Tejvan Pettinger

Economic growth is an increase in real GDP; it means an increase in the value of goods and services produced in an economy.

The rate of economic growth is the annual percentage increase in real GDP. There are several factors affecting economic growth, but it is helpful to split them up into:

Economic growth in the UK

Annual UK economic growth 1949-2017

Demand side factors – Aggregate Demand (AD)

AD= C+I+G+X-M.

Therefore a rise in Consumption, Investment, Government spending or exports can lead to higher AD and higher economic growth.


Graph showing rise in AD

What could affect AD?

Factors that determine long run economic growth

The average growth in real GDP is often known as the long-run-trend rate. This shows the recession of 2008, caused a loss in potential GDP.

In the long run, economic growth is determined by factors which influence the growth of Long Run Aggregate Supply (LRAS). If there is no increase in LRAS, then a rise in AD will just be inflationary.

With this aggregate supply curve, the impact of an increase in AD depends on the situation of the economy.

Classical view


This graph shows an increase in LRAS and AD, leading to an increase in economic growth without inflation.

LRAS (productive capacity) can be influenced by

  1. Levels of infrastructure. Investment in roads, transport and communication can help firms reduce costs and expand production. Without the necessary infrastructure, it can be difficult for firms to be competitive in the international markets. This lack of infrastructure is often a factor holding back some developing economies.
  2. Human capital. Human capital is the productivity of workers. This will be determined by levels of education, training and motivation. Increased labour productivity can help firms take on more sophisticated production processes and become more efficient.
  3. Development of technology. In the long run development of new technology is a key factor in enabling improved productivity and higher economic growth.
  4. The strength of labour markets. If labour markets are flexible, then firms will find it easier to hire the workers they need. This will make expansion easier. Highly regulated markets could discourage firms from hiring in the first place.

The role of productivity

Productivity is output per worker and has a strong bearing on the long-run trend rate of economics growth. Productivity will be determined by technology, levels of investment in new technology and the skills of the labour force.


This shows a fall in productivity growth since the 2007 recession – leading to lower rates of economic growth.

Other factors that can affect growth in the short term

Examples of Economic Growth


A graph showing quarterly economic growth in UK. In 1981,1991 and 2008 we see a recession.

In 1981, this negative economic growth was due to:

In the mid-1980s, the high economic growth was caused by

In 2009, the sharp fall in Real GDP (negative economic growth) was caused by:

The great moderation 1992-2007

This was a long period of economic expansion in the UK.

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