Price level
AS
Initially, changes in C,I,G,X,M can cause an outward shift of AD resulting in higher levels of national income (O=E=Y)
AD2(C+I+G+X-M) AD1(C+I+G+X-M)
Capital goods
Long-term increases in aggregate supply factors can increase the amount that an economy can produce (potential growth) B A
PPF1 PPF2
Consumer goods



In reality economic growth rates over time are seldom steady, instead they often follow a pattern of recession, recovery and boom; during periods of recession the growth rate will fall below the trend and during boom times it will be above the trend Although there are fluctuations over the short-term it is useful to look at the long-term trend which in nearly all cases is upward; whilst the upward trend can look small even a modest growth rate compounded over time generates a large increase in living standards For example the US economy grew by an average of 1.83% from 1870 to 2006; this resulted in an increase in real GDP per capita from $3,752 to $44,260 (at 2006 prices)
National income
Trend output
Actual output
O
Time
O
National output
Price level
LRAS
Eventually however factors of production reach capacity and so long-run aggregate supply can be represented by a vertical line, showing that increases in AD are ineffective in raising national income
AD2(C+I+G+X-M) AD1(C+I+G+X-M)
O
National output


The production possibility frontier (PPF) is a curve that shows the combinations of goods that can be produced in an economy The PPF therefore represents the maximum output level at a given moment
Capital goods
PPF1
Consumer goods
Capital goods
B A
Short-term aggregate demand factors can move an economy closer towards capacity (actual growth)
PPF1
Consumer goods
Topic A Lecture 3 of 4

The increase in the output of goods and services in an economy over a given period of time




Economic growth is measured through changes in the level of real GDP We should however distinguish between actual growth and potential growth Short-term changes in actual growth result from changes in the components of national income (C,I,G,X,M) Long-term changes in potential growth result from changes in supply-side factors such as improvements in technology or labour productivity
AD2(C+I+G+X-M) AD1(C+I+G+X-M)
O
National output
Price level
LRAS1 LRAS2
If however there is an outward shift of the LRAS curve (as a result of an increase of supply-side factors) then national income increases (economic growth)