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Table of Contents

  1. Topic pack - Macroeconomics - introduction
  2. 2.1 The level of overall economic activity (notes)
  3. 2.1 The level of overall economic activity (questions)
  4. Section 2.2 Aggregate demand and supply (notes)
  5. Section 2.2 Aggregate demand and supply (simulations and activities)
  6. 2.2 Aggregate Demand and Aggregate Supply (questions)
  7. 2.3 Macroeconomic objectives (notes)
  8. Low Unemployment
    1. Low Unemployment
    2. What the data says
    3. The meaning of unemployment
    4. Case study - regional variation
    5. Consequences of unemployment
    6. Case study - tougher for men
    7. Types and causes of unemployment
    8. Disequilibrium unemployment
    9. Equilibrium unemployment
    10. Policies to reduce unemployment
    11. Low and stable inflation
    12. Low and stable inflation (notes)
    13. The meaning and measurement of inflation
    14. A consumer price index
    15. Finding out more about consumer price index weights
    16. Problems with measuring inflation
    17. Inflation - videos
    18. Consequences of inflation
    19. Hyperinflation
    20. The consequences of deflation
    21. Types and causes of inflation: demand-pull inflation
    22. Types and causes of inflation: cost-push inflation
    23. Case Study - car prices in Trinidad
    24. Possible relationships between unemployment and inflation
    25. PlotIT - Phillips curve
    26. Phillips curve - long-run
    27. Natural rate of unemployment
    28. NAIRU
    29. Economic growth
    30. Economic growth (notes)
    31. Causes of economic growth
    32. Economic growth and the PPF (1)
    33. Economic growth and the PPF (2)
    34. Economic growth and the business cycle
    35. Economic growth and the aggregate supply curve
    36. Consequences of economic growth
    37. Equity in the distribution of income
    38. Equity in the distribution of income (notes)
    39. Indicators of income equity
    40. Poverty
    41. The poverty line: An Indicator of Relative poverty
    42. The causes of poverty
    43. The role of taxation in promoting equity
    44. The role of taxation in promoting equity (notes)
    45. Other methods of promoting equity
  9. 2.3 Macroeconomic objectives (questions)
  10. 2.4 Fiscal policy (notes)
  11. 2.4 Fiscal policy (questions)
  12. 2.5 Monetary policy (notes)
  13. 2.5 Monetary Policy (questions)
  14. Section 2.6 Supply-side policies (notes)
  15. 2.6 Supply-side policies (questions)
  16. Print View

Investment and Economic Growth

Syllabus: Evaluate the view that increased investment is essential to achieve economic growth.

Capital is the only man - made (person-made for PC people) factor of production and consists of factories, machinery, vehicles, tools, equipment and so on... (Capital Goods)

Investment, in its broadest sense, is the putting off of consumption now in order to have greater consumption later (think about this both in terms of real investment and nominal (financial) investment)

Therefore,  in this context, (real) investment is when firms decide to produce more capital goods (therefore reducing planned resource use on consumption goods) so that more consumption goods can be produced in the future. Investment can be said to be additions to the capital stock.

Potential Growth

Economic growth can be viewed as either actual growth or potetial growth. Clearly potential growth can only come about through an increase in the Quantity and/or Quality of factors of production therefore investment is essential to economic growth. However investment can be broadened to include all the factors of production:

Capital - through Research and Development, innovation and greater resource use to produce capital goods

Labour - improving Human Capital through education and training

Land - using land reclamation schemes (Holland), irrigation schemes (desert) and better fertilisation processes (adding Nitrogen)

Entrepreneur - Nowadays there are ever increasing entrpreneurial and businss start-up training available.

Actual Growth

Actual growth can be achieved through making better use of existing Quantity and Quality of factors of production and in that sense investment is not essential. But it is difficult, realistically, to envisage economic growth without some kind of investment occurring.

Syllabus: Evaluate the view that improved productivity is essential to achieve economic


Productivity is defined as Average Product: It is the amount of output one unit (on average) of a given factor of production produces. It is calculated as:

Average Product of Labour is      APL  =  Total Amount Produced
                                                         Total Units of Labour

Average Product of Capital is      APk  Total Amount Produced
                                                         Total Units of Capital

Usually it is labour productivity that concerns economists and policy-makers - if labour productivity can be increased then economic growth will occur (as long as labour is being used effectively). This is to do with the Quality of factors of production but economic growth can occur through an increase in the Quantity of factors of production too so in that sense productivity increases are not essential but very desireable.

Note the inter-play between the two factors - to improve the productivity of labour you can give them better machinery and technology:
to improve the productivity of capital you can increase education and training of labour:

Consequences of economic growth

Syllabus: Discuss the possible consequences of economic growth, including the possible impacts on
  • living standards (especially quality of life)
  • unemployment
  • inflation
  • the distribution of income
  • the current account of the balance of payments, and
  • sustainability.
You should be well equipped to answer questions on this (eg GDP increases implies more consumption, externalities affecting quality of life etc) by now but further study of International Economics and Development Economics will strengthen your understanding of these topics. Look at arguments below:


Pause for thought

Economic growth is often seen as an economic goal to which all countries and governments should aspire. . However, economic growth can be a double-edged sword in that it can have both distinct advantages, but create problems as well. You might want to work with fellow students to consider what these pros and cons might be. Follow the links below to compare your responses.

Essay question

May 2014

4. (a) Explain two factors which might cause economic growth. [10 marks]

    (b) Evaluate the view that the benefits of economic growth will always outweigh the costs. [15 marks]