4. Economic Growth: Expanding Production Possibilities

From year to year, growth in available supplies of economic resources, improvement in resource quality, and advances in technology can expand production possibilities in a society. Economic growth is the expansion in production possibilities that results from increased availability and increased productivity of economic resources. When economic growth occurs over time, the production possibilities curve will shift outward. This means that the economy will be able to produce more of ail goods.

Three sources of economic growth:

1. Increased quantities of economic resources.

An increase in available economic resources allows us to produce more. Other things being equal, the more workers willing and able to work, the more capital, and the more land, the greater is production possibilities. This means the production possibilities curve will shift outward in response to an increase in available economic resources.

The availability of new capital is especially effective in pushing the production possibilities curve outward, because new capital often complements labor, land, and other natural resources. This means that additional capital tends to increase the productivity of available labor and land. For example, supplying workers with more and better equipment increases the output per worker. Similarly, using more capital per acre of farmland can be very effective in increasing the production of food per acre. Growth in capital is an especially important determinant of our well-being as individuals, because increases in capital per worker result in more goods per person, thereby increasing the material well-being of each of us.

2. Improved quality of economic resources.

Improvement in skills, education, or training of the labor force can also increase the output obtainable from any given combination of inputs. Devoting more economic resources to education and job training in the current year pays off in the future in terms of greater production possibilities. However, those of us who pursue more education must forgo current opportunities to work full time. The opportunity cost to the economy of more education is the production lost when you and others attend college rather than immediately entering the work force after high school. The loss in current way from more education is often more than made up by an increase in future output assuming that college graduates are more productive than high-school graduates.

Similarly, the quality of capital also improves as new machines that can accomplish more tasks or accomplish tasks more quickly or more accurately are introduced. Improvements in the quality of capital require advances in technology.

3. Advances in technology.

Like improvements in the quality of inputs, increased productive potential resulting from the development of new technologies is a very important source of economic growth. For example, technological improvements that increase the speed of computers mean that a given quantity of computers can process more information. One worker operating a more advanced computer can do the job of two or more workers.

Similarly, improvements in agricultural technology mean that a given quantity of land, labor, and capital can produce more food and fiber.

As in the case of improvements in worker skills, there is a cost associated with development of new technologies. To conduct research and development to advance technology, we must withdraw resources from production of goods for immediate consumption. By sacrificing current consumption opportunities, however, we gain future production possibilities.

Surprisingly, technological advances in one sector of the economy cause gains in production possibilities in other sectors as well. For example, suppose there's a technological advance in the food sector of the economy but not in the clothing sector. Improved technology in food production means that for any given quantity of food output more economic resources will now be available for a clothing production, other things being equal. For any given quantity of food output, we can produce more clothing output than before. However, the advance in food technology means we can devote more of our available resources to clothing production for any given amount of food produced. As a result, the maximum amount of clothing corresponding to any given amount of food output is now greater. The shaded area in the graph represents the production possibilities of both food und clothing gained from a technological advance in food production.

Types of economic growth:

1. Extensive – growth of scale of production;

2. Intensive – growth of quality of effective productivity, key factor of growth– investment which must be more than amortization.

There is no one type of growth in economy, usually its mix.

Nowadays there new type of economic growth:

• intensive (use innovations)

• grow of branches which take part in technological progress;

• limits of economic grow – to save nature and its resources.