Economics Essay Example | Topics and Well Written Essays - 1500 words - 7

Economics - Essay Example This piece of research paper defines potential growth and actual growth and explains the basic differences between them based on the literatures. This paper described how governments can influence both actual and potential growth of a country through demand and supply variables. Definitions of Potential and real growth Economic growth in simple term is an increase in a country’s output. Actual growth has been defined as an economic growth which is measured as a rate at which the real GDP- Gross Domestic Product- is changing. A country may be able to produce more quantity of goods and services and thus its potential will increase due to an increase in the quantity or quality of its resources. This is referred as potential growth (Grant and Vidler, p. 142). Thus, actual growth refers to the increase in the output of a country whereas potential growth is an increase in a country’s ability to produce goods and services with the resources it has. As Katz (p. 30) defined, pot ential growth is the rate that an economy can sustain over the long haul by operating in full capacity. Actual growth is the exact change or growth in the economy as a result of the real GDP growth or change. Actual growth occurs when the resources and factors of production are increased and as a result the actual output has been increased. The total output of a country measured in total income or quantities of the goods and services it produced may change over time even when there are no change in the resources. If it is assumed that the quantity and quality of the available resources are fixed in a country, the production possibility curve can still shift its positions as the maximum potential output of that country may change. When the resources are fixed in a specific time period, they can do possibly change over time. A good example for this can be illustrated from a country’s growing population. When its population grows, it will directly cause increase in the supplies of labors and entrepreneurial skills etc and most probably labor quality also improve over time. Apart from these, the country would probably become able to increase its stock of capital, improve the existing energy, mineral and related resources etc. As a result of the increase in these factors of production in the country, its ability to produce more outputs will also increase and it refers to the potential growth (McConnell and Brue, p. 29). Differences between Actual Growth and Potential Growth The basic difference between actual growth and potential growth is that, as detailed above, actual growth refers to the growth in the economy being measured as a rate at which the real GDP is changing whereas potential growth refers to a country’s ability to produce more being its production possibility is more due to an increase in its factors of production (Samuelson, p. 469). From the view of economists, the potential or full-employment growth rate is an estimate of how much sup ply of goods and services that the country produces would be expanding if all the available or existing factors of production were fully utilized (Baumol and Blinder, p. 136). Actual growth measures the demand for goods and services within the country, and the demand for them may be less than the potential supply. Some factors in this case may be underused (Lincoln, p. 26). When a country is accessible to larger