We have already highlighted the importance of economic growth in this course; the 2007 Pre-Budget Report stated “the Government has set itself the objectives of achieving high and stable levels of growth and employment”.
Short-Term Economic Growth
The chart below shows the long-term growth rate for the UK at 2½%. It also demonstrates the short-run booms and recessions and positive and negative output gaps.
It is possible to use the production possibility boundary to demonstrate changes in economic growth. On the production possibility frontier below point A is where there is a negative output gap.
Moving from point A to the production possibility frontier would indicate economic a recovery. This is because the productive capability of the economy has remained the same, the PPF hasn’t moved.
Long-Term Economic Growth
Long-term growth will occur when the long-run aggregate supply curve shifts outwards. We will look in more detail at how this can be achieved when we address supply-side policies. It can be demonstrated by an outward shift of the long run aggregate supply curve.
It is possible to use the production possibility boundary to demonstrate the outward shift in the LRAS, as shown below.
The following diagram shows how an increase in investment can feed through to the whole economy.
The initial increase in investment shifts the AD curve outwards. The second round effects will be that the investment will lead to an increase in the productive capabilities of the economy and both the short run and long run supply curves will shift to the right.
The UK’s Experience of Growth
The UK has experienced varied growth levels since 1979 when Margaret Thatcher’s government first came to power. Wikipedia has a section on the history of economic growth that is kept up to date.