EIBC - Policies to Promote Economic Growth (Lesson)

Policies to Promote Economic Growth

Introduction

Economic growth occurs when the production possibilities curve and the long run aggregate supply curves shift outward or to the right. Growth occurs with the discovery of new resources, increased productivity, and new technology.

A healthy climate for growth in GDP per capita and labor productivity includes human capital deepening, physical capital deepening, and technological gains, operating in a market-oriented economy with supportive government policies.

What policies are in place to promote this type of economic growth?

 

Policies to Promote Economic Growth

A country experiences economic growth if it has increased its long-run ability to produce goods and services, no matter the current short-run phase of the nation’s business cycle. Recall that short-run fluctuations in the business cycle are caused by changes in either aggregate demand or short-run aggregate supply. These short-run changes lead to increases, or decreases, in real gross domestic product (GDP). However, these changes are movements around the long-run stability of full-employment GDP. So another way to think about economic growth is to consider the level of real GDP when the nation is at full employment. If this level of full-employment output is increasing, the nation is experiencing real growth and we will see a rightward shift of a vertical LRAS curve.

Using the production possibilities model, economic growth is shown as an outward movement of the production possibilities curve. This allows a nation to produce combinations of goods and services that were previously unattainable, given the nation’s stock of resources and technology.

Review these policies in the activity below.

Review

Review what you have learned by completing the activity below.

 

In Summary . . .

Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita. Capital deepening refers to an increase in the amount of capital per worker, either human capital per worker, in the form of higher education or skills, or physical capital per worker. Technology, in its economic meaning, refers broadly to all new methods of production, which includes major scientific inventions but also small inventions and even better forms of management or other types of institutions. A healthy climate for growth in GDP per capita consists of improvements in human capital, physical capital, and technology, in a market-oriented environment with supportive public policies and institutions.

 

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