How does actual economic growth differ to potential economic growth?

Actual economic growth can also be known as demand side economic growth because it is affected by changes in the demand in an economy.  It is an increase in output as measured by real GDP/ national income. It can be achieved by shifting AD (Aggregate demand)  to the right by increasing AD, by influencing any of the factors of aggregate demand. (As shown below) 

•Consumption

•Government Spending

•Net Exports

* Investment (However this is also a component of LRAS)

On the other hand potential economic growth deals with the supply side of the economy. It is an increase in the productive capacity (potential). An increase in the short term/long term aggregate supply will cause potential economic growth. The short term deals with costs of production and the long term is affected by changes in the quality and quantity of the factors of production. 

SW

Related Economics A Level answers

All answers ▸

What would happen to the price and quantity of a good if the government imposed a subsidy?


What is Macroeconomics?


Are monopolies more efficient than firms under perfect competition?


Why does the MC Curve cut the AVC curve at the AVC Curve’s lowest point?