Causes & Consequences of Economic Growth

Exam code: 2281

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Economic growth is the increase in the output of goods and services in an economy over time, usually measured by the rise in real gross domestic product (GDP)
Growth can be short-term (from better use of existing resources) or long-term (from an increase in productive capacity)

Actual economic growth occurs when there is an increase in the quantity of goods and services produced in an economy in a given period of time - using existing resources
- If any component of real GDP increases (consumption, investment, government spending, net exports), there will be an increase in total demand
- This type of growth is short-run — it uses up idle resources but does not expand capacity permanently
  
  Any movement from Point E towards the PPC boundary represents actual economic growth and is caused by an increase in output (rGDP)

Previously unused factors of production are now being employed
This is demonstrated by a shift from inside the production possibilities curve (PPC) such as Point E, towards the boundary of the PPC
At any given point in time, the actual economic growth may be less than the potential growth available to the economy

More resources allow the economy to produce more goods and services in the long run
Some factors that lead to an increase in resources include:
- More workers from population growth or immigration
- The discovery of new raw materials
- Increased capital stock from business investment
- More land brought into production for example through land reclamation such as that carried out in The Netherlands
This type of long-term growth expands the productive potential of the economy, shifting the production possibility frontier (PPF) outward

Economic growth occurs when there is an increase in the productive potential of an economy
- This is demonstrated by an outward shift of the entire curve represented by B
- More consumer goods and more capital goods can now be produced using all of the available resources

Higher-quality resources mean greater efficiency and productivity
Some factors that lead to an increase in the quality of resources include:
- Better education and training improving workforce skills
- Investment in advanced technology
- Improved infrastructure such as transport, communications and energy
- Health improvements increasing worker efficiency
These lead to sustainable long-term growth without inflationary pressure
This type of long-term growth expands the productive potential of the economy, shifting the production possibility frontier (PPF) outward

Economic growth is considered to be the main contributor to an improvement in the standards of living
Due to the negative aspects of economic growth, there is much controversy about maintaining it as a central macroeconomic aim
- Instead, arguments for a focus on societal well-being are gaining traction

Advantages	Disadvantages
Increased incomes lead to better standards of living Decreased levels of absolute poverty Improvement in the quality or quantity of environmentally friendly technologies Higher sales revenue for firms and greater profits Increased investment by firms increases the potential output of the economy Higher government tax revenue due to rising incomes and surging corporate profits Increased employment resolves some of the negative social impacts of unemployment	Rising total demand causes demand-pull inflation and the purchasing power of people on fixed incomes may fall Lack of equity in the distribution of income – the rich may get richer and the poor poorer Environmental damage caused by negative externalities of production and consumption increases Increased inflation can harm export sales The level of imports usually increases, negatively impacting the current account Increased income usually leads to greater consumption of demerit goods Greater output often requires more time from workers and can decrease leisure time and well-being Resources are depleted more rapidly

Advantages

Disadvantages

Increased incomes lead to better standards of living
Decreased levels of absolute poverty
Improvement in the quality or quantity of environmentally friendly technologies
Higher sales revenue for firms and greater profits
Increased investment by firms increases the potential output of the economy
Higher government tax revenue due to rising incomes and surging corporate profits
Increased employment resolves some of the negative social impacts of unemployment

Rising total demand causes demand-pull inflation and the purchasing power of people on fixed incomes may fall
Lack of equity in the distribution of income – the rich may get richer and the poor poorer
Environmental damage caused by negative externalities of production and consumption increases
Increased inflation can harm export sales
The level of imports usually increases, negatively impacting the current account
Increased income usually leads to greater consumption of demerit goods
Greater output often requires more time from workers and can decrease leisure time and well-being
Resources are depleted more rapidly

Causes of economic growth