1. Economic growth
Economic growth can be defined as an increase in actual or potential GDP
Using AD/AS analysis, draw an increase in actual GDP (hint, think of this in terms of the latest quarterly number, ie in the short-run)
Give an example of why actual GDP might increase
and how the government might help this happen

2. Increase in actual GDP – increase in AD
Price
Level
Actual GDP (real GDP) increases if aggregate demand increases
AD = C + I + G + (X – M)
So AD might increase if:
Consumption increases. Could happen if the government cuts income taxes, or if the Bank of England lowers interest rates
Investment increases. Could happen if the government reduced corporation taxes, or again if the Bank of England cut interest rates
If G increases. If the government built a new hospital in Surbiton….
If exports increase
SRAS P2 P1
AD2
AD1 Y1 Y2
Real Output

3. Increase in actual GDP – increase in SRAS
Price
Level
Can also happen if SRAS shifts as a result of a reduction in costs
For example, if the government cuts taxes on firms, firms can lower prices, so SRAS shifts down
Since the AD curve is downward sloping, this means an extension along the AD curve and so a higher level of real output = growth
An improvement in productivity will also lead to the same impact, so government policies to improve productivity will also lead to an increase in actual GDP
SRAS1
SRAS2 P1 P2 AD Y1 Y2
Real Output
Which curve should you shift? In general you should shift AD since government policy on growth in the short-run is focussed on aggregate demand. You would only shift SRAS if a question was focussed on the impact of a change in costs

4. Increase in potential GDP
Using AD/AS analysis show on a diagram an increase in potential GDP
How might the government help to increase potential GDP

5. Increase in potential GDP (classical model)
Price
Level
LRAS1
LRAS2
An increase in potential GDP can be shown with the LRAS curve (or with the PPF)
We will look in more detail at this when we consider supply side policies, but LRAS shifts out when
There is more or better capital. So the government can encourage investment
When there is more or better labour. So the government can try to increase the size of the workforce, and to make it more efficient P1 P2 AD Y1 Y2
Real Output

6. Importance of international trade
On the specification:
What is export-led growth?
When an increase in exports is the reason for actual growth (ie aggregate demand increasing)
This growth leads to an increase in investment to fulfil demand, and so LRAS shifts out – potential growth
Which countries have grown this way?
Why is export-led growth a good thing?
Growth in demand generally means an increase in imports (as incomes rise, demand for imports rises) and so a current account deficit
Export-led growth means exports rise first, so a country will have a current account surplus
Can all countries grow this way?

7. Importance of international trade
Let’s say each country can produce 12 units of what it is good at if it uses all its resources to produce that good, or 3 of the others.
Let’s then say UK, China and Germany do not trade, but devote one third of total resources to each product for their own consumption. Output will be as below in red, with each country producing one third of potential output for each good.
Imagine then the UK only produces banking services, China clothes and Germany cars. Output is shown in green. Total world output rises to 12 for each product, and with trade, all countries are better off. This is because the UK would just produce banking services and export them in return for cars from Germany and clothes from China (perhaps 1 for 1)
More advanced: international trade enables all countries to grow
This is because countries can produce more of what they are relatively, or comparatively good at producing, then export these goods to pay for imports of products they are not so good or efficient at producing
China can specialise in low to mid end manufactures like clothes (and steel?), Germany in cars, and the UK in services like banking
So China produces clothes for the UK and Germany. We export banking services to pay for these clothes, whilst Germany exports cars
All countries can be better off, which means economies grow faster because of international trade
Clothes
Cars
Banking UK 1 4 12
Germany
China
Total 6