5.7 Public Policy and Economic Growth

Policies that boost long-run growth

Long-run economic growth is driven by increases in productivity and the quantity/quality of resources. Governments can encourage growth by investing in human capital (education, training), funding research and development, and building infrastructure (roads, ports, communication networks). These shift the long-run aggregate supply (LRAS) and production possibilities curve (PPC) outward, raising potential output.

Property rights, saving, and investment

Strong property rights and stable legal/political institutions encourage entrepreneurship and investment by protecting returns. Policies that boost national saving (like lower budget deficits) free up loanable funds for capital investment, financing new factories, machinery, and technology — key ingredients for growth.

Trade-offs and free trade

Growth-promoting policies often involve trade-offs: spending on infrastructure/education competes with other budget priorities, and may raise deficits short-term. Free trade policies open access to larger markets, specialization, and technology transfer, increasing efficiency and long-run growth, though they can create short-run adjustment costs for some industries.

Key terms

Human capital investment

Spending on education/training that raises worker productivity and supports long-run economic growth.

Property rights

Legal protections ensuring individuals/firms retain benefits of their investments, encouraging growth.

National saving and growth

Higher saving increases loanable funds, lowering interest rates and boosting capital investment.

Infrastructure investment

Government spending on roads, ports, and communication networks that raises productivity and shifts LRAS/PPC outward.

Free trade trade-off

Increases efficiency and long-run growth but can cause short-run losses in import-competing industries.

Try an AP-style question

Which policy most promotes long-run growth?

1. Printing more money
2. Funding education and research
3. Increasing budget deficits
4. Raising import tariffs