Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Considering economic growth

A country experiences economic growth when its productive potential increases. You can represent an economy’s productive potential in the following two ways:

Production possibility frontier (PPF) Long-run aggregate supply (LRAS) curve

Both the PPF and LRAS shift with economic growth.

Production possibility frontier (PPF)


Figure 8-2 shows a PPF, including all possible combinations of consumption and capital goods that the economy can sustainably produce.


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Figure 8-2: Production possibility frontier.

For example, if the economy was at point X, it would be producing quite a lot of consumption goods and not very many capital goods; whereas at point Y, the opposite is true. Point Z is also feasible, but because it’s below the PPF, it’s inefficient. This is because the economy could be producing more of both types of goods but isn’t. In contrast, any point on the PPF (such as X and Y) is efficient because increasing the amount of one good without decreasing the other is impossible.

Economic growth causes the PPF to shift out so the economy can now produce combinations of consumption and capital goods that were previously impossible.

In Figure 8-3, economic growth means that the PPF has shifted out. Previously the economy wouldn’t have been able to operate at point A – it was unfeasible. Now, point A is within the PPF, which means the economy can produce that combination of consumption and capital goods.


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Figure 8-3: Economic growth shifts the PPF.


Doing so, however, would be inefficient, because producing more of both goods is possible by moving even closer to the PPF.