Growth comes from more total demand when there are idle resources, or from more and better resources.
An increase in total demand can cause growth when the economy has unemployed resources. Spending by households, firms, the government or foreign buyers rises. Firms produce more and hire idle workers, so output rises towards the PPC.
An increase in the quantity of resources raises what the economy can produce. Examples are more workers through immigration, more capital through investment, or new land through reclamation.
An increase in the quality of resources does the same. Better education and training, healthier workers and better technology all raise output per worker.
Growth from more demand moves the economy towards its PPC. Growth from more or better resources shifts the PPC outwards. Lasting growth needs the second kind.
- Demand-led growth
- More spending puts idle resources to work.
- Supply-led growth
- More or better resources shift the PPC outwards.
- Quality of resources
- Education, health, technology.
Worked example: Explaining growth in an exam answer
A question asks how investment causes economic growth.
- Short run: firms buy machines and build factories, which is spending, so total demand rises.
- Long run: the new machines add to the quantity and quality of capital.
- Each worker can produce more, so the economy can produce more.
- On a PPC, the curve shifts outwards.
Watch out for this
Economic growth can only happen if the population grows.
More workers is only one cause. Growth also comes from more capital, better skills, better technology, and using idle resources.
Check your understanding
A country invests heavily in new technology. How is this likely to cause growth?
- It raises the quality of capital, shifting the PPC outwards.
- It moves the economy from outside its PPC to inside it.
- It reduces total demand.