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The Difference Between Actual Growth and Potential Growth

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Introduction

David Pearce The Difference Between Actual Growth and Potential Growth There are two different types of economic growth, known as actual growth and potential growth. Actual growth is the percentage annual increase in national input: the rate of growth in actual output. When statistics on growth rates are published, it is actual growth they are referring to. Potential growth is the speed at which economy could grow. It is the percentage annual increase in the economy's capacity to produce: the rate of growth in potential output. ...read more.

Middle

This will result in a growing gap between potential and actual output. To close this gap, the actual growth rate would temporarily have to exceed the potential growth rate. There are thus two major issues concerned with economic growth: the short-run issue of ensuring the actual growth is such as to keep actual output as close as possible to potential output; and the long-run issue of what determines the rate of potential economic growth. A production possibility diagram can be used to illustrate the distinction between actual and potential growth. ...read more.

Conclusion

Actual growth is represented by a movement outward of the production point. In the short run, actual growth can arise from a fuller use of resources (a movement from point a to point b on the diagram). This would involve taking up slack in the economy: using machinery more fully and reducing unemployment. For actual growth to be sustained over a number of years, however, there would have to be an increase in potential output. In other words, to get beyond point b on the diagram, the production possibility curve would have to shift outward beyond curve I. ...read more.

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