Note 6- Economic growth

Economic growth is defined as an sustained increase in the productive potential produced in the economy in the long run which is considered as an objective of an economy.

Let's see the causes of the economic growth:
1)In the short run,it can be increased by a rising aggregate demand,e.g export-led growth and consumption -led growth.
2)In the long run,we have to go to supply-side that economic growth can be achieved by the increasing productive capacity,namely the quantity and quality of resources. e.g. an improving technology to increase the productivity of the supply.

But why does the economic growth so important for an economy?
Benefits:
1) The economic growth that be created by an increase in aggregate demand will encourage the unemployed people to seek jobs. Consequently,the unemployment can be reduced.
2) Living standards will be raised because of a rise on the national income of consumers and people can buy what they want to meet their their demand.
3) As the employment rate increasing,tax revenue will be increasd to finance the goverment spending like on the capital goods.
4) The increasing investment caused by an encouraging signal of more consumption will offer more occupations to those unemployed people.
5) It will also increase the status of the country.
6) Business and consumer confidence.

However,the disadvanges:
1) The economic growth may produce demand-pull inflation.
2) The economic growth is always happening accompanied by increasing evironmental problems,such as the water pollution by too much fishing.

To solve this problems,sustainable economic growth is preferred which means economic growth that can continue over-time and does not endanger the next generation's ability to expand their productive capacity.

And the trend growth is also very important for an economy. The trend growth is the expected increase in potential output that the economy can produce.
1)Positive output gap: If the economy grows much faster than the trend, then aggregate demand will eventually exceed long-run aggregate supply and lead to a positive output gap which can lead to demand-pull and cost-push inflation.
2) Negative output gap: If the actual putput is lower than the potential output,it will lead to downward pressure on prices and rising unemployment because of a lack of aggregate demand.