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Home Field Trips Copper Tour Economic Growth

Theories

Economic Growth and the Production Possibility Curve

Next theory - Fisher Clark's Theory of Structural Change >>

Economic growth is the increase in the real GDP per capita over a period of time. It can be shown by an outward shift of the production possibility curve. The production possibility curve shows the combination of two goods that a country can produce using all of its resources in the most efficient way. Economic growth will increase the amount of goods and services that a country can potentially produce. To do this, the quantity or quality of factors of production must be increased.

Development is a broader process that includes raising living standards and poverty reduction. Economic growth may result in an improvement in the standard of living of a relatively small proportion of the population whilst the majority of the population remain poor. It is how the economic growth is distributed amongst the population that determines the level of development. Some economists argue that economic growth will eventually lead to a general improvement of peoples' living standards as trickle down occurs. Trickle down as its name suggests is the process whereby part of the population experiencing an increase in their income spend money on the domestic economy thus setting in motion multiplier effect which generates income for the poorer sections of the population. However there is considerable evidence from a number of countries that this process does not make any meaningful improvement to the lives of the poor.

It is thus possible to have economic growth with no or little development. This can be demonstrated using the production possibility curve in the diagram below. In the left-hand diagram the economic growth has shifted the production possibility to the right. However, the majority of the additional goods produced are luxury goods and benefit the higher income earners. In this case there is little if any development. In the production possibility curve shown on the right-hand side the additional output consists of necessity items and these could benefit the low-income earners.

Next theory - Fisher Clark's Theory of Structural Change >>

Related Glossary Items:
Production Possibility Curve
GDP
Economic Growth
Trickle Down
Multiplier
Development

Related Theories:
Economic Efficiency
Supply Side Approaches
The Causes of Economic Growth