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Economic growth

15 February, 2016 - 09:58

Three things contribute to growth in the economy. The labour supply grows as the population expands; the stock of capital grows as spending by business on new offices, factories, machinery and equipment expands; and labour-force productivity grows as a result of experience, the development of scientific knowledge combined with product and process innovations, and advances in the technology of production. Combined, these developments expand capacity output. In Figure 1.5 economic growth shifts the PPF out from PPFo to PPF_1.

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Figure 1.5 Growth and the PPF

 

Economic growth or an increase in the available resources can be envisioned as an outward shift in the PPF from PPFo to PPF_1. With PPF_1 the economy can produce more in both sectors than with PPFo.

This basic description of economic growth covers the key sources of growth in total output. Economies differ in their rates of overall economic growth as a result of different rates of growth in labour force, in capital stock, and improvements in the technology. But improvements in standards of living require more than growth in total output. Increases in output per worker and per person are necessary. Sustained increases in living standards require sustained growth in labour productivity based on advances in the technologies used in production.