- An increase in resources – natural resources, labour or capital
- An increase in the efficiency with which these resources are used, through advances in technology, improved labour skills or improved organisation.
There will be an increase in space capacity and an increase in unemployment if the potential growth rate exceeds the actual growth rate. 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. It can show all the possible combinations of two goods that can be produced at any one time. Goods and services can be lumped together into two categories: for example, agricultural goods (good X) and manufactured goods and services (good Y).
The production possibility curve itself shows potential output whereas potential growth is illustrated by a shift out-ward of the curve (see diagram below).
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.
