Economic growth | IGCSE Class 10 Economics Notes

This note covers economic growth: its definition, how it is measured using real GDP and GDP per head, the meaning of recession, the causes and consequences of recession and how a recession moves an economy within its production possibility curve (PPC), the demand-side and supply-side causes of growth, the costs and benefits of growth in different economies, and the policies governments use to promote growth and how effective they might be.

What is economic growth?

Economic growth is an increase in the real output of an economy over a period of time, usually measured as the percentage change in real Gross Domestic Product (GDP) from one year to the next.

A rise in real GDP means an economy is producing more goods and services than before.

Because real GDP strips out the effect of rising prices, a rise in real GDP shows that the actual volume of production has increased, not just its money value.

Growth can be positive, meaning output is rising, or negative, meaning output is falling. A sustained period of negative growth is associated with a recession, discussed below.

Economists distinguish actual growth, a rise in output that is currently being produced, from potential growth, a rise in the maximum output the economy could produce if all its resources were fully employed.

Growth matters because a larger volume of output is what allows average incomes and living standards to rise over time. An economy that grows faster than its population can offer each person more goods and services, while one that grows more slowly than its population may see average living standards fall even though total output is rising.

Growth is also central to how governments judge the health of an economy. A year of falling real GDP is treated as a sign that resources are going to waste, while a year of rising real GDP is treated as a sign that the economy is using its resources better or has become more productive.

Definition: economic growth. An increase in the real output (real GDP) of an economy over a given period, usually expressed as a percentage change in real GDP.

How is economic growth measured?

Economic growth is measured mainly through changes in real GDP and GDP per head.

Real GDP

Nominal GDP is the value of GDP calculated at the prices prevailing in the year of measurement. If prices rise between two years, nominal GDP can rise even though the actual volume of production has stayed the same.

To avoid this problem, economists calculate Real GDP, which values the goods and services produced in a base year using a fixed, constant set of prices.

Because the prices used are fixed, a change in real GDP shows a genuine change in the volume of production rather than a change in prices.

Worked example 1. A country produces only one good. In the base year it produced 100 units at a price of $10 each. In the following year it produced 110 units at a price of $15 each.

Calculate nominal GDP and real GDP for the second year.

Answer: Nominal GDP = 110 × $15 = $1,650. Real GDP (valued at base-year prices) = 110 × $10 = $1,100. In the base year nominal and real GDP were both 100 × $10 = $1,000. Nominal GDP has therefore risen by $650, but real GDP has risen by only $100, so most of the apparent increase is due to the higher price rather than to more output.

GDP per head

GDP per head (also called GDP per capita) is total GDP divided by the size of the population.

It is a better guide to average living standards than total GDP, because a country can have a high total GDP simply because it has a very large population, while the amount of output available per person may still be low.

Comparing GDP per head over time, or between countries, gives a clearer sense of whether the average person is becoming better off.

Worked example 2. Country X has a GDP of $300 billion and a population of 50 million people. Calculate GDP per head.

Answer: GDP per head = GDP ÷ Population = $300,000,000,000 ÷ 50,000,000 = $6,000 per person.

Worked example 3. Country Z has a GDP of $400 billion and a population of 40 million people. Calculate its GDP per head, and state what happens to GDP per head if its population rises to 50 million while GDP stays the same.

Answer: GDP per head = $400,000,000,000 ÷ 40,000,000 = $10,000 per person. After the population rise, GDP per head = $400,000,000,000 ÷ 50,000,000 = $8,000 per person. Total GDP is unchanged, but the average amount of output per person has fallen by $2,000.

What is a recession, and how does it move the economy within its PPC?

A recession is a period during which an economy's real GDP falls, so that the economy is producing less than before. It is commonly defined as a fall in real GDP for two consecutive quarters (six months) or more.

During a recession, resources such as labour and capital that were previously employed fall idle: workers lose jobs and factories operate below capacity.

A Production Possibility Curve (PPC) shows the maximum combinations of two types of output (for example consumer goods and capital goods) that an economy can produce when it is using all its resources fully and efficiently.

Any point on the curve itself represents full and efficient use of resources; any point inside the curve represents unemployed or underused resources.

When an economy enters a recession, falling demand means firms need fewer workers and machines, so actual output moves to a point further inside the PPC, away from the boundary.

The PPC itself does not shift inward, because the economy's maximum potential output has not necessarily fallen; rather, the economy is simply failing to use the resources it has.

(to draw) Draw a PPC with capital goods on the vertical axis and consumer goods on the horizontal axis, bowed outward from the origin.

Mark a point A on the curve showing full employment of resources before the recession.

Mark a point B inside the curve, below and to the left of A, showing lower output of both goods during the recession, with the curve itself unchanged.

What causes a recession?

A recession begins when total demand in the economy falls, or when the economy's ability to produce is suddenly reduced. The main causes are:

1. a fall in consumption, as households spend less, perhaps because they are worried about the future, have lost income or are paying off debt;
2. a fall in investment, as firms expect weaker demand and so delay spending on new machinery, factories and buildings;
3. a fall in exports, as demand from other countries weakens or a country's goods become less competitive;
4. a financial crisis, in which banks make losses and become unwilling to lend, so households and firms cannot borrow to spend;
5. a rise in interest rates, which makes borrowing more expensive and reduces spending on consumer goods and capital goods;
6. a supply-side shock, such as a sharp rise in the price of oil or another key input, which raises firms' costs and reduces the output they can produce.

These causes often reinforce one another. A fall in demand leads firms to cut output and jobs, which reduces household incomes, which reduces demand still further.

What are the consequences of a recession?

A recession harms an economy in several connected ways:

• workers lose their jobs and unemployment rises, while those who keep their jobs may see wages grow more slowly;
• incomes fall and living standards decline, especially for the poorest households, and poverty may increase;
• firms sell less and some make losses and close down, so productive capacity may be lost permanently;
• investment falls, because firms are unwilling to expand when demand is weak, which slows future growth;
• government tax revenue falls, since incomes, profits and spending are lower, while spending on unemployment benefits rises, so the government's budget position worsens;
• prices may fall, or rise more slowly, as firms cut prices to attract scarce customers, and in a severe recession there may be deflation.

Because output falls while resources remain idle, a recession is a waste of the economy's potential, and the economy moves further inside its PPC.

How can changes in total demand cause movement towards the PPC?

If total demand in the economy rises, for example because households spend more or firms invest more, firms respond by employing previously idle resources, such as unemployed workers or spare factory capacity, to produce more output.

This increases the utilisation of resources and raises real GDP, moving the economy from a point inside its PPC towards a point on the boundary of the PPC.

This is a form of economic growth that comes purely from using existing resources more fully, rather than from increasing the economy's maximum potential output.

This kind of growth has a limit: once the economy reaches the boundary of its PPC, all resources are fully employed, and output cannot rise any further without new resources or better technology, which is where the supply-side causes of growth, described next, become important.

The size of the gain from extra demand therefore depends on how much spare capacity the economy has. An economy deep inside its PPC, with many unemployed workers and idle factories, can raise output a great deal in response to higher demand. An economy already close to its PPC has little spare capacity, so extra demand mostly pushes up prices instead of output.

This is why the same rise in total demand can have very different effects at different times. In a recession, a rise in demand mainly raises output and employment; near full employment, it mainly raises inflation.

What shifts the economy's PPC to the right?

A rightward shift of the whole PPC represents an increase in the economy's maximum potential output: the economy becomes able to produce more of both goods than before, even if it already used all its resources fully.

This is the deeper, longer-lasting source of economic growth. The PPC shifts outward because of:

1. a rise in investment, meaning spending by firms on new capital goods such as machinery, factories and infrastructure, which adds to the economy's capital stock;
2. improvements in technology, which allow the same quantity of resources to produce more output, or allow entirely new goods to be produced;
3. an increase in the quantity of factors of production, such as a larger labour force or the discovery of new natural resources;
4. an improvement in the quality of factors of production, for example better-educated and better-trained workers, or more efficient and durable machinery.

(to draw) Draw two PPCs on the same axes, both bowed outward from the origin, with the second curve further from the origin than the first across its whole length.

Label the inner curve "before growth" and the outer curve "after growth", and show that any point on the outer curve represents a higher combination of capital goods and consumer goods than any corresponding point on the inner curve.

Investment adds to the economy's stock of capital goods, such as machinery, tools, buildings and infrastructure. Capital goods wear out over time, so part of each year's investment simply replaces equipment that has become unusable.

Only investment that goes beyond this replacement adds to the productive capacity of the economy, and it is this addition to the capital stock that helps shift the PPC to the right.

What are the benefits of economic growth?

Economic growth brings several benefits to a country, although how large these benefits are depends on the type of economy and how the extra output is used and shared.

• Higher output generally means higher average incomes, which can raise material living standards and allow people to buy more goods and services.
• Growth tends to create more jobs, since firms need more workers to produce more output, which can reduce unemployment.
• Higher output and incomes raise government tax revenue, which can be used to fund public services such as healthcare, education and infrastructure.
• Growth can give an economy more resources to invest in further capital and technology, supporting continued growth in the future.

These benefits are easiest to see in an economy that starts with low output per head. There, a modest rise in real GDP can mean that many more households can afford adequate food, clean water, schooling and basic healthcare, so the gain in welfare is large even if the percentage rate of growth looks small.

In a richer economy the same rate of growth adds a smaller improvement in welfare, because most basic needs are already met. The extra output is more likely to go into goods and services that people want but do not strictly need, so the benefit to living standards is real but less dramatic.

Growth also gives a government more room to act. A growing economy generates rising tax revenue without raising tax rates, which can pay for better public services or for investment in infrastructure that supports further growth.

What are the costs of economic growth?

Economic growth also carries costs, particularly in the context of different types of economy, for example a developed economy already producing close to its PPC compared with a developing economy with significant spare capacity.

• Growth often increases the use of natural resources and energy, which can accelerate environmental damage such as pollution and depletion of non-renewable resources.
• If total demand rises faster than the economy's capacity to produce, growth can cause rising prices, that is, inflation, as firms struggle to meet demand.
• Growth is not always shared evenly: incomes may rise much more for some groups than others, so inequality can widen even as average GDP per head rises.
• Rapid growth driven by heavy investment in capital goods can mean a temporary fall in the production of consumer goods, since resources are diverted away from consumption towards building up the capital stock.

These costs are not spread evenly across economies. In a developed economy already close to its PPC, extra demand quickly runs into capacity limits, so inflation is a greater risk, and further growth adds to the pressure on natural resources and the environment.

In a developing economy with much spare capacity, output can rise by bringing idle resources into use, so growth is less likely to cause inflation at first. Rapid industrialisation can still bring serious pollution and loss of natural resources, and the risk of inflation grows as the economy approaches its PPC.

Growth can also bring social costs. Rapid growth is often accompanied by movement of people from rural areas to cities, which can strain housing, transport and public services, and can widen the gap between fast-growing regions and those left behind.

What policies can promote economic growth?

Governments use a range of policies to promote economic growth, and how effective each one is depends on the circumstances of the economy, including whether it is operating inside or on its PPC.

1. Monetary policy: a central bank can lower interest rates, making borrowing cheaper for households and firms, which can encourage consumer spending and business investment and so raise total demand.
2. Fiscal policy: a government can cut taxes or increase its own spending, directly raising total demand and encouraging firms to use spare capacity, moving the economy towards its PPC.
3. Supply-side policies: a government can invest in education and training to improve the quality of the labour force, or in infrastructure and research, to raise the quantity and quality of factors of production and shift the PPC to the right.
4. Policies to encourage investment, such as tax relief on business investment or support for innovation, can raise the capital stock and improve technology, both of which shift the PPC outward.

Demand-side policies such as monetary and fiscal policy tend to work faster but can only move the economy towards an existing PPC, and may cause inflation if used when resources are already fully employed.

Supply-side policies tend to work more slowly, since education, infrastructure and new capital take time to build, but they can achieve a lasting rightward shift of the PPC.

The effectiveness of any policy also depends on how firms and households respond. A cut in interest rates may not raise investment if firms expect weak demand and are unwilling to borrow, and extra spending on education may not raise output if trained workers then leave the country or cannot find suitable jobs.

For these reasons, governments usually combine policies. Demand-side measures can be used to bring idle resources back into use quickly, while supply-side measures are pursued over many years to raise the economy's potential output.

Worked example 4. A government has a fixed budget and must choose between two growth policies. Policy A is a cut in income tax costing $2 billion, which is expected to raise total demand and move the economy from inside its PPC towards the boundary. Policy B is a $2 billion programme of training and road building, which is expected to shift the PPC to the right over several years. The economy currently has high unemployment and much spare capacity.

Answer: With high unemployment, the quickest gain comes from Policy A, because the extra demand can employ idle workers and machinery at once, moving output towards the existing PPC. Policy B works more slowly but raises maximum potential output. The government should choose Policy A first, since spare capacity makes a demand stimulus effective now, and plan Policy B for lasting growth once the economy nears its PPC.

What are the costs and benefits of growth in different economies?

The costs and benefits of economic growth are not the same everywhere. They depend on how much spare capacity an economy has, how rich it already is, and how the extra output is shared.

Benefits in different economies

• In a developing economy with much spare capacity and low GDP per head, growth can lift large numbers of people out of poverty, because even a small rise in output per person can greatly improve access to food, clean water and basic services.
• In a developing economy with many idle workers and machines, a rise in total demand can raise output and jobs quickly, with little risk of inflation at first.
• In a developed economy, where most basic needs are already met, growth adds less to welfare, but it still raises incomes and the tax revenue available for public services.

Costs in different economies

• In a developed economy already producing close to its PPC, extra growth is harder to achieve and is more likely to run into capacity limits, so inflation is a greater risk.
• In a developing economy, rapid industrialisation can bring serious pollution and loss of natural resources, especially where environmental rules are weak.
• In a developing economy, growth may bring rapid urbanisation and congestion, and may widen the gap between fast-growing cities and poorer rural regions.

Note: The same rise in real GDP can therefore be judged differently in a developed and a developing economy. Where there is much spare capacity, the benefits of higher output and employment usually dominate; where resources are already fully used, the risk of inflation tends to weigh more heavily. In every type of economy, faster growth can add to environmental damage.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

What are the three ways of calculating a nation's total output?

The product method (summing value added by firms), the income method (summing wages, interest, profit and rent paid to factors of production) and the expenditure method (summing spending on final goods and services) all give the same figure for GDP because the circular flow of income means spending by one group becomes income for another.

Understanding this helps explain why GDP is such a consistent single measure of an economy's output, even though it can be arrived at from three different directions.

What is the Consumer Price Index?

A related price index, the Consumer Price Index (CPI), measures how the cost of a fixed basket of goods and services bought by a typical household changes between a base year and a current year, and is widely used alongside real GDP to track living standards and inflation.

Worked example 5. A representative household buys 90 kg of rice and 5 pieces of cloth each year.

In the base year, rice cost $10 a kg and cloth cost $100 a piece, so the basket cost (90 × $10) + (5 × $100) = $900 + $500 = $1,400.

In the current year, rice cost $15 a kg and cloth cost $120 a piece. Calculate the Consumer Price Index.

Answer: Cost of the same basket in the current year = (90 × $15) + (5 × $120) = $1,350 + $600 = $1,950.

CPI = (Cost in current year ÷ Cost in base year) × 100 = (1,950 ÷ 1,400) × 100 = 139.29 (approximately). Prices of the basket rose by about 39% between the two years.

What is the GDP deflator?

The ratio of nominal GDP to real GDP gives the GDP deflator, a price index that shows how far prices have moved between the base year and the current year.

Worked example 6. In a year an economy has a nominal GDP of $1,650 and a real GDP of $1,100. Calculate the GDP deflator.

Answer: GDP deflator = (Nominal GDP ÷ Real GDP) × 100 = (1,650 ÷ 1,100) × 100 = 150. Average prices are 150% of their base-year level, so they have risen by 50%.

What is net investment?

Capital goods wear out over time, and the amount set aside each year to cover this wear and tear is called depreciation. Only investment beyond depreciation adds to the productive capacity of the economy.

Net Investment = Gross Investment − Depreciation

Worked example 7. In a year, firms in an economy spend $500 million on new machinery, buildings and equipment (gross investment). Over the same year, existing capital worth $180 million wears out and needs to be replaced (depreciation). Calculate net investment.

Answer: Net Investment = Gross Investment − Depreciation = $500 million − $180 million = $320 million. This $320 million represents a genuine addition to the economy's capital stock, which helps shift its PPC to the right.

Glossary

• Economic growth: an increase in the real output of an economy over a period, usually measured by the percentage change in real GDP.
• Real GDP: GDP calculated using constant, base-year prices, so changes reflect changes in the volume of production, not prices.
• Nominal GDP: GDP calculated using the prices prevailing in the year being measured.
• GDP per head: total GDP divided by population, used as an indicator of average living standards.
• Recession: a period during which an economy's real GDP falls, commonly defined as two consecutive quarters (six months) of falling real GDP.
• Production Possibility Curve (PPC): a curve showing the maximum combinations of two types of output an economy can produce when using all its resources fully and efficiently.
• Investment: spending by firms on new capital goods such as machinery, buildings and equipment.
• Factors of production: the resources used to produce goods and services: land, labour, capital and entrepreneurship.
• Inflation: a sustained rise in the general level of prices in an economy.
• Monetary policy: government or central bank action using interest rates or the money supply to influence the economy.
• Fiscal policy: government action using taxation and government spending to influence the economy.
• Supply-side policies: measures that raise the quantity or quality of factors of production, shifting the economy's PPC to the right.

Common errors and misconceptions

• Misconception: a rise in nominal GDP always means the economy has grown. Correct: nominal GDP can rise purely because prices have risen; only a rise in real GDP confirms that the volume of production has actually increased.
• Misconception: a recession shifts the PPC inward. Correct: a recession moves the economy to a point further inside an unchanged PPC, because resources that could be used are left idle; the PPC itself only shifts if the economy's maximum potential output changes.
• Misconception: GDP and GDP per head always move in the same direction. Correct: if population grows faster than GDP, GDP per head can fall even while total GDP rises.
• Misconception: economic growth is always good for everyone in a country. Correct: growth can be unevenly shared, and can bring environmental and inflationary costs alongside its benefits.
• Misconception: only demand-side policies can cause economic growth. Correct: demand-side policies can only move the economy towards its existing PPC; shifting the PPC outward needs supply-side policies that raise the quantity or quality of factors of production.
• Misconception: the costs and benefits of growth are the same in every economy. Correct: a developing economy with spare capacity can gain quickly in output and jobs, while a developed economy near its PPC faces a greater risk of inflation; growth can harm the environment in both.

Exam-style questions with model answers

Q1. Define 'economic growth'. [2 marks]

1. Economic growth is an increase in the real output of an economy over a period of time.
2. It is usually measured as the percentage change in real GDP from one period to the next.

Q2. A country's GDP is $240 billion and its population is 30 million. Calculate its GDP per head. Show your working. [2 marks]

1. GDP per head = GDP ÷ Population.
2. GDP per head = $240,000,000,000 ÷ 30,000,000 = $8,000 per person.

Q3. Explain two causes of a recession. [4 marks]

1. A fall in consumption: if households spend less, perhaps because they fear unemployment or are repaying debt, firms receive fewer orders and cut output.
2. A fall in investment: if firms expect weaker demand they delay buying new machinery and buildings, so demand for capital goods falls and output drops.
3. A rise in interest rates makes borrowing more expensive, so households and firms borrow and spend less, reducing total demand.
4. A supply-side shock, such as a sharp rise in oil prices, raises firms' costs and reduces the output they can produce.

Q4. Analyse two consequences of a recession for an economy. [6 marks]

1. Unemployment rises as firms cut jobs when demand falls, so workers lose income and living standards decline.
2. Government tax revenue falls because incomes, profits and spending are lower, while spending on unemployment benefits rises, worsening the budget position.
3. Firms sell less and some close down, so productive capacity may be lost permanently.
4. Investment falls because firms are unwilling to expand when demand is weak, which slows future growth.
5. Prices may fall, or rise more slowly, as firms cut prices to attract customers, and a severe recession may bring deflation.
6. Overall, output falls while resources stay idle, so the economy moves further inside its PPC and potential output is wasted.

Q5. A country's real GDP has fallen for two years, unemployment has risen and factories are operating below capacity. Explain how this situation can be shown on a production possibility curve. [4 marks]

1. The fall in real GDP means the economy is producing less output than before, so it is not using all its resources.
2. On a PPC, this is shown by a movement from a point on the curve to a point inside it.
3. The curve itself does not shift inward, because the economy's maximum potential output has not necessarily fallen.
4. The economy is simply failing to use the resources it has, so the gap between actual and potential output widens.

Q6. Analyse how an improvement in technology and a rise in investment can each shift an economy's PPC to the right. [6 marks]

1. An improvement in technology allows the same quantity of resources to produce more output, or allows entirely new goods to be produced.
2. This raises the maximum output the economy can produce of both goods, so the whole PPC shifts outward.
3. A rise in investment means firms spend more on new capital goods such as machinery, factories and infrastructure.
4. This adds to the economy's capital stock, so each worker has more equipment to work with and can produce more output.
5. Because both changes raise the productive capacity of the economy, more of both goods can be produced even when all resources are fully employed.
6. The shift is therefore a lasting increase in potential output, not merely a movement towards an existing boundary.

Q7. Discuss whether an increase in a country's real GDP always raises the living standards of its people. [8 marks]

1. Higher real GDP usually means higher average incomes, so people can buy more goods and services and material living standards rise.
2. Growth tends to create jobs, reducing unemployment and raising the incomes of those who find work.
3. Higher output and incomes raise government tax revenue, which can fund better healthcare, education and infrastructure.
4. However, GDP per head may fall if population grows faster than total GDP, so the average person is no better off.
5. The extra output may be concentrated in the hands of a few, so inequality can widen even as average GDP rises.
6. Growth can also bring environmental damage such as pollution and depletion of resources, which lowers welfare.
7. Inflation may rise if demand outpaces the economy's capacity to produce, reducing the purchasing power of incomes.
8. Overall, growth is more likely to raise living standards when it is shared widely and does not cause serious environmental or inflationary costs, so it does not always do so.

Q8. A government wants to raise the economy's maximum potential output rather than only increase total demand. Analyse two policies it could use and explain how effective each is likely to be. [6 marks]

1. The government could invest in education and training, which improves the quality of the labour force so workers produce more output per hour.
2. It could also invest in infrastructure and support for new technology, raising the quantity and quality of capital available to firms.
3. Both policies raise the economy's maximum potential output, shifting the whole PPC to the right.
4. They are effective because they allow more of both goods to be produced even when all resources are fully employed.
5. However, they work slowly, since education, infrastructure and new capital take years to build and show results.
6. Their effectiveness also depends on the money being spent well and on firms and workers responding to the new opportunities.

Key takeaways

• Economic growth is an increase in real GDP, so it reflects changes in the volume of output rather than changes in prices.
• Real GDP uses constant prices to allow genuine comparison of output over time; nominal GDP does not.
• GDP per head divides total GDP by population and gives a clearer picture of average living standards than total GDP alone.
• A recession is a fall in real GDP, shown as a movement from the boundary of the PPC to a point further inside it, as resources become idle.
• Recessions are caused by falls in consumption, investment or exports, financial crises, higher interest rates or supply-side shocks.
• Recessions bring rising unemployment, falling incomes, business closures, lower investment, weaker tax revenue and possible deflation.
• A rise in total demand can move an economy from inside its PPC towards the boundary by increasing the utilisation of existing resources.
• A rightward shift of the whole PPC, caused by more investment, better technology, or a greater quantity or quality of factors of production, is a deeper source of growth.
• Economic growth brings benefits such as higher incomes, more jobs and higher tax revenue, but also costs such as environmental damage, inflation risk and possible rising inequality.
• Demand-side policies such as lower interest rates or tax cuts move an economy towards its existing PPC; supply-side policies shift the PPC itself to the right.

Test yourself

What does a point inside a country's PPC represent?

It represents an economy that is not using all its resources fully or efficiently, for example during a recession, so it is producing less than it is capable of.

Why is real GDP preferred to nominal GDP for measuring economic growth?

Real GDP uses constant, base-year prices, so changes in it reflect genuine changes in the volume of production rather than changes caused by rising prices.

How is GDP per head calculated, and why is it useful?

GDP per head = GDP ÷ Population. It shows the average output available per person, so it is a better guide to average living standards than total GDP.

Give two causes of a rightward shift in a country's PPC.

A rise in investment that adds to the capital stock, and an improvement in technology or in the quality of the labour force, can both shift the PPC to the right.

How does a rise in total demand affect an economy that has spare capacity?

It encourages firms to employ idle workers and use spare machinery, raising the utilisation of resources and real GDP, moving the economy towards the boundary of its PPC.

Give two causes of a recession.

A fall in consumption or investment reduces total demand, and a rise in interest rates makes borrowing more expensive, so households and firms spend less.

Name one cost and one benefit of economic growth.

A cost is increased environmental damage from greater use of resources and energy; a benefit is higher average incomes, which can raise material living standards.

Why might a government use supply-side policies rather than only fiscal policy to promote growth?

Fiscal policy can only move the economy towards its existing PPC, but supply-side policies raise the quantity or quality of factors of production, achieving a lasting outward shift of the PPC.