The meaning of actual economic growth

Actual economic growth refers to an increase in the real output of goods and services in an economy. It is also known as short-run economic growth.

Ways actual economic growth is achieved:

• Greater utilisation of existing resources - This involves making better use of resources that are already available but not fully employed.
• Utilisation of more resources - This can happen by increasing the amount of resources in use.

Illustrations of actual economic growth

Actual economic growth can be represented visually using economic diagrams.

Representation on a production possibility curve (PPC)

Actual economic growth is illustrated as a movement from a point inside the PPC towards a point on the curve. For example, if an economy moves from producing fewer consumer and capital goods (inside the curve) to higher levels on the curve, this reflects actual growth.

Representation on an AD/AS diagram

Actual economic growth appears as a rightward shift in the aggregate demand (AD) curve in an economy that has spare capacity. When AD increases, it leads to greater use of unemployed resources, resulting in higher output.

The meaning of potential economic growth

Potential economic growth, often called long-run economic growth, represents an expansion in the maximum possible output that an economy can achieve. It reflects an increase in the productive capacity of the economy. For this increased capacity to result in higher actual output, the new potential must be utilised.

Illustrations of potential economic growth

Potential economic growth is depicted in diagrams as an expansion of the economy's productive boundaries.

Representation on a production possibility curve (PPC)

Potential growth is shown as an outward shift of the entire PPC curve. This shift indicates that the economy can now produce more of both types of goods than before.

Representation on an AD/AS diagram

Potential growth is illustrated by a rightward shift in the long-run aggregate supply (LRAS) curve.

The relationship between actual and potential economic growth

Actual and potential economic growth are interconnected.

How actual and potential growth interact:

• Simultaneous occurrence - Both types of growth can take place together.
• Combined effects - Together, they can boost overall output, raise incomes, and improve the quantity and quality of resources available.
• Contribution to progress - This combination often supports wider economic development.
• Importance of diagrams in analysis - Using PPC or AD/AS diagrams helps distinguish between the two types of growth.