Cambridge International as and a level Economics Ebook

Actual and potential economic 
growth
Actual economic growth
occurs when output increases. It 
can be achieved as the result of greater utilisation of existing 
resources or as the result of the utilisation of more resources. 
Figure 9.1 
uses a production possibility curve (PPC) diagram 
0
Quantity of goods (millions)
Quantity of services
(millions)
250
300
X
Y
500
350
Figure 9.1 
Actual economic growth shown on a production 
possibility curve
Actual economic growth: 
an increase in real GDP.
KEY TERM
219
Chapter 9: The macroeconomy 

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aggregate demand brings into use previously unemployed 
resources and output (measured by real GDP) increases 
from 
Y
to 
Y
1
.
For an economy to continue to grow, it is necessary for 
potential economic growth
to occur. 
Figure 9.3
shows 
potential economic growth using both a production 
possibility curve and an 
AD
/
AS
diagram. Both diagrams 
illustrate an increase in the maximum output the economy 
is capable of producing.
For potential economic growth to lead to higher 
output, the rise in productive potential must be utilised. 
Figure 9.4
 again uses two diagrams, this time to show both 
actual and potential economic growth.
TOP TIP
In distinguishing between actual and potential economic 
growth it is useful to draw diagrams.
0
Quantity of goods (millions)
Real GDP
Y
Y
1
P
1
P
AD
1
AD
1
AD
AD
AS
Figure 9.2 
Actual economic growth shown on an 
AD
/
AS
diagram
0
Price level
Real GDP
Y
P
LRAS
1
LRAS
AD
AD
0
Consumer goods
Capital goods
Figure 9.3 
Potential economic growth shown on a PPC (top) 
and 
AD
/
AS
diagram
0
Price level
Real GDP
Y
P
LRAS
1
LRAS
AD
1
AD
1
AD
AD
Y
1
X
Y
0
Consumer goods
Capital goods
Figure 9.4 
Actual and potential economic growth
to show economic growth resulting from greater use of 
existing resources.
Th
e economy is initially producing at point 
X
. Th
en the 
production point increases to point 
Y
and more goods and 
services are produced.
Actual economic growth can also be shown using an 
AD
/
AS
diagram. 
Figure 9.2
 shows an increase in aggregate 
demand in an economy with spare capacity. Th
e increase in