Macroeconomics

‭B. Economic Growth vs. Economic Expansion‬ ‭Not‬‭all‬‭increases‬‭in‬‭real‬‭GDP‬‭are‬‭considered‬‭economic‬‭growth.‬‭Temporary‬‭fluctuations‬‭in‬‭output‬‭or‬ ‭the‬ ‭use‬‭of‬‭underutilized‬‭resources‬‭can‬‭result‬‭in‬‭economic‬‭expansion‬‭but‬‭not‬‭economic‬‭growth.‬ ‭For‬ ‭instance,‬ ‭when‬ ‭an‬ ‭economy‬ ‭produces‬ ‭beyond‬ ‭potential‬ ‭output‬ ‭(where‬ ‭AD‬‭and‬‭SRAS‬‭intersect‬‭beyond‬ ‭LRAS),‬ ‭there‬ ‭might‬ ‭be‬ ‭an‬ ‭increase‬ ‭in‬ ‭real‬ ‭GDP.‬ ‭However,‬ ‭this‬ ‭is‬ ‭not‬ ‭economic‬ ‭growth,‬ ‭as‬ ‭it‬ ‭is‬ ‭not‬ ‭sustainable in the long run.‬ ‭Similarly,‬‭if‬‭the‬‭economy‬‭is‬‭recovering‬‭from‬‭a‬‭recession‬‭after‬‭operating‬‭below‬‭potential‬‭output‬‭(where‬‭AD‬ ‭and‬‭SRAS‬‭intersect‬‭below‬‭LRAS),‬‭the‬‭increase‬‭in‬‭real‬‭GDP‬‭is‬‭also‬‭not‬‭considered‬‭economic‬‭growth;‬‭it‬‭is‬ ‭temporary.‬ ‭When‬ ‭in‬ ‭doubt‬ ‭about‬ ‭whether‬‭an‬‭increase‬‭in‬‭real‬‭GDP‬‭signifes‬‭economic‬‭expansion‬‭or‬‭growth,‬‭always‬ ‭remember that‬ ‭economic growth entails an increase‬‭in full employment output over time.‬

‭Graphically, economic growth can be illustrated using the PPC and the AD-AS model.‬ ‭Economic Growth on the PPC‬

‭Economic‬ ‭growth‬ ‭is‬ ‭illustrated‬ ‭by‬ ‭an‬ ‭outward‬ ‭shift‬ ‭of‬ ‭the‬ ‭PPC‬ ‭to‬ ‭reach‬ ‭production‬ ‭combinations‬ ‭that‬ ‭were‬ ‭previously‬ ‭unattainable‬ ‭given‬ ‭the‬‭available‬ ‭resources‬ ‭and‬ ‭technology.‬ ‭This‬ ‭shows‬ ‭an‬ ‭increase‬ ‭in‬ ‭the‬ ‭economy’s‬ ‭capacity‬ ‭to‬ ‭produce.‬

‭It‬ ‭is‬ ‭crucial‬ ‭to‬ ‭understand‬ ‭that‬ ‭moving‬ ‭from‬ ‭a‬ ‭point‬ ‭inside‬ ‭the‬‭PPC‬‭to‬‭a‬‭point‬‭on‬‭it‬‭signifes‬‭economic‬ ‭expansion,‬ ‭not‬ ‭economic‬‭growth.‬‭This‬‭is‬‭because‬‭the‬‭economy‬‭initially‬‭had‬‭underutilized‬‭resources,‬‭and‬ ‭utilizing them enables a shift to the full employment level on the PPC.‬

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