MacroeconomicsI_working_version (1)

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Chapter 4
The main aim of human economic activity is to increase the standards of living. In the short
run the standards of living rise if the economy goes from the recession phase towards the
expansion or recovery. In the long run the higher standards of living could be reached
solely by the increase in productive capacity, which is the increase in potential output. A
rise in the economic standards doesn’t depend on the whole amount of GDP. It depends on
the growth of the potential output per capita (per head).
Economic growth belongs to main economic goals from macroeconomic prospect. The rise of
total output relative to the population means increasing real wages and incomes. Accordingly
the standards of living rise as well. An economy experiencing economic growth is better able
to meet people’s wants and resolve socio-economic problems.
Economic growth means the growth of the potential product (output). Therefore the
economic growth results from the growth of the productive capacity.
P
AD
AD’
AS
P
AD
AS
AS’
E’
P‘
P
E
P
E
E’
AD’
Q*
Q‘
Q
Q*
Q*
Q
Figure 4.1 Cyclical expansion vs. economic growth.
The long-term economic growth – the growth of the potential output is influenced solely
by the factors lying on the supply side (the supply factors) of the economy (the rise of
factors of production – land, labour, capital; technological changes, growth in productivity,
specialisation etc.) The growth of the actual output could be caused by the determinants lying
on the demand side (the demand factors).
The long-term economic growth (growth of potential output) and the growth of actual output
should not be used interchangeably.