) to work with. Higher savings rates fund more investment in capital goods, research, and education, boosting future productivity. Policies like tax incentives for R&D, education spending, and property rights protection encourage this investment.

Growth Policies and Tradeoffs

Governments promote growth through investment in human capital (education, training), infrastructure, research and development, and stable institutions/property rights that encourage investment. Growth requires sacrificing present consumption for future capacity — an economy investing more now shifts its PPC outward faster, expanding future consumption possibilities.

Key terms

Economic growth

A sustained increase in real GDP or potential output over time, shown by an outward PPC shift or rightward LRAS shift.

Human capital

The skills, education, and training that make workers more productive.

Productivity

Output produced per worker; increases with more/better capital, education, and technology.

Determinants of growth

Labor, physical capital, human capital, natural resources, and technology.

Role of savings in growth

Savings provide loanable funds for investment in capital, which increases future productive capacity.

Try an AP-style question

Economic growth is best measured by…

1. rising nominal GDP
2. more government spending
3. a higher price level
4. rising real GDP per capita