Causes of Economic Growth -3
Causes of Economic Growth.
1. Increased AD
· If there is spare capacity in the economy an increase in AD will cause an increase in Real GDP.
· An increase in AD could occur for various reasons such as Lower interest rates, increased wages or higher govt spending
· However Classical economists believe higher AD will only increase inflation and not Real GDP, because in the Long run AS is inelastic.
2. Long Term Economic Growth.
· Long run economic growth requires an increase in the LRAS as well as AD
· LRAS or potential growth can increase for the following reasons:
1. Increased Capital e.g. investment in new factories or investment in infrastructures such as roads and telephones.
2. Increase in working population
3. Increase in Labour productivity, through better education and training
4. Producing more raw materials.
5. Technological improvements to improve the productivity of Capital e.g. Microcomputers, the internet have both contributed to economic growth
