Short-term Growth
- Economic growth can occur in the short-term or long-term and each is explained differently
- Changes to any of the components of aggregate demand (AD) will cause short-term economic growth to occur
- This is illustrated on an AD/AS diagram by a rightward shift in AD
- It can also be illustrated by using the production possibilities curves model by moving from a point inside the curve to a point closer to the curve
1. Short-term Economic Growth on an AD/AS Diagram
Short-term economic growth through a shift of aggregate demand from AD→AD1
Diagram Analysis
- An increase in consumption, investment, government spending or net exports has caused a shift in AD from AD→AD1
- The current real output has increased from Y1→Y2 which represents an increase in real GDP
- An increase in real GDP = economic growth
- This short-term growth has led to an increase in average prices from AP1→AP2
2. Short-term Economic Growth on a Production Possibilities Curve (PPC)
Short-term economic growth on a production possibilities curve (PPC) model
Diagram Analysis
- An increase in production has caused a shift in production combinations from X→Y
- The current real output has increased moving closer to the maximum possible output of the economy
- This represents an increase in real GDP
- An increase in real GDP = economic growth